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1 – 10 of over 28000Ons Triki and Fathi Abid
The objective of this paper is twofold: first, to model the value of the firm in the presence of contingent capital and multiple growth options over its life cycle in a stochastic…
Abstract
Purpose
The objective of this paper is twofold: first, to model the value of the firm in the presence of contingent capital and multiple growth options over its life cycle in a stochastic universe to ensure financial stability and recover losses in case of default and second, to clarify how contingent convertible (CoCo) bonds as financial instruments impact the leverage-ratio policies, inefficiencies generated by debt overhang and asset substitution for a firm that has multiple growth options. Additionally, what is its impact on investment timing, capital structure and asset volatility?
Design/methodology/approach
The current paper elaborates the modeling of a dynamic problem with respect to the interaction between funding and investment policies during multiple sequential investment cycles simultaneously with dynamic funding. The authors model the value of the firm in the presence of contingent capital that provides flexibility in dealing with default risks as well as growth options in a stochastic universe. The authors examine the firm's closed-form solutions at each stage of its decision-making process before and after the exercise of the growth options (with and without conversion of CoCo) through applying the backward indication method and the risk-neutral pricing theory.
Findings
The numerical results show that inefficiencies related to debt overhang and asset substitution can go down with a higher conversion ratio and a larger number of growth options. Additionally, the authors’ analysis reveals that the firm systematically opts for conservative leverage to minimize the effect of debt overhang on decisions so as to exercise growth options in the future. However, the capital structure of the firm has a substantial effect on the leverage ratio and the asset substitution. In fact, the effect of the leverage ratio and the risk-shifting incentive will be greater when the capital structure changes during the firm's decision-making process. Contrarily to traditional corporate finance theory, the study displays that the value of the firm before the investment expansion decreases and then increases with asset volatility, instead of decreasing overall with asset volatility.
Research limitations/implications
The study’s findings reveal that funding, default and conversion decisions have crucial implications on growth option exercise decisions and leverage ratio policy. The model also shows that the firm consistently chooses conservative leverage to reduce the effect of debt overhang on decisions to exercise growth options in the future. The risk-shifting incentive and the debt overhang inefficiency basically decrease with a higher conversion ratio and multiple growth options. However, the effect of the leverage ratio and the risk-shifting incentive will be greater when the capital structure changes during the firm's decision-making process.
Originality/value
The firm's composition between assets in place and growth options evolves endogenously with its investment opportunity and growth option financing, as well as its default decision. In contrast to the standard capital structure models of Leland (1994), the model reveals that both exogenous conversion decisions and endogenous default decisions have significant implications for firms' growth option exercise decisions and debt policies. The model induces some predictions about the dynamics of the firm's choice of leverage as well as the link between the dynamics of leverage and the firm's life cycle.
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Cesar L. Escalante and Peter J. Barry
This study identifies key strategies employed by Illinois grain farms to prevent the erosion of their equity positions due to significant downturns in commodity prices during the…
Abstract
This study identifies key strategies employed by Illinois grain farms to prevent the erosion of their equity positions due to significant downturns in commodity prices during the implementation of the 1996 farm bill. The econometric results emphasize the collective importance of revenue enhancement, cost reduction, and capital management strategies. Nonfarm‐related strategies aimed at minimizing equity withdrawals through regulated family living expenditures, as well as supplementing low farm incomes with receipts from nonfarm employment and investments, significantly affect cost value equity growth rates. Moreover, significant financial and asset management strategies include those that minimize the costs of borrowing and maintain high asset productivity levels through elimination of excess farm capacity.
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Aim of the present monograph is the economic analysis of the role of MNEs regarding globalisation and digital economy and in parallel there is a reference and examination of some…
Abstract
Aim of the present monograph is the economic analysis of the role of MNEs regarding globalisation and digital economy and in parallel there is a reference and examination of some legal aspects concerning MNEs, cyberspace and e‐commerce as the means of expression of the digital economy. The whole effort of the author is focused on the examination of various aspects of MNEs and their impact upon globalisation and vice versa and how and if we are moving towards a global digital economy.
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I survey applications of Markov switching models to the asset pricing and portfolio choice literatures. In particular, I discuss the potential that Markov switching models have to…
Abstract
I survey applications of Markov switching models to the asset pricing and portfolio choice literatures. In particular, I discuss the potential that Markov switching models have to fit financial time series and at the same time provide powerful tools to test hypotheses formulated in the light of financial theories, and to generate positive economic value, as measured by risk-adjusted performances, in dynamic asset allocation applications. The chapter also reviews the role of Markov switching dynamics in modern asset pricing models in which the no-arbitrage principle is used to characterize the properties of the fundamental pricing measure in the presence of regimes.
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Giacomo Morri and Christian Beretta
Unlike previous studies on capital structure decisions, the purpose of this paper is to focus on US real estate investment trusts (REITs) in order to find out the main…
Abstract
Purpose
Unlike previous studies on capital structure decisions, the purpose of this paper is to focus on US real estate investment trusts (REITs) in order to find out the main determinants of capital structure choice for real estate companies and in order to verify if they are related to factors similar to those affecting the decisions of public firms in other sectors.
Design/methodology/approach
Using a methodology similar to Rajan and Zingales, a sample of 119 listed REITs with different investment strategies and in different property sectors was analyzed. The analysis is carried out in order to determine the basic factors underpinning the capital structures by selecting financial items and ratios related with leverage (such as asset size, profitability ratios, tangibility of assets, growth opportunities, operating risk and geographical diversification of investments).
Findings
Results show that REITs follow a pecking order theory of financing since more profitable firms are less levered and REITs with more growth opportunities have higher leverage ratios. The tangibility of assets turns out to be positively correlated with leverage, while REITs whose operating risk is high prefer a lower financial risk and consequently a lower gearing. Finally, it is not clear how size affects leverage decisions and more diversified REITs appear to be riskier.
Originality/value
The research also addresses the issue of asymmetric information and the debt‐equity choice for REITs sampled on the basis of their size, highlighting differences with other business sectors.
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Sees the objective of teaching financial management to be to helpmanagers and potential managers to make sensible investment andfinancing decisions. Acknowledges that financial…
Abstract
Sees the objective of teaching financial management to be to help managers and potential managers to make sensible investment and financing decisions. Acknowledges that financial theory teaches that investment and financing decisions should be based on cash flow and risk. Provides information on payback period; return on capital employed, earnings per share effect, working capital, profit planning, standard costing, financial statement planning and ratio analysis. Seeks to combine the practical rules of thumb of the traditionalists with the ideas of the financial theorists to form a balanced approach to practical financial management for MBA students, financial managers and undergraduates.
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“It should also be noted that the objective of convergence and equal distribution, including across under-performing areas, can hinder efforts to generate growth. Contrariwise…
Abstract
“It should also be noted that the objective of convergence and equal distribution, including across under-performing areas, can hinder efforts to generate growth. Contrariwise, the objective of competitiveness can exacerbate regional and social inequalities, by targeting efforts on zones of excellence where projects achieve greater returns (dynamic major cities, higher levels of general education, the most advanced projects, infrastructures with the heaviest traffic, and so on). If cohesion policy and the Lisbon Strategy come into conflict, it must be borne in mind that the former, for the moment, is founded on a rather more solid legal foundation than the latter” European Commission (2005, p. 9)Adaptation of Cohesion Policy to the Enlarged Europe and the Lisbon and Gothenburg Objectives.
In this paper, it is argued that previous estimates of the expected cost of equity and the expected arithmetic risk premium in the UK show a degree of upward bias. Given the…
Abstract
In this paper, it is argued that previous estimates of the expected cost of equity and the expected arithmetic risk premium in the UK show a degree of upward bias. Given the importance of the risk premium in regulatory cost of capital in the UK, this has important policy implications. There are three reasons why previous estimates could be upward biased. The first two arise from the comparison of estimates of the realised returns on government bond (‘gilt’) with those of the realised and expected returns on equities. These estimates are frequently used to infer a risk premium relative to either the current yield on index‐linked gilts or an ‘adjusted’ current yield measure. This is incorrect on two counts; first, inconsistent estimates of the risk‐free rate are implied on the right hand side of the capital asset pricing model; second, they compare the realised returns from a bond that carried inflation risk with the realised and expected returns from equities that may be expected to have at least some protection from inflation risk. The third, and most important, source of bias arises from uplifts to expected returns. If markets exhibit ‘excess volatility’, or f part of the historical return arises because of revisions to expected future cash flows, then estimates of variance derived from the historical returns or the price growth must be used with great care when uplifting average expected returns to derive simple discount rates. Adjusting expected returns for the effect of such biases leads to lower expected cost of equity and risk premia than those that are typically quoted.
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The purpose of this paper is to describe an equity management and planning tool used by rural electric cooperatives (RECs) and based on the times-interest-earned ratio (TIER). The…
Abstract
Purpose
The purpose of this paper is to describe an equity management and planning tool used by rural electric cooperatives (RECs) and based on the times-interest-earned ratio (TIER). The objectives of the paper are to construct a mathematical model that provides a rigorous foundation for the TIER approach, modify the approach so the rate of return on equity is a function of the cooperative’s equity position, demonstrate how elements of the model can be used by RECs in setting electric rates that will enable them to accelerate the retirement of member equity, and derive a generalized form of the “modified Goodwin formula” that can be used by both RECs and agricultural cooperatives.
Design/methodology/approach
Mathematical and graphical expressions of the TIER approach are developed. Simulations are used to demonstrate how RECs can set electric rates according to a target revolving period. The modified Goodwin formula is generalized to include the payment of cash patronage refunds through use of a growth model of an agricultural cooperative developed in Royer (1993).
Findings
This paper demonstrates how TIER analysis and the modified Goodwin formula can be used by cooperatives to aid their decisions regarding debt and equity financing and their choices regarding cash patronage refunds, equity retirement, and growth. The paper demonstrates that cooperatives that fail to recognize the functional relationship between the rate of return on equity and the equity position may substantially underestimate the equity position necessary to meet interest coverage requirements and overestimate their ability to grow and retire equity. It also shows that RECs may be able to make substantial improvements in equity revolvement with only modest increases in electric rates.
Research limitations/implications
The model developed in this paper has been simplified to focus on fundamental financial relationships. To apply this model, cooperatives may need to modify it to accommodate the complexities of their business operations.
Practical implications
TIER analysis can provide a useful equity management and planning tool for both RECs and agricultural cooperatives. It also can be used by lending institutions to assess the financial health of individual cooperative organizations.
Originality/value
Constructing a mathematical model that provides a foundation for TIER analysis, modifying the approach so that the rate of return on equity is a function of the equity position, demonstrating how RECs can use the model to set electric rates according to a target revolving period, and generalizing the modified Goodwin formula so it can be used by agricultural cooperatives are all original contributions.
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