This paper re‐examines the evidence on Purchasing Power Parity (PPP) in the long run. Previous studies have generally been unable to reject the hypothesis that the real exchange rate follows a random walk. If true, this implies that PPP does not hold. In contrast, this paper casts serious doubt on this random walk hypothesis. The results follow from more powerful estimation techniques, applied in a multilateral framework. Deviations from PPP, while substantial in the short run, appear to take about three years to be reduced in half.
On March 19, 2012, Apple announced a program to distribute its “excess” cash to shareholders in the form of dividends and share buybacks. This announcement followed a pattern that is remarkably similar to the one leading up to Microsoft's announcement in 2004. Likewise IBM, the bluest of blue chips, made a path‐breaking decision to initiate share buybacks in the 1980s. And as recently as April 2012, IBM, along with many other large corporations, announced yet another major share buyback program together with an increase in its dividend.
These actions underscore the reality that senior management's main job is to allocate capital efficiently—and that efficient allocation of capital means distributing it when necessary. In light of these events, and the demand from shareholders that appears to be driving them, this paper explores analytical and empirical issues related to excess cash and corporate payout policy. In so doing, it provides the outline of an analytical framework for executives when thinking about the allocation of excess cash among competing uses, including deleveraging, growth, special and regular dividends, and share buybacks.
The essence of the framework is this: Once companies satisfy their demands for cash based on their expected financial transactions, their targeted capital structure, and prospective investment (mergers and acquisitions) considerations, management should turn its attention to capital structure and shareholder payout decisions. Assuming that the company's capital structure is reasonably close to its target, and that its rating agencies are supportive, management should aim to pay a level of dividends that (1) reflects the underlying strength and stability of their projected earnings streams and that (2) satisfies the expectations of its core shareholders while positioning itself for the future. For more cyclical and otherwise riskier companies, management should also consider the use of stock buybacks or special dividends as a way of paying out the more variable, or unexpected, part of their expected earnings stream.
The goal of this paper is to test empirically whether emerging‐market portfolios appear on the mean‐variance efficient frontier, investigate whether particular markets provide better diversification benefits, and to ascertain if these relationships are time‐invariant. Countries that are more economically independent from the United States (as measured by relatively low correlations of their stock markets to the United States, or intuitively as being markets whose real and monetary shocks are seemingly independent of the United States) provide better diversification for US investors. Though these relationships are time‐dependent, Mexico and China appear to be the most important diversifiers. We also compare the results of a mean‐variance framework versus a mean‐VaR (value‐at‐risk) framework that may be more applicable when return distributions are non‐normal, for the period May 1988–2018, and find that there are no significant differences.
scite is a Brooklyn-based organization that helps researchers better discover and understand research articles through Smart Citations–citations that display the context of the citation and describe whether the article provides supporting or contrasting evidence. scite is used by students and researchers from around the world and is funded in part by the National Science Foundation and the National Institute on Drug Abuse of the National Institutes of Health.