Journal of Applied Corporate Finance最新文献

In recent years, collateralized loan obligations, or CLOs, have become the largest nonbank lender in the U.S. This added source of financing, which lies outside the purview of banking regulation, has given rise to the concept of a “shadow banking system.” And the lack of transparency and regulatory oversight of CLOs and shadow banking have led to concern that this growing market might contribute to a financial crisis similar to the GFC of 2007-2008, which was triggered by the securitization of subprime mortgages.

The authors provide a first look at CLOs and their distinctive features as a securitization vehicle that allowed them not only to weather the 2007-2008 financial crisis but to thrive in the post-GFC world. Though the collateral performance of CLOs suffered during GFC, their recovery was faster and stronger than that of mortgage-backed CDOs. Furthermore, the return performance of CLO tranches has in general also been superior to the returns from the comparable leveraged loans upon which CLOs are based—though there are difficulties in measuring returns for CLO tranches since transaction prices are not public information, especially in the case of the equity tranche.

After describing their remarkable growth, the authors focus on two fundamental risks posed by CLOs. The first risk relates to the reliability of credit ratings—though it's important to note that the extensive due diligence behind leverage loans versus mortgage loans effectively reduces CLO investors' reliance on the rating agencies. The second risk relates to the systematic risk borne by the CLO investors, which is lower than that of MBS if only by virtue of the fact that CLOs are based on shorter-term floating rate instruments than 30-year mortgages. More important, what happens in most MBS, CLO managers can actively manage their loan portfolios in the secondary markets, and effective and active management of collateral works to limit both default risk and the possible effects of systemic shocks.

In this final panel at the Texas Private Equity Conference, four active investors discuss the commercial opportunities opened up by the privatization of space exploration. With the cost of launching rockets into space and putting satellites into orbit dropping sharply, unit economics are dropping quickly, much faster than even the industry expected. Reusable rockets in particular are changing the economics of space launches significantly and revolutionized the industry. And the Starship developed by Elon Musk's SpaceX will soon be operational, and is expected to reduce costs by a factor of 10. SpaceX, after just a few years in existence, is now the most valuable private company in the United States, second only to ByteDance in the rest of the world. Satellite costs have also come down dramatically. Thanks to the privatization of space exploration, shareholders of privately owned companies have supplanted national governments as the largest owners of SpaceX rockets, and will own the next International Space Station.

The consensus among the panelists is that today's New Space sector is now where the Internet was around 1995. A lot of money will also be made by the applications and services surrounding the launch sector. Uber, Google Maps, and other GPS-related services create demand for satellite services as do telecommunications that use satellite-based optical laser links instead of land-based fiber optic cable. Among the major challenges, however, space projects continue to take longer and cost more than expected. And the space entrepreneurs on this panel consistently described the time horizons of traditional venture capital as too limited. “Space junk”—orbiting spacecraft or pieces of old spacecraft that might collide with satellites—is viewed as a growing concern, but not an existential threat to the New Space Economy.

Transfer pricing policies have traditionally been driven by a desire to limit taxes by shifting profits from high- to low-tax jurisdictions. Though such practices will no doubt continue, recent changes in public policy, most notably the influence of the OECD's Base Erosion and Profit Shifting initiative, have rendered tax savings more difficult to achieve. But also working in this direction is the tax treaty agreed to by 136 countries in October 2021 mandating a minimum 15% corporate tax rate. The treaty was pushed largely as a reaction against abusive transfer pricing practices.

But another economic consequence of transfer pricing, one that is often ignored in practice, appears to be as important than ever—namely, the agency costs associated with conflicts of interests and incentives between corporate managers and owners. Apart from tax effects, when companies get transfer pricing wrong—that is, when the prices are too high or too low relative to opportunity cost—value-maximizing cooperation across business units tends to be discouraged, resulting in excessive reliance on outsourcing. This article discusses the steps companies can take to limit such agency conflicts and the associated costs.

Valuation experts have recommended using the finance formula equating real growth in net cash flows (g) to the plowback rate (k) times the real return on investment (r) as a more reasonable basis for estimating plowback in the steady-state perpetuity period of the standard value-driver DCF formula. Unfortunately, practitioners make two errors when estimating implied plowback as k = g  ÷ r. The first error is to use the incorrect nominal formula k = G  ÷ R that is still found in finance and valuation textbooks. The second error arises because there are two ways to define plowback in the value-driver DCF model. The problematic traditional definition measures plowback ratio as a function of accounting NOPAT (before it has been transformed into cash NOPAT by deducting incremental working capital), thereby including in the numerator not only net new investment, but also changes in incremental working capital. The authors call this accounting plowback, and show why it is generally inappropriate to estimate implied accounting plowback using the formula k = g  ÷ r. The authors explain in detail why the cash plowback presented in Bradley Jarrell (2008) is generally appropriate for estimating implied plowback and why accounting plowback is more problematic in this application.

The initial enthusiasm for implementing blockchain in financial markets has been dampened considerably by its collision with economic realities. Though the author warns against avoiding the Panglossian trap of viewing ours as the best of all possible worlds, he reminds us that financial institutions have evolved and won the trust of many consumers in a competitive environment as means of economizing on transactions costs. Such costs arise from the nature of transactions, including crucially the information environment in which they take place. Though new technologies such as blockchain have the potential to reduce some of these costs, they often do so without fundamentally changing the underlying economic conditions that have given rise to them. As a result, the traditional institutions such as banks and exchanges that technologists scoff at may well prove surprisingly competitive and durable in the face of technological challengers.

The most successful implementation of blockchain—Bitcoin—solves a very basic transactional challenge peculiar to cryptocurrency: the double spend problem. But it does so in a very expensive way, and many other transactions pose far more complex challenges. The three cautionary tales provided by the author—the first involving securities and derivatives trading and clearing, the second commodity trading, and the third proposals to “equitize” assets—all demonstrate the need to confront “Chesterton's Fence” when evaluating the potential of blockchain in any particular application. To understand the value of a new technology for a given set of functions, one must understand the economic forces that have shaped the processes and institutions that currently perform those functions. When such forces are considered, it often becomes apparent that new technologies like blockchain will not prove superior to existing practices—and may even create adverse unintended consequences that offset and perhaps even eliminate their beneficial effects.

The narrative of pervasive short-termism caused by the stock market, and the need to protect corporations and the economy from it, is now a well established one. Frenetic short-term trading and aggressive activists chasing immediate increases in profit prevent corporations from thinking about the requirements for their own long-run success. Institutional investors squeeze cash out of the corporate sector by pressuring companies into excessive share buybacks instead of supporting long-term investments in R&D and skills development. The relentless pressure for short-term results also causes companies to neglect long-term social problems like climate change, human rights, and inequality as they seek to meet the stock market's expectations for quarterly earnings.

That this set of views is so widely accepted, and allowed to pass unchallenged, even in relatively sophisticated business and policy-making circles, makes Mark Roe's new book particularly important and timely. In a measured, balanced, and utterly non-polemical fashion, and using the highest quality academic evidence, the Harvard Law professor weighs the evidence for and against the charge that stock-market short-termism is a serious problem for the U.S. economy. Spoiler alert: he finds that there is no compelling case to answer. Stock-market-driven short-termism is at most a minor problem.

This finding matters because rather than railing against share buybacks, putting sand in the wheels of shareholder activism, and seeking to insulate corporate managers from investor pressure, Professor Roe contends that our policymakers should instead be focusing action on areas that are much more likely to have positive outcomes for society. Chief among them have been failure to resist the persistent decline in government-funded (not corporate sector) R&D or to beef up regulation and regulatory staffing to ensure that companies bear the costs of externalities that are currently offloaded onto society.

While ignoring these opportunities, we continue to devote too much attention to policies and actions—such as efforts to tax buybacks and limit shareholder activism—that are bound to be ineffective at best, and counterproductive at worst. Missing the Target is essential reading for policymakers, regulators, and anyone else interested in corporate governance, financial markets, and regulation that can and will actually make a positive difference to the rest of us.

The rough coincidence of the 50th anniversary of Milton Friedman's Sunday New York Times Magazine article, “The Social Responsibility of Business Is to Increase Its Profits,” with today's movement advocating broader corporate purpose than maximizing shareholder value and stressing the public corporation's obligation to other stakeholders raises the questions: to whom is the corporation accountable and for what? This essay broadly distinguishes different governance structures that oversee the corporation's allocation and distributive decisions: on the one hand, how it goes about allocating investor capital and creating value; and on the other, whether it chooses to distribute the value it creates to stakeholders in ways that differ from the outcomes that would result from the labor and other various factor markets through which stakeholders provide their contributions. This distinction serves to underscore the difference between corporate governance, which effectively allocates accountability for the profitability of the corporation's business to the market, and real governance, which vests accountability for distributive decisions ultimately in elected officials.

The author posts a warning against those who view today's purpose-driven governance movement as a call for a shift back to a system of management and corporate governance that Alfred Chandler, in his iconic history of the development of the structure of large U.S. corporations, labeled “managerial capitalism.” Such a solution, as Chandler's chronicles should warn us, are likely to leave us confronting the same problem with which his managerial capitalism left us: the replacement of the invisible hand of markets with the visible hand of a management hierarchy. And this in turn forces us back to the hard question: what systems hold Chandler's management hierarchy accountable for its performance? The author argues that corporate governance and markets should continue to hold management accountable for creating efficiency and value, and that real governance, and ultimately the electorate, continue to be responsible—and if anything, assume greater responsibility—for “redistributive” decisions that override factor market allocations.

The U.S. Federal Reserve System has recently added very large additional supplies of its own money, in the form of deposits (cash reserves) held by member banks with the Fed. The first injection of central bank money offered in exchange for Treasury Bonds and MBS (QE) was intended to overcome the Global Financial Crisis (GFC) of 2008-09. The second infusion of extra cash was intended to relieve the impact on the economy of the COVID lockdowns of 2020.

The increase in the money base—defined as commercial bank deposits with the FED plus currency in issue—after 2008 did not lead to any acceleration in what had become a very low rate of inflation. Nor did it lead to any notable acceleration in the supply of money, broadly defined. But both the money supply and spending reactions to the additional central bank money after 2020 have been very different. And the growth in the money supply accelerated sharply and, along with it, inflation.

The author explains these different outcomes in terms consistent with the monetarist and quantity theory traditions. A tradition that focuses on the importance of the demand for as well as the supply of money—including central bank money. The article shows that the demand for as well as the supply of cash reserves increased markedly after the GFC, reflecting the worldwide risk aversion and surfeit of capital. The exposed banks were reluctant to lend more and preferred to shore up their leveraged balance sheets holding extra cash which slowed down deposit growth. Banks in the wake of the COVID lockdowns have proved more willing to exchange cash for overdrafts, leading to rapid increases in the supply of deposits and money. Such increases have in turn led predictably to more spending as the extra money was exchanged for goods, services, and assets that caused prices to rise sharply.

To reverse these inflation trends, the Fed will need to control the supply of money and bank lending. To do so effectively, the Fed should attempt to estimate the demand for large (excess) cash reserves of the banking system and set the interest rate it offers on these cash reserves accordingly. But this Fed is not monetarist; it takes little notice of money or bank credit supplies and will continue to rely on its interest rate tool to limit demand. Nevertheless, monetarists and the market will be watching closely how well the Fed manages a transition not only to higher interest rates, but back to non-inflationary increases in the supply of money.

In the past five years, a growing number of investors have been taking more serious account of climate change in their investment decision-making. Meanwhile, companies have been responding by making bold net zero commitments. But if it seems reasonable to expect that companies making such commitments would see a subsequent market reaction, the authors' recent analysis found no significant abnormal stock price reaction in the days immediately following a corporate net zero announcement.

One interpretation of this lack of investors' response is that it reflects their skepticism and desire to see more evidence of planning and execution, including details of changes in capital allocation plans. Climate transition planning could be the missing piece in this puzzle.

In 2019, FCLTGlobal issued a report called “Driving the Conversation: Long-term Roadmaps for Long-term Success,” which provided a tool to help corporations when building long-term strategic plans. In this article the authors extend that reporting framework by presenting the outlines of its new “Climate Transition Conversation Guide.” Designed to help companies develop a robust climate transition plan that is integrally linked with their long-term strategy, the Guide addresses a number of important questions about how key pillars of the business are likely to affect—and be affected by—climate change:

By integrating climate change into their long-term strategic plans—and perhaps drawing inspiration from some of the corporate best practices showcased in this article—companies are urged to begin the process of making good on their bold climate commitments with plans for action, thereby helping investors to move past their skepticism and recognize and support the plans.

The debate over the purpose of the public corporation has gone on for decades. The idea that companies should prioritize the interests of shareholders gained widespread acceptance in the 1980s. However, the tide turned in the last decade as a growing number of CEOs, boards, employees, customers, social activists, and investors support a move from corporate governance focused on shareholders to one that prioritizes the interests of stakeholders.

Shareholder and stakeholder advocates are unlikely to find common ground any time soon. This article presents four roadblocks responsible for the impasse: stakeholders and shareholder proponents interpret the law differently; companies adopt lofty purpose statements that seek to engage and motivate stakeholders but have little to say about the company's priorities; the meaning of stakeholder governance is ambiguous; and stakeholder advocates routinely display a complete misunderstanding of the concept of shareholder value.

The article concludes with three essential steps to promote transparency and a more efficient market for corporate governance that benefits both stakeholders and shareholders. Stakeholder and shareholder governance proponents, boards of directors, CEOs, and the investment community face two essential choices. They can allow the never-ending corporate purpose debate to continue, or they can join forces to establish a transparent market for corporate governance.