During the 2007-2008 Financial Crisis, several large U.S. financial institutions either faced insolvency or became insolvent as investors lost confidence in the financial system and traditional funding sources evaporated. Self-preservation efforts led many banks, broker-dealers, and other financial firms to seek (often unsuccessfully) funding from private equity firms, competitors, and sovereign-wealth funds. Warren Buffett received several such funding requests because he had ready access to large amounts of capital and because financing from a trusted and savvy investor such as Buffett carried an imprimatur that the investment was likely to be sound. But not even Mr. Buffett had sufficient resources to single-handedly recapitalize the many struggling U.S. financial firms. Nevertheless, other avenues for private funding seemed haphazard and potentially hazardous for many U.S. financial firms as they struggled to survive in a dangerous world that they helped to create but that now seemed destined to destroy them. In the absence of trusted and reliable sources of private funding, struggling firms were forced either to submit to an uncertain and unwieldy bankruptcy process or to risk being subjected to an ad hoc government-facilitated take-over, the terms for which seemed opaque and subject to change at a moment’s notice. Transactions where public funding was used were sure to provoke public outrage and a painful berating by Congress. The public outcry over such taxpayer-funded rescues and the absence of more politically palatable alternatives led Congress to include provisions in the Dodd-Frank Wall Street Reform and Consumer Protection Act (“Dodd-Frank Act”) that provide a framework for a government liquidation of a struggling financial firm that is not federally insured and that poses a significant risk to the financial stability of the United States. Although the Dodd-Frank Act and the rules of the Federal Deposit Insurance Corporation promulgated under that Act codify and clarify the government’s authority to take over a struggling non-bank financial firm, they may not make that alternative much more politically palatable than the ad hoc approaches used during the Financial Crisis. Moreover, certain provisions of the Dodd-Frank Act designed to reduce moral hazard and promote the continued operation of struggling firms may make the Dodd-Frank Liquidation Framework particularly troubling for management, shareholders and would-be creditors of firms to which such provisions might apply. Nevertheless, the absence of a formalized process to facilitate the private recapitalization or orderly liquidation of a systemically important struggling financial firm could leave such firm with little other alternative. Therefore, it is important to consider other options to the Dodd-Frank Act Orderly Liquidation Framework that could minimize government involvement in a winddown of a troubled non-bank financial firm while offering incentives for private investor
在2007-2008年金融危机期间，由于投资者对金融体系失去信心，传统资金来源枯竭，美国几家大型金融机构要么面临破产，要么已经破产。自我保护的努力导致许多银行、经纪自营商和其他金融公司向私募股权公司、竞争对手和主权财富基金寻求融资(通常不成功)。沃伦•巴菲特(Warren Buffett)收到过几次这样的融资请求，因为他随时可以获得大量资金，而且从巴菲特这样一位值得信赖、精明的投资者那里融资，意味着投资可能是稳健的。但即便是巴菲特也没有足够的资源，以一己之力对众多陷入困境的美国金融公司进行资本重组。然而，对于许多美国金融公司来说，其他私人融资渠道似乎杂乱无章，而且存在潜在风险，因为它们在一个自己帮助创造的危险世界中挣扎求生，但现在这个世界似乎注定要毁灭它们。在缺乏可信可靠的私人资金来源的情况下，苦苦挣扎的公司要么被迫接受不确定且难以处理的破产程序，要么冒着被政府临时接管的风险，后者的条款似乎不透明，随时可能改变。使用公共资金的交易肯定会激起公众的愤怒，并受到国会的痛苦斥责。公众对这种纳税人出资的救助计划的强烈抗议，以及缺乏政治上更令人满意的替代方案，导致国会在《多德-弗兰克华尔街改革和消费者保护法案》(“多德-弗兰克法案”)中加入了一些条款，这些条款为政府清算那些没有联邦保险、对美国金融稳定构成重大风险的陷入困境的金融公司提供了一个框架。尽管《多德-弗兰克法案》(Dodd-Frank Act)和根据该法案颁布的联邦存款保险公司(Federal Deposit Insurance Corporation)规定，明确了政府接管陷入困境的非银行金融公司的权力，但与金融危机期间使用的临时方法相比，这种替代方法在政治上可能不会更受欢迎。此外，《多德-弗兰克法案》中旨在减少道德风险和促进陷入困境的公司继续经营的某些条款，可能会使《多德-弗兰克清算框架》对可能适用这些条款的公司的管理层、股东和潜在债权人尤其麻烦。然而，缺乏一个正式的过程来促进私人资本重组或对一个具有系统重要性的挣扎中的金融公司进行有序清算，可能会使这些公司几乎没有其他选择。因此，重要的是要考虑多德-弗兰克法案有序清算框架的其他选择，这些选择可以最大限度地减少政府对陷入困境的非银行金融公司的介入，同时为愿意冒险投资以促进有效资本重组的私人投资者提供激励。本文分析了某些美国金融机构在金融危机期间寻求获得紧急资金时面临的困难，并探讨了2007-2008年金融危机与十年前对冲基金长期资本管理公司(Long-Term Capital Management)的衰落和救助之间的异同。本文还分析了多德-弗兰克法案授权政府清算非银行金融公司的条款，以及联邦存款保险公司颁布和提出的实施这些条款的规则。它认为，《多德-弗兰克有序清算》框架的某些条款可能会使它对那些最有可能受该框架约束的公司不起作用。这篇文章断言，通过有利的监管待遇、税收激励或其他方式，促进流动性提供者私人财团的形成可能会有好处，其中可能包括银行、经纪交易商、大型机构投资者和私人股本公司，这些公司拥有现成的现金来源，可以灵活地在危机时期向金融机构提供短期资本注入。它的结论是，促进私人流动性财团的正式结构可以作为多德-弗兰克法案清算条款和为解决长期资本管理公司(LTCM)破产以及十年后雷曼兄弟(Lehman Brothers)即将破产而形成的特别财团类型的更好替代方案。
{"title":"'Come Monday, It'll be All Right': Buffett, the U.S. Financial Crisis and the Need for a Reliable, Private Liquidity Consortium","authors":"Richard C. Strasser","doi":"10.2139/SSRN.1669525","DOIUrl":"https://doi.org/10.2139/SSRN.1669525","url":null,"abstract":"During the 2007-2008 Financial Crisis, several large U.S. financial institutions either faced insolvency or became insolvent as investors lost confidence in the financial system and traditional funding sources evaporated. Self-preservation efforts led many banks, broker-dealers, and other financial firms to seek (often unsuccessfully) funding from private equity firms, competitors, and sovereign-wealth funds. Warren Buffett received several such funding requests because he had ready access to large amounts of capital and because financing from a trusted and savvy investor such as Buffett carried an imprimatur that the investment was likely to be sound. But not even Mr. Buffett had sufficient resources to single-handedly recapitalize the many struggling U.S. financial firms. Nevertheless, other avenues for private funding seemed haphazard and potentially hazardous for many U.S. financial firms as they struggled to survive in a dangerous world that they helped to create but that now seemed destined to destroy them. In the absence of trusted and reliable sources of private funding, struggling firms were forced either to submit to an uncertain and unwieldy bankruptcy process or to risk being subjected to an ad hoc government-facilitated take-over, the terms for which seemed opaque and subject to change at a moment’s notice. Transactions where public funding was used were sure to provoke public outrage and a painful berating by Congress. The public outcry over such taxpayer-funded rescues and the absence of more politically palatable alternatives led Congress to include provisions in the Dodd-Frank Wall Street Reform and Consumer Protection Act (“Dodd-Frank Act”) that provide a framework for a government liquidation of a struggling financial firm that is not federally insured and that poses a significant risk to the financial stability of the United States. Although the Dodd-Frank Act and the rules of the Federal Deposit Insurance Corporation promulgated under that Act codify and clarify the government’s authority to take over a struggling non-bank financial firm, they may not make that alternative much more politically palatable than the ad hoc approaches used during the Financial Crisis. Moreover, certain provisions of the Dodd-Frank Act designed to reduce moral hazard and promote the continued operation of struggling firms may make the Dodd-Frank Liquidation Framework particularly troubling for management, shareholders and would-be creditors of firms to which such provisions might apply. Nevertheless, the absence of a formalized process to facilitate the private recapitalization or orderly liquidation of a systemically important struggling financial firm could leave such firm with little other alternative. Therefore, it is important to consider other options to the Dodd-Frank Act Orderly Liquidation Framework that could minimize government involvement in a winddown of a troubled non-bank financial firm while offering incentives for private investor","PeriodicalId":340291,"journal":{"name":"ERN: Intertemporal Firm Choice & Growth","volume":"30 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2012-04-28","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"124005786","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}
Prasit Udomsirikul, Seksak Jumreornvong, P. Jiraporn
We explore the impact of liquidity on capital structure decisions. Firms that enjoy more liquid equity experience a lower cost of equity and may be more motivated to adopt more equity and less debt in their capital structure. Consistent with this notion, the empirical evidence demonstrates an inverse relation between liquidity and leverage. Our results are especially interesting because we examine firms in Thailand, where capital markets are less sophisticated than the U.S., bank loans more prevalent, and corporate ownership much more concentrated. In spite of these differences, we document that Thai firms with more liquid equity are significantly less leveraged.
{"title":"Liquidity and Capital Structure: Evidence from a Bank-dominated Economy","authors":"Prasit Udomsirikul, Seksak Jumreornvong, P. Jiraporn","doi":"10.2139/ssrn.1725745","DOIUrl":"https://doi.org/10.2139/ssrn.1725745","url":null,"abstract":"We explore the impact of liquidity on capital structure decisions. Firms that enjoy more liquid equity experience a lower cost of equity and may be more motivated to adopt more equity and less debt in their capital structure. Consistent with this notion, the empirical evidence demonstrates an inverse relation between liquidity and leverage. Our results are especially interesting because we examine firms in Thailand, where capital markets are less sophisticated than the U.S., bank loans more prevalent, and corporate ownership much more concentrated. In spite of these differences, we document that Thai firms with more liquid equity are significantly less leveraged.","PeriodicalId":340291,"journal":{"name":"ERN: Intertemporal Firm Choice & Growth","volume":"17 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2011-10-25","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"125147955","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}
I examine the emergence and evolution of three distinct groups of payers – firms that distribute cash to shareholders in the form of (i) repurchases, (ii) dividends, and (iii) the mixture of dividends and share buybacks – to understand what determines firms’ preferences for certain distribution techniques. I document that the choice of the form of payout is a reflection of a life cycle stage and evolves as firms alternate between the introductory, growth and maturity stages of their life cycle. My findings imply that viewing paying population of industrial firms as a homogeneous group may be seriously flawed – I document the existence of three distinct groups of payers that display dissimilar firm characteristics and have unique motives for choosing a particular method of distribution.
{"title":"Firm Life Cycle and the Choice of the Form of Payout","authors":"G. Stepanyan","doi":"10.2139/ssrn.1632834","DOIUrl":"https://doi.org/10.2139/ssrn.1632834","url":null,"abstract":"I examine the emergence and evolution of three distinct groups of payers – firms that distribute cash to shareholders in the form of (i) repurchases, (ii) dividends, and (iii) the mixture of dividends and share buybacks – to understand what determines firms’ preferences for certain distribution techniques. I document that the choice of the form of payout is a reflection of a life cycle stage and evolves as firms alternate between the introductory, growth and maturity stages of their life cycle. My findings imply that viewing paying population of industrial firms as a homogeneous group may be seriously flawed – I document the existence of three distinct groups of payers that display dissimilar firm characteristics and have unique motives for choosing a particular method of distribution.","PeriodicalId":340291,"journal":{"name":"ERN: Intertemporal Firm Choice & Growth","volume":"28 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2011-10-20","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"125295329","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}
We study the interaction between financing and investment decisions in a dynamic model, where the firm has multiple debt issues and equityholders choose the timing of investment. Jointly optimal capital and priority structures can virtually eliminate investment distortions because debt priority serves as a dynamically optimal contract. Examining the relative efficiency of priority rules observed in practice, we develop several predictions about how firms adjust their priority structure in response to changes in leverage, credit conditions, and firm fundamentals. Notably, financially unconstrained firms with few growth opportunities prefer senior debt, while financially constrained firms, with or without growth opportunities, prefer junior debt. Moreover, lower-rated firms are predicted to spread priority across debt classes. Finally, our analysis has a number of important implications for empirical capital structure research, including the relations between market leverage, book leverage, and credit spreads and Tobin's Q, the influence of firm fundamentals on the agency cost of debt, and the conservative debt policy puzzle. The Author 2011. Published by Oxford University Press on behalf of The Society for Financial Studies. All rights reserved. For Permissions, please e-mail: journals.permissions@oup.com., Oxford University Press.
{"title":"Optimal Priority Structure, Capital Structure, and Investment","authors":"D. Hackbarth, D. Mauer","doi":"10.2139/ssrn.1424107","DOIUrl":"https://doi.org/10.2139/ssrn.1424107","url":null,"abstract":"We study the interaction between financing and investment decisions in a dynamic model, where the firm has multiple debt issues and equityholders choose the timing of investment. Jointly optimal capital and priority structures can virtually eliminate investment distortions because debt priority serves as a dynamically optimal contract. Examining the relative efficiency of priority rules observed in practice, we develop several predictions about how firms adjust their priority structure in response to changes in leverage, credit conditions, and firm fundamentals. Notably, financially unconstrained firms with few growth opportunities prefer senior debt, while financially constrained firms, with or without growth opportunities, prefer junior debt. Moreover, lower-rated firms are predicted to spread priority across debt classes. Finally, our analysis has a number of important implications for empirical capital structure research, including the relations between market leverage, book leverage, and credit spreads and Tobin's Q, the influence of firm fundamentals on the agency cost of debt, and the conservative debt policy puzzle. The Author 2011. Published by Oxford University Press on behalf of The Society for Financial Studies. All rights reserved. For Permissions, please e-mail: journals.permissions@oup.com., Oxford University Press.","PeriodicalId":340291,"journal":{"name":"ERN: Intertemporal Firm Choice & Growth","volume":"11 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2011-08-30","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"114959786","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}
F. Fuerst, Marcelo Cajias, P. Mcallister, Anupam Nanda
This paper investigates the relationship between corporate social and environmental performance and financial performance for a sample of publicly traded US real estate companies. Using the MSCI ESG (formerly KLD) database on seven Environmental, Social & Governance dimensions in the 2003-2010 period, and weighting the dimensions according to prominence in the real estate sector, we model Tobin's Q and annual total return in a panel data framework. The results indicate a positive relationship between ESG rating and Tobin's Q but this effect is driven by ESG concerns rather than strengths. Consistently across all model specifications, overall ESG ratings are associated with lower returns. Negative scores appear to result in higher returns in the short run but positive scores have no significant impact on returns.
{"title":"Do Responsible Real Estate Companies Outperform Their Peers?","authors":"F. Fuerst, Marcelo Cajias, P. Mcallister, Anupam Nanda","doi":"10.2139/ssrn.1808701","DOIUrl":"https://doi.org/10.2139/ssrn.1808701","url":null,"abstract":"This paper investigates the relationship between corporate social and environmental performance and financial performance for a sample of publicly traded US real estate companies. Using the MSCI ESG (formerly KLD) database on seven Environmental, Social & Governance dimensions in the 2003-2010 period, and weighting the dimensions according to prominence in the real estate sector, we model Tobin's Q and annual total return in a panel data framework. The results indicate a positive relationship between ESG rating and Tobin's Q but this effect is driven by ESG concerns rather than strengths. Consistently across all model specifications, overall ESG ratings are associated with lower returns. Negative scores appear to result in higher returns in the short run but positive scores have no significant impact on returns.","PeriodicalId":340291,"journal":{"name":"ERN: Intertemporal Firm Choice & Growth","volume":"90 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2011-08-26","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"116244908","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}
Because of external financing costs, private business owners often need to self-finance new investment projects. These self-financing needs create an incentive for business owners to hold financial assets whose payoffs are positively correlated with self-financing needs. If this effect is aggregated, expected returns on financial assets should be negatively correlated with aggregate private investment self-financing needs. To test the cross-sectional asset pricing implications of this conjecture, we use realized noncorporate investment growth and future forecasted noncorporate investment growth as proxies for self-financing needs. We find that our private investment model can explain a good share of the cross-sectional returns of size-, value- and distress-sorted equity portfolios, almost as well as the Fama–French factors. In contrast to the Fama–French model, however, we find the signs on our estimated coefficients to be consistent with our theoretical predictions.
{"title":"Private Investment and Public Equity Returns","authors":"R. Couch, Wei Wu","doi":"10.2139/ssrn.1598548","DOIUrl":"https://doi.org/10.2139/ssrn.1598548","url":null,"abstract":"Because of external financing costs, private business owners often need to self-finance new investment projects. These self-financing needs create an incentive for business owners to hold financial assets whose payoffs are positively correlated with self-financing needs. If this effect is aggregated, expected returns on financial assets should be negatively correlated with aggregate private investment self-financing needs. To test the cross-sectional asset pricing implications of this conjecture, we use realized noncorporate investment growth and future forecasted noncorporate investment growth as proxies for self-financing needs. We find that our private investment model can explain a good share of the cross-sectional returns of size-, value- and distress-sorted equity portfolios, almost as well as the Fama–French factors. In contrast to the Fama–French model, however, we find the signs on our estimated coefficients to be consistent with our theoretical predictions.","PeriodicalId":340291,"journal":{"name":"ERN: Intertemporal Firm Choice & Growth","volume":"1 9","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2011-07-09","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"114121998","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 contributes to the literature on the effectiveness of R&D incentives by evaluating a unique investment subsidy program implemented in northern Italy. Firms were invited to submit proposals for new projects and only those that scored above a certain threshold received the subsidy. We use a sharp regression discontinuity design to compare investment spending of subsidized firms just above the cut-off score with spending by firms just below the cut-off. For the sample as a whole we find no significant increase in investment as a result of the program. This overall effect, however, masks substantial heterogeneity in the programi?½s impact. On average, we estimate that small enterprises increased their investments by about the amount of the subsidy they received from the program, whereas for larger firms the subsidies appear to have had no additional effect.
{"title":"Are Incentives for R&D Effective? Evidence from a Regression Discontinuity Approach","authors":"Raffaello Bronzini, E. Iachini","doi":"10.2139/ssrn.1829994","DOIUrl":"https://doi.org/10.2139/ssrn.1829994","url":null,"abstract":"This paper contributes to the literature on the effectiveness of R&D incentives by evaluating a unique investment subsidy program implemented in northern Italy. Firms were invited to submit proposals for new projects and only those that scored above a certain threshold received the subsidy. We use a sharp regression discontinuity design to compare investment spending of subsidized firms just above the cut-off score with spending by firms just below the cut-off. For the sample as a whole we find no significant increase in investment as a result of the program. This overall effect, however, masks substantial heterogeneity in the programi?½s impact. On average, we estimate that small enterprises increased their investments by about the amount of the subsidy they received from the program, whereas for larger firms the subsidies appear to have had no additional effect.","PeriodicalId":340291,"journal":{"name":"ERN: Intertemporal Firm Choice & Growth","volume":"1 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2011-05-03","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"129697260","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 demonstrates that liquidity gaps disrupt the venture capital cycle. How should this problem be addressed? We offer a new perspective on the venture capital cycle and argue that the emergence of more liquidity options can bridge these gaps. Analyzing the development of secondary marketplaces for private shares in non-listed companies in the United States and similar initiatives in Europe, Israel and India, this paper makes the case that the development of a structured pre-IPO segment in stock markets can remedy the disruptions in the venture capital industry.
{"title":"The 'New' Venture Capital Cycle (Part I): The Importance of Private Secondary Market Liquidity","authors":"J. Mendoza, E. Vermeulen","doi":"10.2139/SSRN.1829835","DOIUrl":"https://doi.org/10.2139/SSRN.1829835","url":null,"abstract":"This paper demonstrates that liquidity gaps disrupt the venture capital cycle. How should this problem be addressed? We offer a new perspective on the venture capital cycle and argue that the emergence of more liquidity options can bridge these gaps. Analyzing the development of secondary marketplaces for private shares in non-listed companies in the United States and similar initiatives in Europe, Israel and India, this paper makes the case that the development of a structured pre-IPO segment in stock markets can remedy the disruptions in the venture capital industry.","PeriodicalId":340291,"journal":{"name":"ERN: Intertemporal Firm Choice & Growth","volume":"30 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2011-05-03","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"127537135","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}
Invoking the same assumptions as Modigliani and Miller (1963), we demonstrate that their debt-only corner solution is not a unique equilibrium and furthermore that an alternative equilibrium exists in which capital structure is irrelevant for determining shareholder value. Our equilibrium follows from a simple and feasible arbitrage trading strategy and is sustainable in the sense that it is neither dominated by nor dominates the M&M solution in an inter-temporal setting. Our equilibrium has potentially significant implications for topics ranging from the under-leverage puzzle to the cost of capital to assessing fund performance, and beyond.
{"title":"M&M 1963: An Alternative Equilibrium","authors":"Alan L. Tucker, T. F. Sugrue, Kenneth J. Kopecky","doi":"10.2139/SSRN.1803332","DOIUrl":"https://doi.org/10.2139/SSRN.1803332","url":null,"abstract":"Invoking the same assumptions as Modigliani and Miller (1963), we demonstrate that their debt-only corner solution is not a unique equilibrium and furthermore that an alternative equilibrium exists in which capital structure is irrelevant for determining shareholder value. Our equilibrium follows from a simple and feasible arbitrage trading strategy and is sustainable in the sense that it is neither dominated by nor dominates the M&M solution in an inter-temporal setting. Our equilibrium has potentially significant implications for topics ranging from the under-leverage puzzle to the cost of capital to assessing fund performance, and beyond.","PeriodicalId":340291,"journal":{"name":"ERN: Intertemporal Firm Choice & Growth","volume":"7 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2011-04-03","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"116980758","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}
Although the empirical literature has long struggled to identify the impact of taxes on corporate financial structure, a recent boom in studies offers ample support for the debt bias of taxation. Yet, studies differ considerably in effect size and reveal an equally large variety in methodologies and specifications. This paper sheds light on this variation and assesses the systematic impact on the size of the effects. We find that, typically, a one percentage point higher tax rate increases the debt-asset ratio by between 0.17 and 0.28. Responses are increasing over time, which suggests that debt bias distortions have become more important.
{"title":"The Tax Elasticity of Corporate Debt: A Synthesis of Size and Variations","authors":"Ruud A. De Mooij","doi":"10.2139/ssrn.1826548","DOIUrl":"https://doi.org/10.2139/ssrn.1826548","url":null,"abstract":"Although the empirical literature has long struggled to identify the impact of taxes on corporate financial structure, a recent boom in studies offers ample support for the debt bias of taxation. Yet, studies differ considerably in effect size and reveal an equally large variety in methodologies and specifications. This paper sheds light on this variation and assesses the systematic impact on the size of the effects. We find that, typically, a one percentage point higher tax rate increases the debt-asset ratio by between 0.17 and 0.28. Responses are increasing over time, which suggests that debt bias distortions have become more important.","PeriodicalId":340291,"journal":{"name":"ERN: Intertemporal Firm Choice & Growth","volume":"29 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2011-04-01","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"123876943","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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