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Corporate Finance (corporate + finance)
Selected AbstractsThe Agency Costs of Overvalued Equity and the Current State of Corporate FinanceEUROPEAN FINANCIAL MANAGEMENT, Issue 4 2004Michael C. Jensen First page of article [source] Financial Structure, Corporate Finance and Economic GrowthINTERNATIONAL REVIEW OF FINANCE, Issue 1 2000René M. Stulz This paper examines how a country's financial structure affects economic growth through its impact on how corporations raise and manage funds. We define a country's financial structure to consist of the institutions, financial technology and rules of the game that define how financial activity is organized at a point in time. We emphasize that the aspects of financial structure that encourage entrepreneurship are not the same as those that ensure the efficiency of established firms. Financial structures that permit the development of specialized capital by financial intermediaries are crucial to economic growth. [source] The Contributions of Stewart Myers to the Theory and Practice of Corporate Finance,JOURNAL OF APPLIED CORPORATE FINANCE, Issue 4 2008Franklin Allen In a 40-plus year career notable for path-breaking work on capital structure and innovations in capital budgeting and valuation, MIT finance professor Stewart Myers has had a remarkable influence on both the theory and practice of corporate finance. In this article, two of his former students, a colleague, and a co-author offer a brief survey of Professor Myers's accomplishments, along with an assessment of their relevance for the current financial environment. These contributions are seen as falling into three main categories: ,Work on "debt overhang" and the financial "pecking order" that not only provided plausible explanations for much corporate financing behavior, but can also be used to shed light on recent developments, including the reluctance of highly leveraged U.S. financial institutions to raise equity and the recent "mandatory" infusions of capital by the U.S. Treasury. ,Contributions to capital budgeting that complement and reinforce his research on capital structure. By providing a simple and intuitive way to capture the tax benefits of debt when capital structure changes over time, his adjusted present value (or APV) approach has not only become the standard in LBO and venture capital firms, but accomplishes in practice what theorists like M&M had urged finance practitioners to do some 30 years earlier: separate the real operating profitability of a company or project from the "second-order" effects of financing. And his real options valuation method, by recognizing the "option-like" character of many corporate assets, has provided not only a new way of valuing "growth" assets, but a method and, indeed, a language for bringing together the disciplines of corporate strategy and finance. ,Starting with work on estimating fair rates of return for public utilities, he has gone on to develop a cost-of-capital and capital allocation framework for insurance companies, as well as a persuasive explanation for why the rate-setting process for railroads in the U.S. and U.K. has created problems for those industries. [source] How Theories of Financial Intermediation and Corporate Risk-Management Influence Bank Risk-Taking BehaviorFINANCIAL MARKETS, INSTITUTIONS & INSTRUMENTS, Issue 5 2001Michael S. Pagano This paper examines the rationales for risk-taking and risk-management behavior from both a corporate finance and a banking perspective. After combining the theoretical insights from the corporate finance and banking literatures related to hedging and risk-taking, the paper reviews empirical tests based on these theories to determine which of these theories are best supported by the data. Managerial incentives are the most consistently supported rationale for describing how banks manage risk. In particular, moderate/high levels of equity ownership reduce bank risk while positive amounts of stock option grants increase bank risk-taking behavior. The review of empirical tests in the banking literature also suggests that financial intermediaries coordinate different aspects of risk (e.g., credit and interest rate risk) in order to maintain a certain level of total risk. The empirical results indicate hedgeable risks such as interest rate risk represent only one dimension of the risk-management problem. This implies empirical tests of the theories of corporate risk-management need to consider individual sub-components of total risk and the bank's ability to trade these risks in a competitive financial market. This finding is consistent with the reality that banks have non-zero expected financial distress costs and bank managers cannot fully diversify their bank-related personal investments. [source] Supply-Side Economics of Germany's Year 2000 Tax Reform: A Quantitative AssessmentGERMAN ECONOMIC REVIEW, Issue 2 2003Holger Strulik Tax reform; corporate finance; investment; growth; welfare; Germany Abstract. The paper provides an assessment of supply-side economics following Germany's year 2000 tax reform. Investigated are a corporate tax cut, deteriorating depreciation allowances and imputation rules, and a private income tax cut. For this purpose, a neoclassical growth model is augmented by various fiscal policy parameters and endogenous corporate finance and calibrated with German data. The model is used to evaluate consequences of Germany's tax reform on production, firm finance and leverage, investment, consumption and welfare of a representative household. [source] Baylor University Roundtable on The Corporate Mission, CEO Pay, and Improving the Dialogue with InvestorsJOURNAL OF APPLIED CORPORATE FINANCE, Issue 1 2010John Martin A small group of academics and practitioners discusses four major controversies in the theory and practice of corporate finance: ,What is the social purpose of the public corporation? Should corporate managements aim to maximize the profitability and value of their companies, or should they instead try to balance the interests of their shareholders against those of "stakeholder" groups, such as employees, customers, and local communities? ,Should corporate executives consider ending the common practice of earnings guidance? Are there other ways of shifting the focus of the public dialogue between management and investors away from near-term earnings and toward longer-run corporate strategies, policies, and goals? And can companies influence the kinds of investors who buy their shares? ,Are U.S. CEOs overpaid? What role have equity ownership and financial incentives played in the past performance of U.S. companies? And are there ways of improving the design of U.S. executive pay? ,Can the principles of corporate governance and financial management at the core of the private equity model,notably, equity incentives, high leverage, and active participation by large investors,be used to increase the values of U.S. public companies? [source] The Contributions of Stewart Myers to the Theory and Practice of Corporate Finance,JOURNAL OF APPLIED CORPORATE FINANCE, Issue 4 2008Franklin Allen In a 40-plus year career notable for path-breaking work on capital structure and innovations in capital budgeting and valuation, MIT finance professor Stewart Myers has had a remarkable influence on both the theory and practice of corporate finance. In this article, two of his former students, a colleague, and a co-author offer a brief survey of Professor Myers's accomplishments, along with an assessment of their relevance for the current financial environment. These contributions are seen as falling into three main categories: ,Work on "debt overhang" and the financial "pecking order" that not only provided plausible explanations for much corporate financing behavior, but can also be used to shed light on recent developments, including the reluctance of highly leveraged U.S. financial institutions to raise equity and the recent "mandatory" infusions of capital by the U.S. Treasury. ,Contributions to capital budgeting that complement and reinforce his research on capital structure. By providing a simple and intuitive way to capture the tax benefits of debt when capital structure changes over time, his adjusted present value (or APV) approach has not only become the standard in LBO and venture capital firms, but accomplishes in practice what theorists like M&M had urged finance practitioners to do some 30 years earlier: separate the real operating profitability of a company or project from the "second-order" effects of financing. And his real options valuation method, by recognizing the "option-like" character of many corporate assets, has provided not only a new way of valuing "growth" assets, but a method and, indeed, a language for bringing together the disciplines of corporate strategy and finance. ,Starting with work on estimating fair rates of return for public utilities, he has gone on to develop a cost-of-capital and capital allocation framework for insurance companies, as well as a persuasive explanation for why the rate-setting process for railroads in the U.S. and U.K. has created problems for those industries. [source] GLOBAL EVIDENCE ON THE EQUITY RISK PREMIUMJOURNAL OF APPLIED CORPORATE FINANCE, Issue 4 2003Elroy Dimson The size of the equity risk premium,the incremental return that shareholders require to hold risky equities rather than risk-free securities,is a key issue in corporate finance. Financial economists generally measure the equity premium over long periods of time in order to obtain reliable estimates. These estimates are widely used by investors, finance professionals, corporate executives, regulators, lawyers, and consultants. But because the 20th century proved to be a period of such remarkable growth in the U.S. economy, estimates of the risk premium that rely on past market performance may be too high to serve as a reliable guide to the future. The authors analyze a 103-year history of risk premiums in 16 countries and conclude that the U.S. risk premium relative to Treasury bills was 5.3% for that period,lower than previous studies suggest,as compared to 4.2% for the U.K. and 4.5% for a world index. But the article goes on to observe that the historical record may still overstate expectations of the future risk premium, partly because market volatility in the future may be lower than in the past, and partly because of a general decline in risk resulting from new technological advances and increased diversification opportunities for investors. After adjusting for the expected impact of these factors, the authors calculate forward-looking equity risk premiums of 4.3% for the U.S., 3.9% for the U.K., and 3.5% for the world index. At the same time, however, they caution that the risk premium can fluctuate over time and that managers should make appropriate adjustments when there are compelling economic reasons to think that expected premiums are unusually high or low. [source] INTEGRATING RISK MANAGEMENT AND CAPITAL MANAGEMENTJOURNAL OF APPLIED CORPORATE FINANCE, Issue 4 2002Prakash Shimpi Capital management and risk management are two sides of the same coin. But by treating them separately, the conventional theory and practice of corporate finance fails to account for important connections between them. Moreover, an exclusive focus on debt and equity ignores the full range of capital resources available to a corporation, thus distorting management's view of the firm's cost of capital (and its return on equity). An understanding of the role of corporate capital,including off-balance sheet as well as paid-up capital,and its relationship to the riskiness of a firm's activities provides the foundation on which the author builds a corporate finance framework that ties together both the insurance and capital markets. This framework, called the "Insurative Model," captures the economics of both conventional insurance and corporate finance instruments and embraces a wide variety of solutions and instruments,be they debt, equity, insurance, derivative, contingent capital, or any other,and allows managers to evaluate their effectiveness in a consistent, unified way. The Insurative Model demonstrates that a company's decisions on insurance and risk retention can be just as important as its decisions about its debt-equity mix. In fact, the determination of a firm's optimal debt-equity ratio should be the last in a series of capital and risk management decisions. Earlier decisions should address risk retention, risk transfer, and the optimal amounts and structure of off-balance-sheet capital used to support the company's retained risks. [source] Another step toward global convergenceJOURNAL OF CORPORATE ACCOUNTING & FINANCE, Issue 6 2008Kang Cheng The Financial Accounting Standards Board and the International Accounting Standards Board have worked together to develop a single set of accounting standards for business combinations. It will make things easier for corporate finance and accounting professionals when dealing with domestic versus international acquisitions. However, at first glance, the new FASB standard looks like a total revision of SFAS No. 141. What are the latest changes? © 2008 Wiley Periodicals, Inc. [source] Presidential Address: Do Financial Institutions Matter?THE JOURNAL OF FINANCE, Issue 4 2001Franklin Allen In standard asset pricing theory, investors are assumed to invest directly in financial markets. The role of financial institutions is ignored. The focus in corporate finance is on agency problems. How do you ensure that managers act in shareholders' interests? There is an inconsistency in assuming that when you give your money to a financial institution there is no agency problem, but when you give it to a firm there is. It is argued that both areas need to take proper account of the role of financial institutions and markets. Appropriate concepts for analyzing particular situations should be used. [source] | ||||||||||||||||||||||