Showing papers on "Leverage (finance) published in 1975"

Size, leverage, and dividend record as determinants of equity risk

Abstract: THE LAST DECADE has witnessed significant advancements in capital theory and its application to corporate finance, investment policy, and portfolio analysis. More recently a growing body of empirical work has undertaken the task of systematically testing the positive implications of the theory. The study of risk has occupied a central position in this endeavor as it provides the link between the various branches of finance theory. The purpose of this paper is to investigate the empirical determinants of equity risk through the analysis of the firm's underlying characteristics, specifically, the firm's size, its financial leverage, and its dividend record. Section I summarizes the literature, Section II provides the theoretical framework, Section III describes the empirical model and the data, Section IV presents the statistical results, Section V analyzes the effect of excluded variables, and Section VI provides a summary and conclusions.

Some Aspectes of the Pure Theory of Corporate Finance: Bankrupticies and Take-Overs: Comment

Abstract: In a recent paper in this Journal, Stiglitz purports to show that leverage may affect the value of the firm in competitive capital markets if the possibility of bankruptcy and the differential expectations between stock holders and bond holders are admitted. However, Stiglitz argues that leverage may reduce the value of the firm, and this note shows, for Stiglitz' special case and in general, that leverage cannot reduce the value of the firm. The Modigliani-Miller arbitrage argument holds, since investors can always undo the leverage of the firm, even when markets are not complete. Whether leverage can increase the value of the firm under incomplete markets is still an open issue.

The intricate relationship between financial leverage and the stability of stock prices

Abstract: A LARGE PROPORTION of the finance literature in recent years has been devoted to the relationship between risk and expected rates of return (see references [6], [10], and [12]). While highly significant steps have been taken in the development of theoretical models which purport to specify the equilibrium determinants of the first moments of the distributions of security returns, very little attention has been directed toward specifying the theoretical determinants of those moments associated with risk. In this paper we provide an interesting framework of analysis through which the relationship between leverage and the relative stability of stock value can be analyzed. We approach the problem from a unique point of view and, in the process, discover a rather complex relationship between leverage and the stability of common stock prices. The seeds for our ideas were planted in actuarial science [11, 13] through their interest immunization rules for life insurance companies. Later, Grove [2], apparently unaware of the preceding work in actuarial science, generalizes the concepts to the non-intermediary and makes an important contribution in relating financial leverage to interest rate risk. This paper expands these propositions and demonstrates their sweeping significance for the theory of the finance of the firm. Our analytical framework is based on the work of Hicks [5] and other authors (see references [3], [4], [7], and [8]) who have attempted to isolate the theoretical determinants of the risk of equity capital.

The impact of management on farm expansion and survival

Abstract: Commercial agriculture is undergoing a major as well as associated incremental nonland restructural change in the form of decreasing num- sources needed to operate the expanded farm. Rebers and increasing sizes of farm units. This quired equity for expansion can be identified as structural change results in farm firms constantly the minimum equity to expand (MEE), and equity experiencing expansion and survival problems. In for survival as the minimum equity to survive some cases, expansion and survival are related: (MES). If equity in year t is Et, expansion is possigrowth in size is necessary to incorporate cost- ble if Et > MEEt, and survival is guaranteed if reducing technological improvements to maintain Et > MESt. income levels. In others, these problems are sepa- Both MEE and MES are defined by asset rated: expansion is desired to increase income- values and the amount of leverage utilized by the earning capacity, or survival may be a primary firm. The financial concept of leverage refers to objective for the firm when expansion is unlikely. utilization of debt to finance assets. Typically, it This paper develops an analytical framework, in- is measured by the ratio of debt to assets. Since corporating the dynamics of expansion and sur- the ratio of equity to assets is uniquely related vival, and explores their interrelationships. Stoch- to the debt-asset ratio, it is utilized as a measure astic relationships are incorporated for use in con- of leverage in this study to simplify the analyticeptualizing simulation studies of firm growth. Its ca presentation. A high (low) equity-asset ratio empirical relevance is demonstrated with an analy- indicates that the firm has low (high) leverage. sis of the interaction between managerial ability The specific relation between leverage and the and leverage in the process of expansion and sur- minimum equity to expand is given by vival of a representative farm firm in South Cen() (1) MEE t - r e * TA t tral Georgia. where:

Management Reporting System: A New Marriage Between Management and Financial Data Through Management Science

Abstract: This paper reports a significant combination of a linear-programming model of the Liberty, a communication system which visually depicts the model's output by electronically-produced graphics, and a planning concept which has produced a new, more sensitive approach to asset/liability management of a banking organization in an increasingly volatile financial environment. During the past decade, banks generally have increased leverage and reduced liquidity, thereby making them increasingly vulnerable to interest rate volatility. The Management Reporting System (MRS) described is a practical and unique approach in marrying the various sophisticated disciplines necessary for effective management given such constraints. Liberty's Chairman credited the system with 25¢ per share of the 1973 Operating Earnings and noted that the mix of bank assets and liabilities now can be guided by precise, automated facts, rather than by mere “seat-of-the-pants” instinct. In its 1972 Annual Report, the Corporation stated its 1...

The Use and Abuse of Leverage

Abstract: The proliferation of options, warrants, convertibility and other "kickers," over the years has resulted in a bewildering array of alternatives for investors. Clearly important among these devices is leverage, the use of debt to amplify investment performance. One needs only to look at the relative sizes of the private debt and equity markets to recognize that leverage is widely employed. The very word itself is tinged with emotional content, and registers with special impact with investors and lawyers, legislators, and the public. Part I of this article discusses some of the economic and legal aspects of borrowing to invest in securities (portfolio leverage), explores the possible abuses of portfolio leverage and analyzes the multiple financial advantages of its use. Part II compares the actual performance of some 414 mutual funds for the 36-month period 1970-1972 with borrowing against completely diversified, marketvalue-weighted portfolios specifically designed to exhibit the same degree of return variability. Both the economic advantages in principle of using leverage and the empirical evidence suggest that the alternative of borrowing against a completely diversified portfolio is very competitive with existing money management methods.