TRElS ON RATES OF RETURN ON CAPITAL BY INDUSTRIES IN JAPAN
Takaaki Wakasugi
Tohoku University
Fumiko Konya
Japan Securities
Research Institute
and
Kazuhiko Nishina
Yokohama City University
To be Presented at the Bate of
Return Conference, June 9-12, 1981,
Lincoln Institute of Land Policy
TRENEDS ON RATES OF RETURN
ON CAPITAL BY IN.DUSTRIES IN JAPAN
I.
INTRODUCTION
II.
THE ESTIMATION METHOD
A.
The Macro Level Estimation
B.
Estimation Based on Listed Company's Data
III.
GENERAL MOVEMENT OF THE JAPANESE ECONOMY
IV.
TRENDS IN PROFITABILITY FOR THE TOTAL CORPORATE SECTOR
V.
ANALYSIS OF THE INDUSTRIAL RATES OF RETURN OF LISTED
CORPORATIONS
VI.
A.
The ROC's and GNP
B.
Time Trend of ROC
C.
Effective Tax Rates
D.
Inflationary Influences on the Rate of Return
E.
Accounting ROC and Real ROC
F.
ROC Differentials and Risk
G.
Tobin's "q" Ratio and its Stability
H.
Rates of Return to Investors
I.
"Beta" Coefficient of ROC
SUMMARY
I.
INTRODUCTION
Almost all people accept the proposition that Japan has
achieved extraordinarily high economic growth due to
investment in equipment after the World War II.
continuous
Of course, such
investment would never have continued without the cooperation of
many other relevant factors.
Some of the important and essential
factors have been clarified before, such as entrepreneurs' ambitions
for the firm's growth, successive technical renovations that stimulate
entrepreneurship, and people's attitudes toward both moderate
consumption
and positive savings.
In addition to these, we can also
enumerate serious competition between firms, and often between
groups of firms in every field of the economy.
neglect the unique financial system of Japan.
Also, we cannot
Among others, the
most important and critical factor is returns on capital investment.
Even if all other factors were satisfied, investments in equipment would have
never been undertaken without the strong anticipation for future profits.
Past fulfilled profits stimulate entrepreneurs and expectations
of high profitability motivates investment
in capital equipment.
Investment necessiates raising new capital funds and requires certain
returns in exchange for its commitment.
Here, profits for capital,
or returns on capital earned from investment becomes the relevant
variable.
The purpose of this paper is to measure the past per-
formance of capital activities through the concept of "real" rates
of return on capital, and to clarify any relationships between
the profitability on capital and other important economic concepts.
Since the concept of return on capital seems to have a close
relation with certain accounting concepts, it should be easy to calculate
returns on capital by use of accounting data.
ing data is readily available.
In fact, such account-
But, return on capital in the account-
ing sense, has several conceptual and practical difficulties from
the point of view of economics.
For example, since the principal
purpose of accounting is to determine the net profit of stockholders,
accounting profits assigned to equity capital are different from those assigned
to total (both debt and equity) capital; certain parts of returns
on capital are hidden by accounting conventions,
of tax accounting.
especially by those
But these are not truly serious problems, for
we can easily transform accounting returns on capital into economic returns.
The most troublesome problem is that present accounting
systems based on historical costs can never adequately reflect
economic activities, a purpose for which it
was not originally designed.
Accounting figures can neither express the economic values
of assets held by a firm, nor the economic income from the
utilization of such assets.
As for the latter, accounting profits
include holding gains on inventories and depreciable assets arising
from continuous inflation, and cannot differentiate them from genuine
economic income.
Therefore, it is necessary to estimate rates
of return on capital that differ from accounting rates of return.
However,
corporate accounting is a unique, important and the richest
source of information on the firm's activities.
Perhaps
the best
way of estimating economic profitability is to convert accounting
data into a kind of inflation accounting data.
We have performed two measurements of the economic rate of
return on capital in postwar Japan.
One of them was performed
five years ago for the purpose of estimating the profitability
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of the total nonfinancial corporate sector and the manufacturing
corporate sector based upon macro data;
i.e. national income accounts
The other measurement is a recent
and other economic statistics.
calculation on industrial groups using their annual reports.
The
latter measure employed over eight hundred listed companies classified
into three macro and thirty-three individual industries.
The sample
period,however, covered the rather short time span of fifteen
years between 1965 and 1979.
The sample period of the former measure
covered the slightly longer period between 1956 and 1974.
Utili-
zation of national income statistics as the main data base constrained
us to classify the economy into only two macro sectors as stated
above.
Fortunately for such macro level calculations, we could
easily lengthen the estimation period by another five years by
using the new system of National Accounts (the new SNA) although
this sacrifices some continuity in the data definition.
Consequent-
ly, the sample period for measures based on national income accounts
can be lengthened to cover the period 1970 to 1979.
In this paper, the discussion of the long-term trend of profitability on capital is based mainly on twenty-four years' time series
data.
Using the estimated returns for the industrial sectors,
we derive some implications for the movement of rates of return
We analyse some relationships
during the last fourteen years.
between the rates of return on capital and some other important
economic concepts.
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II.
THE ESTIMATION METHOD
The Macro Level Estimation
A.
As already stated, total corporate rates of return (for the
nonfinancial sector and manufacturing sector) were estimated mainly
The measurement based on the
by use of national income accounts.
old SNA is as follows.
debt were calculated.
First, nominal returns on equity and on
Then the "valuation adjustment" amounts
for inventories and for depreciable assets were estimated and subtracted from the above nominal returns to calculate real returns
-
returns after valuation adjustment -
on capital.
Then, current
values of capital stocks are estimated, and rates of return were
calculated as real returns divided by capital stocks.
The measurement in the new SNA is much more simple.
The new
SNA offers data on real returns, except depreciation, although
they are broken down into parts.
stocks in real terms.
It also measures physical capital
So, what is necessary in this case is only
a revaluation of depreciation.
1.
Return on capital
First, corporate income (before and after tax) of the total
sector and the manufacturing sector was estimated by a matrix of
"Composition of Main Factor Income by Industrial Origin of Net
National Product at Factor Cost" included in the Annual Report
of National Income Statistics (Economic Planning Agency).
interest paid by the corporate sector was measured.
ready-made statistics for this value.
There were no
Therefore, outstanding corinstitutions
porate loans and bonds by financial
Secondly,
and interest
rates on the loans and bonds were calculated respectively using the
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4
-
Economic Statistics Annual
Japan).
(Statistics Department, the Bank of
The interest paid was estimated as the product of these
two factors.
The corporate
income
interest paid were summed up
(before and after
to the nominal
tax)
and the
return on capital
(before and after tax).
Inflationary adjustment for inventories sold and depreciation
must be deducted from the nominal return to calculate real return
on capital.
As for inventories adjustment, National Income Statistics
already contains the relevant figures which are used in this study.
Adjustments for depreciation were considerably complex.
First,
calculations of the stock of depreciable assets in current prices
were carried out.
Then, we calculated both gross fixed capital
formation and depreciation values from accounts contained in the
National Income Statistics.
Estimation of economic depreciation,
which is depreciation based on the current prices of depreciable
assets, was carried out by the following equation.
TAt= p
Pt
-TAtt-1
1
+ It-Dt*
depreciable
TAt = amount of"tangible fixed assets at end of period t;
Pt
= wholesale price index for investment goods in period t;
it
= amount of gross fixed capital formation in period t;
Dt* = economic depreciation.
The difference between accounting depreciation and economic depreciation is called the valuation adjustment for depreciation, i.e.
the excess or deficit depreciation caused by price changes in
depreciable assets.
Before and after tax real return on capital,
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thus, was calculated as the nominal return on capital (before and
after tax) less these two valuation adjustments.
The above calculations were for estimations based on the old
In the case of measures using the new SNA, we could calculate
SNA.
nominal nonfinancial corporate income after inventory valuation
adjustment (before and after tax) and interest paid by the nonfinancial corporate sector directly and easily.
were based on accounting concepts
But
depreciation values
and had to be transformed
into
economic values.
Here we used one of the results from measurements for listed
companys, which will be explained in the following section.
We
applied the "revaluation ratio" of depreciation to the depreciation
values from the new SNA to calculate economic depreciation values.
In this way, we could estimate excess or deficit depreciation more
The estimation of valuation
easily than in case of the old SNA.
adjustment for inventories follows the same procedures as in the
case of the old SNA.
2.
Capital
and the rate of return
The new SNA estimates the current prices of firms' physical
assets, but not financial assets.
assets
directly from it.
So, we can take values of total
In case of the measurement based on
the old SNA, we calculated current values of depreciable assets
We regarded book values of inventories to be equal to current
only.
prices,
because average inventory periods were very short and the
difference between current prices and book values was negligible.
In case of the measurement by use of the old SNA, we could
not help but forego revaluating lands at current prices.
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We cancelled
the accounts receivable and payable on both sides of the balance
sheet.
So, real capital is slightly understated.
The rate of
return was calculated as the real return divided by real capital.
The rate of return was calculated both for the total nonfinancial
sector and the total manufacturing sector in case of the old SNA,
but restrictions on data did not allow us to calculate
facturing sector's rate of return in
B.
1.
the manu-
the new SNA.
Estimation Based on Listed Company's Data
Sample and data
Our purpose is to measure the profitability of the listed
companies in contrast to the previous study on all corporations
based on the National Income Statistics.
On listed companies we
can obtain necessary detailed financial data much more easily than
for the whole corporate sector.
The main data employed for this purpose was The Data Base
Nikkei Financials or the so-called NEEDS data provided by the Nihon
Keizai Shimbun, Inc.
(The Japan Economic Journal, Inc.).
This
data base contains the financial statements of all the companies
listed on the Tokyo Stock Exchange (TSE) and also their industrial
aggregate statements.
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7 -
In order to avoid double counting, financial industries axe
Consequently,
excluded.
our sample consists of 33 industries, which
were aggregated into three groups,
to
All,
Manufacturing and
Sample industries and the number of firms
Nonmanufacturing Industry.
included in each
that is,
are shown in Table
3.
Our sample is
firms listed on the First Section of T.S.E.,
so it
firms, which accounted for about one third of assets,
sales and one third of returns on capital of all
limited
contained 829
one quarter of
the firms in
Japan
1)
in 1978.
Although NEEDS provided a fifteen year period of time-series
data from 1965 to 1979 fiscal year2), this period was not long
enough to fully analyze time trends.
Nevertheless, the use of
NEEDS was very advantageous because it supplied much detailed information about business activities.
Other important data sources were as follows:
Economic Planning Agency, Annual Report on National Accounts,
The Ministry of Home Affairs, Survey of Fixed Assets' Prices,
National Land Agency, Public Announcement of Land Prices,
The Bank of Japan, Prices Indexes Annual
Economic Statistics Annual
Japan Securities Research Institute,
The Rates of Return on the Listed Stocks
Notes
1) The number of non-financial corporations listed on the
First Section was 939 and that of financial corporations was
97 in March, 1979.
We included the category of "other
Finance" because it
was composed of the consumer finance
- 8 -
.
industry and leasing industry.
2) Data for certain fiscal years are based on the aggregated
financial statements of the companies whose accounts cover
the period from April in one year to March of the next
year.
2.
Capital
One group
Firms' assets are classified into two major groups.
consists of physical assets which take direct part in production
activities.
The other group consists of financial assets.
The
former assets are further classified into tangible fixed assets,
intangible fixed assets, inventories (materials, unfinished goods
and finished goods) and others.
Tangible fixed assets are further-
more classified into depreciable assets such as buildings and
equipment and non-depreciable assets such as land.
Cash and its
equivalent, marketable securities, accounts receivables, loans
and other investments are included in financial assets.
regard as the standard case (case I),
Here we
situations in which both
physical and financial assets are included in total capital.
The
case where only physical assets are included in total capital is
called case II.
We revaluated depreciable tangible assets
depreciable assets),
(referred to below as merely
land and inventories among physical assets.
It
is almost :.possible to revaluate intangible assets at current
prices, so we regarded book values to be equal to current prices,
As for financial assets, current
prices of marketable securities and other financial assets are
significantly different from book values.
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9 -
Since their weight in
total assets is negligibly small, however, and since their revaluation
has many attendant difficulties, we did not revaluate them.
a)
Inventory
Book values
of inventory assets at the end of fiscal
(B.V.)
years were transformed into current or replacement values
by use of both estimated turnover ratios of inventories for
each industry and the wholesale price indexes (WPI).
The price
indexes used were different for every industry according
to the inventory assets typical for the industry.
Assuming
FIFO, current values of inventories are calculated as follows.
Book value
of inventories
Current value
of inventories
(+1
B.V. of inventoriesxChange in WPI).
2 Cost of sales
The ratio of B.V. of inventories to cost of sales in a
profit and loss statement is the inverse of the turnover rate
of inventories, and expresses an average holding period of
inventories between acquisition and sale.
On the assumption
that both production rate and sales rate are equal and constant,
we multiplied book values of inventories by one half to
calculate average lapsed time for inventories.
b)
Dt -'eciable assets
Depreciable fixed tangible assets, or rather, depreciable
asscts,
were revaluated
Replacement value of
depreciable assets
(1+
in almost the same way as inventories.
Book value of
depreciable assets
Change in price index for investment goods
during the age-life of depreciable assets
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10 -
Composition of depreciable assets is quite different by
industries.
The weighted average of price indexes of indi-
vidual depreciable assets was used as the price index for
investment goods.
Average age-life in the above equation
was estimated as follows.
Average
age-life
Accumulated depreciation
Accumulated plus depreciable assets
log(l.
Depreciation
Depreciable assets plus depreciation
log(1-
Here it is assumed that depreciation was carried out by
the fixed rate method.
This assumption seemed to be plausible
upon consideration that more than ninety percent of listed
companies employed this method.
Because of restrictions on data we had to assume that
every depreciable asset has the same age-life.
c)
Land
The replacement value of land was estimated by the following
equation.
Replacement value
oflnd)
of land
=(
Area measured in
Land price per
)x ()
square kilometers
square kilometers
Current land prices are different from location to location
and from use to use.
We used different land prices for industries
according to their location and use.
TI.e current values of land of the
above three assets for the
aggregate industries (All, Manufacturing and Nonmanufacturing)
were calculated by summing up each industry's land holdings'
current values.
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11 -
3.
Real or economic return on capital
The computational definition of accounting return on capital
is the sum of ordinary profit and interest and dividends received.
Since capital is defined as total physical assets in case II,
interest and dividends are not included in the return on capital.
As
stated before, real or economic return on capital is calculated
as the accounting return minus
adjustment of cost of sales and
depreciation..
We made adjustments of the calculated value of increase or
decrease in cost of sales and of excess or deficit depreciation
return" into "adjusted or
and transformed "accounting
real return".
a)
Adjustment for cost of sales
Adjustment for cost of sales could be changed to the problem
of so-called inventory valuation adjustment (IVA) as follows.
Adjustment of )
(Adutet
=
cost of sales
Change in WPI during
( Cost of ) x(Cag
average inventory period
sales
Average inventory period was defined as the ratio of average
Using this definitional
inventory to cost of sales
relationship, the above equation could be rewritten into
the following expression.
Adjustment of
cos
of sales
average
X
inventry
(Change
in WPI during the accounting period).
Different wholesale price indexes were appliedto different
industries in just the same way as in the revaluation of
inventory assets.
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12 -
b)
Economic depreciation and valuation adjustment for
depreciation
Excess or deficit depreciation results from the accounting
rule that depreciation is reported on the basis of the historical value of the depreciable asset.
Economic depreciation
based on the replacement value of the asset must be
replacement
capacity.
costs
that
will
maintain
the
existing
We regarded the balance of accounting less economic
depreciation as the estimated excess or deficit depreciation.
Economic depreciation for depreciable fixed tangible assets
could be calculated using revaluated values of depreciable
assets.
Economic
.e.i)i = (Depreciation) x
(e
depreciation
Revaluated
depreciable assets
Accounting
Acutn
x
depreciable assets
(1+Average price change in depreciable
assets during age-life estimated
Excess or deficit
depreciation
Economic
)
depreciation
(Accounting
depreciation
The price indexes are those used in the revaluation of
depreciable assets, and it is assumed that depreciation is
determined based on the asset value at the beginning of an
accot
c)
cing period.
Real return on capital
Real return on capital is calculated as follows.
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Interest
received
Ordinary
profit
Real return
on capital
Adjustment of
cost of sales
Excess or deficit
depreciation
Depreciation in cost of sales
Cost of sales
stheThe quantity in last set of parentheses is an adjustment
factor to prevent double-counting in adjustments since adjustments are already made in both cost of sales and :
depreciation.
The above equation is for the standard case.
In case II, interest and dividends received are excluded
from the real return on capital.
4.
The rate of return
Real rate of return (ROC) is defined as the following for
calculation purposes.
ROC =
Real return on capital
Total revaluated assets at ) x (1+~deflator of total
the beginning of the period x
asset),
We revaluate the capital stock at the beginning of a period
by its current price.
On the other hand, we assume that returns
occur at the end of a period and that they are valuated at prices
prevailing then.
So, it is necessary for us to again transform
the amounts of revaluated assets in concordance with prices prevailing
at the end
.f the period.
The deflator of
total asset is the average of price change in each
price at the begining of each period.
asset weirhted by its value in current
Here price change of non-revaluated assets is regarded as zero
Nominal rate of return on capital is defined as follows.
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14 -
Nominal
ROC
)RO.) ROC + ( deflator of asset
s
As explained earlier, this nominal rate of return differs
from the accounting rate of return in that the latter includes
only partial hoiding gain due to inflation
and denominator is.
the book value of total assets.
5.
The market value of firm and industry and the "q" ratio
A market value or gross value of a firm is defined as the
sum of the market value of equity and the market value of debts.
The former value is calculated by the product of a stock price
times the number of outstanding shares.
Debts are classified into
marketable securities and nonmarketable loans.
Estimation of market
values of nonmarketable loans contains both conceptual and computational problems.
On the other hand, calculating market values
of marketable securities is not impossible though it is very difficult.
In addition, short-term debts occupy a considerably large part
of marketable securities, although the differences between the
market values and the book values are not thought to be very large
Thus, we conclude that the market value of total debts does not
differ much from book value.
So, we do not estimate the market
value of debt ,
The aggregate value of firms' market values in a certain industry
we treat as synonymous with the market value of the industry.
We calculated Tobin's "q" ratio for each industry by dividing the
market value of the industry by the replacement cost of total assets of
the industry.
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15 -
Industry market value
q
6.
=Industry's
assets
value in
replacement cost
Rate of return to investors
The rate of return on capital calculated above connotes the
profitability of a firm's economic activities.
The profitability
to investors, however, is not necessarily equal to the rate of
return on capital.
The rate of return to investors, which is equal to cost of
capital if several conditions are satisfied, was calculated as
a weighted average of the rate of return on shares and the interest
rate.
It is also difficult to estimate actual market interest
rates (for investors) associated with certain debt.
We calculated
the following rate as a proxy of the true average interest rate.
Rate of return)
to creditors
Interest paid
Interest-bearing debt outstanding
The denominator is not total debt but the total of interest
bearing-debt outstanding.
We assume that the cost of servicing
other debt is the same as the cost of servicing interest-bearing
debt.
The rate of return to stockholders is usually defined as the
following.
Rate of return
to stockholders
Dividends plus capital gain
Stock price at the beginning of the period
Actual rates of return are
calculated as an average
rate of increase in wealth ratios adjusted for ex-devidend and
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for ex-rights of new stock issues.
The weighted average of the above two rates of return to
investors is the nominal rate of return.
The real rate of return
to investors is calculated by deducting the relevant price change rate
from the nominal rate.
7.
Basic results of the estimation
Some basic results of above calculations are summarized in
tables and figures at the end of this paper.
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17 -
III.
GENERAL MOVEMENT OF THE JAPANESE ECONOMY
The Japanese economy, which had been almost completely destroyed
in World War II, recovered rapidly, suffered from a considerably
serious inflation after the war, and achieved some stability near
There were successive waves of investment
the middle of the 1950's.
in equipment, manpower surpluses, vast consumption demand, and
important government policies in the allocation of
that supported the recovery of the economy.
key resources
Thus, in 1953 the
economy experienced good conditions for the first time since the
war.
Since then, Japan experienced prosperous periods in 1957,
1959-61, 1963, 1966-70 and 1980, but also tasted bitter recessions
in 1958, 1962, 1965, 1971 and 1973 to 1974.
Generally, the periods
of prosperities were rather longer than the periods of recessions
( Figure 1 ).
We can conveniently separate the period
of
1955-80 into
four characteristic periods, i.e. 1955 to 60, 1960 to 72, 1972
to 75 and 1975 to the present.
high growth rates and ,
can be characterized by
The first period is the time of
stable price levels.
The second period
high growth and high prices.
period is rather short and a time of transition.
sLowed down rapidly and inflation was great.
The third
The growth rate
The last and the
present period, for the time being, can be said to be one of stable
growth and stable price levels
As stated already, the
( Figure 4 ).
driving force of Japanese growth was
large investments in equipment.
It
must be noted that the fields of investment
have changed dynamically,
in
equipment
keeping pace with the movement in
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18 -
technical
innovations.
We should consider marvelous the way in which Japanese
firms could diversify their business activities and adapt to environmental changes.
Capital investments were at first oriented to
such industries as textile industries that were labor-intensive,
because there was much cheap labor at the time.
In the first half
of the 1960's, there was a boom in capital investment in largescale plants especially in heavy and petrochemical industries.
Since that time, there appeared some signs of labor shortage.
The rise in wage
levels began to accelerate.
At the same time,
rates of change in wholesale price indexes, which had been very
stable and low, also began to rise along with consumer's price
indexes.
Therefore, the share of investments in labor saving
facilities increased significantly
( Figure 5 ).
Also, environmental damage became a growing social problem,
and many firms were compelled to invest capital to repair and prevent
such damage.
Investments like this were rather great, and since
they did not contribute to raising firm's productivity, they might
have contributed to raising price levels and cutting down capital's
profitability.
Rapid growth of capital stocks, led by investment in equipment,
often resulted in overproduction and excess facilities.
These
were said to be principal causes of several recessions.
Especially
since entering into the early 1970's, the potential for troubles
arising from excess facilities was realized as business conditions
rapidly worsened with the onset of slightly restrictive monetary
policies.
Business conditions tended to improve in the summer of 1971
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19 -
due to expansionary government fiscal policies.
However, the Nixon
,andShock
the upward revaluation of Yen then followed in rapid order.
There was also a shift
from the fixed rate system to a
rate system in early 1973.
floating exchange
Again, the Japanese economy had to
rise from recession in 1972 and 1973 but this time by means of
easy money policies
budgets.
and
by large-scale public investment
Just at this time there occurred the Oil Crisis of the
autumn of 1973, and Japanese economy was again damaged seriously
by the sharp rise in the oil prices as were other advanced countries.
Since business firms hit by this shock just when they were potentially
-- were vulnerable from'overinvestment in equipment, the performance of
business firms dropped down in 1974.
However, Japanese firms commenced investment for cutting all
kinds of costs, although overall growth rates of new investment
were negative or much lower than before.
Investments were done
for energy-saving or oil-saving, automation and other rationalization
purposes.
returned
By striving for efficiency, business performance
to a certain acceptable level in 1976 and the economy successfully
weathered the second oil crisis in 1979 rather easily.
These past
few years, capital investments have been reviving in such high
technology industries as the medical and biochemical, electronics
and precision instruments industries.
International trade has played a very important role during
these periods, not only in overall economic growth, but also in
the cyclical fluctuations of the economy until about 1965.
Needless
to say, the Japanese economy greatly depends on imports of both
natural resources and industrial goods, as well as exports of
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industrial goods.
The free trade system is
a critical factor for
the Japanese economy.
During the long, favorable period from 1966 to 1970, the economy
freed itself from the constraints of an unfavorable balance of
international payments.
Since then, payments have stayed generally
in the black, but they have also aggravated inflation.
After the
changes in the exchange rate system, the surplus balance of payments
continued and
it was only after the New Dollar Defence Policy
started by President Carter in 1978 that the balance of payments
showed a deficit .
Recently, the scale of Japanese international
trade is increasing steadily under the conditions where the domestic
economy is reviving independentry. Here, it must be noted that
the weight of international trade is not more than fifteen percent
of the GNP, and that this weight is far less than what many people
have come to believe it
has been.
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21 -
IV.
TRENDS IN PROFITABILITY FOR THE TOTAL CORPORATE SECTOR
The rates of return (before tax) of the non-financial and
manufacturing corporate sectors are shown in Fig. 2 & Tablel,2.
Five-year
.moving averages are also displayed to illustrate
trends.
For the total corporate sector, estimates based on the new SNA
are also displayed.
It must be noted that the estimates from the
old SNA are based on the book values of land, as opposed to those
of the new SNA which are based on market values.
be some differences between these two time series.
Thus, there should
In spite of
such differences, however, we can still trace the movement of the
rate of return.
1956 to 1966.
The first phase is the slightly upward trend of
The second phase is the falling trend of 1966 to
1975, and, the third is the very gentle upward slope to the present.
The first
phase just coincides with the period when there
occurred high growth in
capital investment in
high economic growth in GNP.
equipment
and the consequent
The second phase is the period when
business firms suffered from overinvestment in equipment as
well as considerably large increases in wage rates because of labor
shortages.
Consequently, the very high rate of capital stock
accumulation exceeded the high growth of the GNP while, at the
same time, the share of capital returns in Net Domestic Product
remained at a rather stable level.
trend of capital profitability.
Thus, there appeared a falling
After 1970 the trend was accelerated,
but we can think of that trend as one aspect of a long-term cyclical
fluctuation in business activity.
oil crisis
Then there occurred the first
which caused a momentary hyperinflation and changed
the basic worldwide economic environment.
- 22 -
is,
As far as'shown in these
figures, the Oil Crisis pushed the rates of return down to an even
lower level, but we must take the concurrent low operation levels
into account.
Although the world and the Japanese economy's slowed
down growth was unavoidable
(
Figure 1
)
, it does not necessarily
mean that the rates of return on capital should remain at a lower
level.
If demand, external and internal, can be created by appropri-
ate capital investment and by international trade in the near future,
there must be some possibility that rates of return will rise again.
As contrasted to the movements in all industry, the aggregate
manufacturing industry's rates of return exhibit a consistently
falling trend.
This phenomena suggests three important facts.
The first is that manufacturing industries offered many a profitable
opportunity at the beginning of the sample period.
Secondly, as
the progress of accumulation in invested capital in manufacturing
industries continued, profitable investment opportunities declined
early in the period.
In other words, the marginal rate of return
on capital was decreasing from the onset of the period.
The third
fact is that relatively profitable investment opportunities appeared
in other sectors other than in manufacturing industries.
In fact,
capital investments in nonmanufacturing industries have been increasing especially since the middle 1960's.
-
23 -
V.
ANALYSIS OF THE INDUSTRIAL RATES OF RETURN OF
LISTED CORPORATIONS
In this section, we analyze some relations between the rates
of return and other important economic variables, and relations
between a few concepts relevant to capital activities and other
variables.
Since we are especially interested in
the transition
period from 1965 to the present, we confine our analyses to the
estimates of the rates of return for listed corporations subsequent to 1965.
The time-series of rates of return for individual industries
are considerably correlated with those for all industry.
In
other words, they share systematic risks if we--regard the total
industry's rates of return as an index of movement in some basic
economic factors.
In addition to this fact, our space is limited,
so we principally follow the movements of the all non-financial
and total manufacturing industries.
A.
The ROC's and GNP
As stated above, the level of rates of return on capital (ROC)
is,
ceteris paribus,
a function of the real rate of growth in
GNP.
Real rates of return before tax for all (non-financial), manufacturing and nonmanufacturing industries are respectively regressed
on the real growth rate of GNP.
-
24 -
Industry
Constant
(t-value)
Regression Coefficient of DurbinWatson
Coefficient Determinant
statistic
(t-value)
All
0.72
(1.81)
0.34
(7.36)**
0.82
1.60
Manufacturing
0.67
(1.94)
0.42
(10.79)**
0.67
1.75
Nonmanufacturing
0.89
(1.75)
0.21
(3.61)**
0.52
1.49
* denotes significance at 5 percent level, and **,
percent level.
at 1
We can certainly find an intimate positive relation between the
ROC's and changes in GNP.
The ROC is a decreasing function of the
difference between growth rates of investment
in
rates in GNP, if other factors remain constant.
equipment and growth
This is because
rates of increase in capital stock growth exceeding the rates of
increase in the product
of capital growth, must necessarily depress
rates of return.
The rate of increase of fixed capital by the private sector in
the New SNA is taken as an index of the rate of increase of overall
capital stock.
The ROC for the all industry is regressed on the difference
between this rate and the real growth rate of GNP.
Real rate) = 3.10 - 0.37 (the difference),
of return
(8.39)/(-2.27)*
B.
R 2 =0.30
Time Trend of ROC
The rates of return on capital by industries are shown in
Table 4 and Figure 7.
- 25 -
During the sample period, the ROC began to decline gradually from a
peak in 1967 to a low in 1974, but the decline was accelerated by the
Oil Crisis, and the ROC dropped to a low in 1974.
But
thereafter the ROC
recovered from the low to the original trend line.
Compared with the accounting rate of return, the movement
of the real ROC is quite different. There are not only differences
-often.
in peaks and troughs, but they also reverse their direction of
change .
In addition, the variability of the accounting ROC is
bigger than real ROC's
The reason may be that the
variability.
accounting ROC includes part of nominal holding gains which fluctuate
in accordance with price level changes.
Accounting ROC shows,
however, a different movement from the nominal ROC that includes
all holding gains.
These tendencies can be seen both in the total
industries and the manufacturing industry group.
-Me sempit.
mean as well as the standard deviation of the time series are bigger
in the manufacturing industry than in all. industry.
"The. R*&I
R.e.*t c+ RcKy-
*-et CepntA L'"
Mean
S.D.
All industry
0.034
0.015
Manufacturing
0.040
0.018
The regression on a time variable leads to the following results.
Coef. of
Regression
(t-yalue)
Constant
(t-value)
Coef. of
Determinant
DW
statistic
All industry
5.817
(10.00)**
-0.289)
(-4.66)**
0.645
0.851
Manufacturing
6.920
(10.10)**
-0.346
(-4.75)**
0.653
0.889
-
26 -
The time va
a
:7e
!A.t a
It
regression.
from 2 (=1966) to 15 (=1974) in the
statistically.
-
essio
falling trend is
was performed for individual
industries,
Thirty-iour industries among thirty-six
industries.
identified
including the three aggregated industry groups, have negative coefficients for the time variable, and among them twenty-nine industries'
coefficients are significant at the five percent level.
estimated coefficients are neither significant.
(
Two positive
See Table
We also calculated the rate of return on "physical"
13.)
capital.
. capital is defined as total assets less financial
In this case, .
assets. Correspondingly, the return on this capital is defined as
the return on
apital less income from financial assets.
total
"Rate of Return on Physical Capital"
Mean
S.D.
All industry
0.034
0.023
Manufacturing
0.043
0.027
There is only a slight difference in the mean levels between
the totaland the physical rates of return.
in the physical rates of return are larger.
However,
fluctuations
This fact suggests
that returns on financial assets tend to stabilize the returns
on total
C.
capital.
Effective Tax Rates
Some people assert that capital must bear the excess burden
of corporate tax under inflasion since, the tax is imposed
on accounting income.
We define the following ratio.
-
27 -
nominal tax rate =tax payed actually /accounting capital incom
effective tax rate = tax payed actually / real return on capital
We also calculated effective tax rates for equity capital.
Taxation on holding gains certainly raises the effective tax
rate.
On the other hand, since interest paid on debt capital can
be deducted from taxable income, the use of debt of leverage
lightens the tax burden.
of debt capital.
This effect is
called the tax shield effect
Therefore, the excess tax burden due to holding
gains, ceteris peribus, could be lessened by increasing leverage.
However, the effective tax rate on returns on equity capital cannot
be decreased by debt.
The effective tax rate, as shown in-Fig.8 & table
than the nominal tax rate.
5, is higher
The differences in these two tax rates
are proportional to the rate of inflation and are, thus, getting
wider.
It must be noted that nominal tax rates as well as effective
tax rates have upward trend.
leverage to exercise
This is because firms did not utilize
the tax shield effect, although tax authorities have
raised the tax rate substantially on taxable income.
(See Figure 8
We do not raise questions here as to why this has been so, however.
Although we cannot infer that business firms purposely utilize
the leverage effect as a tax shield through the time series data
(for all industry
and nonmanufacturing industry), the tax shield
effect can be observed in
the cross-section data (Table=MV==
-
28
-
and
8
Figure
=
).
The average effective tax rates are regressed upon
.gg~quity-'~-to-total capital ratio for each industry, excluding
the average
the three aggregated industry groups and two extraordinary industries,
mining and the railroads.
Effective
rate
(E)=f634+t0684(e
tax
6.34
(1.1)
+
0.684 (Equity-to-total
(4.3)**
capital ratio
)
2
R2
=
0.39
'-Qquity'
This equation implies that high
-- to-total capital ratios
(i.e. leverage at low levels) bring about heavier burdens of corporate
tax.
-
29 -
D.
Inflationary Influences on the Rate of Return
The Japanese Economy has experienced considerably high inflation
Figure 4,
experienced
at least until 1975 by international stanards.'''It
extraordinarily high inflation rates
(in
WPI) of over twenty percent,
But
particulary in 1973 and 1974,because of the First Oil Crisis.
inflation was largely suppressed after 1977,
and the Second Oil Crisis
could exercise only a slight influence on price levels, especially
on the CPI, owing to
rationalization in
business firms and the
What influences has inflation
lowered rates of increase in wages.
exercised on the real ROC then?
We have shown that the ROCs (of the aggregate nonfinancial and
manufacturing industry) have a strong correlation with the real
growth rates in GNP which can be considered an index of economic
and business activities.
It is empirically known in Japan that
cyclical prosperity raises price.levels sooner or later, and that
inflation then suppresses demand, and that business conditions
eventually take a recessionary turn.
Thus, the rate of charge in GNP
is negatively correlated with the inflation rate.
We have regressed
the growth rates of real GNP on the CPI and a time variable.
Here,
the time variable (one in 1965 and fifteen in 1980) is introduced
to express a falling trend due to a shift from a high growth rate
economy to a low growth rate economy.
Growth rate of) = 16.409
+ -0.618 (CPI) + -0.415 (Time).
Real GNP
(12.273)** (-4.826)**
(-4.002)**
2= 0.814
D.W.=2.01
Because the ROC is correlated with the GNP and because the GNP
is correlated with the CPI and time, the ROC is logically correlated
with the CPI and time.
Here
it
meant that the declining trend in
is
GNP and in ROC are just concurrent.
-
It must be noted that a declining
30 -
trend in GNP does not cause the trend in ROC, although these changes
in GNP influence ROC's.
We would understand that the falling trend
in ROC is a cyclical phenomenon resulting from inefficiencies in
business activities caused by excess facilities and so on.
On
the contrary, the falling trend in GNP implies some structural
change in the economy.
There is the possibility that inflation exercised some influence
via other means.
For example, inflation might have suppressed
returns on capital by pushing costs up, as opposed to pulling demand
down.
Simple correlation coefficients were calculated between
the ROC and the CPI, WPI and GNP deflator (PG).
The highest cor-
relation was the one for the CPI, and the lowest was for the GNP
deflator, but we cannot, of course, determine the effects of
inflation from this.(See Table 6 for correlations by individual industries.)
Regressions for ROC before Tax
Constant
All Industry
WPI
CPI
-0.200
(-3.30)**
-0.122
-
(6.87)**
4.644
5.810
Manufacturing
4.648
-
-
-
0.45 0.40
0.184
0.29 0.18
(-2.22)*
-
-
0.44 0.29
-
-0.121
(-2.32)
-
0.31 0.51
-
-
0.207
0.26 0.23
-0.231
(-3.10)**.
(9.22)**
5.411
DW
(-3.14)**
(10.70)**
(8.33)**
R2
0.48 0.19
4.953
(8.71)**
4.041
PG
(-2.03)**
(6.56)**
-
31 -
Theoretically, the effective tax rate is increased through
the expansionary effects inflation has upon taxable income.
The
results of regressions of before and after tax ROC on various indexes,
however, are contrary to our theoretical expectations.
Regressions for ROC after Tax
CPI
Constant
3.937
-0.188
(7.03)**
(-3.15)**
3.112
All Industry
-
-
0.45 0.15
-
0.47 0.16
0.174
0.28 0.32
(-3.29)**
3.649
-
-
(-2.15)*
(5.55)**
4.623
(6.83)**
Manufacturing
DW
PG
-0.121
_
(8.74)**
R2
WPI
-
-0.224
(-3.10)
3.554
-0.127
(-2.63)
-
(7.58)**
4.247
_
_
-
0.44 0.19
-
0.41 0.41
0.201
0.37 0.45
(-2.05)
(5.33)**
Inflation brings about the "debtor's profit" to equity capital
in cases where loans are contracted in money terms.
In this context,
the rate of return on equity may be increased by inflation.
the regression analysis of the rate of return on equity
However,
(all industry)
suggests that the negative effect of inflation already stated is
stronger than this positive effect.
Real ROC on
Equity
=
10.795
-
(5.25)
4.914
0.474 (CPI)
,
R2 = 0.25
(-4.41)
-
D.W. = 0.976
2.022
-
32 -
E.
Accounting ROC and Real ROC
As pointed out already, accounting rates of return move quite
differently from real rates of return, at least cyclically.
We
regressed the real rates of return on the accounting rate of return
in order to see how much the accounting rate of return explained the
variation of the real rate of return for the all industries.
Real=
ROC
-2.4
+ 0.69 (Accounting)
(-1.12)
(2.712)*
,
R
= 0.38, DW = 1.14.
The regression coefficient for accounting rate of return is positive
the five percent level, but the accounting rate of
and significant at
return explains less than forty percent of variations in the real
rate of return.
The
accounting rate of return explains variation in the nominal
rate of return
,
however by more than 50 percent.
. Accounting,
Nominal
ROC
+ 2.32 ' ROC
(3.69)
(-1.93)
= -10.31
/
R=0.53, DW=1.76.
Average real ROC by industries.was regressedon its
average accounting rate
of return to see whether accounting
rates of return can explain industrial differences in real rates of
return.
(average real) = -1.05
+ 0.56
(
average)
(4.361)** accounting ROC
(-0.85)
ROC
2
=0. 3 8.
A similargregression was also performed for the nominal rate oi'
cross sectional
return.
(average
)
nominal ROC
=
4.69
+ 0.58
(7.51)**
(6.38)**
average)
accounting ROC
Revaluation ratios of individual assets for
shown in Fig,10 &Table 9.
2=0.65.
all industry are
The revaluation ratio is defined as the
-
33 -
ratio of value
of revaluated assets divided by book value .
They
are, in general, considerably low and stable until 1972, but shift
to a higher level in correspondence with rapid rise in price levels
after the First Oil Crisis.
The revaluation ratio of depreciable
assets shows a characteristic movement.
and 1974.
It rose sharply after 1973
The movement is correlated both with average age-life-and
with price changes in depreciable assets.
Average age-life was
It will be clear
lengthened to longer than five years after 1973.
that the longer the average-life, the bigger the revaluation ratio.
See Fig.ll for average age-life and inventory period figures. Fig.12 contains
holding gains.
the deflators for nominal capital assets) which shows the rate of
Revaluation ratios of inventory assets are very small and almost
negligible throughout
the period.
On the other hand, those of land
are very high and over fifteen throughout
the period.
The revaluation
ratio of return on capital remained at considerably high levels except
for immediately after the First Oil Crisis.
to its previous 1972 level.
It
has
not entirely returned
The portion of holding gains in
nominal returns very high especially during years
about Oil Shock industry.
F.
ROC Differentials and Risk
Now, we discuss, tbxouth the movements of ROC by industry,
whether changes in industrial structure have been carried out appropriately, or whether economic resources have been allocated to
industries efficiently.
Efficient resource allocation must bring
about a reasonable trade-off between expected return and risk.
In
addition, if there exists any inefficiency at first, and if it disappears gradually under competitive conditions, the degree of
-
34 -
dispersion of industrial ROC will converge to within a certain range.
In
Figure 17-1 and-
17-2 is
drawn each industrial
time-series' ROC curve for manufacturing and for nonmanufacturing
industries respectively.
1974 and in
1979 is
The curve which shows sharp drops both in
that of
which was
the petroleum industry
damaged by the first and second oil crisis.
If this industry is
neglected as an exception, there can be seen some tendencies for ROC
differentials between industries both for the manufacturing and the
non-manufacturing groups.
That is, as far as real rates of return
on capital are concerned, it can be said that industrial coordination
has been carried out smoothly to an efficient state.
However, it is
very interesting that the dispersion was widened in 1979.
The trade-off between returns and risk are represented in
Fig. 13
by points
which expresse:
Figure
the combination of
the mean and the standard deviation for individual industries.
investment opportunities should
No
ever be undertaken unless it could
earn a return corespondent to its risk.
The relevant rate of return in case of investment decisions is
the expected rate of return for the investment opportunity.
But since such
information is never available, we utilize actual means and standard
deviations
instead during the estimation period.
In
Figure
13..
stated aboveare drown points of mean and standard deviation pairs,
except for a few industries which are thought to be protected by
entry barriers.
We can identify the trade-off both by the figure and by the
regression analysis as follows.
+ 0.23
(average of) = 8.77
(4.5)**
(3.4)**
ROC
-
(SD
35 -
of ROC
' R2=0.45.
,
as
Considering that effective tax rates differ by industries due to the
Tax Measure Laws, we
employed regression analysis for
real
rates of return after tax.
(average ROC)
after tax
=
7.54 + 0.33
(3.2)
(5.1)
.
S.D. of)
ROC after tax
R2 =0.51.
Both analyses, we can say, suggest efficient allocation of
capital goods among industries.
G.
Tobin's "q" Ratio and its Stability
Tobin's
"q" does not have any trend overall,
but not a few
industries show upward trends which are significant statistically
(Table
10,11
).
Every industry has a peak in 1972, when the
problem of excess liquidity in
the economy brought about by an easy
money policy took place. (Fig. 15)
In addition to its stability, that the "q" level was constantly
below one is also -
noted. This
means that there were
opportunities to earn gains by purchasing stocks and debts in capital
markets and selling real capital in asset markets.
Here lies a very
interesting problem to be analysed in what follows.
But it
is
more important "q" is
consistently very low,
highly stable.
The fact "q" is
on average 0.65,however,suggest to us that
there are some large adjustment cost in Japanese economy.
For example,
the relative cost of financial and physical
asset sales for Japan and other countries may differ. For this
reason and the international differences in accounting practices,
measured Tobin's "q" for Japan and other nations may necessarily
differ. Even though it is difficult to make international comparisons in
"q's" size,
it
is
nevertheless remarkable that "q" has
been relatively stable in Japan.
-
36 -
Although the economic relation is not yet clear, the regression
analyses of "q" ratios against the growth rate of real GNP yields
good statistical results for the three aggregate industry groups.
Industry
Constant Regression Coefficient of Durbin-Watson
statistic
(t-value) Coefficient Determinant
(t-value)
All
0.67
-0.0029
0.42
1.42
(91.20)** (-3.09)**
.
0.68
-0.0026
Manufacturing (78.04)** (-2.33)**
Non0.66
-0.0031
Manufacturing (75.17)** (-2.78)*
0.30
.65
0.37
0.95
*
denotes significance of 5 percent level,
**
at 1 percent level.
Regressions upon the CPI were also performed.
The results are
as follows.
Industry
Constant
(t-value)
Regression
Coefficient
(t-value)
Coefficient of
determinant
Durbin-Watson
Statistic
0.37
1.10
-0.002
(-2.07)
0.25
1.35
-0.0024
(-2.55)*
0.33
0.80
0.67
-0.0023
All
(88.26)**
(-2.78)*
Manufacturing
0.68
(76.17)**
NonManufacturing
0.66
(73.53)**
*
denotes significance at 5 percent level,
**
at 1 percent level.
The minus sign is an economically reasonable result comparable
to that in
the regression of "q" against real rates of return.
H.
Ratesof Return to Investors
(RRI)
Rates of return to investors have such large fluctuations
in both nominal and real terms that we cannot testify confidently
to any economic hypotheses by the statistical analysis of time
series.
(Caiculated RRI is shown in Table 14
and
Fig.12).
We want, however, to test the hypothesis that rates of return
to investors are realized proportionally to the real rate of return
on capital,
using
Here, the post-tax
industry.
averages of both rates of return.
ROC
is employed because distributed
returns on capital are post-tax returns.
Real rate of
return of investors
= 3.18 + 0.06
5.69)**(0.34)
(Real rate of
)P N2=0.04.
return on capital
The above regression is not significant statistically.
The relation between rate of return to stockholders and rates
of return on equity capital, however, can be determined by regression
analysis.
Real rate of
return to stockholders
8.59 + 0.32
(8.15)**(2.99)*
Real rate of
return on equity
R 2 =0.22.
It is interesting that use of nominal rates of return as
independent variables gives similar Iregression results.
cross sectional
Nominal rate of
return to investors
11.19 + 0.007 Nominal post-tax rate)
(5.43)**(0.03)of return on capital
R2 =0.00.
Nominal rate of
return to stockholders
16.70 + 0.32 Nominal post-tax rate
(14.45) (2. 8 4 )*of return on equity
R =0.20.
-
38 -
Under the assumption of the stationary state, Tobin's q ratio
can also be calculated as a ratio of the rate
of returnon capital
to the rate of return to investors. The calculation results are shown
in Table 10 as q.
The correlation of q and q 'is very low.
( See Fig. 16
)
So we can infer that the assumption of a stationary state is not acceptable
in our sample period for the Japanese economy.
I.
"Beta" coefficient of ROC
We calculated the "beta" coefficient for
on capital by assuming the marke.t model.
rates of return
Although this beta expresses
systematic variation, this is not a relevant risk measure as it
in
in
the
case. of investment in financial assets
real assets cannot be completely diversified.
is
because investment
The relevant
risk measure must be not the systematic risk but the total risk.
The beta
for the ROC merely express the co-movement with individual
industry's ROC and systematic factors i.e. the ROC of the all industry
as a proxy.
The average value of the coefficients of determination for the individual
industry-
regressions is about .67, which means that nearly two-
thirds of variation in an individual industry' s ROC are, in average,
explained by the ROC for all industry. (Table 14).
-
39 -
VI.
(1)
SUMMARY
The rate of return on capital for the aggregate nonfinancial
corporate sector remained at a stable level, except for cyclical
fluctuations, during the period between 1956 and 1970.
However,
a slight falling trend began from 1966, and that trend became more
apparent from 1971 and was accelerating by the time of the First
Oil Crisis.
The rate of return picked up rapidly from its low
of 1974, and since 1977 it has attained a stable level.
It is
still considerably lower than the level of the 1950's, however.
On the other hand, the rate of return for the manufacturing
ovements
similar to those of the total
different
sector exhibited
up untill 1966 ,since that year , however,
(2)
have declined in
sector
a similar fashion.
It is said that there were several big changes in the Japanese
There was the first and the second
economy during this period.
liberalization of capital trade (1967, 1973),
of the Yen and a shift
the upward revaluation
from the fixed rate system to the floating rate
system (1971), the problem of excess liquidity in the economy (1972),
the First and the Second Oil Crises (1973, 1979),
government bond issues
excessive
other changes.
the problem of
(since 1975),
and many
No factor except the First Oil Crisis could inde-
pendently exercise a great influence on the movement in rates of
return.
(3)
As far as the period between 1961 and 1974 is concerned, the
movement of rates of return is correlated strongly with the growth
rate of real GNP.
negatively correlated with one of
It is also
the variables which represent overcapacity and with increases
-
40 -
in
real wages.
has some
It
can be said that the falling trend in
ref-ation
to
the
overcapacity
problem and
rates of return
to
an
increas-
ingly changing wage structure.
(4)
The effective corporate tax burden is correlated with price
changes and has been increasing consistently during our sample
period, especially since 1973.
It must be noted that not only
effective tax rates but also nominal tax rates have increased.
This means that corporate tax rate has risen substantially.
Although
cross industry analysis proves the existence of a tax shield effect
of debt under inflation, industry,s time series data does not clearly
show that firms positively utilized the effect of leverage.
(5)
The real rate of return between 1961 and 1979, particularly
the post-tax rate of return, is also negatively correlated with
price changes.
But the exact economic meaning of this relation
is not necessarily clear.
(6)
As for the relation between accounting ROC and real ROC is
concerned, we cannot completely
as a proxy for real ROC.
(7)
deny
a
role to accounting ROC
It is not always a good proxy, however.
From a certain point of view, resource allocation among different
industries seems to have been performed rather efficiently.
We
can see not only a tendency towards convergence in rates of return
dispersion between industries, but also reasonable trade-offs between
levels of industrial rates of return and risk.
(8)
The movement of Tobin's "q"s is below 1 and remarkably stable over
the period for aggregate industries and has no trend.
-
41 -
Although all
And the very low level of "q" suggests the exsistance of some
adjustment costs innegligible in
(9)
Japanese economy.
Real rate of return to investors is subject to considerably
large fluctuations. By use of cross sectional data, we cannot
find any significant relation between real rate of return to investors and real rate of return on capital. It is interesting, however,
that we can see that the nominal rate of return to investors is
correlated with nominal rate of return on capital in both cross
industrial data and in time series data for individual industries.
-
42
-
BIBLIOGRAPHY
(1)
Feldstein, Martin, and Lawrence Summers, "Is the Rate of Profit
Falling?" Brookings Papers on Economic Activity, Vol.8, No.1
(1977), pp. 211-29
(2)
Holland, Daniel M., and Stewart C. Myers, "Profitability and
Capital Costs for Manufacturing Corporations and All Nonfinancial
Corporations", American Economic Review, Vol.70, No.2 (1980),
pp. 320-325.
(3)
King, Mervyn A., "The United Kingdom Profits Crisis: Myth or
Reality?", Economic Journal Vol.85, (1975), pp. 33-54.
(4)
Liebling, Herman I., U.S. Corporate Profitability and Capital
Formation; Are Rates of Return Sufficient?, Pergamon Press,
1980.
(5)
Nordhaus, William D., "The Falling Share of Profits," Brookings
Papers on Economic Activity, Vol.5, No.1 (1974), pp. 169-217.
(6)
Okun, Arthur M., and George L. Perry, "Notes and Numbers on the
Profits Squeeze," Brookings Papers on Economic Activity, Vol.1
(1970), pp. 466-73.
(7)
Sandilands, F..E.P., Inflation Accounting, Report of the Inflation
Accounting Committee, London: Her Majesty's Stationary Office,
1975.
(8)
Tobin, James, "A General Equilibrium Approach to Monetary Theory,"
Journal of Money, Credit and Banking, 1 (February 1969), pp. 15-29.
(9)
and W.C. Brainard, "Pitfalls in Financial Model
Building," American Economic Review, 58 (May 1968), pp.99-122.
(10) Von Furstenberg, Burton G. Malkiel, and Harry S. Watson, "The
Distribution of Investment Between Industries: A Microeconomic
Application of the "q" Ratio, in Government and Capital Formation, ed. by George M. Von Furstenberg, Ballinger Publishing
Company, pp. 395-460.
(11)
Wakasugi, Takaaki, Kazuhiko, Nishina and Moriaki, Tsuchiya
"Trends in Returns on Capital in Postwar Japan", The Journal of
Economics (The Society of Economics, University of Tokyo),
Vol.42, No.2 (1976) and Vol.42, No.3 (1976).
(12) Wakasugi, Takaaki and Konya, Fumiko, "Rates of Return on Capital
and Tobin's "q"," Keisokushitsu Technical Paper, No.52 (December
1980).
A
ILLUSTRATIONS
Figure
1
Rates of Increase in Fixed Capital Formation by
the Private Sector
2
Pre-Tax Rates of Return on Capital for the Nonfinancial
Sector
3
Pre-Tax Rates of Return on Capital for the Manufacturing
Sector
4
Rates of Increase in Price Levels
5
Rates of Increase in Wage Levels
6
Deflator for Land Holdings by the Corporate Sector
7
Rates of Return on Capital
8
Tax Rates and EQUITY -Total-Capital Return Ratios
9
Regression Line for Effective Tax Rates against
Equity Ratios based upon Market Prices
10
Revaluation Ratios for All Industry
11
Average Age-Life for Depreciable Assets and Average
Inventory Period
12
Deflator for Capital Assets of All Industry
13
The Risk Return Relationship for Real Rates of
Return on Capital (excepting regulated industries)
14
Rates of Return to Investors (RRI) and Rates of
Return on Capital
15
Tobin's "q" for all Industry
16
Correlation between
17
Variation of
"q"
and "q'
real ROC for Each
"
Industry
TABLES
Table
1
Rates of Return on Capital Based upon Old SNA
2
Rates of Return on Capital Based upon New SNA
3
The Classification of Industries and the Number of
Firms Included
4
Rates of Return on Capital
5.
Tax Rates
6
Relationship between Real Rates of Return on Capital
and Inflation (CPI)
9
Revaluation Ratios
10
Trend in Tobin's "q"
11
Calculated Tobin's
12
Rates of Return to Investors
13
Regression of Real Rates of Return on Time
14
Estimation of Covariability in Real Rates of Return
on Capital
"q"
by Sector
Figure
1
Rates of Increase in Fixed Capital Formation
by Private Sector
30
2.0
10
G ro w t'
?ate'
of &ai C-N?
t'
-
(2.
70
~ho)
(S. 's-)
-O
Figure
Pre-Tax Rates of Return on Capital
2
For Nonfinancial Corporate Sector
OL.D
5AJ
5-
-
Figure
-
7
-7--
6o
go
Pre-Tax Rates of Return on Capital
3
n.JI
For Manufacturing Sector
Ss
OLD-
/0
-.
-
-
75
-
Increase Rates of Price Indexes
4
Figure
*.0
7I1
.
If r F
Figure
4
70
L
e
7/
71
71
71
7
Increase Rates of Wage
5
real rate is adjusted by WPI
2.0--
-
-
-
-_
_
_
/5-
/
,1
/
\~~
V
'v/I'
7t7? f F.rY.
Figure
6
Change of Deflator of Land
holding by Corporate Sector
If.
/
II\
1*1
/
0
~
tL
#7
#9
#7
S.
Li
Li
LI
LI
L~
~L
~7
~
It
7o
7~
7~.
73
7~
71'
7S
7~
~I
7~
F.)'
Figure
7-1
Rates of Retuxn on Capital
ALL
on Total.Asset
Dmosm
7.o
'a0
t0
real
aft4r
tax
0
4
67
it
170
17
7
1Vi
7#
71
y
7
Figure
""MAm"ACTUnvl
71
0
7f Fy.
7-2
Rates of
On Total Asset
7.
20
al1
~
r
-
;;
K
/
a
II
/
/0
4
i
7
i
7
S
7a
71
72
7
-
r 7
7
7
It
F.
Figure
8
Tax Rates and
G
iLL IMWnUT Y
fr!WILAT4.
-to Total Capital Return Ratio
Iet
MAIEU7ACTUEI
kx
I
mcat
'/0
+0
30
i
-I
0
c0l
I. a
-ly-ec"WeNi
~.
r
I..
-*
Af' 16 67
''
*1
1
7'
--..
*1
,
7 7
71
V
7
f 76 77
f 71,
FT.
i
s
47
1 f
7
71
72.
71
714, ,7f,-.
77
7
77.
F..
7-3
Figure
Rates of Return on Capital
R=real
N=nominal
A=accounting
FOODS
NONMANUFAC'IRIG
t'
rPJ
/
/
/
/0
-~
-
/
0
;b
67
70
69
72
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73
74
77
75- 76
7
7y
66
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47
br
62
70
7/
1.
73
74L 7T
74
73
?T
77 7
1r
PAP,& P 7L
7.
7
/1
to
'3.:
iI
-
-
~7/~!
-
-
-
to
O
it
7
49
b
4'0
1
7L.72
7uL
7r
14
7771
7 1F y
it
771
,-
'
'7
---
F yy
CaSICA s
DRUGS!
7.
1
10
N
A
"I
I,,
\
N'
/
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I'
-
L5
l.A
I
/
1
"
-..i|
-
~1
0
£4
17
PotimO
42,
it
70
7/
72.
13
7',
7f
7
77
7F
7? T.Y
44
T
67
42
70
47
'l7
73 1
71.
72
74
77
79
RUEER
7.
7.
10
-A
-
-
-
if
70
~
0
1
R
0
-
f 7 - 7
72.
7
47
4?
7-
71
7?
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74
7t
7
7
f
: y.
77
F
IRON & STEEL
~0N & S~EL
CLAY
&GLASS
CLY_& GLASS
__
7.
I10
0
/
/
____________
/
(o
0
44
L7
2?
6?
70
71
72
73
74
7r
7&
77
72
7?
6t &7
F.Y.
18
70
21
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73
71
74
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71
17
7
Fr.
7?
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~DAL
-7.
7.
A
14
A
/
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--
7
Is.
'I
'I
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N
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tor
.3/
1
0
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1-
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7/
7
z
73
7
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74
-
77
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--
44
47
7
- ____--- -
g
4,7
70
7/
7
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71
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7
74t
77
77
79
F
7 73
F
Y.
SLET EIC EQcOIPSPUIfl
7.
'7.
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1A
,-1
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10 --
10
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70
7f
71
73
79
7*
74
77
71
77
F Y.
7
t
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71 72
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714 7t
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71
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QD
Mm~on VsIcras
I.
7.
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/( \\
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OTE
PECISION
MHO
~
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7.
7.
A
--- - - - - - -7 -
is,
/ 0
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70
71
71
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71
7f
76
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7
f
14
77 F.Y.
47
2
£ f
70
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1
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3 7
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7
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75
74
7?
7
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7.
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3£
'7
i2 f
?
70
-7
71
73
7u 7
76
77
72
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6 '7
12
61
70
71
7 L
73
7o
77
7t
7?
F
CONSTRUCTION
7.
t7
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to
-
A
_________
-
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1
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'A
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0
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it
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REAL_ESTATE
7.I
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(0
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a
4
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i
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7
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72
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F. Y
SEA TRANSPORT
TB ItG_____
7.
7.
20'
N
-10I-
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//
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7
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7
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W-amoI7sfl#
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//
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a
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73
72
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71
7
T
It
F Y.
47
47
19
70
7/
7 J- 71 7%
i
76
77
7
fY
7
E.ZCIC POWER
CommUWCATIoN
7.
7.
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//
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\
(
/
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/ 5 --
V
N
N~
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S467
9
6 F 70
7
72
73
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7
74
77
7?
7
fFT
5.
7
7
73
77
7
Y
71
J IS *i
a
,
,
t,
,
AjiJ
it &4
)4
I4
Atj
J7 L71?
---------------- 4 0
'I'.
/
/
N
"ii
0/
iii
N
I
Figure
10
Revaluation Ratio
ALL INDUSTRY
2.0
Figure
9
Ass,.eI
Regression Line for Effective Tax Rates
against Equity Ratios based upon Market Prices
I0
0
Figure
11
Average Age-life of Depreciable Asset and Average
Inventory Period
Figure
12
Deflater of Capital Asset on All Inustry
:
2
(Holding Gain Rate),
.10
,,-- _ _ - - I
-- V
~~L
L
nfo,
i0
1o
ro.
0-
6
6
~
7o
71
72
73
//4
7S'
76
77
7
1(
0
~L
£ ~
770
7/
72-
73
7
7t , 71
77
79
As
Sp r ic;c
Asel{
Figure
14
Rates of Return to Investors (RRI)
and Rates of Return on Capital
7*
Figure
13
Risk-Return Relationship on Real Rate of Return on
Capital(except regulated industries)
I
-
-L
20
nominal ROC
after Tax
(0
nominal RRI
-real RRI
a r1
er RYC
Sax
0
*
I'
to
M-EAN
-
11
19
~7
y
7/
7-
3
I
'I
?-
?f
7
?7
7P
7
.Y
;/I
Figure
Tobin's q of All In
15
Figure
Correlation of ti and q
16
stry
,0.
,0
t
/
11a
:1
I'
1
V
It
I.
e
I'
* I
* II
I I
0-
0.0
l-
-o.4 L
.
'7
.I_
? 1
i
7b
7)
72
73
7'
1'
77
1
79
?7 , .
y
-2
It I'
~1
liii
Figuxre 17-:-
Variation of Real Rates of Return on Capital for
20
I
___________
--
MANUFACTURING
Each Industry
-
-
7
//
I77---,'
-:
-----
--
7
_
.2
I.
I
*
-/0
-120
72
73
7
7*
76
77
7
Y
F- Y
_
_
Figure 17-2
20
Variation of Real Rates of Return on Capital for Each Industry
-
NON MANUFACTURING
(0
..........
0
-/0
-20
446
67
b2
476
70
7/
7
73
741
7
'
76
77
22*
7?
Table
1
Rates of Return on Capital Based upon Old SNA
aa
Arf asTaxes
c~ ~
s
A LL
1NDUSTf
r
MF G
, 72
ALL
L T
r ..
7. /0
/3.12
7,74
22. 3?
60
/
/0. 25S p3.4.2
.3I
,1.
60
6
-
-
I
124
76
/3. 45
7.73
/ 3..20
7.3
io.70
S6
67
11.*$*1
to.'!?
IG.11
11.6
10 -74
4-7S
/0.S3
/9, 7 4
//03
13.
7
2. 33
414
7.4L
.33
6-16
7.16
11 77
?.47
8.?7
7/
|1.6
?2
!?
!U
I0'.1 I
10.60
-7
7,3.2
a.%
?5.21
7.40
7.2 6
2.46
5.132
7.17
g0.9 !
2..32.
g.37
734-
.7/7 !2.51
6.20
2
6.70
*67/7
/0.2
70
5.40
3.21
Rates of Return on Capital Based upon New SNA
e
ac~
Bef~e
71y
a
A-.e,
7.2
6.7
7
7-S
11.-5
. 35
/0.04
11.3
72
E-GFr-
INDUSTRY
2. e,?
I.43
F sca
YeA.w
15.g~
10.12
634
Table
ALL
8?. b?7 /2.27
31
iI30
12
6 3
11"et
12.4 .0
S, 72 /2.2 ~
7
lut;.,Ad/tsi
63.2
3.5
7.j 3.$
3.
7.7
3.8
?)
?.7
4.2
2z.2
2.2
2.7
Tax
Table
The Classification of Industries
and the Number of Firms Included
3
FOODS
MTARINE
TEXTILE
MAINING
PAPER & PULP
CONSTRUCTION
74
TRADE_
5,
DRUGS
RETAIL
2..
PETROLEUM
OTHER FINANCE
RUBERR
REAL ESTATE
CLAT & GLASS
RAILWAY & BUS
CBEMICALS
IRON & STEEL
METAL
MACBI
Y
/7 i
71
35
30
TRUCKING
7'
AIR TRANSPORT
27
3
/ 6
7
SEA TRANSPORT
3
3
COMMUNICATION
ELECTRIC POWER
MOTOR VEBICLES
TRANSPORT EQUIP_
/
WAREHOUSING
ELECTRIC EQUIP
SBIPBUILDTNG
__
2
1
GASS
PRECISION
SERVICAES
2
OTEER MNFG
NON MANUFACTURING
.261
MANUFACTURING
ALL INDUSTRY
Table
ALL
4-1
INDUSTRY__
Tota
PE-/sical
Asset
Bet oeT-x
1.7
.b)i
Ae
.2.
S.
,3.
9-l
g.o
2..6
7L /.j
9
o
2.6
b .7
9
1.
I
7.i
7.
3.3
L.7
07
i
3
/&.3
.'+7
7./
17.o
6.7
f.3
4.6
/.7
6.
o.7
781
-1
7
i
~
.o
-/.
j
.7
2.1 I
.
/3.7
6.o
-3.7
o.2
0.L
-/.
...
0.
3.3
b.0
, 3
/0.
-/.0
.7
.
7.1 /2.
2.
1.2
3.1
77
b.3
1.2
.
3
1
9.7
3.7
7
o.905.7
.
6.3
2.
/..
1.6
S./1S
.
3t
.8.
3.3
o..
O.7
4
lo.7
/3.2
7,
4.7
/
3.6
7.o
c
..
6.7
3.4
i.1/
.
.0
//
M
7.3
2-1
./.7
2. 6.6
2.7
7.3
3.7
.1 /. -0.3
7.
??
7
6 4
2.
a-s
9.
7.
3.7 ?.6a
7.6
3.0
.
70
/|
?.
4.7
/o.1
16
.
/0. /3./1
/.o
70
721
.
f
//9.6
r.
Eindy As.atL
Asset
Te
.6.
1
..
&/1.5
7
No.
Rates of Return on Capital
/.
0.
4.g
.3
.4
MMiCTURIG
TOtLILQ
se
P
Asset
Afte
_ee
aA
ed
To,,
.
A D
IuV
Ac
41
.
4 2
/)3 3
//.
0
6. /1.2.
10
. 0-
/
o
1
.
1. /
0.
.
9 3.7
71
74
71
(-~EM
3.
35:
9..
.2.3
2.
__7.
T
.7
A.'
LI
?K
7
77 7
7
1
7
.
/
.2
.6
.
L
7.4
/t.4-
7.6
.
3o./
-3.7
/
2.3
1..
9 f/
- /.1-j.
4.
/.3
6.0
/.0o
/-
3.3
/
7
f./
o.8
0.7
/.7
4.2
9
4
7.2
7 3
o.o
i
i
.
/ .-
.
2
-
72.
6
2.
U
/7
o.
17
2?
70
3
7 6
o
7'.L
2
* Return on Equity Asset = Ordinary Profit/( Total Asset Value
7
7.
10.
6.1
/
-3.7
1
7- 6
.
6.
-a.6
11
/2.
7.0
.
.0
7L
6.7
/.6
1
/0 1
. 1 ?-0o . 3
3.7
2.6 - .7."
7.1.
/
7.
/
/
3
1.7
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o. 7
1
4'.7
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7/ . 9.f :.
.1'3.-
7
1..
6A
,.6
7.
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A
AcecI
.
/i A!t
71x
Sef_
TG.O
,t
.
b
5
AfteI
y
Eg
Assa
/sical
Liability)
/9..
2
2
2..?
Tacle
4-2
A55e-L
-f,
Pe we T
Rates of Return on Capital
(K
ALL INDUSTRY
Alte
7.'
p'L
-
MANUFACTURING
4'
h--
I/c;, .L. 'f~~
2
.
DRUGS
PETROLEUM
--
~.
r
ilQ~
IRON & STEEL
.1:?
-.
MACHINERY
~
ELECTRIC EQUIP
--
.
9. ~
y
2
IIV
4
Y
9?
A
2 .2
,o.C
b
b
76
2 1
2-i
I
3
.A
1
I.
/
9 ?
-
3
0. 0__
Q
2, 3
lL7li
-
K
.J4
-[
I?
A
~.
9
#7
/.
L~
i
1-4-
.
I
i.
0
I
- -
A
-0
to-
1L
3 .3
9
in
I -L-~--'--~-- I .....J.._________
_____--
llli
0
1
/7 3, 7
±m
p
14.1
-
")
I~
I7
io
I
- ----
I
9.
t-
(-C.
L ~.
7
S7
1?
I
II
I,
I)
9.4L
c~
3
MOTOR VEHICLES
-Li
9
- 2
I1-7
I)
0
9
2-
IC.
Inp
~I
727?
~~.__
7L
i.-j....I~.
A
-'--±--~---
&1*~-________
b
4L
'1.')
2
11O0
0
1-
I
-b.L~l.
iL
7
o7
Q~
SHIPBUILDING
&L~nV~
r
-
'I'.,
I. I
~
iq.
No.
2.D
1
7o. o
K ~
K
K ~'t. 3
--- ''S.
CLAY & GLASS
e
in.?
RUBBER
METAL
A. I?
Lj
.2.
PAIER & PULP
CHEMICALS
~~
I?
.10
TEXTILE
7
7 9
NON MANUFACTURING
FOODS
__
d
I~
f
I__LiLLi~2
0
T"
vk
TT
b
I
e
A
.---
17
Li* 0
91
4b
i
__ i
_
_
_
__-O
I
6?')
7I.
I
I.
,
TRANSPORT EQUIP
PRECISION
OTHER
I4NFG
MARINE
ioy
I
7)L+
6.
-
7
MINING
6Li
I2_
~
~~
2
'
2l~
_______
0
CONSTRUCTION
TRADE
21
2
I
OTHER FINANCE.
RAILWAY & BUS,
-0
0
11- YA
TRUCKING
6 7
/.
I
L.a
3.2.
6
.
0
Lk~2LJ.L1
~
--
1
2
-2-
7
2
6
SEA TRANSPORT.
AIR TRANSPORT
fTAR~lOUSING
COMMIJN ICATI ON
13
ELECTRIC POWER
_ SERVICES
L._
-
GAS
7
/0.
7
9.
o
3. 2
-
)
/
1.* ~'
Mean
hE.tween
166-i.17
----.-.-
L
ib.I
i?.l
-_
I
.LJL-
I
Ld
4'
2-
REAL ESTATE
Z~ZZL~2
(~1.-2-
RETAIL
__________
__
--
___
__
Table
Tax Rates
5-1
5
(%)
7-.
0
V.
i
ALL NDUSTRY
MA.NJFACTU=flG:
_
1
MFUG3.
I
NON MANUFACTRDITG
.
__
5,-3.
_ .7
13. A
y 7
77.0 0
'y3.2!
).3
5
2-3. 7
PE&U
3 /. 2
22.1
7/. 4/.3
.
FOODS:
~EXILE
M. V.
7, -3
.23
3 frC
.4
tA 3. 0
.2
.
27._4_
g
6~b, Q
-6bo.
_2
2
7L
?_.- 6 -4L
DlRUGS:
gf
PETROLEM
0.7
47.
1BER 6. 2 3J.f ug
0
1
CLAY & GLASS
2.2..
IRON & STEEL
1/.
METAL!
3u.
3.3
2-K
_6
___
ILDo__
27. o0
___
BbIPBU.LiDING(
o. 3
MOTOR VEEICLES
20
27. ?_1
(0.2
23.i 1 3.
/27.
3.
7 0. _
y_q2~ULiL
-2
. 3__
j o.
3. 3
S.
-I.
PRECISION
..
s'9
3.
3i3J.L3
.o
MDNTDTG
/____/g
_
o2.3
___
_MARINE
t.
.
(
RETAIL --
3o
4
6
REAL ESTATE
3
7_L,
._3_._
.
U
_76. 6
L
__fJ6 _
31 ./
Lk
Y
iit.1
/ 1 2.2
OTBERFTANCE
20.
32
2- .0
3i
_/939LJ
TRADE
6. 2
3Y.
2.._92_1
OTHER NFG
3 f. o
7
7
TRANSPORT EQUIP
CONSTRUCTION
25
3._ '~~22).4I
.o
3j.0)R.7L,3
__
13. 6.
/ .
2
.
ELECTRIC EQUIP
3 .o
.[
MACHERTy
___
I
A
37 . 3
j97.
2.3,2.
2
If 3 . I
7o.4-- -
i.
_.---.- _,-
J~
9.2 .7
3 I
3 0.1
.. f.L. 3
2_ _ .
2 o . /
/
f
._ _
7 _
_
21...4/o./
RAILWAT & BUS E A13.
7
TRUCKING
31)
SEA TRANSPORT
_
__
43
.
AIR TRANSPORT
3_.
- /._1
3
o.3
2.7.7
COMMUNICATION
ELECTRIC POWE
GAS
A-4
. A
- 4 - 1.3
1.3'
4
2L.
312.
7
/
LAQ
-.
_
_
q
~L
f7.1
623
_
3 L.~
Kl_ 9 .
L7.1
~.
2.
(~6~
between 1966-1979
Mean
Mean between 1966-1979
10
Table
5-2
Tax Rates
ALL INDUSTRY
-
0
____IF.YJ
&L
44
A tUA~tp__
mat
.
16._1
/
f.
6
0 ,6
3/.0
37.6
23,0
32.4
-6
)-.2. 2
-L7A
3.
I
10
3
10.12.
.20.
.
2 i
lo.S
7
77
/
/Y~(2..
?7.7 /
-23.2
/7.7
72.S
/3 1)4
'3
60.
.27.
.2 4. 7
3 2. (4
.LT.
7.
/
2
-9u.
-/'.2
LC4
-2-6. 7
3
±3t.1
L'7.-7#
1-
21.
'p6.!
37-
40.7
3
4
.
2.1.
20
.
I 9.S
27. 7
30.
,
,
IIA1M ACTURNG
U..A
.I
-4
-
XLqQL
4(~LCL~
/7.
/
s,
o
120.
31.7
37,3
2-o. (4
67
17.
2-.. o
/
2/
72
7,
.L2.
30.
27.
32-.
33.7
2.9.
30.
37.Y
30.6
1h. 0
? 2.0o
3|.
yo.
/ 6.
/
/2.
7.
7
3t4. o7
/ 63.o
3(.11
ll.
2.-6.
20.
I f.
-7;
27.
, .
2S'.
3
3 I.
3$.1
.20.
,29.
37.7
2. 2
21.
3.
-0.
,
2S1 .
1. 4 -/33.6
5
2-f.7
'9
,"2.
z3.
2/.c
22.
.
.I
31.7
61
311.2.
/
to,. 6 ,
3
23. 6
3?. 2
7£
22.
31. 6
70
.
22.
t-.2
,
/-').1
.
22-.?
3£.
Relationship between Real Rates of Return
6
Table
on Capital and Inflation (CPI)
RXR 1 = c +-3()
I
ALL INDUSTRY
f
l
MANUFACTURING
Y1
NON MANUFACTURING
7
1
FOODS
TEXTILE
_
PAPER & PULP
__
g
_3.
, 36
2.
CLAY & GLASS
V.
-3. 233
-
-L.
/fl
0
o.I
)/. 1. /
0, 32.
.
o
./3
- 0.26
-y,144
7. Po
-/o/
o.13 I
O. 6
o. ??
/.
-2.. fco 0.
-2.
3942-
o,6
c.16? c,
2S
-1.LA9
0
6.7 -./o -2.??2-/3
-0.337
-3.o7
-7)
-0.30' -2.3
.307
ou3
3-4
.3
uo
0.6.
o.
.
-3.732
7L9o
MARINE
-y.993
0-/o -o.4/7
-0./70
b2
-- LI , -0.1 3~
A C -
-2.114
6 F I
*
/19.
.'.
0/./ 776 -/6S -3.1/6
U1I
0 30
o.ss7
o
-o.2147
-0.377
t?
f'
PRECISION
OTEER MNFG
o, LS
- 0.2.03
.
TRANSPORT EQUIP
o 2-3/
3
P34
7
-/. ?o
- -.
-%
S
o.2.
'.b1/
-
SBIPBUIL-DING
MOTOR VEHICLES
74
7/
o
ELECTRIC EQUIP
o. t?
-0.0
.
7.
0.
1
3-o./
MACBIERY
o.t 49Y-
. o.3
2-3
METAL!
ooi
-o. 63
go
STEEL
/o
- o.U
.0
RUBBER
, 070.'?
7/
12.4'/7 . r
PETROLEUM
3- .
D.W,
2..
)gg. -0.0
6 . 33
.12-
DRUGS !
IRON&
W.-22
?
0-3.
22.3 6 1-0.2.31 /
4
C CALS
1-0.oo
F. 7?
R
t( 0)
t( )
3
.6/
V.9.
0.61
/.37
i
o
o.3
0, 0/!?
2-. ,3
i
CONSTRUCTIO
9.36
1 30
TRADE!
_ 4" ? y
6.
4
RETAIL
OTEER FINAN
REAL ESTATE
ic
b. ~2
o. ?
b.2
34'
3.~3?
RAILWAY & BUS
TRUCKING
7 2
713
.
SEA T ANSPOR
T-77
AIR TRANSPOR T1g
J,
o
0.
2.2. 1
6
3
-,
2.
c70
- ,),
/g1
o
-0.
1v 4.
-U.
??
0. 627
0 .127
2.|-1
-ocS~
0. c
0. o
.
o
-
~-~)
0./I)
63
S,/
S.3
o .
3.a
U
2
'31/
o .9
7
e
62 -o.6 3 o c 3 /
-0.0
-
- o .973
2o
-
'-1?3
.26. -0.2.L2
Y
o
-0.
3b
..
6
-0.
0-
.3?
.
.//3
32.
.
-t. 20
c.-/3
L-er
- ./7
.2 2o/'/ 9.7~
3
.
0,32-3
/,3
0. 3 q
~A REHOUSING
COMM-UNICATIC N
ELECTRIC POW
ER
GAS
SERVICES
0~- . o
U?.
___
I
-
27ct
0.,.W
o 7? .0 96 -0.
>o
2.
-0.
u
#-3L
-2,?2
-3,0 77
-_
_
.3..
o, -wo
22
]
0.
.- /
o.
4/
Table
9-1
Revaluation Ratio
ALL IDUSTRY
LtcA
Asse
!.07s,
9H>
/
66
Ivenitoines
/
~6
GIAAA L"-
.037
|
S303
;377
P4-6t,91* -A.
DeyecaW
1.
0 76 /f7.z.0o
/-*OV
/3u.
1.o |
l.
l
0-7C4
. '77
2.
2
2."!7
.2. ,
~
.2.1
0
7o
7)
i.o47
|.
I.o77
!.
1.100
1.
!7.77<
-I? '
0. 3 0
/7.7/.-.
,.
72/
0. 7)
0.973
0. ?3 I
0.
80o
i0 6
o.tv
//t
-o.102.
80
(-
I ~' S.gj.062
732
0. 83
i.27 o.g3
37
2 7 t
77.
.037
1.0 64
17.
o.
/.
A
0. yc
.s!
/ .7
-3 7
2. 3/
(.o7f
-- 31
a.
wVs
/.
£LI60
-0. 2-o21
0.10
ib.722
2-2.
ti
0.
77
/
720
3
2-b
/ o
I.
!.0o38
/-.
.
S6.7 37
6 30
7
I.
7
7
/?
o .7!
0. 613
o
337
l.l9h
MANUFACTURIG
enL
L41
teories pepecMe.
2.2.37
2. 33
7
/
c
3
2..
.i
2.
c 4
oQ'
0.171
!.
/.oo3
Io?
7
.0oco
3.37
/ .1
3
3 1
i
0.740
2.??
7s'
33
00
2'U
cc 7
0%3
Z
i774oo
73
2
C7 L
77
L1
|
ol
'eI~t
I
(.62-7
6~ ( ,32
77
7
16
*>;z
,
I ,
>0
/ :, I. 43 4 1 F.-
6
903
l.263
73
0 .20
.
36 0. &
.
Revaluation Ratio
9-2
Table
PLPs
Aiet
sse-t-
___
ALL INDUSTRY
L±Y
MANUFACTURING i
I
NON MANUFACTURING
I
F444:4 Ass-f
Lta,..~.tL
IN~rcc~
t) eipreej a LI P_ La,, C
vietkies
i I A*
viivt 6-fi s
/.377
.3J2
073
2
-2 ( 70.
70
IA~'n
RD
-
j(.
7 71
)i0
_.aoop~
00
. [8
/
142.
1
FOODS__.2.
TEXTILE
17
17. 723Y72±
3
l.
__7_.76__l.0
PAPER &PULP
. &o
CHEMICALS
DRUGS!
(.
3
PETROLEUM
1.361
RUBBER
/
C9F._
CLAY & GLASS
l.123
)
j d
,RUG,
1ool
I
.RI I
.oof
).
60
I
.:)l
4
METAL
y
1.00
l
1 ogI
o o
b
J
MOTOR VEHICLES
TRANSPORT EQUIP_
4
,
LJL23-~
I
.
2.
I.73L2
3
PRECISION
6- Ie
I
-1
0o
ri±zi
- Y_2
-
L3L ,
I00
f.oo
|.617
--
2.
~L
2.1.
CONSTRUCTION
TRARE
_ 12
RETAIL
OTHER FjINACE
--
J
%..003
lolO
2 ,0oo
Ia
V,
I f
94
Q/C
Y,
10
2
7_.
TRUCKING
,3
I
,
,
,0
1.
2-
0.
_
f.06?
1-o 't
3-7
0.66L 1
0.
0. 9
I. -TIl
m
Lol/
1
__
a ovI
,
1.0o0l
1.00 (/-
,
.
,
,
3_
J
II&
61Y
_4/
f,
0
6I?7
CL./3h
.l.)049
~
_L o4
7ALJA
1
1- 7
-
fL ~
9-495?
0i7_
7R I
_2301-
1-8,i 3
I.
2- 7
D.77
,
1.9)
L
o3
_Y-iLLL_1.1
2-22-n4_2
~B
3
1, o_o
oo
3
6~~
3 ki
3.
7 .8 6
V7
/L/
-
4
~KLJAi.L4
.(
C7g
ijg.
1.
J~oo~
I 1.KI3
_t7.
6
Y
_
2.d /
I
Q
L7
2.
0.Y
2(
014__
44_0
5_2
1-.o~ 1 ?)
1.91
__
69
0 o /I?
/-,4_
LilUL~L33 o
.L2i
v.
07
, 31
o .720
77
0
WAREHOUSING
GAS
SEVCSSERVICES
-9_.01
.6
1.
2
_,170
L, o
I1 -7)
' 2 2-
0 -713
i
o
-
-2
_ 1
77
!6.
JJL
27
I77~~
,, ,1
7
0 7o7
0.691_
__L 3
tui?
Ij
'1.266
q
E3
I. 1I £3
0
_
o.277
L.LL
___
i0
/;
ol
-
- 0 .214
11
0
-J
__ 39~-Y
0A
AIR TRANSPORT,
ELECTRIC POWER
.2113
-v.0(3
SEA TRANSPORT
COMMUNICATION
94
2~. 1-~ ~
J1
1.3.V3
col
q3c,6J
I- tIj
l
7.
-f
7
REAL ESTATE
RAILWAY & BUS
IML
9 Z 2I
0 1 L
I. o of.
\
io
o.
0jL
6
OTHER MNFG
MINING
L~4~
1._ 1148
I i h1
I, 0 0 -
00
--
~b
16.
0,?2
_
1)
_
a-L_V,
?
2- I
,o
,o
, ,
LLL
.___ g_
SHIPBUILDING
.
1.1
b'io
?t
3I.
.
,~
I
l 'L I74
f
Ie '
0-7//
_L' 09
iA2~L
,I-F
MACF
R
ELECTRIC EQUIP
MARINE
I.
U.66 1
-
L-LL
1
',
f.o39 I.
W.3
LL.~4
2.60
1.6o6
-0j
0
JX
0)
-4,
i
0. '7Ig,
0.)1i_
it 2
1~
l~L
L
'/, 1
1.,
0
3
I.
. 0oL,
77
/
/2-0
IRON~ A: STEELT.
6
.3n
.oo#
j
2 .fo
_
LW
(to)
i
/.0 s?
17.7,?
1.360
L
00
I.
W
0.
I.tV 3-
/7i77
3
Cai
2tu
Et--It4
LL
JUFL~Lli~
J
0.
0 4
~)7Y
02.
~
~AMean
___
L)4
between 1966-197
= or
( ,
Trend in
10
Table
Tobinstfl"
T
10
5
0
ALL INDUSTRY
.o
MANUFACTURING
o 4
d/
000/
o
43
NON MANUFACTURING
7
TEXTILE
o
PAPER & PULP
o. 3g
37.73
CHEMICALS
o0,0
76to
,
i0.
oooo7
.?
/
PETROLEUM
RUBBER
Ii.)
CLAY & GLASS
o
2
___
o ?3g
SHIPBUILDING
c
TRANSPORT EQUIP
666
PRECISION
MARIE
_
___
?2.
a.
o 7
CONSTRUCTI ON
TRADE
o
RETAIL
7
Io
,
.6/
/
IV
c.
7
2.
/.o74
o~o ?/
/. R
tf .7S?
0O0/
0a o o
0.
-0,
. 0o
-
3
o
,
oco?
-
2-.Ae-/
-o.
L:oo
0 22.
1.
0
0 o . o !r
2,
3
.
c3
7 1 -o,
c.
. 2
LA
7/
3 6/
o.
O
-/.9
93
9./37 r-
2
o
3 C .69 7
2.l
/.
1
co
-0.270
P??
/. A 6
. 2.
ff3
-/
Y. 6
0,;o2.
./ o7a
6?
73
/
2.oS
/ oo
o,
-/2,
.,oo
,
i6/
3
3
OTEER FINA NCE
0,
Y
0co
6/
I
o79
,t 3
4
0.
2-./.3?7
2.u.a93
12.
o.
,1//7
Q/
0-
o,/oY
/. 3/3
2--
/.6
-g. / oo2.
t-0.
L
6
0. 7F3
o s 4 a .;9
VELL CLES
o.
7.o 7
.
OTEER ITFG
-
372.2 ,.co
ELECTRIC EQUIP
o,o0o
.
/.747
-o. 7o1
____--?2/
MACHINERY
o. ?
o
-//
0,002.
/6
/.
oo13
3
-.
-oo
37,Y2
.1-7
IRON & STEEL
METAL
16.774
0.90
-
/
-0 .0o7
g,o F/
2.
.43
3.(,L
79 0 oY
/
/.
/
-
-/.oo7
0oo2.
DRUGS '
o
o. 4,/ 6
-o.oo
/67
o.o
or l- 0.2?
FOODS
-MOTOR
9
-.co
-/
o 0 1?
7
REAL ESTAT
RAILWAY &: BUS
cc )?
7
2
6
7 -2
o
/
92
TRUCKING
SEA TRANSP
3..
2.1
2
AIR TRANSP
W-AREHOUSIN
COMMICAT [ON--.
ELECTRIC P
_2
GAS
SERVICES
o
7,.'
\4
-3
S
t2
e
%
-
7
XeI
-
? ;.
3-
o2
4 /
-
Table
11
Calculated Tobin s q by Sector
-I
V
MANTFACTURING
ALL IDUSTRY
663
.Lo
6_
ob23
0.6L
2'J o.692._/o.66 o.697_
0.
76
_o2.-
=
_ __
.6 6f-
_ o
11
q
/.1
_0-..J
_0.
-o.
_
Market Value/
.
30 F-
-
35
A
-
44y /.xo
9
9F- 0.
/,L9377
-
a.2.32
o.L
23 2.7
.
3 8_1-bb3
o-.332
2.-o-
_
0
o 1& o.6R'|
oo.332L6 7
4l o-0.
Lo4 .6
7 -0.
77
1i
. Lto
Total Asset in Current Price
q= Return on Capital
20
n
03c2.
t-7o.6 3__ J6 o.-b __0.1
'-7_3
_____________.3
1b77
41 0.37
a 660.
2
o & 3 /.24L
70
47
/
Cost of Capital(= Return to Investors)
-~1
C
ALL INDUSTRY
7 7
0.6L
MANUFACTURING,
o. 66 4
0.
NON MANUFACTURING
0.
FOODS
0. 6 392
0. S ItI
TTILE
7 7
0.
72-7
DRUGS!
0.
l3
PETROLEUM
0.
637
0.
PAPER & PULP
o
CBMEICALS
RUBBER
fy2
oo.. 767
CLAY & GLASS
0.7
IRON & STEEL
0. 6 o f
METAL
o. 33 0
0.
a.
o.
0.
MACBINERY
0.
I o.
o.87? 7 3
/
ELECTRIC EQUIP
0.
o . 92-7
ZBPBULDING
1
3 LAI
/0.??s
MOTOR VEEICLES
TRANSPORT EQUIP_
o. 670
PRECISION
OTEER
NFG
7 7
o 2 -
.2 9 2.l
S.
S.
MARINE
MINING
3.
2.3
/0,
"4
CONSTRUCTIONTRADE'
.7 3 0
RETAIL
0. 7io
0TEERFINANCE
So
0.
S.
o
/I.
REAL ESTATE
RAILWAY & BUS
TRUCKING
SEA TRANSPORT_
.AIR TRANSPORT
VAREHOUSING
COMMUNICATION
ELECTRIC POWER
/ ,
2-77
7 />
c.7 46
o.
C. S'I 3
o.?6
C.
LO
if
/b,
GAS
SERVICES
-
/
.
vEAN between 1966 and 1979
/.
Table
Rates of Return to Investors
12--1
ALL nmUSTRY
Nominal
Real
SI
De bt
T;Ca -l
/2.f
/.6
67
/(.2.
2-7.16 7
b
-/
10
2/
2.
1.
27.I
7.
- 3.
i.2
2/.0
6- 2
7_2-
ii.?
/0..
i
t
/. 7
70.g
11.2
2-
3
17
/?.2.
72..
7.1
/2.7
1.6
-/.
7
f-.
7.0
-7
-3.7
I.7
7.3
S-1.0
3
-9~
6.1
7A
/6.2.
11.'
77
,
10.7
L 7
11.7
3.21.
/i
L
/.
6.2
5. /
/o.3
9.L
/
6. i
t4.0
MANUFACTURING'
Real
Nominal
I
I
67
.2
S9 31.Y-
-Tt
11,
/3.Y
6. /
0,p
"7.7
- 3.2
7.7
II.
I
X
1e~t
I .
-
7.7
0
11/.
!.
7/
30.
73
|
,
}1.
23.0
1 2.
4.4
1/.
7/7.,!
p
L.4
(0.0
A.
9*7 3
L. /
I.
/ 1.
-/,?
C
.1 3
7
77
-13
I,'.
1 3./1
/
1.'I
i.
70
7,
-3.7/
-1|.7
6. 2
/0.0
13.73
/3.0
/3
.~
7.7
3
li2.)
7.3
0
.1
adjusted by deflator of GNP
7.7~
.
il1-2
Table
Rates of Return to Investors
Real
Nominal
- f1i
ALL INDUSTRY
/ 6. St
MANUFACTURING
7E',Y
7
/0.
/0.
4__
7.2.
S
.6
9.914
'y.2
3.S
'7.6
7.!
i-.3
£.2
f..7
7. o
>.3
s.-./
7,.3
0.
NON MANUFACTURING
FOODS
i3.i
TEXTILE
PAPER & FU 1 P
/ .6
tII.
'3
17
C EICALS
I.b
DRUGS
U,~
PETROLEUM
7. I
/
RUBBER_
2' 3
/3.7
ii
CLAY & GLASS
6.6
/(7./9.
,9.
.7
'C.0
1/.?
IRON & STEEL_,
6.9
METAL
,3
6.2
a.7
/3.2
/1.7
ELECTRIC EQUIP_
20.2
SHIPBUILDING
/1.0
MOTOR V2iLCLES
2.0.6
f .o
TRA.NSPORT )EQUTP
/1.4.
13.I
/3.7
17.6
* ARfIE
3
/3.3
/.4
7
1/.
7
/.o
0
/7.0
11.7
/f.
CONSTRUCTION
/7.4'
1.6
2 s. i
OTER FINANCE
3 3. 1
2.75.
/1.3
.C
7.2
TRUCKING
3
1'l.
/7.,
f,
o
1I. /
7.7
7
2.26
jI
V.
6
27 -
0i
/
.0
7 .3O
'V.
o
26.
3
3.2
V-
2. 2
/-
0
,-D7
i0. 3
/o.
/~
6.
I
7.7o
SEA TRANSPORT.
AIR TRANSPORT
SERVICES
-c
(I I
A
'.
RAILWAY & BUS.
2/.
4. 6
REAL ESTATE
_
o. 3
7.'
RETAIL
ELECTRIC POWER
7.o
L~
TRADE
COMMUNICATION_
1
6.6
'i'3
MINING
WAREHOUSING
1.
/2.2
/1.1
7.7
-
OTHER_ MFG
GAS
c'
ii.
MACBINERY
PRECISION
1 . 04
7
1.2-
7 1
21.3
2.. .
?9
MEAN between 1966 and 1979
2
4r
Table 13 Regression of Real Rates of Return on Time
RXR
1
(L=0(3T
2.
.~
t (c()
j7
/6.
%lo
/0
ALL INDUSTRY
MANUFACTURING
6
2
NON MANUFACTURING
6 -o,7
/
-o-346
-
7. 6
-0.1I97
-3.?77
0.
-2..F2.?
0.uoo
7 ?.v2
FOODS
.
o
4
CBEMICALS
.
DRUGS
9
PETROLEUM
3/
MACHINERY
4777
SLLEBILDING
MOTOR VEiCLES
o,/?S
/
-o.4-33
-<-.7/I
o,7/
/
-,.
0,74
-6.63o
o. 7
-o.31
/0.7/0
? /04
-.
7,SE
-c.
6:1
-.
o
0,
I-
I
/
-2
?
3
2
-
7/
O
-
72
-13.
-<.337 -Lou4
z-
o 62-
ci
-/(I.4
2.&
o/?
~
I,2J
.
2
1 63
, 33
-
0
c
6
1 .
I
-9-"27
/9
0
I
3
o.3.
..- ~
72.
o.
7?3
~"
1-
I
_CONSTRUCTION
4-9
c.32
OTBER TNFG.
M'EI=G
fi7
-
,2oo
0-.220
,7/
-
-
2,/6
,9
-
PRECISION
-/-67/
4,7
E P
TANSPORT
-o-75-
-??
/0,84
ELECTRIC EQUIP
o7
-
-o.t'4
7
/
METAL!
c
7
3. ?7 -o,2'7
374
1S/
-3.7?
-0,476
-6
-7
C
c
,
4to
7
IRON & STEEL
o7
'7
o.?2.
-9.2
-L-
.3
0,'R 4
-0,3
2.3
0
/37
./2.7
-2
732.
0.80
-0./60
4.
CLAY & GLASS
-o.7?
.o23
/
t ?
RUBBER
I
- oi
TEXTILE.
PAPER!& PULP
. W.
t (/3)
/(3
.
3.
0
/
:-
TRADE
RETAIL
OTm
FINANCE
2o2
-e
6.
2
/ 1
21 1-
-3A-i
1 0 -o,5io -
2
CL2
6? '
7
REAL ESTATE
RAILWAY & BUS
TRUCKING
-.
0
- . -o
'
63213
o
/.X
3
2
-1- 7o
7F8~
-
-3 7''
I
SEA TRANSPORT
cI 3 -c7, i4 o.
AIR TRANSPORT;
VA REHOUSING
-s.5 7
7 u
77
2
COMMUNICATION!
SERVICES
-17
2
( -o/4-
3
ELECTRIC POWER
GAS
~
4.0
. 72
-3.f
g
V
0 '7 v. 9o f9 -.
-'7
O791
o
/42..
-6,7?
7
2 2
0
_22
, 6
Ta-,b
le
14
Estimation of Covariability
of Real Rates of Return on Capital
RXRI =--O +19 RXR1r,
t(13
/3
MAN_~FACTUG
0 a to
NON MNUFACTO'IING
./7o
7o.70
o 3o?
oc
FOODS
g.i6
o 76
7.69
/
4
PULP
CBEMICALS
0 -2-3
46
o,
PETROLEUM
-0.7og
CLAY & GLASS
METAL!
730
SBIPBUILDING
7r
-- o.cbo
-
0 7
-/.
OTHER FINANCE.
REAL ESTATE
0
4
3
?,?9
c.
W.?7
3.'70
6
2
01
-U
.a
- 04
-. 3,
-
3o
I. 3
2
oi
,
791
.
7
c?
o
.g
3a
/2 b2 .
-3o .
AIR TRANSPORT
2,L~7T
~-
0~
-
/ 4'V (,
-
(.3
7 ?2
.2.y9
4
e
3gis
0, 7?'?
7
3,
72
-
/ .
o
-3 .Lt3
2_
o. t
3
/
0 . D,4
7
SEA TRANSPORT!
CO=ICATION
o6
/.23
e
.r
'
.22
3L
W~A REHOUSING
i.
/ 3
o
.
2
6
73
.
3 o)
.09o
793
/,
39.
?
.0
o o
o.2i3'!
72
.oso-00
-
/-T7
,
13u?
2.69-1
/
-0 . 3
TRUCKING
SERVIC ES
1
3 -/,
c,.
,
/.2/f
3 _
3
g 3/0
o. f
3 . ? o.7 3 30
7
1.
RETAIL
.323
/ .
.7
4
,7!7
,
/,It-
I.-
7
6
/
- 0 -
.
..
f
0. 93 ?
-
TRA.DE
GAS
/
,?3
4.39
1
CONSTRUCTION T
ELECTRIC POWEN
./
-o
200 o
RAILWAY & BUS
/..t?6
63 6
/.77
'7
o.5ov
.77
1 137
OTHER'MNFG
4.9
2 F
33
TRANSPORT EQUIP
o,
o.-17
7
, / 7 c.6??
c*sio
7
U-
-0.7/7
PRECISION
/,g
,27
2.1.-6
3?
/6o
-4/.27
..
MOTOR vEEICLES___
MARINE
/.
..-
.
/.o3
o.
-
o go3
MACHINERY
ELECTRIC EQUIP
o.S/
0 g7.
66-
i42o
STETL
. 23 o.77.
7
RUBBR
33
I L/?
).o7g
Ig__/._
DRUGS!
IRON&
o.6
o. 71?
TEXTI__o7
PAPER&
D. W.
o ,':o
-
/
'
/ - / 7f
o-~
t
1
b26
27.
1
3
,777
r, / r R
I
o -_
0 .26-
4
/ .
/
/
/-
6