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on Corporate Finance |
| By: | Joaquim J.S. Ramalho (Department of Economics, University of Évora); Jacinto Vidigal da Silva (Department of Mangment, University of Évora) |
| Abstract: | A key theme in corporate finance has been the study of the main factors that affect the financing decisions of firms. In this paper we examine the following two hypotheses which traditional theories of capital structure are relatively silent about: (i) the determinants of capital structure are different for micro, small, medium and large firms; and (ii) the factors that determine whether or not a firm issues debt are different from those that determine how much debt it issues. Using a binary choice model to explain the probability of a firm raising debt and a fractional regression model to explain the amount issued, we find strong support for both hypotheses. Nevertheless, the pecking-order theory seems to be suitable to describe the capital structure choices made by all size-based groups of firms. |
| Keywords: | Corporate finance, capital structure, leverage, micro firms, SMEs, fractional data, two-part model |
| JEL: | C51 G32 |
| Date: | 2006 |
| URL: | http://d.repec.org/n?u=RePEc:evo:wpecon:9_2006&r=cfn |
| By: | Fernandez, Pablo (IESE Business School); Carabias, Jose M. (IESE Business School); Aznarez, Julio (ESE, Business School); Carbonell, Oscar E. (IPADE Business School) |
| Abstract: | 2005 was a very good year for the shareholders of the companies in the Euro Stoxx 50. The shareholder value creation of these 50 companies was €292.9 billion. The companies that created most value for their shareholders were Total (€30 billion), Sanofi-Synthelabo (€23.2 billion) and Eni (€20.7 billion). The companies that destroyed most value were telecoms: Deutsche Telekom (€-14.8 billion), France Telecom (€-11.8 billion) and Telecom Italia (€-7.1 billion). In 2005, the Euro Stoxx 50 was slightly more volatile than the S&P 500. Shareholder value creation in the three-year period 2003-2005 was €551 billion. The market value of the 50 companies included in the Euro Stoxx 50 was €2.1 trillion in 2005, although only €1.8 trillion were included in the index. SAP was the top shareholder value creator and Deutsche Telekom the top shareholder value destroyer during the eight-year period 1997-2005. A portfolio long in the companies that entered the index and short in the companies that abandoned the index had on average a 6.85% return in the 20 days prior to the index recomposition and a 0.97% return in the 20 days after the index recomposition. |
| Keywords: | shareholder value creation; created shareholder value; shareholder value added; shareholder return; required return to equity; |
| JEL: | G12 G31 M21 |
| Date: | 2006–04–15 |
| URL: | http://d.repec.org/n?u=RePEc:ebg:iesewp:d-0626&r=cfn |
| By: | Fernandez, Pablo (IESE Business School) |
| Abstract: | This paper provides guidelines to evaluate the appropriateness of 23 different valuation methods for estimating the present value of tax shields. We first show that the value of tax shields is the difference between the present values of two different cash flows with their own risks: the present value of taxes for the unlevered company and the present value of taxes for the levered company. This implies, as a first guideline, that, for the particular case of a perpetuity and a world without costs of leverage, the value of tax shields is equal to the tax rate times the value of debt. The value of tax shields can be lower when costs of leverage exist. In that case, we show that, since the existence of leverage costs is independent of taxes, a second guideline for the appropriateness of the valuation method should be that the value of tax shields, when there are no taxes, is negative. We then look at the case of constant growth and derive similar conclusions. Second, we identify 23 valuation theories proposed in the literature to estimate the present value of tax shields and illustrate their performance relative to the proposed guidelines. Eight of these theories do not satisfy the two proposed guidelines for the case of perpetuities. Only one of the valuation methods is consistent with these restrictions when we look at the case of constant growth and no leverage costs. Two theories provide consistent valuations when we allow for leverage costs and growth. Finally, we use the 23 theories to value a hypothetical firm and show remarkable differences in the values obtained, which demonstrates the importance of using a method consistent with the proposed guidelines. |
| Keywords: | value tax shields; valuation theories; valuation methods; |
| JEL: | G12 G31 M21 |
| Date: | 2006–05–13 |
| URL: | http://d.repec.org/n?u=RePEc:ebg:iesewp:d-0628&r=cfn |
| By: | Fernandez, Pablo (IESE Business School) |
| Abstract: | A company's profit after tax (or net income) is quite an arbitrary figure, obtained after assuming certain accounting hypotheses regarding expenses and revenues. On the other hand, its cash flow is an objective measure, a single figure that is not subject to any personal criterion. In general, to study a company's situation, it is more useful to operate with the cash flow (equity cash flow, free cash flow or capital cash flow) as it is a single figure, while the net income is one of several that can be obtained, depending on the criteria applied. Profit after tax (PAT) is equal to the equity cash flow when the company is not growing, buys fixed assets for an amount identical to depreciation, keeps debt constant, and only writes off or sells fully depreciated assets. Profit after tax (PAT) is also equal to the equity cash flow when the company collects in cash, pays in cash, holds no stock (this company's working capital requirements are zero), and buys fixed assets for an amount identical to depreciation. When making projections, the dividends and other forecast payments to shareholders must be exactly equal to expected equity cash flows. |
| Keywords: | Cash flow; Net income; Equity cash flow; Free cash flow; Capital cash flow; |
| Date: | 2006–05–17 |
| URL: | http://d.repec.org/n?u=RePEc:ebg:iesewp:d-0629&r=cfn |
| By: | Dean Karlan (Economic Growth Center, Yale University); Xavier Gine (World Bank); Jonathan Morduch (New York University); Pamela Jakiela (University of California, Berkeley) |
| Abstract: | Microfinance has been heralded as an effective way to address imperfections in credit markets. From a theoretical perspective, however, the success of microfinance contracts has puzzling elements. In particular, the group-based mechanisms often employed are vulnerable to free-riding and collusion, although they can also reduce moral hazard and improve selection. We created an experimental economics laboratory in a large urban market in Lima, Peru and over seven months conducted eleven different games that allow us to unpack microfinance mechanisms in a systematic way. We find that risk-taking broadly conforms to predicted patterns, but that behavior is safer than optimal. The results help to explain why pioneering microfinance institutions have been moving away from group-based contracts. |
| Keywords: | Microfinance, Group Lending, Information Asymmetries, Contract Theory, Experimental Economics |
| JEL: | O12 D92 D10 D21 D82 C93 |
| URL: | http://d.repec.org/n?u=RePEc:egc:wpaper:936&r=cfn |
| By: | Han Smit (Erasmus Universiteit Rotterdam); Ward A. van den Berg (Erasmus Universiteit Rotterdam) |
| Abstract: | This study presents a dynamic model for the private equity market in which information revelation and uncertainty rationally explain the cyclical pattern of investment flows into private equity. The net benefit of private equity over public equity is i) uncertain and ii) agents have private information about the benefits of their investment. When these distinguishing characteristics determine investment behavior in private equity markets, rational investment waves may arise endogenously. Investment behavior reveals private information on the benefits of private equity financing and may trigger a cascade when investors jump on the bandwagon and invest irrespective of their private information content. We argue that the procyclical behavior of private equity volumes is strengthened by the revelation of information on the benefits of private equity investments. The occurrence and length of such waves in the market for private equity depend on the capabilities of agents. |
| Keywords: | private equity; information economics |
| JEL: | G24 G34 |
| Date: | 2006–06–09 |
| URL: | http://d.repec.org/n?u=RePEc:dgr:uvatin:20060053&r=cfn |
| By: | Silvia Dominguez Martinez (Erasmus Universiteit Rotterdam); Otto H. Swank (Erasmus Universiteit Rotterdam); Bauke Visser (Erasmus Universiteit Rotterdam) |
| Abstract: | Boards of directors face the twin task of disciplining and screening executives. To perform these tasks directors do not have detailed information about executives' behaviour, and only infrequently have information about the success or failure of initiated strategies, reorganizations, mergers etc. We analyse the nature of (implicit) retention contracts boards use to discipline and screen executives. Consistent with empirical observation, we find that executives may become overly active to show their credentials; that the link between bad performance and dismissal is weak; and that boards occasionally dismiss competent executives. |
| Keywords: | board of directors; turnover; retention contracts; selection; moral hazard; empire building |
| JEL: | G30 G34 |
| Date: | 2006–06–19 |
| URL: | http://d.repec.org/n?u=RePEc:dgr:uvatin:20060054&r=cfn |
| By: | Hirofumi Uchida |
| Abstract: | This paper empirically investigates what determine bargaining power between a lender and a borrower who have continuing transactional relationships. Bargaining power is proxied by which side of the transaction, i.e. the lender or the borrower, usually incurs a shoe-leather cost when they have contact. The proxy is regressed on three types of variables that can potentially determine distribution: (i) lender's competition, (ii) the degree of informational asymmetry between the two parties, and (iii) borrower performance. Consistent with theoretical predictions, we find that intensive lender competition and borrowers' good performance increase the likelihood of the lender incurring the cost, or the borrower's power. We also obtain evidence suggesting that some lenders enjoy a status of informational monopoly and capture borrowers. |
| Date: | 2006–06 |
| URL: | http://d.repec.org/n?u=RePEc:eti:dpaper:06030&r=cfn |
| By: | Bechman, Ken L. (Department of Finance, Copenhagen Business School); Raaballe, Johannes (Department of Finance, Copenhagen Business School) |
| Abstract: | Firms pay out cash using both dividends and share repurchases. In many aspects these two means are similar, but one important difference is that dividends are generally taxed more heavily than share repurchases. Nevertheless firms persist in paying out large amounts in dividends. This paper provides an explanation for this dividend puzzle by developing a class of signaling models violating the “single-crossing property in which information about the quality of the firm is asymmetric between the management and the shareholders. In these models a high-quality firm can always signal its quality by using share repurchases only. However, in certain cases share repurchases become costlier on the margin for a high-quality firm than for a low-quality imitator. In such cases, the high-quality firm signals most cost efficiently by means of a combination of share repurchases and taxable cash dividends financed by the issuance of new shares. Taxable cash dividends financed by the issuance of new shares then can be considered a positive kind of money burning whose role is to signal a firm’s high quality. The implications of the models are consistent with several important empirical facts about dividends and share repurchases. Thus, this paper’s main contribution is to examine a range of new signaling models that provides a role for taxable cash dividends and share repurchases and to derive their empirical implications. |
| Keywords: | Dividends; Share Repurchases; Signaling; Single-Crossing Property; Money Burning |
| JEL: | D82 G35 |
| Date: | 2006–06–28 |
| URL: | http://d.repec.org/n?u=RePEc:hhs:cbsfin:2005_004&r=cfn |
| By: | Varma Jayanth R; Barua Samir K |
| Abstract: | We estimate the equity risk premium in India using data for the last 25 years. We address the shortcomings of existing indices by constructing our own total return index for the 1980s and early 1990s. We use our estimates of the extent of financial repression during this period to construct a series of the risk free rate in India going back to the early 1980s. We find that the equity risk premium is about 8?% on a geometric mean basis and about 12?% on an arithmetic mean basis. There is no significant difference between the pre reform and post reform period: the premium has declined marginally on a geometric mean basis and has risen slightly on an arithmetic mean basis. The reason for this divergence between the sub period behaviour of the two means is the increase in the annualized standard deviation of stock market returns from less than 20% in the pre reform period to about 25% in the post reform period. The higher standard deviation depresses the geometric mean in the post reform period. |
| Date: | 2006–06–26 |
| URL: | http://d.repec.org/n?u=RePEc:iim:iimawp:2006-06-04&r=cfn |
| By: | Julie Kozack |
| Abstract: | Assessments regarding the effectiveness of sovereign debt restructurings are often summarized by comparisons of the net present value of debt service before and after the restructuring. These calculations are inherently sensitive to the choice of discount rate. This paper explores issues that arise in selecting discount rates when evaluating sovereign debt restructurings. It suggests using a range of discount rates and centering the analysis around the internal rate of return to assess whether the debt restructuring has generated net present value savings or costs to the debtor. |
| Keywords: | Sovereign Debt Restructuring Mechanism , Discount rates , |
| Date: | 2006–01–03 |
| URL: | http://d.repec.org/n?u=RePEc:imf:imfpdp:05/09&r=cfn |
| By: | Karl Friedrich Habermeier; Andrei Kirilenko |
| Abstract: | This paper argues that securities transaction taxes "throw sand" not in the wheels, but into the engine of financial markets where the transformation of latent demands into realized transactions takes place. The paper considers the impact of transaction taxes on financial markets in the context of four questions. How important is trading? What causes price volatility? How are prices formed? How valuable is the volume of transactions? The paper concludes that transaction taxes or such equivalents as capital controls can have negative effects on price discovery, volatility, and liquidity and lead to a reduction in the informational efficiency of markets. |
| Keywords: | Taxes , Bonds , Capital markets , Capital controls , |
| URL: | http://d.repec.org/n?u=RePEc:imf:imfwpa:01/51&r=cfn |