Internal capital is a major source of funds for financing corporate investments. For example, Lamont (1997) estimates that for the 1981-1991 period, internal funds accounted for more than three quarters of capital expenditure outlays for U.S. non-financial corporations. This reliance on self-generated cash as a source of investment funds has prompted researchers to investigate the relationship between firms‘ investment decisions and internal resources. In a world where capital markets are perfect and all firms have free access to external sources of financing, investment decisions would be based solely on expected future profitability and, thus, not be affected by the availability of internally generated funds. In the real world, however, capital market imperfections exist, making internal funds less costly and therefore more attractive than external funds. This reliance on internal funds should be stronger for firms facing greater capital market imperfections, i.e., firms in countries where external capital markets are less developed. The interesting empirical question that arises therefore is whether corporate investments are indeed more sensitive to the availability of internal funds for firms in less developed economies. This is the question this paper addresses.
In recent years, there have been several studies examining cross-country differences in the development of financial markets and its impact on economic growth (La Porta, Lopez de Silanes, Shleifer, and Vishny (1997, 1998), Levine and Zervos (1998), Rajan and Zingales (1998), Beck, Levine, and Loayza (2000)). Starting with the seminal work of Fazzari, Hubbard,and Petersen (1988), there is also a large literature on the impact of external financing constraints on the sensitivity of investments to internal cash in a variety of domestic contexts (see, e.g., Fazzari, Hubbard, and Petersen (1988, 2000), Blanchard, Lopez-de-Silanes, and Shleifer (1994), Calem and Rizzo (1995), Gilchrist and Himmelberg (1995), Kaplan and Zingales (1997, 2000), Cleary (1999), Erickson and Whited (2000), and Houston and James (2001)).1 In view of the fact that current cash flow is likely to be positively correlated with future profitability/growth opportunities, these studies have typically used Tobin‘s q as an independent variable to control for it. While the domestic evidence on the impact of internal cash on investments is extensive, the international evidence is surprisingly sparse. Even the limited evidence that exists is mixed in nature. On the one hand, Hoshi, Kashyap, and Scharfstein (1991) and Shin and Park (1998) find that the sensitivity of investments to internal cash flow is less for Japanese and Korean firms that belong to corporate groups and thus have easier access to external capital. Similarly, Schaller (1993) finds the sensitivity to be lower for Canadian firms that are older and have more dispersed ownership. On the other hand, Kadapakkam, Kumar, and Riddick (1998) and Cleary (2001) find that in several developed countries, the sensitivity is lower for smaller and financially more constrained firms, i.e., firms for which external capital market frictions are likely to be greater. None of these studies examines the variation of investment-cash flow sensitivity across countries, however. Using cash stock as a measure of internal resources, and sales as a proxy for the marginal productivity of capital, Love (2000) finds the sensitivity to be greater for less developed countries. In a somewhat different context, Wurgler (2000) examines industry-level data and finds that investment is more sensitive to value added in countries with better developed financial markets, but is unable to distinguish between the effects of future profitability and current cash flow due to data limitations in the non-U.S. portions of his sample, which preclude measuring Tobin‘s q at the industry level.
Over the last three decades, there has emerged a vast and well developed literature on the theory of search unemployment both in closed and open economies. Empirical support for the existence of substantial search frictions and their importance in generating unemployment has made the introduction of such frictions into economic models of labor markets the most standard and accepted way of modeling unemployment. This does not mean that there do not exist other additional distortions or other possible shocks that can interact with search frictions to magnify or reduce their impact. The objective of our paper is to study such interactions and their spillover from the point of impact to the rest of the economy. While this is primarily a theoretical paper, we focus on distortions and shocks that have empirical relevance.
The first distortion we introduce is a fair-wage constraint. Akerlof and Shiller (2009) argue that fairness is an important aspect of "animal spirits" or "the thought patterns that animate people's ideas and feelings," whose study is crucial in understanding how economies behave. Akerlof and Yellen (1990) actually focus on such fairness or fair wage considerations to explain the existence of unemployment. Surveys of managers and workers, sociological studies of work environments, firm level studies of pay structures, experiments, personnel management textbooks etc. provide a wealth of evidence supporting the assumption or idea of a fair wage.
Being called to active duty is disruptive to your life. For many, being called to active duty means an extended absence from your family and medical practice, and may also impact your income. If you are in an active reserve or a National Guard unit, your exposure to a call-up is greater than that of a non-reserve physicians who have retired from the military. At this time, no other physicians face the risk of being called into service. Currently, there is no provision to draft any civilian. This can, of course be changed by an act of Congress with the President’s approval.
This material is provided to address some issues related to active military duty. This document contains basic information to assist both employed and physician owners in their transition from private practice to active duty. It is prudent to work with your counsel and accountant, as appropriate, to address specific issues if called to active duty.
