Search results

The purpose of this paper is to instruct advanced business students on the debt-equity choice by showing how wealth transfers between security holders influence security values when a levered firm undergoes an incremental debt-to-equity approach.

The design involves a pedagogical exercise that applies gain to leverage (GL) formulas for a firm aspiring to increase its value by exchanging debt for equity. The valuation method includes perpetuity formulations including those with growth and wealth transfers. The instructional approach offers an understanding of the debt-equity decision.

Unlike studies that provide empirical findings or new theories, this paper provides knowledge and skills for students learning capital structure decision making.

All GL equations in this paper are limited by derivational assumptions and estimation of values for variables.

This paper bridges the gap between theory and practice by illustrating the impact of the costs of borrowings, growth rates and risk shifts on debt-equity decision making. Students will learn and apply GL equations. They will get an appreciation for the practical complexities of financial decision making including the agency complication embodied in wealth transfers.

Society can be enhanced to the extent this paper helps future financial managers make optimal capital structure decisions.

This paper adds to the Capital Structure Model (CSM) pedagogical research by using the new CSM equations that address a levered situation and incremental approach. As such, it is the first CMS instructional paper to incorporate wealth transfers between security holders.

The purpose of this paper is to instruct upper level business students on the intricacies of the debt‐equity choice with the emphasis on showing the interrelation of this choice with the plowback‐payout choice.

The paper is designed around a pedagogical exercise that applies academic theories on the computation of the gain to leverage for an unleveraged nongrowth firm. A question and answer methodology is used within the exercise. The approach is instructional as it attempts to teach students about firm valuation and the variables that are important in the valuation process. The firm valuation method is based on perpetuity equations with and without growth.

Unlike an empirical study that concentrates on providing findings from a data analysis, this paper attempts to instill knowledge and skills to students when making debt‐equity and plowback‐payout choices.

All gain to leverage equations used in this paper are limited by their derivational assumptions and the estimation of values for variables used in the equations.

Besides using the traditional Modigliani and Miller (MM)‐Miller gain to leverage equations, this paper also uses more recent gain to leverage equations that attempt to bridge the gap between theory and practice by applying new theory on the impact of the plowback‐payout choice on the debt‐equity choice. Students will be able to compare traditional and recent gain to leverage equations and form their own opinions as to their potential value in practice. In the process, they should get an idea of the practical complexities of financial decision‐making.

Optimizing firm value through proper decision‐making implies there is a proper and efficient utilization of societal resources.

The paper builds on a prior pedagogical paper that incorporated discount rates (costs of borrowing) within the nongrowth MM‐Miller gain to leverage framework. This paper's originality and value lies in being the first pedagogical paper to incorporate growth as determined by the plowback‐payout decision within the nongrowth gain to leverage framework.

The purpose of this paper is to explore if hedge fund variables (HFVs) are associated with long-run compounded raw returns (CRRs) for seasoned equity offering (SEO) firms for a six-year window around the offering month for firms undergoing SEOs.

The event study methodology is used to calculate long-run CRRs that are used in a regression model as dependent variables. Independent variables include HFVs and nonhedge fund variables (NFVs) with standard errors clustered at the month level.

Three new long-run findings, consistent with recent short-run findings, are offered. First, HFVs are significantly associated with long-run CRRs for SEO firms. Second, HFVs perform competitively compared to NFVs. Third, a potential omitted-variable bias results if HFVs are not used.

This research assumes that hedge fund managers can identify good (poor) performing SEO firm that allow for profitable long (short) positions. The proportion of hedge funds using a strategy will change in the hypothesized manner needed to make profit.

Hedge fund managers can use long-run strategies to capitalize on price movements around significant corporate events.

Larger institutional traders have investment advantages due to superior knowledge and greater ability to manipulate prices.

This research is the first study to detail the significant association between hedge fund stratagems and long-run stock returns for firms undergoing key corporate events. This study demonstrates the need to consider hedge fund strategies when trying to understand stock price movements.

The main purpose is to explore the impact of major stock markets on China's market where major markets are represented by former G8 nations (current G7 and Russia).

The article makes use of: stationarity tests (ADF and PP unit root); long-run correlation tests (Johansen integration involving trace and maximum eigenvalue); impact of G8 markets on China (VECM test); influence of G8 markets on volatility in China's market (variance decomposition analysis) and, effect from shocks in G8 markets on China (impulse response function).

Using a period of 2009–2019 that avoids detecting linkages caused by interdependencies created by two major international crises, the article offers four major findings. First, except for Germany and Russia, G8 markets have a significant causal influence on China with UK having the greatest. Second, G8 markets are not the major source of short-run fluctuation in China's market but over time exercise a noteworthy collective impact with UK having the greatest impact. Third, there are occasions for international portfolio diversification with China's market providing greater diversification than G8 nations. Fourth, all markets provide a short-run window of abnormal profit.

The indexes used to represent national markets are assumed to be adequate representations.

Short-term abnormal profits exist. Investing in China, compared to G8 countries, offers greater portfolio diversification possibilities.

Removal of trade and investment barriers cause greater market integration.

By using recent data, this study reveals that G8 stock markets influence China's market.

Capital structure decisions rely on a complex array of theoretical foundations and practical considerations. At the managerial level, it is impractical to base decisions purely on theory. While one can develop a perception of an optimal capital structure, the decision is often obscured by practical limitations to the theoretical base. In order to be useful to practicing managers, policies and decision techniques need to be efficiently accomplished and based on available information. This paper seeks to provide that practical framework.

This paper recounts the simple theoretical base for capital structure, highlights some of the problems encountered when applying the theory to reality, and suggests a framework for practical managerial decisions about capital structure. This exposition is especially useful in undergraduate business curricula, in particular for finance majors considering professional management as a career.

While application of traditional capital structure theory is often impractical, numerous tools are available for use by professional managers to make informed decisions about capital structure.

The conclusions from this paper provide a framework for current and prospective professional managers for making appropriate capital structure decisions in their management careers.

Proper managerial techniques and considerations for leverage and capital structure can potentially benefit society through more prudent use of debt, based on the variety of measures presented in this paper.

Topics discussed in this paper have been in development since the 1950s. The contribution of this paper is the creation of a framework for understanding and applying these topics, for pedagogical and management training purposes.

The purpose of this paper is to examine the impact of insider ownership decreases on stock returns for firms undergoing seasoned equity offerings (SEOs).

Insider data were gathered for firms undergoing SEOs and this information used to compute the insider ownership percentage decreases caused by the SEOs. These insider percentage decreases and standard compounded abnormal return methodology were used to test signaling theory.

It was discovered that the short‐run and long‐run stock returns accompanying SEOs are not consistent with what signaling theory predicts. In particular, for greater decreases in insider ownership percentages, a superior market response for both short‐run tests and long‐run post‐SEO tests was often found.

Prior research has not examined how the change in insider ownership caused by a corporate event influences stock returns. Future research can build on the univariate tests by examining the impact of insider ownership within a multivariate framework.

Investors cannot profit by following the behavior of insiders by selling shares in companies where insiders lower their ownership percentages. This is because insiders appear to have personal agendas that they follow when decreasing their holdings.

This is the first study to examine how changes in insider ownership caused by a significant corporate event affect stock returns. The findings of this empirical examination challenge signaling theory as regards insider knowledge, the ability of insiders to convey their privileged knowledge (if it exists), and the capacity of outsiders to decipher and act on insider actions.

This paper aims to examine the link between financing patterns, information asymmetry and legal traditions in 37 countries during the 1990‐2004 period.

The analysis is based on three theories: the trade‐off theory, pecking order hypothesis and market timing hypothesis. The authors test the predictions of these theories/hypotheses using regression analysis. The econometric method used is panel data with firm and country fixed effects. The authors develop a modified pecking order model which controls for short‐ and long‐term debt level changes and simultaneously test the predictions of all theories.

Consistent with studies for US firms, the results show that firms across all countries adjust toward the target leverage, but with significantly different rate. The long‐term debt contribution in the rate of adjustment is 64 percent in common law countries and 51 percent in civil law countries. The ability of the model to explain changes in leverage ratios is higher in common law countries. The authors find support for market timing hypothesis but no support for pecking order of financing. These results support their conjecture that stronger investor protection, higher transparency and well‐developed financial markets in common law countries reduce the cost of recapitalization.

The limitation of this study comes from lack of data availability to measure contract enforcement, transparency, and corporate governance variables. Future research can incorporate these variables to explain the differences in capital structure decisions across countries with different legal systems.

The findings show that firms' capital structure decisions are not only a function of their own characteristics but also the result of legal and financial market development in which they operate.

This is the first study that sheds light about rate of adjustment to optimal capital structure and pecking order of financing in 37 countries with different legal traditions and financial market developments. The authors are not aware of any other study that uses a modified pecking order model in an international context.

The traditional discounted cash flows (DCF) valuation procedure used by financial analysts assumes that firms maintain a policy of fixed debt. However, empirical evidence suggests that many firms rebalance their debt. This paper seeks to explore the implication of this discrepancy for valuation of firms that undergo a capital structure change.

The approach taken is both theoretical and empirical.

The authors show how the valuation process should be modified for firms that are expected to rebalance their debt and demonstrate the distortion in value that results if the traditional DCF valuation procedure is used instead. Furthermore, they illustrate the significance of their results using a sample of the largest largest leveraged buyouts of the current decade.

To the authors' knowledge, this is the first investigation into this issue.