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Financial Leverage (financial + leverage)
Selected AbstractsPrecision in Accounting Information, Financial Leverage and the Value of EquityJOURNAL OF BUSINESS FINANCE & ACCOUNTING, Issue 7-8 2007Glenn Feltham Abstract:, Using an equity valuation model characterized by periodic imperfect accounting information, we examine how financial leverage affects a firm's accounting quality choice (i.e., precision). We find that the existence of financial leverage motivates firms with average to good performance to prepare accounting information with a high degree of precision. However, we conclude that when a firm is performing poorly it has an incentive to reduce accounting precision in order to lower the likelihood of both a debt covenant violation and the detection of accounting bias. [source] Who Cares about Auditor Reputation?,CONTEMPORARY ACCOUNTING RESEARCH, Issue 3 2005JAN BARTON Abstract I provide evidence on the demand for auditor reputation by examining the defections of Arthur Andersen LLP's clients following the accounting scandals and criminal conviction marring the auditor's reputation in 2002. About 95 percent of clients in my sample did not switch auditors until after Andersen was indicted for criminal misconduct regarding its failed audit of Enron Corp. I test whether the timing of client defections and the choice of a new auditor are consistent with managers' incentives to mitigate potentially costly information and agency problems. I find that clients defected sooner, mostly to another Big 5 auditor, if they were more visible in the capital markets; such clients attracted more analysts and press coverage, had larger institutional ownership and share turnover, and raised more cash in recent security issues. However, my proxies for agency conflicts , managerial ownership and financial leverage , are not associated with the timing of defections or the choice of new auditor. Overall, my study suggests that firms more visible in the capital markets tend to be more concerned about engaging highly reputable auditors, consistent with such firms trying to build and preserve their own reputations for credible financial reporting. [source] Corporate Governance and Capital Structure Decisions of the Chinese Listed FirmsCORPORATE GOVERNANCE, Issue 2 2002Yu Wen This paper studies the relationship between some characteristics of the corporate board and the firm's capital structure in Chinese listed firms. The findings provide some preliminary empirical evidence and seem to suggest that managers tend to pursue lower financial leverage when they face stronger corporate governance from the board. However, the empirical results of the relationships are statistically significant only in the case of the board composition and the CEO tenure. The results are statistically insignificant in the case of the board size and fixed CEO compensation. This may in general suggest that, up to the time period of our investigation, the corporate board structures and processes in Chinese listed firms might not as yet be fully working in the manner, or as well, as might have been so far assumed on the basis of Western theoretical finance literature. [source] Risk-taking incentives of executive stock options and the asset substitution problemACCOUNTING & FINANCE, Issue 1 2005Gerald T. Garvey G32; D23; J33 Abstract Various theoretical models show that managerial compensation schemes can reduce the distortionary effects of financial leverage. There is mixed evidence as to whether highly levered firms offer less stock-based compensation, a common prediction of such models. Both the theoretical and empirical research, however, have overlooked the leverage provided by executive stock options. In principle, adjusting the exercise prices of executive stock options can mitigate the risk incentive effects of financial leverage. We show that the near-universal practice of setting option exercise prices near the prevailing stock price at the date of grant effectively undoes most of the effects of financial leverage. In a large cross-sectional sample of Canadian option-granting firms, we find evidence that executives' incentives to take equity risk are negatively rather than positively related to the leverage of their employers. [source] The impact of macroeconomic uncertainty on firms' changes in financial leverageINTERNATIONAL JOURNAL OF FINANCE & ECONOMICS, Issue 1 2010Christopher F. Baum Abstract We investigate the relationship between a firm's measures of corporate governance, macroeconomic uncertainty and changes in leverage. Recent research highlights the role of governance in financing decisions. Previous research also indicates that macroeconomic uncertainty affects a firm's ability to borrow. In this paper we investigate how both these channels of influence affects firms' financing decisions. Our findings show that macroeconomic uncertainty has an important role to play, both by itself and in interaction with a measure of corporate governance. Copyright © 2009 John Wiley & Sons, Ltd. [source] Precision in Accounting Information, Financial Leverage and the Value of EquityJOURNAL OF BUSINESS FINANCE & ACCOUNTING, Issue 7-8 2007Glenn Feltham Abstract:, Using an equity valuation model characterized by periodic imperfect accounting information, we examine how financial leverage affects a firm's accounting quality choice (i.e., precision). We find that the existence of financial leverage motivates firms with average to good performance to prepare accounting information with a high degree of precision. However, we conclude that when a firm is performing poorly it has an incentive to reduce accounting precision in order to lower the likelihood of both a debt covenant violation and the detection of accounting bias. [source] The Free Cash Flow Anomaly Revisited: Finnish EvidenceJOURNAL OF BUSINESS FINANCE & ACCOUNTING, Issue 7-8 2006Annukka Jokipii Abstract:, This paper examines the performance of an investment strategy based on free cash flows using financial statement data of Finnish companies during the period 1992-2002. The analysis in this paper is motivated by the so-called free cash flow anomaly previously documented e.g. in Hackel, Livnat and Rai (2000). Using annual financial statement information, we identify large-capitalization companies with positive free cash flows, low free cash flow multiples, and low financial leverage. Since a portfolio of these companies is found to consistently outperform the market index, our results suggest that the free cash flow anomaly also exists in the Finnish stock market. [source] Managing Earnings with Intercorporate InvestmentsJOURNAL OF BUSINESS FINANCE & ACCOUNTING, Issue 5-6 2006Øyvind Bøhren Abstract:, We explore to what extent firms deliberately manage their financial reports by exploiting the flexibility of generally accepted accounting principles. Using a sample of Oslo Stock Exchange-listed firms with 20,50% equity holdings in other firms, we find that firms with high financial leverage tend to maximize reported earnings from these investments through their choice between the cost method and the equity method, possibly in an attempt to reduce debt renegotiation costs or to avoid regulatory attention. In contrast, managers do not systematically bias reported earnings to extract private benefits or to signal revised expectations about future cash flows. Firms use different earnings management tools in a consistent way, as the earnings effect of the cost/equity choice is not offset by discretionary accruals. [source] Labor and Corporate Governance: International Evidence from Restructuring DecisionsTHE JOURNAL OF FINANCE, Issue 1 2009JULIAN ATANASSOV ABSTRACT Our results highlight the importance of interaction among management, labor, and investors in shaping corporate governance. We find that strong union laws protect not only workers but also underperforming managers. Weak investor protection combined with strong union laws are conducive to worker,management alliances, wherein poorly performing firms sell assets to prevent large-scale layoffs, garnering worker support to retain management. Asset sales in weak investor protection countries lead to further deteriorating performance, whereas in strong investor protection countries they improve performance and lead to more layoffs. Strong union laws are less effective in preventing layoffs when financial leverage is high. [source] Corporate Diversification, Relatedness, and Firm Value: Evidence from Korean Firms,ASIA-PACIFIC JOURNAL OF FINANCIAL STUDIES, Issue 6 2008Sung C. Bae Abstract We examine the valuation effects of diversification activities for Korean firms by diversification type and the occasion of the Korean financial crisis. Employing a unique dataset of 2,894 firm-years for the entire manufacturing industries, we find that diversification by Korean firms on average decreases firm value but its effect varies by the type of diversification. While unrelated diversification erodes firm value, related diversification is associated with a non-negative effect on firm value. These valuation effects are more pronounced before the crisis than after the crisis. Our results also show an important role of a firm's affiliation to a large business group, known as chaebols, that related diversification by chaebol-affiliated firms comes with a significant value gain. We further find that the different valuation effects of unrelated and related diversification are closely related to a firm's ownership concentration and financial leverage. Our results are robust to different samples and regression model specifications. [source] From Public To Private: Evidence From a Transitional Economy SettingAUSTRALIAN ACCOUNTING REVIEW, Issue 3 2009Tyrone M. Carlin The literature on public financial management reform has devoted comparatively little attention to the detail and effect of reform process implementation in developing economies. This study contributes to an understanding of this phenomenon by examining the impact of privatisation on a sample of previously state-owned enterprises in Vietnam. Using a detailed, financially focused methodology and drawing on data sourced from audited general purpose financial statements, our analysis suggests evidence of material variation in financial performance and position post-privatisation compared to the position observed immediately prior to privatisation. Specifically, our data suggest that after being privatised, firms generally exhibit reductions in profitability, some degree of improvement in working capital management, an increase in financial leverage accompanied by a higher degree of solvency risk and greater calls on cash resources for the purpose of funding capital expenditure. Our results assist with understanding the impact of privatisation as a reform technique in developing economies, and may help policymakers and managers better target areas of likely risk, during the process of transition from public to private ownership. [source] Property-Led Redevelopment in Post-Reform China: A Case Study of Xintiandi Redevelopment Project in ShanghaiJOURNAL OF URBAN AFFAIRS, Issue 1 2005Shenjing He Government-backed redevelopment has been replaced by privately funded and property-led redevelopment. This article discerns the impetus of ongoing property-led redevelopment. A case study of the Xintiandi project in Shanghai reveals how property-led redevelopment actually works. Pro-growth coalitions between local government and developers are formed. Despite its role as capital provider, the private sector is still regulated by the government due to its negligible influence on local governance. The government controls the direction and pace of urban redevelopment through policy intervention, financial leverages, and governance of land leasing. Property-led redevelopment is driven by diverse motivations of different levels of the government, e.g. transforming urban land use functions, showing off the entrepreneurial capability of local government, and maximizing negotiated land benefits. Driven by profit seeking, some thriving urban neighborhoods are displaced by high-value property development, and suffer from uneven redevelopment. [source] | ||||||||||||||||||||||