Open AccessPosted Content
Agency Costs of Free Cash Flow, Corporate Finance, and Takeovers
Reads0
Chats0
TLDR
In this paper, the benefits of debt in reducing agency costs of free cash flows, how debt can substitute for dividends, why diversification programs are more likely to generate losses than takeovers or expansion in the same line of business or liquidationmotivated takeovers, and why the factors generating takeover activity in such diverse activities as broadcasting and tobacco are similar to those in oil.Abstract:
The interests and incentives of managers and shareholders conflict over such issues as the optimal size of the firm and the payment of cash to shareholders. These conflicts are especially severe in firms with large free cash flows—more cash than profitable investment opportunities. The theory developed here explains 1) the benefits of debt in reducing agency costs of free cash flows, 2) how debt can substitute for dividends, 3) why “diversification” programs are more likely to generate losses than takeovers or expansion in the same line of business or liquidationmotivated takeovers, 4) why the factors generating takeover activity in such diverse activities as broadcasting and tobacco are similar to those in oil, and 5) why bidders and some targets tend to perform abnormally well prior to takeover.read more
Citations
More filters
Journal ArticleDOI
The Determinants of Capital Structure: Evidence from China
TL;DR: Li et al. as discussed by the authors employed a new database, which contains the market and accounting data from more than 1000 Chinese listed companies up to the year 2000, to document the characteristics of these firms in terms of capital structure.
Journal ArticleDOI
Financial Policy and Reputation for Product Quality
TL;DR: In this paper, the effect of financial policy on a firm's incentives to maintain its reputation for producing a high-quality product is analyzed, and it is demonstrated that in certain situations debt will reduce a firms ability to credibly offer high quality products and, as a consequence, will reduce its value.
Journal ArticleDOI
Pursuing Strategic Advantage Through Political Means: A Multivariate Approach
TL;DR: In a constantly changing business environment, firms with access to those who make public policy enjoy competitive advantage as discussed by the authors, and to gain such access, politically active firms engage in a variety of activities.
Journal ArticleDOI
Financial Expertise of Directors
TL;DR: In this paper, the authors analyze how directors with financial expertise affect corporate decisions and find that financial experts exert significant influence, though not necessarily in the interest of shareholders, and that increasing financial expertise on boards may not benefit shareholders if conflicting interests (e.g., bank profits) are neglected.
Journal ArticleDOI
The capital structure implications of pursuing a strategy of innovation
TL;DR: In this article, the authors argue that the form of competition that each firm chooses will determine the strategic value to the firm of maintaining financial slack, and that firms pursuing such a strategy that fail to recognize the value of financial slack are likely to perform poorly.