Firms facing significant business risks have incentives to mitigate the costs of these risks by adjusting their capital structures. This paper investigates this link by analyzing the exposures of multinational firms to political risks. The evidence indicates that returns on investment in politically risky foreign countries are more volatile than...
We derive a firm's optimal capital structure and managerial compensation contract when employees are averse to bearing their own human capital risk, while equity holders can diversify this risk away. In the presence of corporate taxes, our model delivers optimal debt levels consistent with those observed in practice. It also...
This paper examines the financial structure and performance of young micro-firms. As regards age, their average time from financial inception is one and a half years; and as regards size, their average number of employees is just three full-time, and two part-time workers. Short-run performance is measured over one year,...
There is a sharp contrast when one compares firm leverage ratios between US and British electric utilities, which have both been deregulated in the past decade. In the US, leverage ratios have been declining while in the UK, they show a marked increase. To better understand the decline in leverage...
Firm size has become such a routine to use as a control variable in empirical corporate finance studies that it receives little to no discussion in most research papers even though not uncommonly it is among the most significant variables. This paper's goal is to provide rationale for one of...
While firm growth critically depends on financing ability and access to external capital, the operations management literature seldom considers the effects of financial constraints on the firms' operational decisions. Another critical assumption in traditional operations models is that corporate managers always act in the firm owners' best interests. Managers are,...
A large literature examines the e?ects of a firm's mixture of debt and equity on its incentives to produce. For nearly 30 years, researchers have examined the consequences of splits between ownership and control agency models and the resulting diversity of claims on cash flow. A related stream of research...
Growing demands from shareholders for senior management to take enterprise risk management ERM more seriously has at last formalized the essential connection between a company's business operations and its overall risk management program. A unifying framework can help companies identify and articulate risks consistently across the enterprise and evaluate alternative...
Firms undertaking innovative activities typically hold a larger share of immaterial assets and have a different capital structure. Differences in the propensity to innovate are likely to translate in different TFP levels. Data is used on a panel of firms to study the relationship between firms' capital structure and TFP....
In a cross section of emerging markets and developing countries, it is found that equity-like liabilities (FDI and, especially, portfolio equity) as a share of countries' total external liabilities or as a share of GDP are positively and significantly associated with indicators of educational attainment, natural resource abundance, and especially,...
From the executive summary: ‘In a surprisingly short timeframe, loan market conditions have changed dramatically. Covenants continue to loosen, maturities continue to increase, and lenders are competing very aggressively on price. As a result, leveraged loan volume is on the rise, driven largely by re-financings and re-pricing of existing debt....
When asked about optimal capital structure, the typical response from a commercial real estate investor is "go for it?use as much debt as possible." This answer, while not being necessarily incorrect, is not very informative. This paper seeks to articulate the economics underlying the market for outside finance in commercial...
Capital structure arbitrage is one of the most recent hedge fund strategies that are rapidly gaining popularity amongst traders. This paper looks at the possibility of arbitraging mispricings between a company's high yield bond and stock. The argument behind the strategy is that the equity and debt markets quite often...
U.S. corporations do not use their debt and equity issuing and repurchasing activities to counteract the mechanistic effects of stock returns on their debt equity ratios. Thus, over 1-5 year horizons, stock returns can explain about 40% of debt ratio dynamics. Although corporate net issuing activity is lively, and although...
This paper builds on Froot and Stein (1998) in developing a framework for analyzing the risk allocation, capital budgeting, and capital structure decisions facing insurers and reinsurers. The model incorporates three key features: value-maximizing insurers and reinsurers face product market as well as capital market imperfections that give rise to...
Capital structure arbitrage strategies currently are the fastest growing sector in the hedge fund market and in proprietary trading departments in large banks. The objective of the thesis is the theoretical and practical background of capital structure arbitrage and hedging strategies, and the empirical evidence of key relationships applying these...
A perfect storm of adverse market conditions over the past three years has devastated many corporate defined benefit pension plans. Negative equity market returns have eroded plan assets at the same time that declining interest rates have increased benefit obligations. In extreme cases, this has left corporate pension plans with...
This paper examines the impact of local tax rates and capital market conditions on the level and composition of borrowing by foreign affiliates of American multinational corporations. The evidence indicates that 10 percent higher local tax rates are associated with 2.8 percent higher debt/asset ratios of American-owned affiliates, and that...
This paper focuses on the effects of managerial entrenchment, to consider how safety-net subsidies and financial distress costs interact with managerial incentives to influence capital structure in U.S. commercial banking. Using cross-sectional data on publicly traded, highest-level U.S. bank holding companies, the paper finds empirical evidence of Marcus' proposition (1984)...
This article is about the business strategy that include capital structure. The motivation of this paper is to develop a unified dynamic model of the firm that can simultaneously incorporate a number of important variables that explain the capital structure choice and to quantify the economic importance of those variables...
