In recent years, practitioners and academics have argued that traditional discounted cash flow (DCF) valuation models do not adequately capture the value of managerial…
In recent years, practitioners and academics have argued that traditional discounted cash flow (DCF) valuation models do not adequately capture the value of managerial flexibility to delay, grow, scale down or abandon projects. The insight is that a business investment opportunity can be conceptually compared to a financial option. The purpose of this paper is to develop a theoretical model based on option pricing theory to value managerial flexibility arising in stock for stock exchanges. The paper shows how a mergers and acquisition (M&A) deal may be optimally structured as a real options swap by including managerial flexibility of both the acquiring and target firms when stock prices are volatile. Using a recent acquisition case example from US banking industry the paper illustrates how the proposed exchange ratio swap optimize deal value and avoids earnings per share (EPS) dilution to both parties. Appropriate valuation of managerial flexibility is important given the historical premiums paid in takeovers. While the fact that such premiums exist lends some credibility to the idea that at least implicitly managerial flexibility is valued, the real options approach allows for more explicit valuation of such flexibility.
The rise in hostile corporate takeover attempts during the 1980s motivated many states to pass antitakeover legislation, often after lobbying by the management of affected…
The rise in hostile corporate takeover attempts during the 1980s motivated many states to pass antitakeover legislation, often after lobbying by the management of affected firms. Empirical attempts to assess the impact of such statutes on firm value have yielded mixed results finding either no effect or a significant negative effect. We hypothesize that, while there may be a negative market reaction associated with state antitakeover legislation, the effect is temporary. In empirically examining the effects from the actions of nineteen states, we find that any negative market reactions tend to be followed by roughly equal positive counter‐reactions, suggesting a market overreaction.
The global banking environment is experiencing significant change as regulatory and geographical barriers to competition are reduced. As these barriers are removed…
The global banking environment is experiencing significant change as regulatory and geographical barriers to competition are reduced. As these barriers are removed, greater integration of banking services is developing throughout the world affecting the performance and structure of banking institutions. This research examines the stock returns and volatility of stock returns for a sample of banks in the United States, Europe, Canada and Japan. The general focus is to identify factors influencing the return and risk and to examine cross‐country differences in these factors. The results suggest that while size does not affect return volatility for any of the categories of banks, it does affect returns for banks in Japan, the U.S. and other non‐universal banking systems. Likewise, the investment in fixed assets appears consistently to adversely affect returns. A number of differences are found across country borders and across type of institutions (i.e. universal versus non‐universal banks).
Despite many efforts to develop a universally accepted theory of capital structure, observed capital structures do not appear to conform to existing theories. The…
Despite many efforts to develop a universally accepted theory of capital structure, observed capital structures do not appear to conform to existing theories. The objective of this research is to empirically examine capital structure decisions in terms of the relationship of debt policy with explanatory variables designed to capture the asset structure of each firm, the degree to which each firm is diversified, the agency relationships between management and owners, the level of business risk and the impact of alternative tax shields. The results suggest that the most influential factors are the asset type, the degree of firm diversification and the availability of alternative tax shields.
The purpose of this paper is to compare and contrast the structure, regulation, and performance of banks in the EU and G‐10 countries. This enables one to identify any…
The purpose of this paper is to compare and contrast the structure, regulation, and performance of banks in the EU and G‐10 countries. This enables one to identify any significant differences in the structure of banking in the nineteen separate countries comprising these two groups. The regulatory, supervisory, and deposit‐insurance environment in which banks operate in each of these countries is also compared and contrasted. This enables one to identify any significant differences in the regulatory environment that may help explain the structure of banking in the various countries. Beyond this, the effect of the overall structural and regulatory environment on individual bank performance is investigated in order to evaluate the appropriateness of existing regulations in individual countries and any proposals for reforming them. Hence, an exploratory empirical analysis based upon a sample of banks in the different countries is conducted to assess the effect of the different “regulatory regimes” on the performance of individual banks, controlling for various bank‐specific and country‐specific factors that may also affect bank performance. In this way, the paper attempts to contribute to an assessment of the appropriate balance between market and regulatory discipline to ensure that banks have sufficient opportunities to compete prudently and profitability in a competitive and global financial marketplace. In the process of conducting such an assessment, the paper necessarily provides information as to whether the U.S. is “out‐of‐step” with banking developments in other industrial countries.
The flexibility of managers to respond to risk and uncertainty inherent in business decisions is clearly of value. This value has historically been recognized in an ad hoc…
The flexibility of managers to respond to risk and uncertainty inherent in business decisions is clearly of value. This value has historically been recognized in an ad hoc manner in the absence of a methodology for more rigorous assessment of value. The application of real option methodology represents a more objective mechanism that allows managers to hedge against adverse effects and exploit upside potential. Of particular interest to managers in the merger and acquisition (M&A) process is the value of such flexibility related to the particular terms of a transaction. Typically, stock for stock transactions take more time to complete as compared to cash given the time lapse between announcement and completion. Over this period, if stock prices are volatile, stock for stock exchanges may result in adverse selection through the dilution of shareholder wealth of an acquiring firm or a target firm.
The paper develops a real option collar model that may be employed by managers to measure the market price risk involved to their shareholders in offering or accepting stock. We further discuss accounting issues related to this contingency pricing effect. Using an acquisition example from U.S. banking industry we illustrate how the collar arrangement may be used to hedge market price risk through flexibility to renegotiate the deal by exercising managerial options.
This paper examines the determinants of corporate dividend policy in Jordan. The study uses a firm‐level panel data set of all publicly traded firms on the Amman Stock…
This paper examines the determinants of corporate dividend policy in Jordan. The study uses a firm‐level panel data set of all publicly traded firms on the Amman Stock Exchange between 1989 and 2000. The study develops eight research hypotheses, which are used to represent the main theories of corporate dividends. A general‐to‐specific modeling approach is used to choose between the competing hypotheses. The study examines the determinants of the amount of dividends using Tobit specifications. The results suggest that the proportion of stocks held by insiders and state ownership significantly affect the amount of dividends paid. Size, age, and profitability of the firm seem to be determinant factors of corporate dividend policy in Jordan. The findings provide strong support for the agency costs hypothesis and are broadly consistent with the pecking order hypothesis. The results provide no support for the signaling hypothesis.
The purpose of this paper is to investigate the effect of corporate governance strength as measured by the Gompers governance index (gindex) and other related factors on corporate risk as measured by implied volatility of returns.
The research incorporates implied volatility as the measure of risk, as compared to earlier studies that have used historic volatility measures. Governance variables include the Gompers Index, as well as other measures to control for firm size, ownership and leverage.
The findings indicate that corporate risk is significantly inversely‐related with the gindex, which essentially gauges how extensively antitakeover provisions are adopted by a firm. Firm size is the other variable significant in both univariate and multivariate models. Financial leverage and the percentage of outsiders on the board are significantly related to firm risk when not controlling for other factors. Board percentage of voting power does not appear to affect firm riskiness statistically.
Future research needs to examine specifically why higher takeover defenses lead to lower implied volatility. This includes exploring whether the lower level of expected volatility is due to lower levels of takeover activity or whether firms with poor governance assume a suboptimal amount of risk.
The paper contributes to the literature by the use of implied volatility as the measure of risk. The results are robust and provide further support for the relationship between corporate governance and risk. While counter to initial expectations, these results suggest, at the very least, a firm with good governance may not necessarily have low implied volatility in its stock price.
This paper examines whether financial buyers are more likely to initiate takeovers of inefficient firms. We show that they indeed are and thus conclude that takeovers by financial buyers play a potentially beneficial role in the allocation of corporate assets in the US. economy. Our analysis of determinants of takeovers initiated by financial buyers uses an application of the methodology developed in Trimbath, Frydman and Frydman (2001). In order to illustrate efficiency enhancements introduced by financial buyers, we select Forstmann Little’s acquisition of General Instrument for a brief case study. We show that their aggressive programs of cost management substantially improved the efficiency of General Instrument. Moreover, it allowed General Instrument to expand research and development to become the global leader in high definition television.
Examines the applicability of alternative measures of service quality in the developing economy of India and assesses related issues in that context. Based on data…
Examines the applicability of alternative measures of service quality in the developing economy of India and assesses related issues in that context. Based on data gathered from customers of two major banks, overall results support a multidimensional construct of service quality and suggest that the SERVQUAL scale provides greater diagnostic information than the SERVPERF scale. However, the five‐factor conceptualization of SERVQUAL does not seem to be totally applicable, and no significant difference was found in the predictive ability of the two measures. Further, although SERVQUAL and SERVPERF have identical convergent validity, SERVPERF appears to have higher discriminant validity than SERVQUAL.