This paper examines the relative importance of many factors in the capital structure decisions of publicly traded American firms from 1950 to 2003. The most reliable factors for explaining market ...leverage are: median industry leverage (+ effect on leverage), market-to-book assets ratio (-), tangibility (+), profits (-), log of assets (+), and expected inflation (+). In addition, we find that dividend-paying firms tend to have lower leverage. When considering book leverage, somewhat similar effects are found. However, for book leverage, the impact of firm size, the market-to-book ratio, and the effect of inflation are not reliable. The empirical evidence seems reasonably consistent with some versions of the trade-off theory of capital structure.
We examine whether differences in legal protection affect the size, maturity, and interest rate spread on loans to borrowers in 48 countries. Results show that banks respond to poor enforceability of ...contracts by reducing loan amounts, shortening loan maturities, and increasing loan spreads. These effects are both statistically significant and economically large. While stronger creditor rights reduce spreads, they do not seem to matter for loan size and maturity. Overall, we show that variation in enforceability of contracts matters a great deal more to how loans are structured and how they are priced.
We test the pecking order theory of corporate leverage on a broad cross-section of publicly traded American firms for 1971 to 1998. Contrary to the pecking order theory, net equity issues track the ...financing deficit more closely than do net debt issues. While large firms exhibit some aspects of pecking order behavior, the evidence is not robust to the inclusion of conventional leverage factors, nor to the analysis of evidence from the 1990s. Financing deficit is less important in explaining net debt issues over time for firms of all sizes.
We use a real options approach to evaluate the performance of several proxy variables for a firm's investment opportunity set. The results show that, on a relative scale, the market‐to‐book assets ...ratio has the highest information content with respect to investment opportunities. Although both the market‐to‐book equity and the earnings–price ratios are related to investment opportunities, they do not contain information that is not already contained in the market‐to‐book assets ratio. Consistent with this finding, a common factor constructed from several proxy variables does not improve the performance of the market‐to‐book assets ratio.
Abstract
The inverse relation between leverage and profitability is widely regarded as a serious defect of the trade-off theory. We show that the defect is not with the theory but with the use of a ...leverage ratio in which profitability affects both the numerator and the denominator. Profitability directly increases the value of equity. Firms do take the predicted offsetting actions. They issue debt and repurchase equity when profitability rises, and retire debt and issue equity when profitability falls. Consistent with variable transactions costs, the adjustment is not generally sufficient to fully undo the profitability shocks. Accordingly, on average the leverage ratio falls as profitability rises.
Asymmetric information models suggest that a borrower’s choice of debt maturity depends on its private information about its default probabilities, that is, borrowers with favorable information ...prefer short-term debt while those with unfavorable information prefer long-term debt. We test this implication by tracing the evolution of debt issuers’ default risk following debt issuances. We find that short-term debt issuance leads to a decline inborrowers’ asset volatility and an increase in their distance to default. The opposite is true for long-term debt issues. The results suggest that borrowers’ private information about their default risk is an important determinant of their debt maturity choices.
Equity market liberalizations open up domestic stock markets to foreign investors. A puzzle in the literature is why developing countries exhibit relatively small financial impacts associated with ...liberalizations. We use cross-firm variation in corporate governance at the time of the official liberalization of the equity market in Korea to test whether governance can explain the extent to which firms benefit when countries liberalize. The results show that better-governed firms experience significantly greater stock price increases upon equity market liberalization. Following the liberalization in Korea, foreign ownership in firms with strong corporate governance was significantly higher than that in firms with weak governance. Better-governed firms also exhibit higher rates of physical capital accumulation after liberalization.
Investor Myopia and CEO Turnover Goyal, Vidhan K.; Low, Angie
International review of finance,
December 2019, 2019-12-00, 20191201, Letnik:
19, Številka:
4
Journal Article
Recenzirano
We find that Chief Executive Officer (CEO) turnover is significantly higher and considerably less sensitive to performance in firms with short investor horizons. Decisions to dismiss a CEO lead to ...worse operating performance, which is even poorer when investors have short horizons. Furthermore, new managers respond to investor short‐termism by increasing industry‐adjusted capital expenditures while maintaining R&D and patenting activity. In addition, in firms with short‐horizon investors, total risk increases around forced CEO turnovers, largely because of an increase in idiosyncratic risk. The evidence is consistent with short‐term investors distorting corporate policies of firms through their influence on top management turnover.
Board leadership structure and CEO turnover Goyal, Vidhan K; Park, Chul W
Journal of corporate finance (Amsterdam, Netherlands),
2002, 2002-1-00, Letnik:
8, Številka:
1
Journal Article
Recenzirano
We study whether bestowing chief executive officer (CEO) and board chairman duties on one individual affects a boards decision to dismiss an ineffective CEO. The results show that the sensitivity of ...CEO turnover to firm performance is significantly lower when the CEO and chairman duties are vested in the same individual. These results are consistent with the view that the lack of independent leadership in firms that combine the CEO and Chairman positions makes it difficult for the board to remove poorly performing managers.
We use industry commodity flows information to measure vertical relations in completed mergers from 1962 to 1996. Almost one‐third of the mergers display vertical relatedness. Vertical merger ...activity is more intensive in the 1980s and 1990s and less so in the 1960s and the 1970s. Vertical mergers generate positive wealth effects that are significantly larger than those for diversifying mergers; the wealth effects in vertical mergers are comparable to those in pure horizontal mergers.
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