Since 1973 technological, political, regulatory, and economic forces have been changing the worldwide economy in a fashion comparable to the changes experienced during the nineteenth century Industrial Revolution. As in the nineteenth century, we are experiencing declining costs, increaing average (but decreasing marginal) productivity of labor, reduced growth rates of labor income, excess capacity, and the requirement for downsizing and exit. The last two decades indicate corporate internal control systems have failed to deal effectively with these changes, especially slow growth and the requirement for exit. The next several decades pose a major challenge for Western firms and political systems as these forces continue to work their way through the worldwide economy. © M. C. Jensen, 1993

We investigate the determinants of capital structure choice by analyzing the financing decisions of public firms in the major industrialized countries. At an aggregate level, firm leverage is fairly similar across the G-7 countries. We find that factors identified by previous studies as correlated in the cross-section with firm leverage in the U.S., are similarly correlated in other countries as well. However, a deeper examination of the U.S. and foreign evidence suggests that the theoretical underpinnings of the observed correlations are still largely unresolved.

We survey 392 CFOs about the cost of capital, capital budgeting, and capital structure. Large firms rely heavily on present value techniques and the capital asset pricing model, while small firms are relatively likely to use the payback criterion. We find that a surprising number of firms use their firm risk rather than project risk in evaluating new investments. Firms are concerned about maintaining financial flexibility and a good credit rating when issuing debt, and earnings per share dilution and recent stock price appreciation when issuing equity. We find some support for the pecking-order and trade-off capital structure hypotheses but little evidence that executives are concerned about asset substitution, asymmetric information, transactions costs, free cash flows, or personal taxes. Key words: capital structure, cost of capital, cost of equity, capital budgeting, discount rates, project valuation, survey. 1 We thank Franklin Allen for his detailed comments on the survey instrument and the overall project. We

No. This paper investigates the relationship between �nancing constraints and investment-cash �ow sensitivities by analyzing the �rms identi�ed by Fazzari, Hubbard, and Petersen as having unusually high investment-cash �ow sensitivities. We �nd that �rms that appear less �nancially constrained exhibit signi�cantly greater sensitivities than �rms that appear more �nancially constrained. We �nd this pattern for the entire sample period, subperiods, and individual years. These results (and simple theoretical arguments) suggest that higher sensitivities cannot be interpreted as evidence that �rms are more �nancially constrained. These �ndings call into question the interpretation of most previous research that uses this methodology. “Our �nancial position is sound... Most of the company’s funds are generated by operations and these funds grew at an average annual rate of 29 % [over the past 3 years]. Throughout the company’s history this self-�nancing concept has not been a constraint on the company’s growth. With recent growth restrained by depressed economic

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We develop a two-tiered agency model that shows how rent-seeking behavior on the part of division managers can subvert the workings of an internal capital market. By rent-seeking, division mangers can raise their bargaining power and extract greater overall compensation from the CEO. And because the CEO is herself an agent of outside investors, this extra com- pensation may take the form not of cash wages, but rather of preferential capital budgeting allocations. One interesting feature of our model is that it implies a kind of "socialism" in internal capital allocation, whereby weaker divisions get subsidized by stronger ones.

It is well known that firms are more likely to issue equity when their market values are high, relative to book and past market values, and to repurchase equity when their market values are low. We document that the resulting effects on capital structure are very persistent. As a consequence, current capital structure is strongly related to historical market values. The results suggest the theory that capital structure is the cumulative outcome of past attempts to time the equity market.

The percent of firms paying cash dividends falls from 66.5 in 1978 to 20.8 in 1999. The decline is due in part to the changing characteristics of publicly traded firms. Fed by new lists, the population of publicly traded firms tilts increasingly toward small firms with low profitability and strong growth opportunities -- characteristics typical of firms that have never paid dividends. More interesting, we also show that controlling for characteristics, firms become less likely to pay dividends. This lower propensity to pay is at least as important as changing characteristics in the declining incidence of dividend payers. * Graduate School of Business, University of Chicago (Fama) and Sloan School of Management, MIT (French). We acknowledge the comments of John Graham, Douglas Hannah, Anil Kashyap, Tobias Moskowitz, G. William Schwert, Andrei Shleifer, Paul Zarowin, two anonymous (and especially helpful) referees, and seminar participants at Harvard University, the University of Chica...

This article designs a framework for evaluating the causes, consequences, and future implications of financial services industry consolidation, reviews the extant research literature within the context of this framework (over 250 references), and suggests fruitful avenues for future research. The evidence is consistent with increases in market power from some types of consolidation; improvements in profit efficiency and diversification of risks, but little or no cost efficiency improvements on average; relatively little effect on the availability of services to small customers; potential improvements in payments system efficiency; and potential costs on the financial system from increasing systemic risk or expanding the financial safety net. JEL classification codes: G21, G28, G34, E58, L89 Key words: Banks, Mergers, Payments, Small business The opinions expressed do not necessarily reflect those of the Federal Reserve Board, the New York Reserve Bank, or their staffs. We thank Bob ...

We test the dividend and leverage predictions of the tradeoff and pecking order models. As both models predict, more profitable firms have higher long-term dividend payouts, and firms with more investments have lower payouts. Confirming the pecking order model but contradicting the tradeoff model, more profitable firms are less levered. Firms with more investment opportunities are also less levered, which is in line with the tradeoff model and a complex version of the pecking order model. Firms with more investments have lower long-term dividend payouts, but dividends do not vary to accommodate short-term variation in investment. Confirming the pecking order model, short-term variation in investment and earnings is mostly absorbed by variation in debt. * Graduate School of Business, University of Chicago (Fama) and Sloan School of Management, MIT (French). The finance literature offers two competing models of financing decisions. In the tradeoff model, firms identify their optimal l...