Abstract not found

The traditional view is that interest deductibility encourages firms to use debt financing; however, some argue that the personal tax disadvantage to interest offsets the corporate tax advantage. This paper investigates the degree to which personal taxes affect corporate financing decisions. In crosssectional regressions that control for personal taxes, debt usage is positively correlated with tax rates in each year 1980-1994, with significant coefficients in almost every year. A specification that adjusts tax benefits for the personal tax penalty statistically dominates a specification that does not. The positive (negative) effect of corporate (personal) taxes on debt usage is distinctly identified.

Firm value is influenced in many direct and indirect ways by financial risks, which consist of unexpected changes of foreign exchange rates, interest rates and commodity prices. The fact that a significant number of corporations are committing resources to risk management activities is, however, only an indication of the potential of corporate risk management to increase firm value. This paper presents a comprehensive review of positive theories and their empirical evidence regarding the contribution of corporate risk management to shareholder value. It is argued that because of realistic capital market imperfections, such as agency costs, transaction costs, taxes, and increasing costs of external financing, risk management at the firm level (as opposed to risk management by stock owners) represents a means to increase firm value to the benefit of the shareholders.

We posit that firms with valuable real options have higher demand for liquid assets, particularly cash. Higher cash holdings enable firms to optimally exercise their options without reliance on capital markets, which could reveal the firm’s strategic decisions to its competitors. We propose a simple procedure for separating firms with valuable real options from other firms. Our procedure assumes that, all else being equal, real options are more valuable when the underlying volatility is high and when managers possess significant flexibility to optimally exercise these options. We propose alternative measures of underlying risk and managerial flexibility. Using a large sample from the Compustat data, we categorize firms as having high (low) volatility and high (low) managerial flexibility. We then study the determinants of demand for cash holdings for each group of firms. We find that firms with valuable real options (high volatility and high managerial flexibility) hold significantly higher cash levels. Moreover, we find that factors that derive demand for liquidity are very different across the two types of firms. Our finding brings new insights to the literature on demand for corporate cash holdings. 2

I contend that structural quantitative models are better suited for situations in which the important forces are a priori well understood. This is rarely the case in corporate finance. It is also more difficult to detect and correct for misspecification in these models. Their existing empirical tests have largely been perfunctory. They have not entertained powerful and often simpler alternatives. They have not been tested out-of-sample. They have not been tested in the context of quasi-experiments, such as tax law changes. Moreover, even insample, the empirical evidence strongly rejects current models. They attribute capital structure behavior primarily to forces that seem to be, at best, of minor importance. Managers intervene in their capital structures very actively for reasons not yet understood. This paper would make suitable reading for a Ph.D. course in empirical methods or corporate finance, especially together with Fischer, Heinkel and Zechner (1989), Hennessy and Whited (2005), and Strebulaev

The rate of capital formation by businesses has long been among the most closely watched elements of the national accounts. During the last decade, this component of investment attracted considerable interest as capital spending helped support our uncommonly high rate of economic growth. Businesses ’ demand for capital goods grew rapidly, accounting for more than its typical share of the demand for output. Not only did this spending lift the growth of aggregate demand, it also increased our capacity for supplying goods and services, which in turn could allow output to continue growing rapidly in the future. This article analyzes the performance of conventional models of investment spending by comparing their abilities to describe this spending from 1960 to 1990 as well as their abilities to forecast spending during the 1990s. These comparisons test the models and provide standards for measuring the rate of investment spending. If spending has accelerated recently, these models can help define its timing and magnitude, while

The dynamics of capital structure in transition economies Bank of Finland

A common wisdom about term structure models is that they predict much lower spreads than the observed spreads for investment-grade bond, and most of them tend to overpredict spreads for junk bonds. Among them, the Leland-Toft model is perhaps most controversial. Some studies show it always overpredict spreads, in some cases they can be as high as over 5000 bps, yet other studies show it generates extremely low spreads for investment-grade ratings, hence it is just as poor as other models. We introduce an approach for calibration of the model. We particularly stress the importance of carrying out the calibration properly and show what are the cautions one must take for such a calibration to be successful. Using the calibrated model and some actual bonds data as bench mark, we find the Leland-Toft model performs significantly better than reported by some recent studies. Our findings may help to clarify the controversy and serve as a reference for calibration of other term structure models. In the end, we also provide some general thinking on the calibration and applicability of the structural term structure models.

The cost of capital is important in the financial management of agricultural cooperatives. A measure of the cost of capital is required when evaluating various aspects of strategic business plans, e.g., selecting a financial leverage position, calculating the profitability of alternative investment opportunities, measuring economic value-added, and comparing various merger and acquisition plans. The task of determining the appropriate cost of capital to use requires a careful analysis of the effect of alternative financing choices which are open to a cooperative. This report considers the close relationship between the cost of capital and capital structure. Ways are examined to determine the cost of capital by a cooperative. The report sequentially identifies: principles of capital structure and cost of capital, guidelines for capital structure choice, and applications of these guidelines through cooperative case examples. These applications are a starting point for cooperatives to develop capital positions and consider alternative assumptions about financing sources and their potential impacts on the overall cost of capital. To determine the overall cost of capital for a selected capital structure, a cooperative must first determine its cost of equity capital. The cost of equity capital cannot be derived directly from the market, as in the case of a publicly traded firm. Thus, there is no ideal method for determining the cost of capital for a cooperative. So an innovative approach is needed. The opportunity cost of funds approach relates the cost of capital to the rates of return from alternative uses of capital (i.e., the assets side of the balance sheet). The focus is on the expected (or required) rates of return from alternative investments which reflects the degree of risk involved. The discounted cash flow approach relates the cost of capital to the alternative sources of capital (i.e., the liabilities and equity capital side of the balance sheet). The component costs of equity and debt capital are combined into an overall cost of capital for the cooperative. Both approaches require making some assumptions to determine the cost of equity capital for a cooperative.

Financing choices of firms in EU accession countiries Bank of Finland