as far back as the classic study of Berle and Means (1932) documenting the existence of a “separation of ownership from control.” Since their book appeared numerous studies have hypothesized about the nature of the conflict between managers and owners, and/or attempted to measure the economic consequences of this conflict.1 This literature, implicitly or explicitly, has assumed an “Anglo-Saxon” corporate governance structure. A firm’s owners are its shareholders; shares are widely dispersed, so that no outside shareholder has a strong incentive to monitor managers carefully; managers do not hold large fractions of their companies’ shares, and thus do not have the same financial interest in the firm as the shareholders. When managers held a large fraction of the shares, as say ten percent, it was assumed that they identified with the shareholders and maximized their wealth.
In a seminal article, Mørck, Shleifer and Vishny (1988, hereafter MSV) highlighted a second feature of insider ownership – the larger the fraction of a company’s shares held by its managers, the more entrenched they are. Thus, insider ownership has two conflicting effects: (1) an alignment effect -- as the number of shares held by the insiders increases, the effect on their wealth of a rise in the firm’s market value increases; (2) an entrenchment effect – the likelihood of replacement through a proxy fight or takeover declines as the managers’ shareholdings increase giving them more discretion to pursue their own goals.
It has long been recognized that inventory investment plays a large role in explaining fluctuations in real GDP, although it makes up only a small fraction of the latter. Blinder and Maccini (1991) document that in a typical recession in the U.S., the fall in inventory investment accounts for 87% of the decline in output despite being only one half of 1 percent of real GDP. A lot of research has been trying to explain how this seemingly insignificant component of GDP has such a disproportionate role in business cycle fluctuations. However, surprisingly few studies have focused on the conduct of monetary policy when firms can invest in inventories. In this paper we attempt to fill this gap by investigating how inventory investment affects the design of optimal monetary policy.
We employ the simple New Keynesian model which has become the benchmark for analyzing monetary policy from both a normative and a positive perspective. We introduce inventories into the model by assuming that the inventory stock facilitates sales, as suggested in Bils and Kahn (2000). We first establish that the dynamics, and therefore the monetary transmission mechanism, differ between the models with and without inventories for a given behavior of the monetary authority. Monetary policy is then endogenized by assuming that policymakers solve an optimal monetary policy problem.
Management needs performance measurement tools for planning and strategic decision-making. Good performance measurement tools bring discipline to the business planning process and can help to align corporate objectives with management incentive plans.
Capital allocation procedures are a common way to fulfill some of these needs. Recent developments in capital allocation methods originated from work on tail events, catastrophes, and capital adequacy. Borrowing from capital adequacy analysis, practitioners developed new approaches to allocating capital based on how business segments contribute to solvency (or insolvency) risk.
