The Global Rise of Corporate Saving
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1 The Global Rise of Corporate Saving Peter Chen Loukas Karabarbounis Brent Neiman University of Chicago University of Minnesota University of Chicago January 2017
2 This paper 1 Global rise of corporate saving and net lending. reflects decline in labor share and stability of dividend share 1 / 39
3 This paper 1 Global rise of corporate saving and net lending. reflects decline in labor share and stability of dividend share 2 Increase observed within many countries, industries, and firms. global common and not idiosyncratic country or industry factors 1 / 39
4 This paper 1 Global rise of corporate saving and net lending. reflects decline in labor share and stability of dividend share 2 Increase observed within many countries, industries, and firms. global common and not idiosyncratic country or industry factors 3 Model assigns important role to decline in cost of capital. global declines in interest rate, investment prices, corporate taxes 1 / 39
5 National Accounts Data
6 Data from national accounts Sources: UN and OECD. Sectors: corporate, household, government. Sample starts in 1980 with 8 countries. By 2007 we have over 60 countries and 85% of global GDP. 2 / 39
7 Key identities Gross Value Added Gross Operating Surplus Taxes on Production Taxes on Profits Interest Gross Operating Surplus Reinvested Earnings FDI Other Transfers Compensation to Labor Dividends Gross Saving 3 / 39
8 Global saving and investment Sectoral Saving to Global GDP Sectoral Investment to Global GDP Corporates Households Government Corporates Households Government (a) Saving to GDP (b) Investment to GDP 4 / 39
9 Saving rates by sector Sectoral Saving to Sectoral GVA Corporates Households 5 / 39
10 Trend in corporate saving rate by country plots 6 / 39
11 Decomposition of corporate gross value added Gross Value Added = Compensation to Labor + Taxes + Payments to Capital + Gross Saving. (1) Taxes equals taxes on production and taxes on profits. Payments to capital equals dividends, interest, and transfers. 7 / 39
12 Components of corporate value added Share of Corporate GVA Share of Corporate GVA Compensation to Labor Taxes Payments to Capital Gross Saving Interest Transfers Dividends Saving (a) Components of GVA (b) Saving, Dividends, and Interest 8 / 39
13 Summary of macro facts 1 Corporate saving rise relative to GDP, total saving, corporate GVA. 2 Corporate sector has become net lender of funds. 3 Rise of corporate saving broad-based across countries. 4 Proximate cause is decline in labor share. 9 / 39
14 Firm-Level Data
15 Data at the firm level Sources: Compustat Global and North America. Differences from national accounts: 1 Focus on non-financial firms. go 2 Activity by country of headquarters instead of operation. 3 Listed firms. 10 / 39
16 Gross Value Added = Sales Intermediates: Imputation 11 / 39
17 Gross Value Added = Sales Intermediates: Imputation Intermediates f,c,i,t = Oper. Exp. f,c,i,t Depr. f,c,i,t R&D f,c,i,t }{{} Available in Compustat (2) Compensation f,c,i,t Production Taxes f,c,i,t. }{{} Not Available in Compustat 11 / 39
18 Gross Value Added = Sales Intermediates: Imputation Intermediates f,c,i,t = Oper. Exp. f,c,i,t Depr. f,c,i,t R&D f,c,i,t }{{} Available in Compustat (2) Compensation f,c,i,t Production Taxes f,c,i,t. }{{} Not Available in Compustat π c,i,t = Intermediates c,i,t Intermediates c,i,t + Not Available c,i,t. (3) 11 / 39
19 Gross Value Added = Sales Intermediates: Imputation Intermediates f,c,i,t = Oper. Exp. f,c,i,t Depr. f,c,i,t R&D f,c,i,t }{{} Available in Compustat (2) Compensation f,c,i,t Production Taxes f,c,i,t. }{{} Not Available in Compustat π c,i,t = Intermediates c,i,t Intermediates c,i,t + Not Available c,i,t. (3) GVA f,c,i,t = Sales f,c,i,t π c,i,t Available f,c,i,t. (4) other variables 11 / 39
20 Corporate saving rates (non-financials) Non-Financial Corporate Saving as Share of Non-Financial Global Corporate GVA Firm-Level Data National Accounts firm data includes 60% of global non-financial corporate GVA 12 / 39
21 Trends in saving rates by industry (p.p. per 10 years) Industry Saving Rate Net Lending Rate Agriculture and Mining Construction Information and Communications Total Manufacturing Chemical, Petro, and Coal Electronics and Electrical Transportation Equipment Rubber, Plastic, Glass, Metal Other Manufacturing Services Transportation Utilities Wholesale/Retail Trade / 39
22 Decomposition into within and between components For value added weights: we have: ω i,t = GVA i,t GVA t, ( ) GSt GVA t = Within-Industry Component = 7.6 p.p. ( GSi,t {}} ){ 1 (ω i,t + ω i,t 1 ) 2 i GVA i,t + 1 ( GSi,t + GS ) i,t 1 ω i,t. (5) 2 GVA i,t GVA i,t 1 i }{{} Between-Industry Component = 1.1 p.p. 14 / 39
23 Trend in Saving to Gross Value Added Trend in Dividends to Gross Value Added Components of gross operating surplus at the firm level Trend in Gross Operating Surplus to Gross Value Added Trend in Taxes to Gross Value Added Trend in Interest to Gross Value Added (b) Dividends 10 (a) Saving Trend in Gross Operating Surplus to Gross Value Added Trend in Gross Operating Surplus to Gross Value Added (c) Interest Trend in Gross Operating Surplus to Gross Value Added 10 (d) Taxes 15 / 39
24 1 Saving to Gross Value Added Saving to Gross Value Added Saving rates and firm characteristics log Sales (a) Firm Size Age (b) Firm Age 16 / 39
25 Decomposition of changes in saving rate across firm types (p.p.) Beginning to End Annual Changes Within Between Within Between Groups (1) (2) (3) (4) Size Age Size and Age / 39
26 10 Trend in Saving to Gross Value Added Trend in Saving to Gross Value Added Trends in saving rates and firm characteristics log Sales (a) Firm Size Age (b) Firm Age 18 / 39
27 Multinational production Mismatch between production and profit realization: example U.S. GVA reduced when company produces through foreign affiliate. U.S. GS not affected because it is associated with headquarters. Opposite movements in foreign countries = no mismatch globally. Rise of global corporate saving does not reflect cross-country reshuffling of profits and production. 19 / 39
28 Are firms with significant foreign income different? Foreign income above 1% (p.p.) Levels Trends Saving / GVA Dividend / GVA Taxes / GVA Interest / GVA GOS / GVA GVA Weighted Yes No Yes No 20 / 39
29 How was corporate saving used? Saving Investment = Net Buybacks + Net Financial Assets. }{{} Net Lending Net Buybacks Debt Repayment Cash Holdings (0.064) (0.071) (0.051) (0.048) (0.142) (0.054) GVA Weighted Yes No Yes No Yes No 21 / 39
30 Uses of corporate saving by subperiod Net Buybacks Debt Repayment Cash Holdings (0.098) (0.075) (0.149) (0.067) (0.074) (0.028) (0.029) (0.026) (0.067) (0.051) (0.127) (0.049) (0.090) (0.076) (0.050) (0.050) (0.063) (0.058) (0.028) (0.018) (0.082) (0.051) (0.053) (0.031) GVA Weighted Yes No Yes No Yes No 22 / 39
31 Summary of micro facts 1 Rise of corporate saving pervasive across industries. 2 Rise of corporate saving within industries and types of firms. 3 Proximate cause is increase in corporate profits (even for multinationals). 4 Allocated to buybacks, cash, and repayment of debt (time-varying). 23 / 39
32 Model
33 What we do with the model Workhorse GE model with capital market imperfections. Focus on global shocks rather than idiosyncratic factors. Quantify how parameter changes affected cost of capital, profits, financial policies, investment, and saving. Significant role of real interest rate, price of investment goods, corporate income taxes, and markups. 24 / 39
34 Households Population grows at rate g. Households maximize: β t log (C t ), (6) t=0 C t + i v it s it+1 = w t L + T h t + (1 + r t )B t (1 + g)b t+1 + ) ((1 τt d )d it e it + v it s it. (7) i 25 / 39
35 Final goods Final good CES aggregate of varieties: ( Y t = y i ε ε 1 it ) ε ε 1. (8) Final good uses: Y t = C t + ξ t X t + RC t. (9) 26 / 39
36 Final goods Final good CES aggregate of varieties: ( Y t = y i ε ε 1 it ) ε ε 1. (8) Final good uses: Y t = C t + ξ t X t + RC t. (9) Markup and economic profit share: µ = ɛ ɛ 1 and s π = µ 1 µ. (10) 26 / 39
37 Corporate sector Firms choose: 1 prices and output (monopolistic competition) 2 labor and capital (investment) 3 dividends, net equity issuance, and debt 27 / 39
38 Corporate sector Firms choose: 1 prices and output (monopolistic competition) 2 labor and capital (investment) 3 dividends, net equity issuance, and debt Objective function: max {d it,e it,b it+1,x it,l it,p it } t=0 E 0 t=0 β t { (1 τ d t )d it e it }. (11) 27 / 39
39 Dividend policy Whenever τ d t > 0, repurchases preferred to dividends. Postulate dividend policy function: d it = κ (p it y it ) κr (ξ t k it ) κ k, (12) where: κ r : revenue elasticity of dividends, κ k : (fixed) assets elasticity of dividends. 28 / 39
40 Financing frictions Equity flotation costs: EC it = λe it I (e it 0). (13) Collateral constraint: b it+1 θξ t+1 k it+1. (14) 29 / 39
41 Production and capital accumulation Production function: ( y it = exp (A it ) αk σ 1 σ it ) σ + (1 α)l σ 1 σ it σ 1, (15) σ 2 A A it = 2(1 + ρ A ) + ρ AA it 1 + σ A u it with u it N(0, 1). (16) 30 / 39
42 Production and capital accumulation Production function: ( y it = exp (A it ) αk σ 1 σ it ) σ + (1 α)l σ 1 σ it σ 1, (15) σ 2 A A it = 2(1 + ρ A ) + ρ AA it 1 + σ A u it with u it N(0, 1). (16) Capital accumulation: (1 + g)k it+1 = (1 δ)k it + x it. (17) Convex adjustment costs: CC it = ψ(k it+1 k it ) 2 2k it. 30 / 39
43 Corporate flow of funds Profits (operating): π it (k it, A it ; Y t, w t ) = p it y it w t l it. (18) 31 / 39
44 Corporate flow of funds Profits (operating): π it (k it, A it ; Y t, w t ) = p it y it w t l it. (18) Budget constraint: d it + (1 + τ x t ) ξ t x it = (1 τ c t )π it + τ f t + τ c t (δξ t k it + r t b it ) EC it +CC it {}}{ RC it + (1 + g)b it+1 (1 + r t )b it + e it. (19) 31 / 39
45 General equilibrium and flow of funds Equilibrium: household and firms maximize values labor, capital, and goods markets clear government budgets balance 32 / 39
46 General equilibrium and flow of funds Equilibrium: household and firms maximize values labor, capital, and goods markets clear government budgets balance Saving flows: S t = Y t C t RC t = ξ t X t. (20) S f t = B t B t+1 E t + ξ t X t. (21) 32 / 39
47 Plan 1 Parameterize BGP of model to early global sample ( ) external parameters from various sources go internal parameters to match macro and micro moments go 33 / 39
48 Plan 1 Parameterize BGP of model to early global sample ( ) external parameters from various sources go internal parameters to match macro and micro moments go 2 Introduce parameters changes from end of sample ( ). 33 / 39
49 Plan 1 Parameterize BGP of model to early global sample ( ) external parameters from various sources go internal parameters to match macro and micro moments go 2 Introduce parameters changes from end of sample ( ). 3 Compare key aggregates between new and old BGP. 33 / 39
50 Changes in parameters across BGPs Parameter From To Rationale ξ Karabarbounis and Neiman (2014). τ c OECD Corporate Income Tax. τ x McDaniel (updated). r King and Low (2014). g Slowdown of growth. δ U.S. National Accounts. s π Generate observed decline in labor share. T f /Y Stabilize tax payments to value added. 34 / 39
51 Quantifying the rise of corporate saving Start of Sample S f Y wl Y D Y I Y R 1. Data Model End of Sample ( ) S f Y wl Y D Y I Y R 3. Data Model Cost of capital R := (1 s L s π)y K. 35 / 39
52 Mechanisms Corporate saving rate: S f Y = 1 wl }{{} Y labor share D Taxes & Payments to Capital. (22) }{{} Y dividends Labor share: wl Y = ( 1 µ ) ( ( ) ) exp(a) σ 1 1 α σ. (23) µr Dividend share: ( ) D ξk κk ( ) 1 1 κr κ k Y = κ. (24) Y Y 36 / 39
53 Counterfactuals Changes across BGPs S f Y wl Y D Y I Y R 1. Model No ξ No τ c No r No s π / 39
54 CES vs. CD production function End of Sample ( ) S f Y wl Y D Y I Y R 1. Data Model CES (σ = 1.25) Model C-D (σ = 1.00) / 39
55 Conclusion
56 Takeaways 1 Global rise of corporate saving and net lending. 2 Reflects decline in labor share and sticky dividends. 3 Increase observed within many countries, industries, and firms. 4 Quantitatively important role of decline in cost of capital. 39 / 39
57 EXTRA SLIDES
58 Corporate saving rates by country back Corporate Saving to Gross Value Added Unites States United Kingdom Canada
59 Corporate saving rates by country back Corporate Saving to Gross Value Added Japan China Korea
60 Corporate saving rates by country back Corporate Saving to Gross Value Added Germany France Italy
61 Corporate saving in non-financials vs. financials back Sectoral Saving to Global GDP All Corporates Non-Financials Financials
62 Variable definitions at the firm level back GVA f,c,i,t = Sales f,c,i,t π c,i,t Available f,c,i,t. (25) GOS f,c,i,t = Sales f,c,i,t Oper. Exp. f,c,i,t + Depr. f,c,i,t +R&D f,c,i,t. }{{} Operating Income Before Depreciation and Amortization (26) GS f,c,i,t = GOS f,c,i,t Interest f,c,i,t Corp. Taxes f,c,i,t Dividends f,c,i,t. (27)
63 Multinational production example back U.S. HQ company earns 1$ produced in: United States Foreign Repatriation of 1$ in U.S.? No Yes United States GVA and GOS Saving Reinvested Earnings Net Dividends Foreign GVA and GOS Saving Reinvested Earnings Net Dividends 0 0 1
64 External parameters back Parameter Value Source g World Bank. r King and Low (2014). σ 1.25 Karabarbounis and Neiman (2014). δ U.S. National Accounts. ξ 1.00 Normalization. s π 0.05 Basu and Fernald (1997). θ 1.70 Ratio of debt to fixed assets (Compustat). λ Gomes (2001). τ d 0.17 OECD Dividend Tax. τ c 0.48 OECD Corporate Income Tax. κ r 0.63 Estimation of dividend policy function. κ k 0.05 Estimation of dividend policy function.
65 Internal parameters back Parameter Value Source α Labor share of κ Dividend to output of T f /Y Corporate saving rate of τ x Investment rate of ψ Firm-level revenue elasticity of investment of ρ A Autocorrelation log revenues of σ A Standard deviation log revenues of 1.79.
The Global Rise of Corporate Saving. Online Appendix
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