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1 – 10 of 639Hui Di, Dalia Marciukaityte and Eugenie A. Goodwin
Firms are concerned about earnings per share (EPS) dilution after equity issues. The purpose of this paper is to investigate whether firms manage upward their discretionary…
Abstract
Purpose
Firms are concerned about earnings per share (EPS) dilution after equity issues. The purpose of this paper is to investigate whether firms manage upward their discretionary accruals around seasoned equity offerings (SEOs) to mitigate the impact of dilution on reported earnings.
Design/methodology/approach
The authors employ adjusted discretionary accruals from cash flow statements, normalized by the average common equity, in the multivariate tests.
Findings
There is evidence that SEO‐year discretionary accruals are the highest when contemporaneous operating cash flows are the lowest. Moreover, managers react to temporary rather than permanent declines in operating performance. Firms with the highest SEO‐year discretionary accruals experience the strongest improvements in post‐SEO operating cash flows. In addition, investors are not misled by the SEO‐year earnings management. There is no relation between the SEO‐year discretionary accruals and post‐SEO stock performance. Overall, these findings are consistent with the hypothesis that firms manage discretionary accruals around SEOs to mitigate the effect of temporary EPS dilution.
Practical implications
The paper's findings suggest that firms manage discretionary accruals during the SEO year to reduce the temporary negative impact of SEOs on operating performance measures, consistent with the EPS dilution hypothesis. Such earnings management makes earnings smoother and more predictable, improving earnings informativeness. The findings also suggest that misleading earnings management is not a common practice during the SEO year.
Originality/value
This paper adds to the literature questioning the evidence that managers frequently engage in misleading earnings management around corporate events. The authors provide an alternative explanation for earnings management around SEOs.
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Weerakoon Banda Yatiwelle Koralalage
The purpose of this paper is to examine the managerial views on the corporate financing practices of firms in the emerging market of Sri Lanka.
Abstract
Purpose
The purpose of this paper is to examine the managerial views on the corporate financing practices of firms in the emerging market of Sri Lanka.
Design/methodology/approach
A survey approach was employed using chief financial officers (CFOs) from the top non-financial firms listed on the Colombo Stock Exchange.
Findings
CFOs’ views on corporate financing practices are not fully consistent with the theory: financial hierarchy appears to be more important and firms are less leveraged. Most Sri Lankan CFOs perceive some policy factors as important and theoretically support: volatility of earnings and cash flows, tax advantages of interest deductibility, transaction costs, timing of interest rates, low foreign interest rates and debt equity targets. These factors are high priority in emerging markets but either not important at all or less important in developed markets. Matching debt maturity with the life of assets is equally important in both markets. Most CFOs adhere their financing to the local debt market, while a few firms use foreign debt. CFOs are concerned about earnings per share (EPS) dilution, providing a natural hedge in foreign debt issues, credit ratings, under/overvaluation of stocks and corporate control, whereas they are significantly important in developed markets. Age and education mostly explain the differences.
Research limitations/implications
The study is restricted to large companies in a relatively smaller market. Hence, sample size is relatively small, even though it shows a higher response rate.
Practical implications
The study offers insights for corporate financing decision-makers that could impact on firm value through a shift in emphasis toward capital structure theories.
Originality/value
The paper focuses on corporate financing practices in Sri Lanka in search of emerging market features that could mitigate the gap in the emerging market literature through survey evidence.
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Robert F. Bruner, Robert E. Spekman, Petra Christmann, Brian Kannry and Melinda Davies
This case may be taught singly or used as a merger-negotiation exercise with “Chrysler Corporation: Negotiations between Daimler and Chrysler” (UVA-F-1240). Set in February 1998…
Abstract
This case may be taught singly or used as a merger-negotiation exercise with “Chrysler Corporation: Negotiations between Daimler and Chrysler” (UVA-F-1240). Set in February 1998, the case places students in the position of negotiators for the company; their task is to value both firms, assess the potential earnings dilution of a combination, and negotiate a detailed agreement with their counterpart. The case can be used to explore such interesting negotiation issues as determination of a share-exchange ratio, treatment of major stockholders, and structuring a deal. Also, the case and exercise can be used to spark a discussion of acquisition in comparison with strategic alliance, or other less formal models of combination.
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Robert F. Bruner, Robert E. Spekman, Petra Christmann, Brian Kannry and Melinda Davies
This case may be taught singly or used as a merger-negotiation exercise with “Daimler-Benz A. G.: Negotiations between Daimler and Chrysler” (UVA-F-1241). Set in February 1998…
Abstract
This case may be taught singly or used as a merger-negotiation exercise with “Daimler-Benz A. G.: Negotiations between Daimler and Chrysler” (UVA-F-1241). Set in February 1998, the case places students in the position of negotiators for the company; their task is to value both firms, assess the potential earnings dilution of a combination, and negotiate a detailed agreement with their counterpart. The case can be used to explore such interesting negotiation issues as determination of a share-exchange ratio, treatment of major stockholders, and structuring a deal. Also, the case and exercise can be used to spark a discussion of acquisition in comparison with strategic alliance, or other less formal models of combination.
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Despite the existence of accounting standards, there still remains a degree of flexibility in their interpretation and gaps between rules. It is alleged that management practises…
Abstract
Despite the existence of accounting standards, there still remains a degree of flexibility in their interpretation and gaps between rules. It is alleged that management practises “creative compliance” to influence the picture of financial performance portrayed in the annual report. This practice is not necessarily “illegal” because it need not violate the letter of any rules, but may challenge their spirit. Since accounting is an integral part of the regulation and governance of the corporation, the practice of creative compliance makes accounting regulation appear weak and ineffective. Traces and analyses the objectives underlying the design and implementation of one major creative accounting scheme through a case study of financial innovation in convertible securities. The evidence highlights the pressures on management to perform on specific accounting ratios, and the extent to which companies were willing to go (with assistance from bankers and lawyers) to practise creative accounting. Shows that the conventional restraints on these practices, such as auditors, analysts and the media, have not been effective. What emerges is an unbalanced conflict between the regulators and the regulated corporations, where the latter, having access to significant financial and professional resources, appear to have a consistent upper hand.
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Susan Chaplinsky and Felicia C. Marston
The Nokia case provides an opportunity to explore financing alternatives in a situation of broad strategic change. The case emphasizes the difficulties of managing the financial…
Abstract
The Nokia case provides an opportunity to explore financing alternatives in a situation of broad strategic change. The case emphasizes the difficulties of managing the financial resources of technology-based companies when they fall behind in product innovation. Nokia, the world's leading producer of mobile phones, had recently seen its market share and profits eroded by rival products such as Apple's iPhone and phones featuring Google's Android operating system. In February 2011, Nokia CEO Stephen Elop announced a strategic plan and partnership with Microsoft to have Windows serve as its primary OS for smartphones. Since that announcement, Nokia reported a net loss in earnings, followed by a downgrade of its credit rating in the summer of 2012.
Analysts regard the next two years as a period of great uncertainty for the company. In January 2012, the CFO of Nokia estimates that the firm might require up to EUR4.3 billion in funding over the next two years to implement the plan under a representative downside scenario. Students are asked to evaluate the tradeoffs of raising the funds by issuing long-term debt, issuing equity, cutting dividends, or reducing cash. Given the firm's recent competitive struggles, none of the options is particularly appealing, which forces careful consideration of tradeoffs.
The Nokia is appropriate for use in upper-level undergraduate and graduate courses covering topics in capital raising, capital structure, corporate finance, and the costs of financing. A spreadsheet file of case exhibits to facilitate student preparation, teaching note, and instructional spreadsheet file are available for the case.
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The main aim of this paper is to report on a comprehensive survey of corporate financing decision‐making process in Sri Lankan listed companies and to compare these results with…
Abstract
Purpose
The main aim of this paper is to report on a comprehensive survey of corporate financing decision‐making process in Sri Lankan listed companies and to compare these results with those of similar studies conducted in developed markets.
Design/methodology/approach
The study was based on a survey questionnaire distributed among the chief executive officers (CEOs) of companies listed on the Colombo Stock Exchange, with the content of the questionnaire being based upon a review of theoretical and empirical literature in the field of finance.
Findings
The results demonstrate an adherence to a financial hierarchy, which appears to be the dominant financial policy among listed Sri Lankan companies. Corporate financing decisions seem to be influenced mostly by interest and tax considerations, while lesser weight is accorded to financial flexibility in determining the amount of funds to be raised externally through debt contracts. The evidence largely supports the propositions of the pecking order model, but also confirms some predictions found in static trade‐off theory.
Practical implications
Some of the most striking implications of the analysis relate to the under‐development of the local capital market, and the apparent need for an efficient financial system that spurs economic growth. An efficient capital market will in turn ensure that capital will be more easily channeled into financing investments.
Originality/value
This paper highlights how and why the determinants of capital structure decisions reported for developed capital markets may differ from those existing in transitional or emerging economies.
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Hai-yen Pham, Richard Chung, Ben-Hsien Bao and Byung-Seong Min
The purpose of this paper is to examine the impact of product market competition on dividend payout and share repurchases in Australia in which a full dividend imputation system…
Abstract
Purpose
The purpose of this paper is to examine the impact of product market competition on dividend payout and share repurchases in Australia in which a full dividend imputation system has been in place since 1987.
Design/methodology/approach
Panel data estimation with industry and year-fixed effects is employed to examine the role of industry competition on dividend payout and share repurchases. The paper uses a sample of ASX200 non-financial firms, including 4,272 observations over the period 1992–2015. To address the endogeneity problem, the authors utilize the event of Australia–United States Free Trade Agreement (AUSFTA), which became effective on 01 January 2005, and perform a difference-in-difference analysis.
Findings
The authors find that firms operating in competitive markets are likely to pay more dividends and repurchase more shares to reduce agency costs. The positive relation between industry competition and dividends is stronger among firms where the CEO and the Chairman of the Board are the same person and among firms with higher market-to-book ratio and higher standard deviation of stock returns. The study results are robust when the authors account for the impact of franking credit on dividend payment. In the difference-in-difference analysis, the authors find strong evidence of a casual relation that product competition drives changes in dividend policy.
Practical implications
The findings are consistent with the notion that intense product market competition can mitigate agency conflicts between managers and shareholders and with the information signalling explanation of market competition. As such, regulators may want to introduce policies that encourage more market competition (e.g. market deregulation) to enhance market efficiency.
Originality/value
This study incorporates product market competition in explaining the firm payout policy.
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Finance has begun to utilize clinical approach in its research. The extent of its appropriate use is a serious point for consideration. Any adequate use of a research methodology…
Abstract
Finance has begun to utilize clinical approach in its research. The extent of its appropriate use is a serious point for consideration. Any adequate use of a research methodology would highly benefit from a deep understanding of its underlying worldview. This paper, therefore, discusses how worldviews underlie methodologies in general, and those of finance, in particular. It starts with a discussion on how any worldview can be positioned on a continuum formed by four basic paradigms: functionalist, interpretive, radical humanist, and radical structuralist. Next, the paper focuses on methodologies implied by the functionalist and interpretive paradigms, namely: scientific and clinical, respectively. Then, it notes that mainstream finance adheres to the functionalist paradigm. It examines how mainstream functionalist finance intends to use the interpretive clinical approach in its research. While this step towards a more balanced approach to research in finance is appreciated, the paper points out that clinical approach can be appropriately used only if certain fundamental, contextual, paradigmatic assumptions are met.