Showing papers on "Financial risk published in 1972"

Psychological study of human judgment: Implications for investment decision making

Abstract: (2001). Psychological Study of Human Judgment: Implications for Investment Decision Making. Journal of Psychology and Financial Markets: Vol. 2, No. 3, pp. 160-172.

Evidence on the importance of financial structure

Abstract: equity in lower ranges of debt to equity to lower the firm's cost of capital. Beyond an ill-defined point, however, due to excessive risk, the securities markets will not react favorably to further increases in the degree of leverage used by the firm, and its cost of capital will rise. Thus, there is an optimum financial structure that minimizes cost of capital. In basic conceptual disagreement are the proponents of the "independence" hypothesis. Modigliani and Miller [5, 6, 7], in particular, argue that, given certain conditions (i.e., no taxes on corporate income and perfect capital markets), cost of capital is not influenced by a firm's financing mix. The favorable effect upon total market value of substituting nominally low-cost debt for high-cost equity in the firm's financial structure will be offset exactly by a decrease in the price that investors are willing to pay for the firm's common stock. A higher common equity yield is imposed by the market in return for being exposed to greater financial risk. Thus the cost of capital is independent of the financial structure of the firm, and financing decisions are of minimal importance. By strict interpretation, these two theories stand at opposite poles. The principal differences between them disappear, however, in a world where interest exp nse is tax deductible and market imperfections operate to restrict the amount of fixed-income obligations a firm can issue [9, pp. 39-41]. Both schools of thought do in fact subscribe to the optimum financial structure concept under conditions approximating the actual business environment. Accordingly, it is the objective of this article to present evidence on whether the importance of the financial structure of the firm has in practice been confirmed by corporate decision makers. It is hypothesized that, if the financing decision is critical with respect to the valuation of the firm, then decision makers in various industry groups have recognized this fact and developed financial structures suited to their particular business risk. The approach will be to show that an appropriate range of leverage exis s for a particular industry and that firms seek to find this range. In addition, it will be demons rated that inter-industry financial structure differences are persistent over time and are pervasive through ut the industries studied.

Control, Size, Growth, and Financial Performance in the Firm

Abstract: A recent study by Larner [11] concluded that the managerial revolution analyzed earlier by Berle and Means [4] was close to completion because a large percentage of the nation's 200 largest nonfinancial corporations was controlled by nonowner managers. This finding makes more significant any substantial differences in financial performance that may exist between owner-controlled and manager-controlled firms, and it increases the potential impact of numerous related theories; for example, see Berle [3], Donaldson [5], Gordon [6, 7 ], Mason [14], Monsen and Downs [16], Williamson [21], and others.