Abstract
In order to grow, a firm must have finance. To increase demand for its products and services it must finance the costs of growth as they were described in Chapters 3 and 4. To undertake increased production to meet the increased demands that it has created, it must have new capacity: that is, investment. The original Chapter 5 was therefore titled ‘Supply’, because it was essentially concerned with the supply of finance. The original Chapter 6, which brought ‘Demand’ and ‘Supply’ together — in the sense of balancing the profitable growth of demand with the financable growth of capacity — was called ‘Complete Micro Models’, but the plural was a mistake: there was basically only one model. In this new chapter I set out the bare bones of that model, removing unncessary complexities, but maintaining the basic economic assumptions.
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Notes
I conceived this ratio for the specific purposes of my micro model. Subsequently, Nicholas Kaldor, without acknowledgement, cleverly developed it into a macro concept and Nobel Laureate, James Tobin, who had not encountered it, reinvented it as his ‘q’ for the purpose of building a beautiful model of the general equilibrium of the monetary system (N. Kaldor (1966) Review of Economic Studies, October; J. Tobin (1969) ‘A General-equilibrium Approach to Monetary Theory’, Journal of Money, Credit and Banking, vol. 1).
By Hiro Odagiri (1980) in The Theory of Growth in a Corporate Economy (Cambridge).
See R. F. Kahn (1972) ‘The Rate of Interest and the Growth of Firms’, Essays on Employment and Growth, ch. 10 (Cambridge).
Pages 113 et seq. above. For convenience, the reader is reminded that the references are ‘A Theory of Conglomerate Mergers’, Quarterly Journal of Economics, November 1969, vol. 83, pp. 643–60; and ‘Mergers: Theory and Evidence’, in Giuliani Mussatti (ed.), Mergers, Markets and Public Policy (Dordrecht) (1995).
The earliest, and classic, studies were done in the later 1960s by Douglas Kuehn (1969) ‘Stock Market Valuation and Acquisitions: An Empirical Test of One Component of Managerial Utility’, Journal of Industrial Economics, April, vol. 17, pp. 132–44; and D. Kuehn (1975) Takeovers and the Theory of the Firm: An Empirical Analysis of the United Kingdom, 1957–1969 (London). The most recent, also classic, study was by J. W. Bartley and C. M. Boardman (1986) ‘Replacement-Cost-Adjusted Valuation Ratio as a Discriminator among Take-over Target and Nontarget Firms’, Journal of Economics and Business, vol. 38, pp. 41–55. Kuehn postulated that the critical level of the valuation ratio at which a take-over occurred would vary between firms according to underlying factors that could not be observed statistically. If, however, it could be assumed that the critical value was statistically normally distributed, the statistical relationship between the valuation ratio and the observed probability of take-over would form an S-shaped, or Logit, curve. Mathematical techniques for testing Logit-curve hypotheses were applied to the British data, with very positive and significant results. Among the several contributions of Bartley and Boardman was the deployment of replacement cost instead of historical cost to represent the denominator the valuation-ratio fraction. This contributed a major improvement in the robustness of results. Using multiple discriminant analysis they studied a carefully matched sample of US target and non-target firms to discriminate between the valuation ratio and other possible predictors of targetability, and found that the absolute level of the valuation ratio was in effect the only clear discriminator between target and non-target firms.
H. Radice (1971) ‘Control type, profitability and growth in large firms’, Economic Journal, vol. 81, September, pp. 547–62.
See, for example, Michael Jensen (1984) ‘The Eclipse of the Public Corporation’, Harvard Business Review, 61, Sep–Oct.
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© 1998 Robin Marris
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Marris, R. (1998). The Completed Micro Model. In: Managerial Capitalism in Retrospect. Palgrave Macmillan, London. https://doi.org/10.1057/9780230376168_6
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