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on Accounting and Auditing |
| By: | Borja Larrain; Motohiro Yogo |
| Abstract: | The appropriate measure of cash flow for valuing corporate assets is net payout, which is the sum of dividends, interest, and net repurchases of equity and debt. Variation in net payout yield, the ratio of net payout to asset value, is mostly driven by movements in expected cash flow growth, rather than by movements in discount rates. Net payout yield is less persistent than dividend yield and implies much smaller variation in long-horizon discount rates. Therefore, movements in the value of corporate assets can be justified by changes in expected future cash flow. |
| JEL: | G12 G32 G35 |
| Date: | 2007–01 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:12847&r=acc |
| By: | Anderson, Ronald W; Carverhill, Andrew |
| Abstract: | This paper solves for a firm's optimal cash holding policy within a continuous time, contingent claims framework that has been extended to incorporate most of the significant contracting frictions that have been identified in the corporate finance literature. Under the optimal policy the firm targets a level of cash holding that is a non-monotonic function of business conditions and an increasing function of the amount of long-term debt outstanding. By allowing firms to either issue equity or to borrow short-term, we show how share issue and dividends on the one hand and cash accumulation and bank borrowing on the other are all mutually interlinked. We calibrate the model and show that it matches closely a wide range of empirical benchmarks including cash holdings, leverage, equity volatility, yield spreads, default probabilities and recovery rates. Furthermore, we show the predicted dynamics of cash and leverage are in line with the empirical literature. Despite the presence of significant contracting frictions we show that the model exhibits a near irrelevance of long-term capital structure property. Furthermore, the optimal policy exhibits a state-dependent hierarchy among financing alternatives that is consistent with recent explorations of pecking order theory. We calculate the agency costs generated by the conflict of interest between shareholders and creditors regarding the firm's liquidity policy and show that bond covenants that establish an earnings restriction on dividend payments may be value increasing. |
| Keywords: | capital structure; dynamic corporate finance; liquidity |
| JEL: | G30 G32 |
| Date: | 2007–01 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:6044&r=acc |
| By: | Ravina, Enrichetta; Sapienza, Paola |
| Abstract: | We compare the trading performance of independent directors and other officers of the firm. We find that independent directors earn positive and substantial abnormal returns when they purchase their company stock, and that the difference with the same firm's officers is relatively small at most horizons. The results are robust to controlling for firm fixed effects and to using a variety of alternative specifications. Executive officers and independent directors make higher returns in firms with weaker governance and the gap between these two groups widens in such firms. Independent directors who sit in audit committees earn higher return than other independent directors at the same firm. Finally, independent directors earn significantly higher returns than the market when they sell the company stock in a window before bad news and around a restatement announcement. |
| Keywords: | Boards of directors; Corporate governance; Independent Directors |
| JEL: | G34 |
| Date: | 2007–01 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:6046&r=acc |
| By: | Michael Kuhn (University of Rostock, Department of Economics and Social Sciences, and MPIDR); Qianhui Yan (DERS, University of York, UK) |
| Abstract: | We discuss the social welfare improvement under centralized and decentralized hierarchies and focus on supervisoris ability to monitor quality. Although the possibility of collusion against the principal is eliminated under decentralized hierarchy, the decentralization is dominating only if supervisory accuracy is large enough in the case of public information. Private information about the accuracy hurts the principal under both hierarchies. The optimal effort in hierarchy A is pooling one. The dominance of decentralization over centralization depend combination of accuracies of both the low and the high type supervisor. |
| Keywords: | auditing, collusion, delegation, hierarchy, quality |
| JEL: | D73 D82 I18 L22 |
| Date: | 2006 |
| URL: | http://d.repec.org/n?u=RePEc:ros:wpaper:70&r=acc |
| By: | Gavin C. Reid; Julia A. Smith |
| Abstract: | This paper has four purposes. First, to establish the policy background leading to a special financial reporting standard for small firms (FRSSE), aimed at reducing compliance costs. An indirect policy implication of this was that small firms would be stimulated, for example, in terms of start-up rate, performance (including survival rate, and profitability, and growth), and contribution to employment and innovation within the economy. Second, to consider the implications for FRSSE itself on compliance costs, and to ask what forms they may take. Third, to analyse new evidence on adopters and non-adopters of the FRSSE. Fourth, to cast this new evidence into a cost effectiveness framework, to judge whether adopters who engage in upgrading of skills to implement the FRSSE had attained a net benefit as compared to non-adopters. The conclusion, based on this preliminary evidence, is that upgrading of skills to implement the FRSSE has indeed led to a significant net benefit. |
| Keywords: | Small firms, financial reporting, compliance costs, cost-effectiveness. |
| JEL: | G32 M13 M41 |
| Date: | 2007–01 |
| URL: | http://d.repec.org/n?u=RePEc:san:crieff:0701&r=acc |