Ali Anari James W. Kolari. The Power of Profit. Business and Economic Analyses, Forecasting, and Stock Valuation

Transcription

1 The Power of Profit

2 Ali Anari James W. Kolari The Power of Profit Business and Economic Analyses, Forecasting, and Stock Valuation 123

3 Ali Anari Texas A&M University Mays Business School College Station TX USA James W. Kolari Texas A&M University Mays Business School College Station TX USA ISBN e-isbn DOI / Springer New York Dordrecht Heidelberg London Library of Congress Control Number: Springer Science+Business Media, LLC 2010 All rights reserved. This work may not be translated or copied in whole or in part without the written permission of the publisher (Springer Science+Business Media, LLC, 233 Spring Street, New York, NY 10013, USA), except for brief excerpts in connection with reviews or scholarly analysis. Use in connection with any form of information storage and retrieval, electronic adaptation, computer software, or by similar or dissimilar methodology now known or hereafter developed is forbidden. The use in this publication of trade names, trademarks, service marks, and similar terms, even if they are not identified as such, is not to be taken as an expression of opinion as to whether or not they are subject to proprietary rights. Printed on acid-free paper Springer is part of Springer Science+Business Media (

4 To Faye, Karie, Armita, and Wes

5 Preface In recent years the USA and global economy have been shocked by financial crises that severely damaged credit markets and financial institutions. The upshot has been unprecedented in post-great Depression era declines in output, capital stock, and profits among business firms around the world. Critics point to a variety of potential culprits to explain the current economic and financial crises, such as poor corporate governance mechanisms, excessive management compensation incentives, short-run wealth maximization, irresponsible financial practices, lack of regulatory oversight of systemic risk, and macroeconomic and monetary policy breakdowns. Naturally, a debate is emerging about how to instill more prudent management practices in an effort to avoid repeating the catastrophes of the last few years. These difficult times therefore provide an opportunity to consider new ideas and see whether they are useful in better managing business practices in the future. This book seeks to contribute to this debate by carefully examining the role of profit in business firms in particular and the economy in general. It combines the efforts of a macroeconomist (Ali Anari) and finance professor (James W. Kolari), who share a common interest in business and economic analysis, forecasting, and stock valuation. The authors previous work experiences in business firms, as well as consulting and academic research activities, motivated the development of a profit system model that takes into account interactions between fundamental business variables, including output, capital stock, profit rate, profit margin, and total profit. The profit system model is a tool that business firms can use to analyze and forecast these fundamental variables. To our knowledge, no such model exists that integrates these important business variables, even though they are inextricably dependent on one another. We believe that the profit system model has many practical applications to business firms and industries, in addition to the aggregate business sector and national economy. Also, stock investors can utilize the profit system model for estimating and forecasting the valuation of the stock market as a whole in addition to individual firms stocks. It is our hope that readers will implement this new model in their daily business and investment practices and find other innovative applications also. We would like to thank our editor, Nicholas Philipson, for his enthusiastic support during this project. We met briefly with him in Houston a few years ago, explained the basic ideas to him, and immediately gained a friend who understood what we were trying to do. Also, we thank Charlotte Cusumano, who provided editorial assistance. vii

6 Contents 1 The Role of Profit in Advanced Market Economies Profit System Models of the Firm, Industry, and Business Sector Theoretical Foundation of Profit System Models ofthefirm Mathematical Economic Approach to Obtaining a Profit System Model of Production Accounting Approach to Obtaining a Profit System Model of Production Profit System Model of Capital Stock Profit System Model of Profit Margins Profit System Model of Employment Other Key Business Variables: Sales Tax, Depreciation, Total Employment Compensation, andwagerate Profit System Channel of Inflation Transmission Profit System Models of Deflated Output, Deflated Capital Stock, and Deflated Labor Productivity TotalProfitEquations Profit System Economic Equilibrium Profit System Theory of Economic Growth Profit System Theory of Business Cycles Financial Sector Variables: Interest Rate and Credit Empirical Profit System Models in the Form of Dynamic Equations General Approach Summary Appendix: General Form of the Extended Profit System Model with Goods and Services Plus Labor Markets A Macroeconomic Profit System Model of Advanced Market Economies Macroeconomic Profit System Model Business Sector Profit System Model ix

7 x Contents Nonprofit Sector Model Combined Business Sector Profit System Model and Nonprofit Sector Model The Monetary Policy Model Debt Model Macroeconomic Equilibrium Channels of Inflation and Monetary Policy Transmission Wicksell s Cumulative Process in the Macroeconomic Profit System Model The Government Sector and Profitability Application of the Macroeconomic Profit System Model to the US Economy Data Estimation of the Macroeconomic Model Testing Model Reliability Monetary Policy Analysis and the Impacts of Economic StimulusPlans Monetary Policy Analysis FiscalPolicyAnalysis Macroeconomic Policy Analyses: A Scenario Approach BusinessCycleAnalysis Conclusion Profit System Models of the Corporate Sector Corporate Models The Corporate Model The Nonfinancial Corporate Model Data for Estimating Corporate and Nonfinancial Corporate Sector Models The Estimated Corporate Profit System Model The Estimated Nonfinancial Corporate Sector Profit System Model Stochastic Simulations of the Estimated Corporate Models Out-of-Sample Forecasts of Corporate Profit System Models A Quarterly Profit System Model of the Nonfinancial Corporate Sector Conclusion Appendix: Estimated Nonfinancial Corporate Profit System Model Using Quarterly Data Series: 1958Q1 2008Q Profit System Models for Industries The Empirical Representation of the Model for Industries Industry Data

8 Contents xi 5.3 EmpiricalResults Mining, Quarrying, and Oil and Gas Extraction (NAICS21) Utilities Industry (NAICS 22) Construction Industry (NAICS 23) Manufacturing Industry (NAICS 31 33) Wholesale Trade Industry (NAICS 42) Retail Trade Industry (NAICS 44 45) Transportation and Warehousing Industry (NAICS 48 49) Information Industry (NAICS 51) Finance and Insurance Industry (NAICS 52) Professional and Business Services Industry (NAICS 54 56) Education and Health Services Industry (NAICS 61 62) Leisure and Hospitality Services Industry (NAICS 71 72) Conclusion A Profit System Model of Stock Market Valuation A Profit System Model of the Standard and Poor s Industrial Index StockMarketPriceIndexes Data for Standard and Poor Industrial Index Firms A Profit System Model for Stock Market Index Valuation Estimated Profit System Model for the S&P Industrial Index Firms Estimating S&P s Industrial Index of the Stock Market StockMarketCapitalization Conclusion A Profit System Model of the Firm for Business Analysis and Stock Valuation Application of the Profit System Model to Firms Empirical Model DataIssues EmpiricalResultsforTwoUSCorporations DataforFirms Empirical Results for International Business Machines Corporation Empirical Results for Johnson & Johnson FurtherDiscussion Strategic Business Planning Budgetary Control

9 xii Contents Capital Budgeting Decisions Conclusion Concluding Remarks References About the Authors Author Index Subject Index