Showing papers on "Capital structure published in 1972"

The effect of the firm's capital structure on the systematic risk of common stocks

Abstract: ONLY RECENTLY has there been an interest in relating the issues historically associated with corporation finance to those historically associated with investment and portfolio analyses. In fact, rigorous theoretical attempts in this direction were made only since the capital asset pricing model of Sharpe [13], Lintner [6], and Mossin [11], itself an extension of the Markowitz [7] portfolio theory. This study is one of the first empirical works consciously attempting to show and test the relationships between the two fields. In addition, differences in the observed systematic or nondiversifiable risk of common stocks, P, have never really been analyzed before by investigating some of the underlying differences in the firms. In the capital asset pricing model, it was demonstrated that the efficient set of portfolios to any individual investor will always be some combination of lending at the risk-free rate and the "market portfolio," or borrowing at the riskfree rate and the "market portfolio." At the same time, the Modigliani and Miller (MM) propositions [9, 10] on the effect of corporate leverage are well known to the students of corporation finance. In order for their propositions to hold, personal leverage is required to be a perfect substitute for corporate leverage. If this is true, then corporate borrowing could substitute for personal borrowing in the capital asset pricing model as well. Both in the pricing model and the MM theory, borrowing, from whatever source, while maintaining a fixed amount of equity, increases the risk to the investor. Therefore, in the mean-standard deviation version of the capital asset pricing model, the covariance of the asset's rate of return with the market portfolio's rate of return (which measures the nondiversifiable risk of the asset-the proxy P will be used to measure this) should be greater for the stock of a firm with a higher debt-equity ratio than for the stock of another firm in the same risk-class with a lower debt-equity ratio.1 This study, then, has a number of purposes. First, we shall attempt to link empirically corporation finance issues with portfolio and security analyses through the effect of a firm's leverage on the systematic risk of its common

The Microeconomic Consequences of Corporate Mergers

Abstract: The objective of this study is to examine empirically the validity of a series of allegations regarding the economic effects of mergers. These alleged effects of mergers can be classified into two groups: The first is concerned with the possible impairment of market competition (the market level); the second deals with the impact of mergers on the firms concerned and on their stockholders (the firm level). The current study is restricted to the latter (firm level) effects. Despite the impressive number of mergers in the United States, the empirical evidence regarding their effects is still scanty. The few microeconomic studies that have been published are mainly concerned with the profitability of mergers, and the conclusions reached are often contradictory.' The current study examines, in addition to the profitability of mergers, such aspects as risk, growth, capital structure, income tax savings, earnings per share, etc. The conclusion is that the long-run profitability of acquiring firms is probably somewhat higher than that of comparable nonmerging firms. The evidence is largely negative, however, with respect to other alleged effects of mergers; the characteristics of merging firms are hardly distinguishable from those of comparable nonmerging firms.

Evidence on the Association between Mergers and Capital Structure

Abstract: This article examines whether merger per se may be related to changes in the capital structure of the participating firms. The findings are consistent with the existence of merger-related incentives to increase financial leverage for a significant subset of merging firms. No evidence has been found that supports the latent debt capacity hypothesis. There is a strong relationship between merger accounting procedures (purchase vs. pooling) and relative increases in leverage accompanying mergers. This relationship reflects the potential for increased debt capacity and/or wealth shifting by the managements of acquiring firms. The terms of purchase of the acquired company were consistent with an immediate increase in leverage in the merging entities. Analysis of the year-by-year relative leverage positions of purchase merger firms indicates an immediate and persistent relative increase in financial leverage. Similar investigation of pooling accounting mergers detects no such systematic changes in leverage. Finally, analysis of the relationship between pre-merger cash flow correlation for merging firms and relative changes in leverage tend to support both the increased debt capacity theory and the coinsurance wealth transfer theory.

Equilibrium in the Pricing of Capital Assets, Risk-Bearing Debt Instruments, and the Question of Optimal Capital structure: A Comment

Abstract: In a recent article in this Journal , Haugen and Pappas (H-P, hereafter) [1] attempted to prove, within the framework of the capital asset pricing model, the already proven proposition that the cost of capital is invariant with respect to leverage even with risky debt. The H-P proof contains a serious error which we would like to point out in this note.