Substantial work has been done during the past three decades to determine the theories of trade credit. But as observed by Frank and Maksimovic (1998), though the theories apply in specific circumstances, they are unable to explain the widespread use of trade credit and the empirical patterns of its use. Long, Malitz and Ravid (1993) also held that although trade credit is a very useful source of finance for different firms, its explanation, as yet, is not very clear. In this article we shall present a critical evaluation of each of these theories, highlight the problems associated with it and indicate specific areas of its application.
{"title":"Theories of Trade Credit: Limitations and Applications","authors":"H. Bhattacharya","doi":"10.2139/ssrn.1286443","DOIUrl":"https://doi.org/10.2139/ssrn.1286443","url":null,"abstract":"Substantial work has been done during the past three decades to determine the theories of trade credit. But as observed by Frank and Maksimovic (1998), though the theories apply in specific circumstances, they are unable to explain the widespread use of trade credit and the empirical patterns of its use. Long, Malitz and Ravid (1993) also held that although trade credit is a very useful source of finance for different firms, its explanation, as yet, is not very clear. In this article we shall present a critical evaluation of each of these theories, highlight the problems associated with it and indicate specific areas of its application.","PeriodicalId":437258,"journal":{"name":"Corporate Finance: Capital Structure & Payout Policies","volume":"68 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2008-10-18","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"126952198","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 : 2008-10-01DOI: 10.1111/j.1468-0106.2008.00411.x
Ming-Cheng Wu, Erin H. C. Kao, Hung-Gay Fung
This study used a sample of 1035 Taiwanese firms to examine the impact of dividend protected employee stock options on stock repurchase and cash dividend policies from 2000 to 2005. This study finds a positive relationship between cash dividends and executive options, implying that executives holding stock options might prefer to distribute cash dividends to boost the stock price. This result, unlike in earlier studies, arises from the dividend protected characteristic of Taiwanese employee stock options. Finally, free cash flow, firm profitability, level of debt, investment opportunities and firm size are found to considerably influence payout decisions. Copyright 2008 The Authors. Journal compilation 2008 Blackwell Publishing Asia Pty Ltd
{"title":"Impact of Dividend-Protected Employee Stock Options on Payout Policies: Evidence from Taiwan","authors":"Ming-Cheng Wu, Erin H. C. Kao, Hung-Gay Fung","doi":"10.1111/j.1468-0106.2008.00411.x","DOIUrl":"https://doi.org/10.1111/j.1468-0106.2008.00411.x","url":null,"abstract":"This study used a sample of 1035 Taiwanese firms to examine the impact of dividend protected employee stock options on stock repurchase and cash dividend policies from 2000 to 2005. This study finds a positive relationship between cash dividends and executive options, implying that executives holding stock options might prefer to distribute cash dividends to boost the stock price. This result, unlike in earlier studies, arises from the dividend protected characteristic of Taiwanese employee stock options. Finally, free cash flow, firm profitability, level of debt, investment opportunities and firm size are found to considerably influence payout decisions. Copyright 2008 The Authors. Journal compilation 2008 Blackwell Publishing Asia Pty Ltd","PeriodicalId":437258,"journal":{"name":"Corporate Finance: Capital Structure & Payout Policies","volume":"1 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2008-10-01","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"129973072","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}
Historical market-to-book and past returns have been shown to explain current leverage. Prior studies attribute the evidence to market timing or passive management. This study shows that with the presence of time-varying targets and adjustment costs, historical variables have a significant impact on leverage even when firms do not time the market and managers actively rebalance the leverage ratios toward the targets. The historical value of alternative market timing proxies, such as insider sales and market sentiment, are shown to have no effects on leverage while the historical value of alternative growth options proxies do. Overall, the evidence is largely consistent with a partial adjustment model of leverage.
{"title":"Historical Market-to-Book and Past Returns in a Partial-Adjustment Model of Leverage","authors":"L. Liu","doi":"10.2139/ssrn.1004466","DOIUrl":"https://doi.org/10.2139/ssrn.1004466","url":null,"abstract":"Historical market-to-book and past returns have been shown to explain current leverage. Prior studies attribute the evidence to market timing or passive management. This study shows that with the presence of time-varying targets and adjustment costs, historical variables have a significant impact on leverage even when firms do not time the market and managers actively rebalance the leverage ratios toward the targets. The historical value of alternative market timing proxies, such as insider sales and market sentiment, are shown to have no effects on leverage while the historical value of alternative growth options proxies do. Overall, the evidence is largely consistent with a partial adjustment model of leverage.","PeriodicalId":437258,"journal":{"name":"Corporate Finance: Capital Structure & Payout Policies","volume":"35 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2008-09-30","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"122881243","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 use daily short-selling data to examine whether short selling around seasoned equity offerings (SEOs) reflects informed or manipulative trading. Around SEO announcements, we find no evidence of informed short selling. Around issue dates, higher levels of pre-issue short selling are significantly related to larger issue discounts for non-shelf-registered offerings. This evidence is consistent with manipulative trading. We show that SEC Rule 105 constrains some but not all manipulative trading. Our results reverse previous research that uses monthly short-interest data, because daily data allow more powerful tests. Our evidence helps explain the increased popularity of shelf registrations. Although short selling usually enhances price efficiency, we document a situation where short selling reduces price efficiency. The Author 2010. Published by Oxford University Press on behalf of The Society for Financial Studies. All rights reserved. For Permissions, please e-mail: journals.permissions@oxfordjournals.org., Oxford University Press.
{"title":"Short Selling Around Seasoned Equity Offerings","authors":"Tyler R. Henry, Jennifer L. Koski","doi":"10.2139/SSRN.972076","DOIUrl":"https://doi.org/10.2139/SSRN.972076","url":null,"abstract":"We use daily short-selling data to examine whether short selling around seasoned equity offerings (SEOs) reflects informed or manipulative trading. Around SEO announcements, we find no evidence of informed short selling. Around issue dates, higher levels of pre-issue short selling are significantly related to larger issue discounts for non-shelf-registered offerings. This evidence is consistent with manipulative trading. We show that SEC Rule 105 constrains some but not all manipulative trading. Our results reverse previous research that uses monthly short-interest data, because daily data allow more powerful tests. Our evidence helps explain the increased popularity of shelf registrations. Although short selling usually enhances price efficiency, we document a situation where short selling reduces price efficiency. The Author 2010. Published by Oxford University Press on behalf of The Society for Financial Studies. All rights reserved. For Permissions, please e-mail: journals.permissions@oxfordjournals.org., Oxford University Press.","PeriodicalId":437258,"journal":{"name":"Corporate Finance: Capital Structure & Payout Policies","volume":"5 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2008-09-15","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"126463856","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}
In this paper we examine the effects of capital gains taxation on firms' investment and financing decisions. We develop a real-options model in which the timing of investment, the decision to default, and the firm's capital structure are endogenously and jointly determined. Our analysis demonstrates that the asymmetric taxation of capital gains and losses fosters investment by eroding the option value of waiting. It also shows that firms controlled by taxable investors employ more equity financing, the higher the firm's stock price and the worse the firm's historical performance. Using a large sample of U.S. industrial firms that are owned by taxable investors between 1970 and 2008, we present new evidence on corporate investment and financing policies, which is supportive of the model's predictions. The Author 2009. Published by Oxford University Press on behalf of The Society for Financial Studies. All rights reserved. For Permissions, please email: journals.permissions@oxfordjournals.org, Oxford University Press.
{"title":"Dynamic Investment and Financing under Personal Taxation","authors":"E. Morellec, N. Schürhoff","doi":"10.2139/ssrn.1261923","DOIUrl":"https://doi.org/10.2139/ssrn.1261923","url":null,"abstract":"In this paper we examine the effects of capital gains taxation on firms' investment and financing decisions. We develop a real-options model in which the timing of investment, the decision to default, and the firm's capital structure are endogenously and jointly determined. Our analysis demonstrates that the asymmetric taxation of capital gains and losses fosters investment by eroding the option value of waiting. It also shows that firms controlled by taxable investors employ more equity financing, the higher the firm's stock price and the worse the firm's historical performance. Using a large sample of U.S. industrial firms that are owned by taxable investors between 1970 and 2008, we present new evidence on corporate investment and financing policies, which is supportive of the model's predictions. The Author 2009. Published by Oxford University Press on behalf of The Society for Financial Studies. All rights reserved. For Permissions, please email: journals.permissions@oxfordjournals.org, Oxford University Press.","PeriodicalId":437258,"journal":{"name":"Corporate Finance: Capital Structure & Payout Policies","volume":"10 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2008-09-01","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"128427351","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 purpose of this paper is to present in a unified context the reduced form modelling approach, in which a credit event is modelled as a totally inaccessible stopping time. Once the general framework is introduced (frequently referred to as pure intensity set-up), we focus on the special case where the full information at the disposal of the traders may be split in two sub-filtrations, one of them carrying the information of the occurrence of the credit event (in general referred to as hazard process approach). The general pricing rule when only one filtration is considered reveals to be non tractable in most of cases, whereas the second construction leads to much simplest formulas. Examples are given and evidence advanced that this set-up is more tractable.
{"title":"Reduced Form Modelling for Credit Risk","authors":"M. Jeanblanc, Yann Lecam","doi":"10.2139/ssrn.1021545","DOIUrl":"https://doi.org/10.2139/ssrn.1021545","url":null,"abstract":"The purpose of this paper is to present in a unified context the reduced form modelling approach, in which a credit event is modelled as a totally inaccessible stopping time. Once the general framework is introduced (frequently referred to as pure intensity set-up), we focus on the special case where the full information at the disposal of the traders may be split in two sub-filtrations, one of them carrying the information of the occurrence of the credit event (in general referred to as hazard process approach). The general pricing rule when only one filtration is considered reveals to be non tractable in most of cases, whereas the second construction leads to much simplest formulas. Examples are given and evidence advanced that this set-up is more tractable.","PeriodicalId":437258,"journal":{"name":"Corporate Finance: Capital Structure & Payout Policies","volume":"6 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2008-08-24","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"123521868","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 examine the impact of CEO turnover announcements on bondholder wealth, stockholder wealth, and overall firm value. Using publicly traded data for the period from 1973 to 2000, we find evidence consistent with both the wealth transfer and signaling hypotheses. Specifically, we find that CEO turnover events are associated with lower bondholder values, higher stockholder values, and that net changes in firm value are a function of turnover type (forced vs voluntary and outside vs inside firm replacements) and the riskiness of the firm's debt (investment vs non-investment grade). Overall, the results contribute to the understanding of the effects of corporate governance mechanisms, of which CEO turnover is an extreme form, on bondholders.
{"title":"CEO Turnover and Bondholder Wealth","authors":"John C. Adams, S. Mansi","doi":"10.2139/ssrn.786687","DOIUrl":"https://doi.org/10.2139/ssrn.786687","url":null,"abstract":"We examine the impact of CEO turnover announcements on bondholder wealth, stockholder wealth, and overall firm value. Using publicly traded data for the period from 1973 to 2000, we find evidence consistent with both the wealth transfer and signaling hypotheses. Specifically, we find that CEO turnover events are associated with lower bondholder values, higher stockholder values, and that net changes in firm value are a function of turnover type (forced vs voluntary and outside vs inside firm replacements) and the riskiness of the firm's debt (investment vs non-investment grade). Overall, the results contribute to the understanding of the effects of corporate governance mechanisms, of which CEO turnover is an extreme form, on bondholders.","PeriodicalId":437258,"journal":{"name":"Corporate Finance: Capital Structure & Payout Policies","volume":"17 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2008-08-20","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"129606340","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 use event date methodology to examine the market reaction to reverse stock splits. I find that the abnormal returns around the announcement date are negative both for the whole reverse split sample and for the pure reverse split sample. I conduct a matched sample as the benchmark to valuate the performance of reverse splitting firms. Their firm performance and long run stock performance are documented worse compared with their matched firms. And the reverse splitting firms conducting a capital reduction perform even worse both in the view of announcement effect and of their firm performance. The adjusted trading volume increases considerably after reverse splits. This result partially suggests that reverse stock splits improve the liquidity of the stock. The relative tick size, which affects the transaction cost, decreases significantly after splitting. The relationship between the decision on split factor and the deviation from market-wide average stock price is not statistically significant. Therefore, the result does not support the hypothesis of 'optimal stock price range'.
{"title":"Why Firms Consolidate Their Stocks?","authors":"Lihua Jing","doi":"10.2139/ssrn.497482","DOIUrl":"https://doi.org/10.2139/ssrn.497482","url":null,"abstract":"I use event date methodology to examine the market reaction to reverse stock splits. I find that the abnormal returns around the announcement date are negative both for the whole reverse split sample and for the pure reverse split sample. I conduct a matched sample as the benchmark to valuate the performance of reverse splitting firms. Their firm performance and long run stock performance are documented worse compared with their matched firms. And the reverse splitting firms conducting a capital reduction perform even worse both in the view of announcement effect and of their firm performance. The adjusted trading volume increases considerably after reverse splits. This result partially suggests that reverse stock splits improve the liquidity of the stock. The relative tick size, which affects the transaction cost, decreases significantly after splitting. The relationship between the decision on split factor and the deviation from market-wide average stock price is not statistically significant. Therefore, the result does not support the hypothesis of 'optimal stock price range'.","PeriodicalId":437258,"journal":{"name":"Corporate Finance: Capital Structure & Payout Policies","volume":"14 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2008-08-07","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"125485107","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}
Much literature has amassed in the area of corporate financing structure, a majority of which has tended to focus on the debt/equity decision and more recently on flotation mechanisms in equity issuance, with less attention devoted to debt issuance. To the extent that recent papers have spoken to the drivers of debt structure, maturity and/or priority, these have tended to focus on the US financing environment, little investigation has been conducted into the determinants of debt structure for UK firms. It is considered helpful at this point to document evidence in respect of alternative institutional regimes. We examine the determinants of debt ownership structure for UK FTSE 350 listed firms at 2001 year end and specifically explore the relationship between corporate debt structure and firm characteristics. Our approach differs to much of the extant literature in that we apply a decision choice model that relates a variety of attributes to the probability that firms will choose to issue debt publicly rather than to the public debt ratio per se, a model that can explain and potentially predict which firms are most likely to choose public debt isuance. Our results highlight the importance of firm size, credit quality and prior leverage in debt issuance decisions, larger more highly levered firms being more inclined to issue debt publicly. However theories based on information asymmetry and adverse selection, future prospects and reputational considerations do not receive empirical support based on our data set. Inconsistent with the extant literature we also find that riskier firms, based on an earnings growth volatility metric, tend to be more likely to issue debt publicly.
{"title":"Private or Public Debt? The Drivers of Debt Priority Structure for UK Firms","authors":"Edel Barnes, B. Cahill","doi":"10.2139/ssrn.493383","DOIUrl":"https://doi.org/10.2139/ssrn.493383","url":null,"abstract":"Much literature has amassed in the area of corporate financing structure, a majority of which has tended to focus on the debt/equity decision and more recently on flotation mechanisms in equity issuance, with less attention devoted to debt issuance. To the extent that recent papers have spoken to the drivers of debt structure, maturity and/or priority, these have tended to focus on the US financing environment, little investigation has been conducted into the determinants of debt structure for UK firms. It is considered helpful at this point to document evidence in respect of alternative institutional regimes. We examine the determinants of debt ownership structure for UK FTSE 350 listed firms at 2001 year end and specifically explore the relationship between corporate debt structure and firm characteristics. Our approach differs to much of the extant literature in that we apply a decision choice model that relates a variety of attributes to the probability that firms will choose to issue debt publicly rather than to the public debt ratio per se, a model that can explain and potentially predict which firms are most likely to choose public debt isuance. Our results highlight the importance of firm size, credit quality and prior leverage in debt issuance decisions, larger more highly levered firms being more inclined to issue debt publicly. However theories based on information asymmetry and adverse selection, future prospects and reputational considerations do not receive empirical support based on our data set. Inconsistent with the extant literature we also find that riskier firms, based on an earnings growth volatility metric, tend to be more likely to issue debt publicly.","PeriodicalId":437258,"journal":{"name":"Corporate Finance: Capital Structure & Payout Policies","volume":"11 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2008-08-06","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"132301749","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}
German firms pay out a lower proportion of their cash flows, but a higher proportion of their published profits than UK and US firms. We estimate partial adjustment models and report two major findings. First, German firms base their dividend decisions on cash flows rather than published earnings as (i) published earnings do not correctly reflect performance because German firms retain parts of their earnings to build up legal reserves, (ii) German accounting is conservative, (iii) published earnings are subject to more smoothing than cash flows. Second, to the opposite of UK and US firms, German firms have more flexible dividend policies as they are willing to cut the dividend when profitability is only temporarily down.
{"title":"The Dividend Policy of German Firms","authors":"C. Andres, A. Betzer, M. Goergen, L. Renneboog","doi":"10.2139/ssrn.1262171","DOIUrl":"https://doi.org/10.2139/ssrn.1262171","url":null,"abstract":"German firms pay out a lower proportion of their cash flows, but a higher proportion of their published profits than UK and US firms. We estimate partial adjustment models and report two major findings. First, German firms base their dividend decisions on cash flows rather than published earnings as (i) published earnings do not correctly reflect performance because German firms retain parts of their earnings to build up legal reserves, (ii) German accounting is conservative, (iii) published earnings are subject to more smoothing than cash flows. Second, to the opposite of UK and US firms, German firms have more flexible dividend policies as they are willing to cut the dividend when profitability is only temporarily down.","PeriodicalId":437258,"journal":{"name":"Corporate Finance: Capital Structure & Payout Policies","volume":"9 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2008-08-04","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"133249774","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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