Pub Date : 2009-06-05DOI: 10.1108/17554170910975900
D. Vasiliou, N. Eriotis, N. Daskalakis
Purpose - The purpose of this paper is to show that different methodologies may lead to different implications about the validity of the pecking order theory. Design/methodology/approach - Using data from Greek firms as a starting-point, the paper first investigates whether they follow the financing pattern implied by the pecking order theory and then illustrates that conclusions concerning the pecking order should be carefully shaped by researchers, as the methodology used can be misleading. Two different information sources are used; the first is data derived from the financial statements of the Greek firms listed in the Athens Exchange, while the second comprises the answers to a detailed questionnaire. Findings - It is shown that a negative relationship between leverage and profitability does not necessarily mean that the pecking order financing hierarchy holds. Analysis should not rely solely on the mean-oriented regression quantitative analysis to test the pecking order theory, as it refers to a distinct hierarchy. Research limitations/implications - Further research should focus on investigating the reasons that underlie actual firm financing. Practical implications - The fact that the pecking order is actually a hierarchy makes research in this field more complex. Analysts should consider this special feature of the pecking order approach when analyzing the existence of the pecking order financing pattern. The methodology followed is of crucial importance in the analysis of the existence of the pecking order financing pattern. Originality/value - To the authors' knowledge, this is the first paper to test the pecking order pattern of financing using simultaneously quantitative and qualitative data, and to compare results and conclusions drawn from these two different types of methodology.
{"title":"Testing the Pecking Order Theory: The Importance of Methodology","authors":"D. Vasiliou, N. Eriotis, N. Daskalakis","doi":"10.1108/17554170910975900","DOIUrl":"https://doi.org/10.1108/17554170910975900","url":null,"abstract":"Purpose - The purpose of this paper is to show that different methodologies may lead to different implications about the validity of the pecking order theory. Design/methodology/approach - Using data from Greek firms as a starting-point, the paper first investigates whether they follow the financing pattern implied by the pecking order theory and then illustrates that conclusions concerning the pecking order should be carefully shaped by researchers, as the methodology used can be misleading. Two different information sources are used; the first is data derived from the financial statements of the Greek firms listed in the Athens Exchange, while the second comprises the answers to a detailed questionnaire. Findings - It is shown that a negative relationship between leverage and profitability does not necessarily mean that the pecking order financing hierarchy holds. Analysis should not rely solely on the mean-oriented regression quantitative analysis to test the pecking order theory, as it refers to a distinct hierarchy. Research limitations/implications - Further research should focus on investigating the reasons that underlie actual firm financing. Practical implications - The fact that the pecking order is actually a hierarchy makes research in this field more complex. Analysts should consider this special feature of the pecking order approach when analyzing the existence of the pecking order financing pattern. The methodology followed is of crucial importance in the analysis of the existence of the pecking order financing pattern. Originality/value - To the authors' knowledge, this is the first paper to test the pecking order pattern of financing using simultaneously quantitative and qualitative data, and to compare results and conclusions drawn from these two different types of methodology.","PeriodicalId":340291,"journal":{"name":"ERN: Intertemporal Firm Choice & Growth","volume":"44 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2009-06-05","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"115907173","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
Valuing banks, insurance companies and investment banks has always been difficult, but the market crisis of 2008 elevated the concern to the top of the list of valuation issues. The problems with valuing financial service firm stem from two key characteristics. The first is that the cash flows to a financial service firm cannot be easily estimated, since items like capital expenditures, working capital and debt are not clearly defined. The second is that most financial service firms operate under a regulatory framework that governs how they are capitalized, where they invest, how much they can pay in dividends and how fast they can grow. Changes in the regulatory environment can create large shifts in value. In this paper, we confront both factors. We argue that financial service firms are best valued using equity valuation models, rather than enterprise valuation models, and with actual or potential dividends, rather than free cash flow to equity. The two key numbers that drive value are the cost of equity, which will be a function of the risk that emanates from the firm’s investments, and the return on equity, which is determined both by the company’s business choices as well as regulatory restrictions. We also look at how relative valuation can be adapted, when used to value financial service firms.
{"title":"Breach of Trust: Valuing Financial Service Firms in the Post-Crisis Era","authors":"A. Damodaran","doi":"10.2139/ssrn.1798578","DOIUrl":"https://doi.org/10.2139/ssrn.1798578","url":null,"abstract":"Valuing banks, insurance companies and investment banks has always been difficult, but the market crisis of 2008 elevated the concern to the top of the list of valuation issues. The problems with valuing financial service firm stem from two key characteristics. The first is that the cash flows to a financial service firm cannot be easily estimated, since items like capital expenditures, working capital and debt are not clearly defined. The second is that most financial service firms operate under a regulatory framework that governs how they are capitalized, where they invest, how much they can pay in dividends and how fast they can grow. Changes in the regulatory environment can create large shifts in value. In this paper, we confront both factors. We argue that financial service firms are best valued using equity valuation models, rather than enterprise valuation models, and with actual or potential dividends, rather than free cash flow to equity. The two key numbers that drive value are the cost of equity, which will be a function of the risk that emanates from the firm’s investments, and the return on equity, which is determined both by the company’s business choices as well as regulatory restrictions. We also look at how relative valuation can be adapted, when used to value financial service firms.","PeriodicalId":340291,"journal":{"name":"ERN: Intertemporal Firm Choice & Growth","volume":"52 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2009-04-29","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"127991630","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
This paper examines venture capital investment activity in the United States during the period 1995 to the first quarter 2009, taking into consideration both location and industry sector. The research question is whether industry and region are important factors in determining venture capital investment. Furthermore, the paper explores the effects of macroeconomic variables on investment activity. Consequently, the venture capital data are augmented by Gross Domestic Product (GDP), Federal Funds Rate, three, five and ten year interest rates. By examining long term trends, the effect of the current economic crisis on venture capital investment may be better understood.
{"title":"Venture Capital Meets Industrial Sector and Location","authors":"Emanuel Shachmurove, Yochanan Shachmurove","doi":"10.2139/ssrn.1515743","DOIUrl":"https://doi.org/10.2139/ssrn.1515743","url":null,"abstract":"This paper examines venture capital investment activity in the United States during the period 1995 to the first quarter 2009, taking into consideration both location and industry sector. The research question is whether industry and region are important factors in determining venture capital investment. Furthermore, the paper explores the effects of macroeconomic variables on investment activity. Consequently, the venture capital data are augmented by Gross Domestic Product (GDP), Federal Funds Rate, three, five and ten year interest rates. By examining long term trends, the effect of the current economic crisis on venture capital investment may be better understood.","PeriodicalId":340291,"journal":{"name":"ERN: Intertemporal Firm Choice & Growth","volume":"60 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2009-04-01","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"123855154","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
Public concern over global climate change, resource depletion, and environmental degradation has amplified over the last several years, leading to increased demand for environmentally friendly products. Additionally, the price of Clean-Technology products has fallen. This paper examines venture capital investment in the Clean-Technology industry of the U.S. in 1995-2008. The paper explores the effects of macroeconomic variables, national venture capital investment and geography on Clean-Technology investment. The conclusion indicates the importance of geographical location in affecting Clean-Technology investment. A weak correlation between national venture capital and Clean-Technology investments raises the possibility of a more diversified investment portfolio.
{"title":"U.S. Venture Capital Meets Clean-Technology","authors":"Emanuel Shachmurove, Yochanan Shachmurove","doi":"10.2139/ssrn.1515751","DOIUrl":"https://doi.org/10.2139/ssrn.1515751","url":null,"abstract":"Public concern over global climate change, resource depletion, and environmental degradation has amplified over the last several years, leading to increased demand for environmentally friendly products. Additionally, the price of Clean-Technology products has fallen. This paper examines venture capital investment in the Clean-Technology industry of the U.S. in 1995-2008. The paper explores the effects of macroeconomic variables, national venture capital investment and geography on Clean-Technology investment. The conclusion indicates the importance of geographical location in affecting Clean-Technology investment. A weak correlation between national venture capital and Clean-Technology investments raises the possibility of a more diversified investment portfolio.","PeriodicalId":340291,"journal":{"name":"ERN: Intertemporal Firm Choice & Growth","volume":"25 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2009-04-01","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"132611843","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
Pub Date : 2009-03-01DOI: 10.1142/S1084946709001156
Howard E. Van Auken, Jing Zhang
Capital acquisition is one of the most challenging and important issues facing small firms. This paper examines issues related to the acquisition of capital by niche agricultural producers. Niche agricultural producers face greater capital acquisition challenges than traditional small firms because their business models are not well understood and, thus, often considered high risk. Few studies have examined the capital acquisition of niche agricultural producers despite the importance of the overall agricultural industry and niche producers. The findings show firms that are more familiar with sources of capital are more likely to acquire capital. Commercial banks have a pivotal role in providing financial advice and are an important source of capital.
{"title":"Niche Agricultures Producers' Acquisition of Capital","authors":"Howard E. Van Auken, Jing Zhang","doi":"10.1142/S1084946709001156","DOIUrl":"https://doi.org/10.1142/S1084946709001156","url":null,"abstract":"Capital acquisition is one of the most challenging and important issues facing small firms. This paper examines issues related to the acquisition of capital by niche agricultural producers. Niche agricultural producers face greater capital acquisition challenges than traditional small firms because their business models are not well understood and, thus, often considered high risk. Few studies have examined the capital acquisition of niche agricultural producers despite the importance of the overall agricultural industry and niche producers. The findings show firms that are more familiar with sources of capital are more likely to acquire capital. Commercial banks have a pivotal role in providing financial advice and are an important source of capital.","PeriodicalId":340291,"journal":{"name":"ERN: Intertemporal Firm Choice & Growth","volume":"61 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2009-03-01","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"122641011","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
Pub Date : 2009-02-21DOI: 10.1111/j.1467-629X.2009.00304.x
Maurizio La Rocca, Tiziana La Rocca, Dionigi Gerace, Ciorstan J. Smark
Previous empirical financial studies have paid little attention to the role of diversification strategy on financial choices. This study analyses the financing strategies of multibusiness firms, suggesting the relevance of sorting the diversification phenomena into its related and unrelated components. The implications of our findings are important because they explain earlier contradictory results on capital-structure determinants and offer an explanation of how the degree of product specialization/diversification and the direction of diversification (related or unrelated) translate into different corporate financial behaviours.
{"title":"Effect of Diversification on Capital Structure","authors":"Maurizio La Rocca, Tiziana La Rocca, Dionigi Gerace, Ciorstan J. Smark","doi":"10.1111/j.1467-629X.2009.00304.x","DOIUrl":"https://doi.org/10.1111/j.1467-629X.2009.00304.x","url":null,"abstract":"Previous empirical financial studies have paid little attention to the role of diversification strategy on financial choices. This study analyses the financing strategies of multibusiness firms, suggesting the relevance of sorting the diversification phenomena into its related and unrelated components. The implications of our findings are important because they explain earlier contradictory results on capital-structure determinants and offer an explanation of how the degree of product specialization/diversification and the direction of diversification (related or unrelated) translate into different corporate financial behaviours.","PeriodicalId":340291,"journal":{"name":"ERN: Intertemporal Firm Choice & Growth","volume":"6 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2009-02-21","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"133341512","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
Do modes of management depend on company ownership? Does macroeconomic performance rely on shareholder value? The contributions collected in this book explore these questions from economic, historical and legal perspectives. They examine company ownership through the study of national institutions, with particular focus on North America and Europe. The twelve economic and legal specialists of this volume seek to explain why firms organized along the shareholder model have not outperformed other forms of ownership. Answers lie in the historical and institutional background of each country.
{"title":"Ownership, Corporate Governance, Specialization and Performance: Interpreting Recent Evidence for OECD Countries","authors":"W. Carlin","doi":"10.2139/ssrn.1471975","DOIUrl":"https://doi.org/10.2139/ssrn.1471975","url":null,"abstract":"Do modes of management depend on company ownership? Does macroeconomic performance rely on shareholder value? The contributions collected in this book explore these questions from economic, historical and legal perspectives. They examine company ownership through the study of national institutions, with particular focus on North America and Europe. The twelve economic and legal specialists of this volume seek to explain why firms organized along the shareholder model have not outperformed other forms of ownership. Answers lie in the historical and institutional background of each country.","PeriodicalId":340291,"journal":{"name":"ERN: Intertemporal Firm Choice & Growth","volume":"22 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2009-02-20","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"133306228","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
C. Coluzzi, Annalisa Ferrando, Carmen Martínez-Carrascal
This paper investigates whether financial obstacles, and, more generally, financial pressure faced by firms, significantly affect firm growth. For this purpose, we use an unbalanced panel of about 1,000,000 observations for around 155,000 non-financial corporations in five euro area countries. In addition to the balance sheet information in this panel, we also rely on firm level survey data. In this way we are able to work out a direct measure of the firms’ probability of facing financing obstacles. Our results indicate that, though based on few variables, this measure appears to be relevant in explaining firm growth in four out of the five countries considered. Other firm-level variables related to the financial pressure faced by firms, such as cash flow (debt burden) are found to exert a positive (negative) impact on firm growth, while the results for leverage are less clear-cut.
{"title":"Financing Obstacles and Growth: An Analysis for Euro Area Non-Financial Corporations","authors":"C. Coluzzi, Annalisa Ferrando, Carmen Martínez-Carrascal","doi":"10.2139/ssrn.1333026","DOIUrl":"https://doi.org/10.2139/ssrn.1333026","url":null,"abstract":"This paper investigates whether financial obstacles, and, more generally, financial pressure faced by firms, significantly affect firm growth. For this purpose, we use an unbalanced panel of about 1,000,000 observations for around 155,000 non-financial corporations in five euro area countries. In addition to the balance sheet information in this panel, we also rely on firm level survey data. In this way we are able to work out a direct measure of the firms’ probability of facing financing obstacles. Our results indicate that, though based on few variables, this measure appears to be relevant in explaining firm growth in four out of the five countries considered. Other firm-level variables related to the financial pressure faced by firms, such as cash flow (debt burden) are found to exert a positive (negative) impact on firm growth, while the results for leverage are less clear-cut.","PeriodicalId":340291,"journal":{"name":"ERN: Intertemporal Firm Choice & Growth","volume":"81 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2009-01-26","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"125752238","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
The commonly accepted explanation in early studies to diversification discount is that diversification destroys value because of operational inefficiency. Such argument neglects the real options value incorporated in the value measures. It cannot explain why a firm diversifies if diversification is ex ante inefficient either. Our study indicates that diversification activities are strategic decisions that will change growth opportunities, thus the real options, of a firm and will create value impacts that are different from those caused by changes in operational efficiency. We find that diversification activities, especially unrelated diversification activities, carried out by below average performers tend to increase firm value as a result of searching for new growth opportunities. Whereas diversification activities carried out by above average performers tend to decrease firm value as a result of exploiting excess capability. The result indicates that value changes around diversification are more related to the changes in future growth opportunities rather than the changes in operational efficiency. Our evidence shows that diversification is not ex ante inefficient.
{"title":"The Impact of Real Options on Firm Value: A Study on the Value Change Around Diversification","authors":"M. Holder, Aiwu Zhao","doi":"10.2139/ssrn.1533405","DOIUrl":"https://doi.org/10.2139/ssrn.1533405","url":null,"abstract":"The commonly accepted explanation in early studies to diversification discount is that diversification destroys value because of operational inefficiency. Such argument neglects the real options value incorporated in the value measures. It cannot explain why a firm diversifies if diversification is ex ante inefficient either. Our study indicates that diversification activities are strategic decisions that will change growth opportunities, thus the real options, of a firm and will create value impacts that are different from those caused by changes in operational efficiency. We find that diversification activities, especially unrelated diversification activities, carried out by below average performers tend to increase firm value as a result of searching for new growth opportunities. Whereas diversification activities carried out by above average performers tend to decrease firm value as a result of exploiting excess capability. The result indicates that value changes around diversification are more related to the changes in future growth opportunities rather than the changes in operational efficiency. Our evidence shows that diversification is not ex ante inefficient.","PeriodicalId":340291,"journal":{"name":"ERN: Intertemporal Firm Choice & Growth","volume":"192 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2009-01-13","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"115057944","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
The paper argues that the networked firms have an advantage in securing bank finance in countries with weak legal and judicial institutions. An analysis of recent BEEPS data from sixteen CEE transition countries lends some support to this hypothesis. Firms affiliated to business associations are more likely to have bank finance while small and medium firms are less likely to secure it. Importance of being associated with business networks is particularly evident among firms who borrow from foreign banks, as the latter attempt to hedge risk in an uncertain environment. Significance of business networking however vanishes if institutional quality improves.
{"title":"The Value of Business Networks: An Analysis of Firm Financing in Transition Economies","authors":"O. Owolabi, S. Pal","doi":"10.2139/ssrn.1503984","DOIUrl":"https://doi.org/10.2139/ssrn.1503984","url":null,"abstract":"The paper argues that the networked firms have an advantage in securing bank finance in countries with weak legal and judicial institutions. An analysis of recent BEEPS data from sixteen CEE transition countries lends some support to this hypothesis. Firms affiliated to business associations are more likely to have bank finance while small and medium firms are less likely to secure it. Importance of being associated with business networks is particularly evident among firms who borrow from foreign banks, as the latter attempt to hedge risk in an uncertain environment. Significance of business networking however vanishes if institutional quality improves.","PeriodicalId":340291,"journal":{"name":"ERN: Intertemporal Firm Choice & Growth","volume":"2 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2009-01-01","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"128856534","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
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