Naval Postgraduate School
Graduate School of Business and Public Policy
1 University Circle
Monterey, CA 93943
NBER Working Papers and Publications
|August 2013||Investment, Tobin's q, and Interest Rates|
with Neng Wang, Jinqiang Yang: w19327
The interest rate is a key determinant of firm investment. We integrate a widely used term structure model of interest rates, CIR (Cox, Ingersoll, and Ross (1985)), with the q theory of investment (Hayashi (1982) and Abel and Eberly (1994)). We show that stochastic interest rates have significant effects on investment and firm value because capital is medium/long lived. Capital adjustment costs have a first-order effect on investment and firm value. We use duration to measure the interest rate sensitivity of firm value, decompose a firm into assets in place and growth opportunities, and value each component. By extending the model to allow for endogenous capital liquidation, we find that the liquidation option provides a valuable protection against the increase of interest rates. We furthe...
|Optimal Consumption and Savings with Stochastic Income and Recursive Utility|
with Neng Wang, Jinqiang Yang: w19319
We develop a tractable incomplete-markets model with an earnings process Y subject to permanent shocks and borrowing constraints. Financial frictions cause the marginal (certainty equivalent) value of wealth W to be greater than unity and decrease with liquidity w = W/Y . Additionally, financial frictions cause consumption to decrease with this endogenously determined marginal value of liquidity. Risk aversion and the elasticity of inter-temporal substitution play very different roles on consumption and the dispersion of w. Permanent earnings shocks, especially large discrete stochastic jumps, make consumption smoothing quantitatively difficult to achieve. Borrowing constraints and permanent discrete jump shocks can generate empirically plausible values for marginal propensities to consume...
Published: Journal of Economic Theory Volume 165, September 2016, Pages 292–331
|March 2011||A Unified Model of Entrepreneurship Dynamics|
with Neng Wang, Jinqiang Yang: w16843
We develop an incomplete-markets q-theoretic model to study entrepreneurship dynamics. Precautionary motive, borrowing constraints, and capital illiquidity lead to underinvestment, conservative debt use, under-consumption, and less risky portfolio allocation. The endogenous liquid wealth-illiquid capital ratio w measures time-varying financial constraint. The option to accumulate wealth before entry is critical for entrepreneurship. Flexible exit option is important for risk management purposes. Investment increases and the private marginal value of liquidity decreases as w decreases and exit becomes more likely, contrary to predictions of standard financial constraint models. We show that the idiosyncratic risk premium is quantitatively significant, especially for low w.
Published: as "A unified model of entrepreneurship dynamics" in Journal of Financial Economics Volume 106, Issue 1, October 2012, Pages 1–23 citation courtesy of