Investing for Productivity and Prosperity (1994) / Chapter Skim
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Hurdle Rates, Time Horizons, and Capital Allocation Systems in the Industrial Countries
Hurdle Rates, Time Horizons, and Capital Allocation Systems in the Industrial Countries
Pages 29-33
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From page 29... ...
Even if investors demand the same compensation for a given amount of risk in the United States and Japan, the required return on Japanese stocks may be lower because the overall level of risk has also been lower. To summarize, direct measurement of interest rates and the saving shortfall in the United States indicate that the cost of funds to corpora£ions for investment in the United States has been and likely will remain higher than in Japan and probably in other competitor countries.
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From page 30... ...
Japanese and German public markets are more volatile and less efficient and provide investors with less information than their counterparts receive in the United States. Although the average holding period for all stocks in the United States declined substantially in the past decade as holdings by institutional investors and other investment managers increased, participants in the lapanese and German public markets hold their stocks for even shorter periods.
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From page 31... ...
Capital is fluid and moves rapidly between firms on the basis of perceptions of near-term appreciation opportunities. Although their portfolios are often huge, the investment managers typically hold only a small percentage of any particular company's capitalization and have relatively little influence on the management.~5 The reasons for such small holdings include regulatory restrictions on equity holdings by mutual funds, banks, and other holders; fiduciary considerations, and the nature of a particular portfolio (e.g., indexed funds requiring proportionality)
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From page 32... ...
system is pressure from investors on corporate management and the directors to shift the emphasis toward the shorter run and toward results measurable in financial term Thus, in the internal capital allocation process In U.S. public companies, outside owners usually have little knowledge about the allocation choices available and no direct influence on the decisions.
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From page 33... ...
Indeed, the investment and capital allocation systems that support entrepreneurial ventures are remarkably similar in important respects to the capital allocation systems in Germany and Japan for larger, well-established enterprises.~7 In the United States, venture capitalists own major stakes in companies, sit on corporate boards, are deeply informed about investment choices, are influential in corporate decisions, and expect to retain a substantial stake in the venture for a number of years. This does not violate principles of fairness because virtually all of the investors in companies in the start-up phase have access to what would be viewed as "inside information" in a publicly held company.
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