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Corporate Saving Behaviour*

Published online by Cambridge University Press:  07 November 2014

David C. Smith
David C. Smith*
Affiliation:
Queen's University
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Extract

The expected behaviour of aggregate corporate saving is an unsettled problem that has received considerably less attention in economic research than personal saving behaviour. In part this has reflected the rather uncertain status of the corporation as a separate behavioural entity in much of economic analysis. Keynes in the General Theory emphasized personal saving behaviour, and in a brief discussion of saving by corporations, governments, and other institutions he suggested rather obscurely that their motives for saving were “largely analogous to, but not identical with, those actuating individuals.’ Keynes's neglect of corporate saving was not new in the development of economic analysis, and H. G. Johnson has argued that it “reflects Marshall's inability to integrate the modern corporation into his system of economic analysis.”

An attempt to sort out some of the significant determinants of corporate saving is particularly important for two broad questions in economics. First, is the cyclical behaviour of corporate saving an important stabilizer? This question involves a study not only of the marginal relationship between changes in planned corporate saving and corporate income but also of the interdependence between planned corporate saving and planned corporate investment. Secondly, does the behaviour of corporate saving in our society adversely affect the allocation of economic resources? This question is important for the position one takes on whether or not government policy should be designed to increase the distribution of corporate income and thus to increase the channelling of new corporate funds through the capital market.

Type
Articles
Information
Canadian Journal of Economics and Political Science/Revue canadienne de economiques et science politique , Volume 29 , Issue 3 , August 1963 , pp. 297 - 310
Copyright
Copyright © Canadian Political Science Association 1963

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Footnotes

*

Research on the paper was supported by the Institute for Economic Research, Queen's University. The author wishes to thank, in particular, F. W. Emmerson, S. A. Goldberg, D. W. Slater, and M. C. Urquhart for helpful comments.

References

1 Keynes, J. M., The General Theory of Employment, Interest and Money (London, 1951), 108.Google Scholar

2 Johnson, H. G., “The General Theory after Twenty-Five Years,” American Economic Review, Papers and Proceedings, LI, 05, 1961, 5.Google Scholar

3 Unincorporated business saving is usually included in aggregate data on personal saving. For the importance of examining unincorporated business saving separately, see Klein, L. R. and Margolis, J., “Statistical Studies of Unincorporated Business,” Review of Economics and Statistics, XXXVI, 02, 1954, 33–46.CrossRefGoogle Scholar

4 Gordon, M. J., “Variability in Earnings-Price Ratios: Comment,” American Economic Review, LII, 03, 1962, 203.Google Scholar

5 Modigliani, F. and Miller, M. H., “The Cost of Capital, Corporation Finance, and the Theory of Investment,” American Economic Review, XLVIII, 06, 1958, 261–97.Google Scholar

6 Lutz, F. and Lutz, V., The Theory of Investment of the Firm (Princeton, 1951), 165.Google Scholar

7 Dobrovolsky, S. P., Corporate Income Retention, 1915–43 (New York: National Bureau of Economic Research, 1951).Google Scholar

8 Lintner, J., “Distribution of Incomes of Corporations among Dividends, Retained Earnings, and Taxes,” American Economic Review, Papers and Proceedings, XLVI, 05, 1956, 97–113.Google Scholar

9 Darling, P. G., “The Influence of Expectations and Liquidity on Dividend Policy,” Journal of Political Economy, LXV, 06, 1957, 209–24.CrossRefGoogle Scholar

10 See, for example, Hickman, B. G., Growth and Stability of the Postwar Economy, (Washington, 1960), 221–32Google Scholar; Duesenberry, J., Eckstein, O., and Fromm, G., “A Simulation of the United States Economy in Recession,” Econometrica, XXVIII, 10, 1960, 749–809.CrossRefGoogle Scholar

11 For differences in viewpoint among Canadian economists on the implications of these studies for resource allocation see, for example, Hood, Wm. C., Financing of Economic Activity (Ottawa, 1959), 267–75Google Scholar, and Scott, A., “Allocation of Resources to Future Uses and Related Public Policy,” in Brewis, T. N. et al., Canadian Economic Policy (Toronto, 1961), 100–2.Google Scholar

12 In addition, of course, the greater publicity given to the investment decision when it is financed by issues of new securities may be viewed by management as increasing the risk to the security of management positions.

13 For an interesting statistical study in this area see Fisher, G. R., “Some Factors Influencing Share Prices,” Economic Journal, LXXI, 03, 1961, 121–41.CrossRefGoogle Scholar

14 In this study no attempt has been made to examine possible differences in behaviour of foreign enterprises. In the Dominion Bureau of Statistics, The Canadian Balance of International Payments, 1960, some data and analysis of undistributed profits and total earnings on foreign direct investments in Canada are presented for the period 1946 to 1960. While more data are necessary before the effects of foreign ownership on saving or dividend policy are very clear, there may be several respects in which special influences bear on the saving out of earnings on foreign direct investments. For some foreign subsidiaries there may be less pressure for stability of dividends because the dividends are not being paid directly to the public. In addition, since the foreign parent company may have debt as well as equity investment in the subsidiary, the distinction between a repayment of debt and a payment of dividends will not sometimes be a very significant one. Special tax factors will also play a role. This is clearly an area in which further study is needed.

15 No attempt has been made here to include the effects of demand for long-term funds to finance working capital.

16 “Distribution of Incomes of Corporations.”

17 It should be remembered in interpreting the results that it was argued earlier that investment may be influenced by the level of corporate income and saving. In the highly aggregative form of the data some problems of covariation among the variables cannot be avoided.

18 Dobrovolsky has argued that the desired pay-out ratio increased during the depressed thirties: “During the expansion years of the twenties the notion was rather widespread that sound financial policy required retention in the enterprise of 50 cents out of every dollar of net income. In the late thirties some large corporations considered the retention of 30 per cent on net income an appropriate long-run policy.” Corporate Income Retention, 13.