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Showing papers on "Capital structure published in 1981"


Journal ArticleDOI
TL;DR: In this article, the authors examined the impact of convertible security calls on securityholder's wealth and found that on average common stock values fall by approximately two percent at the announcements of convertible debt calls, but common stockholders wealth is unaffected by convertible preferred stock calls.

229 citations



Journal ArticleDOI
TL;DR: In this article, the authors consider a case in which current assets increase in proportion to nominal increases in sales, concluding that inflation can exacerbate a company's sustainable growth problems, when sales increase at a rate different from the sustainable growth rate, or a combination of them, must change.
Abstract: pany is unable or unwilling to raise new equity, there exists only one growth rate in sales which is consistent with the maintenance of certain operating and financial ratios. This is the company's sustainable growth rate. When sales increase at a rate different from the sustainable growth rate, one ratio, or a combination of them, must change. Frequently, this means that companies must increase leverage to finance rapid growth. Nominal sales growth can come from two sources: increasing physical volume, and increasing prices. The earlier paper considered a case in which current assets increase in proportion to nominal increases in sales, concluding that inflation can exacerbate a company's sustainable growth problems. When the objective is to maintain a stable capital structure, as defined by the ratio of the total book value of liabilities to the book value of equity, inflationary growth substitutes in large part for real growth. So, if in the absence of inflation a company's real sustainable growth rate is 15%, the comparable figure in the presence of 10% inf tion might be only 8%. This s a sobering conclusion, for it implies that inflation may have a substantial depressing effect on economic growth. Companies experiencing difficulty financing growth in the absence of inflation will find that inflation forces them to choose between increased leverage or reduced real growth. To the extent that companies reduce real growth in response to falling sustainable growth rates, economic growth will suffer. This is essentially Lintner's message in [5]. Johnson [4] extends my early work by distinguishing between the behavior of current liabilities and long-term liabilities under inflation. Johnson looks at a case where current liabilities vary with nominal sales, but where management constrains long-term liabilities to be a constant fraction of the book value of equity. She finds that in general the real sustainable growth rate under these conditions exceeds the one I found, and that in certain cases the real sustainable growth rate can be independent of the rate of inflation, or even vary inversely with it. The Johnson paper suffers from three problems. Just as I did, Johnson ignores the impact of inflation

124 citations


Journal ArticleDOI
TL;DR: In this article, the authors developed a measure of the implicit rental price of tractors which accounts for the capital structure used by farmers, the capacity depreciation, and income tax considerations, and found that the frequently used geometric decay pattern does the poorest job of explaining annual real net investment in farm tractors.
Abstract: A wide range of assumptions about the capital deterioration and marginal factor cost of tractors has been made in previous studies. This study develops a measure of the implicit rental price of tractors which accounts for the capital structure used by farmers, the capacity depreciation of tractors, and income tax considerations. Estimates of net investment models for alternative capacity depreciation patterns are compared to those suggested by engineering considerations. The results show that the frequently used geometric decay pattern does the poorest job of explaining annual real net investment in farm tractors.

36 citations


Journal ArticleDOI
TL;DR: In this article, the amount of funds to contribute to the pension fund in any given period and the selection of a particular mix of assets for that fund are discussed, and two decisions facing firms with defined benefit, trusteed pension plans.
Abstract: This paper is concerned with two decisions facing firms with defined benefit, trusteed pension plans: the amount of funds to contribute to the pension fund in any given period; and the selection of a particular mix of assets for that fund. The pension decision area is of importance for many firms today due to the recent rapid growth in pension costs in absolute terms and as a percent of firm profits. Unfunded liabilities (pension benefits payable net of pension assets) have become a sizable component of the capital structure of many firms. Pension funds (assets) also have grown rapidly due to liberalizationof pension benefits, inflation, the higher funding requirements of the pension reform law (ERISA), and the overall aging of the labor force.

14 citations


Journal ArticleDOI
TL;DR: In this paper, a review of recent developments in models dealing with capital structure and cost of capital for the multinational firm is presented, with a summary of financial policy prescribed for the firm by the present state of knowledge.
Abstract: This paper reviews recent developments in models dealing with capital structure and cost of capital for the multinational firm. A number of issues which bear upon the financing decisions of the multinational corporation are addressed, and related to underlying theoretical and empirical questions with regard to the degree of segmentation or integration of international money and capital markets and the efficiency of the foreign exchange market. Data problems, areas of conflict, and topics for future research are identified. The paper concludes with a summary of financial policy prescribed for the firm by the present state of knowledge.

13 citations


Posted Content
TL;DR: In this article, the authors apply some recent advances in corporate capital structure theory to the determination of optimal capital in banking and find that commercial banks tend to have relatively less capital than non-financial firms, and leverage has tended to increase over time.
Abstract: This paper applies some recent advances in corporate capital structure theory to the determination of optimal capital in banking The effects of corporate and personal taxes, government regulation, the technology of producing deposit services and the costs of bankruptcy and agency problems are all discussed in the context of the US commercial banking system The analysis suggests explanations for why commercial banks tend to have relatively less capital than nonfinancial firms, why commercial bank leverage has tended to increase over time and why large banks tend to have relatively less capital than small banks

6 citations



ReportDOI
TL;DR: This article studied the determinants of capital structure for the incomplete markets case, where incompleteness manifests itself in the form of divergent borrowing and lending rates, and argued that firms have a natural incentive to tailor their financing choices so as to narrow such divergences.
Abstract: Most discussions of corporate capital structure have been set in the context of a complete capital market. In this paper we study the determinants of capital structure for the incomplete markets case, where incompleteness manifests itself in the form of divergent borrowing and lending rates. We argue that firms have a natural incentive to tailor their financing choices so as to narrow such divergences. While this implies an optimal capital structure for firms in the aggregate, however, competition will drive out profits, and the capital structure of any individual firm may still be a matter of indifference. Firms' incentive to try to complete the market provides a rationale for corporate finance even in a taxless environment. This incentive may also shed light on such related issues as corporate mergers, the use of complex securities and the role of financial intermediaries.

5 citations


Journal ArticleDOI
TL;DR: In this paper, the authors re-affirmed the irrelevance theorem of the Modigliani-Miller model in the context of corporate tax reform, and argued that whether capital is obtained through debt or equity has no bearing on the market value of the firm and is therefore irrelevant.
Abstract: Controversy over the implications of debt and the rationale belying capital structure has seemingly come to rest upon a plateau defined by Miller's equilibrium analysis of aggregate corporate debt [10]. In “Debt and Taxes,” Miller reasserts his contention that whether capital is obtained through debt or equity has no bearing on the market value of the firm and is, therefore, irrelevant--a notion which has long been accepted with some reluctance by the finance academe. When the Modigliani-Miller model was first offered some 20 years ago [11], it was accompanied by a set of assumptions which portrayed the world of corporate finance in such malleable terms as to make the irrelevancy propositions palatable. Adaptation of this theoretical model (by its originators) to its secular counterpart through the imposition of corporate taxes [12] brought about a reassuring reversal of the irrelevancy doctrine, but left in its stead the disconcerting prescription to maximize firm value by financing exclusively via debt. Consideration of tax effects at the personal level by Farrar and Selwyn [7] marked the next concession to reality by capital structure theorists. Instead of alienating the original model still further from observed corporate behavior, this step provided a means of reconciling the overwhelming advantage of debt financing at the corporate level with the ultimate after-tax “consumption possibilities” afforded to individual investors. Miller's analysis explains that corporations are forced to “gross up” nominal interest rates to attract bondholders who must be compensated for their personal tax liability [10]. Potential increases in market value due to the taxdeductibility of interest payments are exhausted in the competitive drive toward equilibrium—at which point there are no gains from leverage. The sanctity of the irrelevance theorem thus appears to have been restored at the aggregate level.

4 citations


Posted Content
TL;DR: This article studied the determinants of capital structure for the incomplete markets case, where incompleteness manifests itself in the form of divergent borrowing and lending rates, and argued that firms have a natural incentive to tailor their financing choices so as to narrow such divergences.
Abstract: Most discussions of corporate capital structure have been set in the context of a complete capital market. In this paper we study the determinants of capital structure for the incomplete markets case, where incompleteness manifests itself in the form of divergent borrowing and lending rates. We argue that firms have a natural incentive to tailor their financing choices so as to narrow such divergences. While this implies an optimal capital structure for firms in the aggregate, however, competition will drive out profits, and the capital structure of any individual firm may still be a matter of indifference. Firms' incentive to try to complete the market provides a rationale for corporate finance even in a taxless environment. This incentive may also shed light on such related issues as corporate mergers, the use of complex securities and the role of financial intermediaries.

Posted Content
TL;DR: The authors analyzes the impact of changes in the financial market in a general equilibrium, two-period context, and finds that nonsynergistic corporate spinoffs and the opening of option markets have, on balance, strongly positive welfare effects; nonsynergyistic mergers tend to have strong negative welfare effects, while the welfare effects of alternative risky debt structures tend to be ambiguous.
Abstract: This paper analyzes the impact, on both welfare and equilibrium prices, of changes in the financial market in a general equilibrium, two-period context. Previous papers have focussed on the "securities effect," tending to essentially ignore the equally important "endowment effect" that arises when market structure changes are implemented. Two forms of endowment neutrality and market structure changes which either preserve, expand, or shift allocational feasibility differentiate the main theorems, which are based on arbitrary preferences and beliefs and substantially extend and modify extant results; in particular, earlier statements identified with value conservation are sharply moderated. Very roughly, the paper yields the following implications for some of the more common changes in the market: nonsynergistic corporate spinoffs and the opening of option markets have, on balance, strongly positive welfare effects; nonsynergistic mergers tend to have strong negative welfare effects, while the welfare effects of alternative risky debt structures tend to be ambiguous. All of the preceding, however, may under plausible conditions be redistributive. CHANGES IN THE STRUCTURE of the financial market have long been of interest to financial economists. While such changes may take many forms, it is perhaps surprising that only a few of the more common ones have been systematically studied. Foremost among these are changes which involve the firm's capital structure (the relative amounts of debt and equity), mergers, and other special recapitalizations. This paper analyzes the impact, on both welfare and equilibrium prices, of changes in the financial market in a two-period context. It differs from previous studies primarily in that it is based on a fully integrated (general equilibrium) approach similar to that employed in international trade analysis. Thus, while the resulting mosaic contains previous studies as clearly recognizable fragments, such as the classic paper of Modigliani and Miller [33], it also provides the necessary framework and tools for an evaluation of market structure changes of any type, such as changes involving subordinated debt, convertibles, warrants, mergers, spinoffs, and the opening of option markets.


Book ChapterDOI
01 Jan 1981
TL;DR: The concept of the firm's cost of capital (FCOC) has proved to be a useful device for both elementary and advanced teaching In addition, it is generally held in high esteem as a powerful analytical tool for both theoretical and practical research.
Abstract: The concept of the firm’s cost of capital (FCOC) has proved to be a useful device for both elementary and advanced teaching In addition, it is generally held in high esteem as a powerful analytical tool for both theoretical and practical research Theories of financial structure and FCOC generally employ a cash-flow stream of a perpetual form, which simplifies its capitalization As seen in Table 1, when such cash flows (CFs) are conceived to be uncertain, the uncertainty involves only the level on which the perpetuities are realized