Showing papers on "Leverage (finance) published in 1987"
TL;DR: This article applied the multi-period investment model to a universe of international securities on the basis of the simple probability assessment approach and found that the gains from including non-U.S. asset categories in the universe were remarkably large (in some cases statistically significant), especially for the highly risk-averse strategies.
Abstract: This paper applies the multi-period investment model to a universe of international securities on the basis of the simple probability assessment approach. Our principal findings are: 1) the gains from including non-U.S. asset categories in the universe were remarkably large (in some cases statistically significant), especially for the highly risk-averse strategies, 2) the gains from removing the no leverage constraint were more substantial than they were in the absence of non-U.S. securities, and 3) there is strong evidence of market segmentation in that the optimal levels of investment in U.S. securities were mostly zero in the presence of the non-U.S. asset categories.
235 citations
TL;DR: In this paper, the authors examine the financing and incorporation modes for new projects and provide a theory of optimal capital structure that links risk, leverage, and value and is particularly applicable to large firms.
181 citations
TL;DR: In this article, the authors examined optimal corporate financing arrangements under asymmetric information for different patterns of temporal resolution of uncertainty in the underlying technology and compared the associated informational equilibria and the optimal financing arrangements.
Abstract: This paper examines optimal corporate financing arrangements under asymmetric information for different patterns of temporal resolution of uncertainty in the underlying technology. An agency problem, a signalling problem and an agency-signalling problem arise as special cases. The associated informational equilibria and the optimal financing arrangements are characterized and compared. In the agency-signalling equilibrium the private information of corporate insiders at the time of financing is signalled through capital structure choices which deviate optimally from agency-cost minimizing financing arrangements, which in turn induce risk-shifting incentives in the investment policy. In the pure signalling case the equilibrium is characterized by direct contractual precommitments to implement investment policies which are riskier than paretooptimal levels. Empirical implications for debt covenants and the announcement effect of investment policies and leverage increasing transactions on existing stock and bond prices are explicitly derived. THIS PAPER is an exploratory attempt to relate optimal corporate financing arrangements to patterns of temporal resolution of uncertainty in the underlying technology. Since, in general, the timing of the uncertainty resolution could be different for different agents (say corporate insiders vs. outsiders) some of the issues which arise are those of financing under asymmetric information. However, a systematic analysis of the implications for corporate finance of the interaction of private information and temporal resolution of uncertainty has not been undertaken.' It is hoped that such a program of research will yield better answers to questions of timing of various corporate financing decisions. For instance, is there an optimal maturity structure of corporate claims (debt claims in particular) to be used to finance a technology with given characteristics? Why are projects in their initial phase often financed differently from projects in more advanced phases? For example, growth firms use a larger component of retained earnings for their financing than mature firms, and project financing (incorporated as legally segregated entities) is often used for the start-up phase of some ventures to switch later to more conventional modes. Why do leveraged buy-outs often * New York University and University of Chicago. Earlier versions of this paper have benefitted from the helpful comments of Chris Blake, Yuk-Shee Chan, Gene Fama, Larry Glosten, Rob Heinkel, Max Maksimovic, Merton Miller, Bani Mishra, David Nachman, Roy Radner, Marti Subrahmanyam, Tommy Tan, Joseph Williams and participants in seminars at Buffalo, Baruch, Illinois, Maryland, NYU, Ohio State and the AFA, EFA, and WFA. Financial support in the early stages of the project from a Batterymarch fellowship and later stages from a Salomon Brothers fellowship and an
88 citations
TL;DR: In this article, it was shown that codetermination has little, if any, effect on corporate operations and performance, and that workers are wealth maximizers and should lead to less risky investments, smaller dividends, reduced firm leverage, higher and more stable salaries, and more capital-intensive production processes.
Abstract: If workers are wealth maximizers, codetermination should lead to less risky investments, smaller dividends, reduced firm leverage, higher and more stable salaries, and more capital-intensive production processes Unless codetermination also increases productivity by raising wokers' morale and satisfaction or reduces information asymmetries within the firm, shareholder wealth and firm value will decline An analysis of West Germany's case, however, indicates that codetermination has little, if any, effect on corporate operations and performance
72 citations
TL;DR: In this paper, a regression analysis comparing the nonperforming asset statistics with examiner classifications of assets suggests that the non-performing asset information can be useful aid in analyzing the asset quality of banks, particularly when the information is timely.
Abstract: In 1983, the public was given its first opportunity to review bank asset quality in the form of non-performaing asset information. The purpose of this study is to evaluate that information. A regression analysis comparing the non-performing asset statistics with examiner classifications of assets suggests that the non-performing asset information can be useful aid in analyzing the asset quality of banks, particularly when the information is timely.
49 citations
TL;DR: A simple operational framework that can assist in framing a company's strategic plan, which concentrates on the likelihood of being unable to meet fixed financial charges, is presented.
Abstract: Among the important elements of a company's strategic plan is its decision about the degree of financial leverage it elects to imbed in its capital structure. A simple operational framework that can assist in framing that decision, which concentrates on the likelihood of being unable to meet fixed financial charges, is presented. The model is tested empirically, and support for its potential usefulness in the financial planning process is found.
36 citations
TL;DR: Hansen et al. as discussed by the authors examined whether convertible debt financing decreases a firm's financial leverage by regressing convertible bond rates of return on common stock and straight debt rate of return, and showed that negative announcement period returns are not consistent with the leverage hypothesis (i.e., the hypothesis that greater leverage increases firm value).
Abstract: A convertible bond is a hybrid security. One component is like a straight bond, with regular interest payments and less downside risk than common stock. The other component is like common stock, giving the investor a claim on the residual earnings of the firm. Although convertible bonds are often categorized as straight debt, some convertibles may really be more like common stock. In fact, as Broman [1] documents, it is not uncommon for convertibles to be converted into common stock within a few years of issuance even though they would not mature for two or three decades. Therefore, if convertibles are primarily equity, their issuance can decrease financial leverage. Common stock price declines are associated with convertible debt issuance announcements. For 132 announcements of convertible offerings made between 1970 and 1979, Dann and Mikkelson [3] find an average two-day announcement period abnormal common stock return of 2.31% which is significantly different from zero at the 0.01 level. Eckbo [4], Hansen and Crutchley [6], and Mikkelson and Partch [8] document similar results. Dann and Mikkelson fail to find evidence in support of a number of theories they consider as possible explanations for these negative equity returns. One of these theories relates to information conveyed by a change in leverage. If convertible debt financing is leverage-increasing, negative announcement period returns are not consistent with the leverage hypothesis (i.e., the hypothesis that greater leverage increases firm value). This argument is used by Dann and Mikkelson to show that the leverage hypothesis is not a plausible explanation for announcement period common stock price behavior. This study examines whether convertible debt financing decreases a firm's financial leverage. By regressing convertible bond rates of return on common stock and straight debt rates of return, it is shown that This study is derived from my dissertation completed at Virginia Tech, Blacksburg, VA. I am grateful to Robert S. Hansen (Chairman), Arthur J. Keown, John M. Pinkerton, Dilip K. Shome, Bernard W. Taylor, and Walter L. Young for their valuable assistance in developing the ideas in this paper. I would also like to thank Robert A. Taggart of Financial Management as well as the anonymous reviewers.
22 citations
TL;DR: In this article, the authors synthesize various elements of prior research and extend the content of that research, within a unified framework, to provide a more complete statement of the conditions under which inflation will preserve a firm's real growth opportunities.
Abstract: M The effect of inflation on firms' financing and investment decisions has been a recurring topic of analysis. Attention has been devoted to both the managerial implications and the security valuation consequences of broad-based upward movements in nominal product and factor-input prices.' A generally separate stream of research has dealt with the equilibrium rate of growth a corporation can sustain, given its operating characteristics.2 Because the two topic areas have only occasionally intersected, there are some influences of inflation on the investment opportunities and financial strategies of the growing firm that we feel have yet to be fully appreciated. We attempt to address those here. Our objectives are both pedagogical and analytical. We synthesize various elements of prior research and extend the content of that research, within a unified framework. The analysis is differentiated from previous literature by a more thorough treatment of the effects of the corporate income tax, asset turnover, fixed asset replacement requirements, and corporate debt and liquidity policies on sustainable growth. We thereby provide a more complete statement of the conditions under which inflation will preserve a firm's real growth opportunities. The potential implications of those conditions for the corporate leverage decision are then examined.
8 citations
TL;DR: In this article, the interactive effect of inflation and differential dividend and capital gains taxes on the value of a levered firm is analyzed in an inflation-non-indexed progressive tax system, and the gain from leverage is also derived and compared with other valuation models.
Abstract: In an inflation-non-indexed progressive tax system, inflation results in a “bracket-creep” effect that reduces the demand for corporate debt while the tax-deductibility of nominal interest makes the use of debt financing cheaper. The interactive effect of inflation and differential dividend and capital gains taxes on the value of a levered firm is analyzed in this paper. Under a non-indexed progressive tax system, inflation decreases the value of the unlevered firm but the effect of inflation on the firm's debt-to-asset ratio is theoretically indeterminate. The gain from leverage is also derived and compared with other valuation models.
4 citations
TL;DR: In this paper, a theoretical model which takes into account the tax and nontax factors, both of which include general and Korea-specific aspects, was developed to analyze the excessive leverage and the change in the corporate capital structure, and the empirical test using the data of the last 25 years supported the hypotheses derived from the theoretical model.
Abstract: One of the issues of great policy concern in Korea has been the unusually high degree of financial leverage and the continuous deterioration of corporate capital structure. The capital structure existing at any one time and its change over time reflects corporate responses to the surrounding stimuli. To analyze the excessive leverage and the change in the corporate capital structure, this paper develops a theoretical model which takes into account the tax and nontax factors, both of which include general and Korea-specific aspects. The empirical test using the data of the last 25 years supports the hypotheses derived from the theoretical model. [320]
2 citations
TL;DR: In this article, a multi-period management model for balance sheets of bond assets and liabilities is developed, where decision variables are the amounts to buy, sell, or hold for each bond maturity class and the amount to borrow or debt to be repurchased for each liability class.
Abstract: This paper develops a multiperiod management model for balance sheets of bond assets and liabilities. The decision variables are the amounts to buy, sell, or hold for each bond maturity class and the amount to borrow or debt to be repurchased for each liability class. Decisions are made at the beginning of each period conditional on the revealed interest rates scenario. The investor's utility is maximized in a state-preference approach. The maturity structure of the initial holdings is an important component of the input parameters. The possible states of the world are described in terms of interest rate scenarios. The solution is subject to funds flow, inventory, liquidity, leverage, policy, and expiration constraints. The model leads to a large-scale linear programming model, with multi-indexed variables, that is solved with the Dantzig-Wolfe decomposition algorithm. A numerical application that was motivated by discussions with top management at the RepublicBank Trust Department is presented. The experiments suggest that optimal portfolios frequently have a barbell structure consisting of short and long maturities with few intermediate maturities.
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TL;DR: In this article, the authors developed a method to estimate the proportion of individual farm financial stress attributable to an income problem, a leverage problem, and an interest rate problem and found that a reduction of leverage or interest rate to the level attained by the average non-stressed farms would make 31% and 32% of the stressed farms profitable, respectively.
Abstract: Suggested methods to reduce farm financial stress have included interest rate buy-downs and debt forgiveness. This study develops a method to estimate the proportion of individual farm financial stress attributable to an income problem, a leverage problem, and an interest rate problem. Of the financially stressed farms, 33.5% suffered most from an interest rate problem, and 23.4% suffered most from a leverage problem. A reduction of leverage or interest rate to the level attained by the average nonstressed farms would make 31% and 32% of the stressed farms profitable, respectively. Therefore, in the shortrun, an interest rate buy-down or a debt reduction would be equally effective.
TL;DR: In this paper, the null hypothesis that the sensitivity of equity prices is independent of the level of systematic risk and financial leverage was tested using a short-term and long-term interest rate index.
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TL;DR: In this article, it is shown that if projects are funded in such a way that resulting debt to equity is the optimal leverage then both specifications will yield identical net present values, and that in cases where such capital structure maintenance is not feasible there is loss of value due to unused debt capacity.
Abstract: Two alternative specifications of weighted average cost of capital are prevalent in finance literature. Though both the specifications result in consistent accept/reject or ranking decisions the net present value arrived is different under each method. This paper traces the origin of this difference and resolves the same. It is shown that if projects are funded in such a way that resulting debt to equity is the optimal leverage then both specifications will yield identical net present values. In cases where such capital structure maintenance is not feasible there is loss of value due to unused debt capacity. We arrive at a lower bound for such a loss and also show that in such situations there exists a possibility of a synergy between projects which are otherwise independent.
TL;DR: In this paper, the interactive effect of inflation and differential dividend and capital gains taxes on the value of a levered firm is analyzed in an inflation-non-indexed progressive tax system, and the gain from leverage is also derived and compared with other valuation models.
Abstract: In an inflation-non-indexed progressive tax system, inflation results in a “bracket-creep” effect that reduces the demand for corporate debt while the tax-deductibility of nominal interest makes the use of debt financing cheaper. The interactive effect of inflation and differential dividend and capital gains taxes on the value of a levered firm is analyzed in this paper. Under a non-indexed progressive tax system, inflation decreases the value of the unlevered firm but the effect of inflation on the firm's debt-to-asset ratio is theoretically indeterminate. The gain from leverage is also derived and compared with other valuation models.