Can valuation factors be prescribed? The case of collective enfranchisement and leasehold extension of flats in England and Wales

Recent concerns over the valuation process in collective leasehold enfranchisement and lease extension cases have culminated in new legislation. To underpin this, the Government (Department of Environment Transport and the Regions (DETR)) commissioned new research, which examined whether the valuation of the freehold in such cases could be simplified through the prescription of either yield or marriage value/relativity. This paper, which is based on that research, examines whether it is possible or desirable to prescribe such factors in the valuation process. Market, settlement and Local Valuation Tribunal (LVT) decisions are analysed, and the basis of 'relativity charts' used in practice is critically examined. Ultimately the imperfect nature of the market in freehold investment sales and leasehold vacant possession sales means that recommendations must rest on an analysis of LVT data. New relativity curves are developed from this data and used in conjunction with an alternative approach to valuation yields (based on other investment assets). However, the paper concludes that although the prescription of yields and relativity is possible, it is not fully defensible because of problems in determining risk premia; that the evidential basis for relativity consists of LVT decisions; and that a formula approach would tend to 'lead' the market as a whole.

Liability of country foreignness and liability of regional foreignness: their effects on geographic diversification and firm performance

The costs of inter- and intra-regional diversification have been widely discussed in the existing international business literature, but the findings are mixed. Explanations for the mixed findings have important managerial implications, because business managers have to estimate accurately the costs of doing business within and across regions before they make their internationalization decisions. To explain the existing mixed findings, this study differentiates between liabilities of foreignness at the country and regional levels, and explores the joint effects of liability of country foreignness (LCF) and liability of regional foreignness (LRF) on the performance of internationalizing firms. Using data from 167 Canadian firms, we find that LCF may not necessarily be negatively correlated with intra-regional diversification, but LRF is positively correlated with inter-regional diversification. LCF moderates the relationship between LRF and inter-regional diversification, and also mediates the relationship between intra-regional diversification and firm performance. LRF mediates the relationship between inter-regional diversification and firm performance. Missing one or more of these variables may result in different cost estimates. Identification of the relationships between these variables helps to improve the accuracy of estimating the costs of doing business aboard.

Proactive R&D management and firm growth: a punctuated equilibrium model

The external environment is characterized by periods of relative stability interspersed with periods of extreme change, implying that high performing firms must practice exploration and exploitation in order to survive and thrive. In this paper, we posit that R&D expenditure volatility indicates the presence of proactive R&D management, and is evidence of a firm moving from exploitation to exploration over time. This is consistent with a punctuated equilibrium model of R&D investment where shocks are induced by reactions to external turbulence. Using an unbalanced panel of almost 11,000 firm-years from 1997 to 2006, we show that greater fluctuations in the firm's R&D expenditure over time are associated with higher firm growth. Developing a contextual view of the relationship between R&D expenditure volatility and firm growth, we find that this relationship is weaker among firms with higher levels of corporate diversification and negative among smaller firms and those in slow clockspeed industries.

Greasing the wheels? The impact of regulations and corruption on firm entry

This paper investigates the question of whether corruption might ‘grease the wheels’ of an economy. We investigate whether and to what extent the impact of regulations on entrepreneurship is dependent on corruption. We first test whether regulations robustly deter firm entry into markets. Our results show that the existence of a larger number of procedures required to start a business, as well as larger minimum capital requirements are detrimental to entrepreneurship. Second, we test whether corruption reduces the negative impact of regulations on entrepreneurship in highly regulated economies. Our empirical analysis, covering a maximum of 43 countries over the 2003–2005 period, shows that corruption facilitates firm entry in highly regulated economies. For example, the ‘greasing’ effect of corruption kicks in at around 50 days required to start a new business. Our results thus provide support for the ‘grease the wheels’ hypothesis.

Relative values: residential leasehold reform in England and Wales - valuation of lease extension and enfranchisement

This research report was commissioned by the DETR and examines valuation issues relating to leasehold enfanchisement and lease extension - the right for flat owners to collectively purchase the freehold or buy a longer lease. The two factors examined examined in detail are the yield to be applied when capitalising the ground rent and the relative value of leases with a relatively short period left to run as against the value of the freehold or a new long lease, which determines the level of 'marriage level'. The research report will be of interest to all those involved in the valuation of residential leasehold property and those with an interest in legislative proposals for leasehold reform.

Two-way communication costs and the boundaries of the firm

Casson and Wadeson (International Journal of the Economics of Business, 1998, 5, pp. 5-27) have modelled the dialogue, or conversation, which customers have with their suppliers in order to convey their requirements, while taking production implications into account. They showed that this has important implications for the positioning of the boundaries of the firm. Unfortunately, their model has the restriction that communication is only costly in the direction of customer to supplier. This paper extends their model by introducing two-way communication costs. It shows that the level of communication cost in the direction of supplier to customer is a key additional factor in determining the nature of the dialogue that takes place. It also shows that this has important additional implications for the positioning of the boundaries of the firm. Custom computer software development is used as an example of an application of the theory.

Communication costs and the boundaries of the firm

Much has been written about where the boundaries of the firm are drawn, but little about what occurs at the boundaries themselves. When a firm subcontracts, does it inform its suppliers fully of what it requires, or is it willing to accept what they have available? In practice firms often engage in a dialogue, or conversation, with their suppliers, in which at first they set out their general requirements, and only when the supplier reports back on how these can be met are their more specific requirements set out. This paper models such conversations as a rational response to communication costs. The model is used to examine the impact of new information technology, such as CAD/CAM, on the conduct of subcontracting. It can also be used to examine its impact on the marketing activities of firms. The technique of analysis, which is based on the economic theory of teams, has more general applications too. It can be used to model all the forms of dialogue involved in the processes of coordination both within and between firms.

Information strategies and the theory of the Firm

Information costs play a key role in determining the relative efficiency of alternative organisational structures. The choice of locations at which information is stored in a firm is an important determinant of its information costs. A specific example of information use is modelled in order to explore what factors determine whether information should be stored centrally or locally and if it should be replicated at different sites. This provides insights into why firms are structured hierarchically, with some decisions and tasks being performed centrally and others at different levels of decentralisation. The effects of new information technologies are also discussed. These can radically alter the patterns and levels of information costs within a firm and so can cause substantial changes in organisational structure.

Modeling growth strategy in a biotechnology startup firm

The top managers of a biotechnology startup firm agreed to participate in a system dynamics modeling project to help them think about the firm's growth strategy. The article describes how the model was created and used to stimulate debate and discussion about growth management. The paper highlights several novel features about the process used for capturing management team knowledge. A heavy emphasis was placed on mapping the operating structure of the factory and distribution channels. Qualitative modeling methods (structural diagrams, descriptive variable names, and friendly algebra) were used to capture the management team's descriptions of the business. Simulation scenarios were crafted to stimulate debate about strategic issues such as capacity allocation, capacity expansion, customer recruitment, customer retention, and market growth, and to engage the management team in using the computer to design strategic scenarios. The article concludes with comments on the impact of the project.