Showing papers on "Leverage (finance) published in 1988"
TL;DR: In this article, the authors explore the determinants of corporate takeover methods and their outcomes and price effects and focus on the effect of leverage on the takeover method and outcome and obtain several other results on price effects.
771 citations
TL;DR: It is reaffirmed that firms which diversify into related businesses have, on the average, higher profitability than non-diversified firms, although these results are not always statistically significant.
Abstract: Two major diversification strategies of firms are examined: diversification into related businesses and diversification into unrelated businesses. The first strategy attempts to exploit operating synergies. In the second, the firm attempts to gain financial benefits from its ability to increase leverage due to a greater stability of cash flows.
The study utilizes a large sample affirms to assess empirically the benefits and costs of these two diversification strategies by developing a new measure of diversification across business cycles and economic sectors. This new measure is compared with Berry—Herfindahl type measures of total diversification and recent measures of diversification into related businesses.
The results indicate that pure financial diversification is associated with (a) more stable cash flows, i.e. lower operating risk; (b) increased levels of leverage; and (c) lower profitability. These observations are in accord with the theory. We also reaffirm that firms which diversify into related businesses have, on the average, higher profitability than non-diversified firms, although these results are not always statistically significant.
310 citations
TL;DR: This article provided an analysis of the effect of corporate and personal taxes on the firm's optimal investment and financing decisions under uncertainty, and showed that increases in investment-related tax shields due to changes in the corporate tax code are not necessarily associated with reductions in leverage at the individual firm level.
Abstract: This paper provides an analysis of the effect of corporate and personal taxes on the firm's optimal investment and financing decisions under uncertainty. It extends the DeAngelo aAd Masulis capital structure model by endogenizing the firm's investment decision. The authors' results indicate that, when investment is allowed to adjust optimally, the existing predictions about the relationship between investment-related and debt-related tax shields must be modified. In particular, the authors show that increases in investment-related tax shields due to changes in the corporate tax code are not necessarily associated with reductions in leverage at the individual firm level. In cross-sectional analysis, firms with higher investment-related tax shields (normalized by expected earnings) need not have lower debt-related tax shields (normalized by expected earnings) unless all firms utilize the same production technology. Differences in production technologies across firms may thus explain why the empirical results of recent cross-sectional studies have not conformed to the predictions of DeAngelo and Masulis.
201 citations
TL;DR: The authors explored the hypothesis that capital structure change provides bidders and tar? gets a motive for merger and reported results of tests on (1) leverage in bidder and target firms, and (2) change in shareholder wealth associated with change in leverage.
Abstract: This study explores the hypothesis that capital structure change provides bidders and tar? gets a motive for merger. After a brief review of theories that would support the hypothe? sis, the paper reports results of tests on (1) leverage in bidder and target firms, and (2) change in shareholder wealth associated with change in leverage. The findings support the theory of Myers and Majluf that "slack-rich" bidders pair with "slack-poor" targets to create value. These results are contrary to other studies, which find highly levered bid? ders.
187 citations
TL;DR: In this article, the authors surveyed seventeen papers in this special issue of the Journal of Financial Economics, and related work, and found that patterns of stock ownership by insiders and outsiders can influence managerial behavior, corporate performance, and stockholder voting in election contests.
Abstract: This article surveys the seventeen papers in this special issue of the Journal of Financial Economics, and related work. The major findings are: (1) patterns of stock ownership by insiders and outsiders can influence managerial behavior, corporate performance, and stockholder voting in election contests; (2) corporate leverage, inside stock ownership by managers, and the control market are interrelated; (3) departures from one share/one vote affect firm value and efficiency; (4) takeover resistance through defensive restructurings or poison pill provisions is associated with declines in share price; and (5) top management turnover is inversely related to share price performance.
139 citations
TL;DR: In this article, the authors examined the effect of pertinent features of hospital capital payment policies on hospital capital structure decisions in a one-period stochastic, value-maximization model.
Abstract: This study examines effects of pertinent features of hospital capital payment policies on hospital capital structure decisions in a one-period stochastic, value-maximization model. Separate models are developed for for-profit and not-for-profit hospitals. Hospital debt-to-assets ratios are analyzed empirically using a cross-section of data from the American Hospital Association. Although the effect on capital structure of hospital reliance on cost-based reimbursement cannot be signed theoretically, in both for-profit and not-for-profit cases, a higher cost-based share leads to higher leverage. Factors associated with high bankruptcy risk (e.g., earnings volatility) cause hospitals to take on less debt. THE HOSPITAL INDUSTRY EXHIBITS two prominent characteristics that have unique implications for its capital structure. First, the majority of hospitals are organized as private not-for-profit (NFP) institutions. Since there is no applicable corporate income tax, any risk of bankruptcy might imply that the NFP hospital would select an all-equity hospital structure. Yet it is a stylized fact that almost all NFP hospitals have debt obligations. At the same time, there exists a sizeable minority of hospitals operated by government or as for-profit organizations. Forprofit hospitals are subject to all tax privileges and obligations applicable to forprofit enterprises in other sectors. Thus, the industry provides a laboratory for analysis of the effect of ownership on organizations' capital structures. A second unique feature of the industry is that almost all hospital revenue is derived from public and private insurers (Waldo et al. [21]). At least until very recently, insurers in this industry paid hospitals on either a retrospective-cost or
103 citations
TL;DR: In this article, the authors investigate whether international operations have a discernible effect on the financing policies of U.S.-based firms and find that firms with notable foreign involvement have target leverage ratios significantly below those of their domestic counterparts.
89 citations
TL;DR: In this article, the degree to which the use of debt is increased in response to risk-reducing and income-augmenting farm policies is studied theoretically, and the effects of policies on the cumulative probability of earning very low rates of return on equity are examined.
Abstract: The degree to which the use of debt is increased in response to risk-reducing and income-augmenting farm policies is studied theoretically. A mean-variance model is used to determine the optimal leverage adjustment, then the effects of policies on the cumulative probability of earning very low rates of return on equity are examined. The evidence suggests that farm policies induce a large enough increase in financial leverage to increase the probability of farmers having negative returns to equity.
79 citations
TL;DR: In this article, the authors explore the popular perception that political action committees (PACs) have substantial influence over elected legislators and question whether the leverage in the PAC market is on the side of the contributionmaker or the contribution-taker.
Abstract: In this paper we explore the popular perception that political action committees (PACs) have substantial influence over elected legislators. We question whether the leverage in the PAC market is on the side of the contribution-maker or the contribution-taker. Analysis of the structure of PAC markets suggests most markets are sellers' markets, not buyers' markets. PAC contributions then may be more like protection money than attempts to buy votes or access. The leverage of the politician (seller) may be tempered if a substantial number of large PACs have homogeneous interests, and the ability to concentrate their contributions to the same legislators. This contention is supported by analysis of differences in labor and corporate PAC giving in the 1980 and 1984 general elections. Labor PACs, which are much larger than corporate PACs, have more homogeneous interests, give virtually all of their money to one party, and appear to have more discretion in making contribution decisions than do corporate PACs. An implication of this analysis for corporate executives is that using political action committees at the federal level may not be a strategy where corporations have a comparative advantage. — Senator Robert Dole (R-Kan.) — Senator Thomas Eaglecton (D-Mo.)
62 citations
TL;DR: In this article, financial characteristics of December and non-December year-end companies are compared and a comparison of leverage ratios does not reveal a stable systematic difference between the two types of companies.
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01 Jan 1988
TL;DR: For example, during the 17 years in which I was associated with forecasting in the Bank of England, I cannot recall a single forecast which did not begin with some such proviso as, "In current circumstances it is unusually difficult to construct a forecast." The same trait holds t h e in assessments of asset price volatility as mentioned in this paper.
Abstract: There is a human tendency to overstate current difficulties and problems and to compare perceived present disturbances with some (partly mythical) prior golden age when everything was calm and ordered. To take one example, during the 17 years in which I was associated with forecasting in the Bank of England, I cannot now recall a single forecast which did not begin with some such proviso as, "In current circumstances it is unusually difficult to construct a forecast." The same trait holds t h e in assessments of asset price volatility. ' It was a regular occurrence for senior officials at the Bank of England (and for pundits elsewhere) to complain that asset price volatility was higher at the present time (as each year went by) than in previous
TL;DR: It has long been recognized that margin requirements, through leverage, affect the volume of speculative activity and that controlling speculative behavior is one approach to inhibiting overvaluation in stocks and reducing the potential for a precipitate price decline fueled by the involuntary selling that stems, for example, from margin calls as discussed by the authors.
TL;DR: In this article, tax-timing options associated with opportunities to trade corporate securities are examined and the availability of such options to both the firm and its securityholders is shown to create incentives for, and thereby to add to the possible explanation of, three empirically observed financial phenomena: (1) the existence of complex corporate capital structures; (2) the presence of debt in those capital structures, and (3) corporate spin-offs as vehicles to increase the total market value of a firm's assets.
Abstract: The tax-timing options associated with opportunities to trade corporate securities are examined. The availability of such options to both the firm and its securityholders is shown to create incentives for, and thereby to add to the possible explanation of, three empirically observed financial phenomena: (1) the existence of complex corporate capital structures; (2) the presence of debt in those capital structures; and (3) corporate spin-offs as vehicles to increase the total market value of a firm's assets. A set of symmetrical arguments also offers a reason to expect at least one negative effect on shareholder wealth from mergers of publicly traded companies.
TL;DR: In this paper, the authors show that the aggregate value of these tax-timing options for the securityholders of a firm will be enhanced when the firm has multiple classes of tradeable securities outstanding.
Abstract: Among the elements of value reflected in the prices of corporate securities are the taxtiming options associated with the opportunities for investors to tax manage their portfolios by deferring gains and taking losses. We show that the aggregate value of these taxtiming options for the securityholders of a firm will be enhanced when the firm has multiple classes of tradeable securities outstanding. For that reason, the inclusion of debt as well as equity in a firm's capital structure should raise the total market value of the firm. We further show that, under most likely circumstances, there will be an interior optimal degree of leverage that will maximize tax-timing option values.
TL;DR: The appropriate discount rate for evaluation of capital expenditures depends on leverage, taxation, costbased reimbursement, and risk, and a method is presented to account for these effects that is both practical and consistent with theory.
Abstract: The appropriate discount rate for evaluation of capital expenditures depends on leverage, taxation, cost-based reimbursement, and risk. A method is presented to account for these effects that is both practical and consistent with theory.
TL;DR: In this article, Brake and Boehlje developed a model to estimate the proportion of individual farm financial stress attributable to income, debt, and interest rate problems, and found that 30 percent of the total financial lem, or a combination of income and debt probcial problem, was caused by an interest rate problem, determined by the leverae debt and the in28 percent by a leverage problem.
Abstract: rate. Several policies have been proposed to Suggested methods to reduce farm financial try to reduce the severity of financial stress, including income enhancements, welfare stress have included interest rate buy-downs udin ince enncere and debt forgiveness. This study develops a paments, debt restrucung, and interest rate reductions or buy-downs (Brake and method to estimate the proportion of in- Bej Brr dividual farm financial stress attributable to Boehlje; Barry) an income problem, a leverage problem, and Analyses of farm financial stress and proan interest rate problem. Of the Kansas Farm posed solions s e a finani tress is Management Association farms with a finan- composed of an income problem, a debt probcial problem, 30 percent of the total financial lem, or a combination of income and debt prob.cial problem, 30 percent of the total lems. The seriousness of the debt problem is problem is caused by an interest rate problem, determined by the leverae debt pra he is determined by the leverage ratiol and the in28 percent by a leverage problem, and 42 per- teet te ve the nn cent by an income problem. A reduction of t leverage or interest rate to the level attained assets. Recent literature emphasizes he debt by the average nonstressed farms would make problem. Brake and Boehlje assert that "the by the average nonstressed farms would make common element in farm financial problems 31 percent and 32 percent of the stressed common element farm financial problems , p t ad 32 p n of te s d ... is unserviceable debt" and "an interest farms profitable, respectively. Therefore, in
TL;DR: In this paper, a new representation of non-marketable (NM) income is introduced and continuous trading is introduced, where a set of individuals who do not participate in the asset market and who consume at the rate of nonmarketable income derived from human capital is introduced.
Abstract: A new representation of nonmarketable (NM) income is introduced in this essay. Using this representation and continuous trading, there exists a set of individuals who do not participate in the asset market and who consume at the rate of nonmarketable income derived from human capital. Because these individuals remain nonparticipants for a range of stochastic processes governing the NM income, consumption betas are not generally unique in value and the consumption-based CAPM (CCAPM) does not obtain. However, the intertemporal CAPM (ICAPM) of Merton remains valid. NONMARKETABLE INCOME FROM HUMAN capital is a fact of life. Employers and financial intermediaries will not lend an individual the net present value of fullemployment, lifetime earnings unless collateral is available. For many young and/or poor individuals, such collateral is not to be had. Personal credit constraints exist because the size of a personal loan will affect the individual's willingness to work or to "skip town"; an increase in the size of the loan reduces the probability that full payment will be returned at a later date. This phenomenon has not as yet been captured by models of asset pricing. Breeden [2], Grossman and Shiller [4], Mayers [8, 9], Merton [11], Stapleton and Subrahmanyam [15], and others include "nonmarketable" income in their models. However, because they do not constrain individuals' holdings of marketable assets, the potential assets for selling the future income via trading strategies. A brief example demonstrates this fact. Suppose an individual's rate of income y(t) is instantaneously certain but that the instantaneous change in the range of income, dy(t), is (possibly) stochastic; this is the assumption Breeden uses. Also assume that there exists a trading strategy using marketable assets that has a zero value at the terminal date and pays a dividend rate of y(t) at all times t.' If the individual short-sells this portfolio, a positive payment will be received now and the future random income stream will be sufficient to pay the promised dividends. Thus, the individual can effectively sell the "nonmarketable" income by trading in marketable assets.
TL;DR: In this paper, the food-distribution industry consolidates and food-service operators will need a strategic approach to purchasing, and unless they take a businesslike approach, their buying leverage may diminish.
Abstract: As the food-distribution industry consolidates, food-service operators will need a strategic approach to purchasing. Unless you take a businesslike approach, your buying leverage may diminish
01 Jan 1988
TL;DR: In this article, the authors show that marketing cooperatives with pooling have less market risk compared with those without pools and as a consequence can incur more financial risk and command greater leverage.
Abstract: Committed marketing cooperatives have ensured member support and because of pooling may have higher leverage relative to buy-sell cooperatives. The hypothesis tested in this article is that marketing cooperatives with pooling have less market risk compared with those without pools and as a consequence can incur more financial risk and command greater leverage. Using an econometric approach to control for size of cooperative, empirical results suggest that pooling cooperatives have increased leverage, about 9 percent more than nonpooling cooperatives.
TL;DR: In this article, the stock price impact induced by the announcement of Eurobonds issued by industrial US firms over the period 1974-84 was examined, and the authors found that the negative impact of domestic debt is significantly different from the positive impact of matched Eurobond issue.
Abstract: This study examines the stock price impact induced by the announcement of Eurobonds issued by industrial US firms over the period 1974–84. In contrast to the negative effect of domestic debt announcements reported in prior research, we document a positive, statistically significant, announcement impact of Eurobonds on stockholder wealth. Further, in analysing a sample of firms that issued both domestic and Euro-debt within a six-month interval, we find that the negative impact of domestic debt is significantly different from the positive impact of the matched Eurobond issue. This positive impact is consistent with advantages attributed to the Eurobond market, namely, lower interest costs relative to domestic debt, absence to SEC (Securiries and Exchange Commission) regulation and less restrictive debt covenants.
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TL;DR: In this article, the effects of stochastic inflation on the assets' risk characteristics are studied in a parameterized version of a cash-in-advance asset pricing model, where the growth rates of the endowment and monetary transfer evolve according to a VAR.
Abstract: Stochastic inflation affects the risk characteristics, measured by the equity premium and the correlation of the equity’s return with consumption, in a fundamental way. The riskiness of a dollar-denominated asset depends on two conditional covariances: the covariance of the marginal rate of substitution (MRS) with the equity price and the covariance of the MRS with the rate of appreciation in the purchasing power of money. The second covariance may take either sign which becomes significant when the risk characteristics of the dollar-denominated asset are compared with the risk characteristics of an indexed asset constructed in a real version of the model. ; The effects of stochastic inflation on the assets’ risk characteristics are studied in a parameterized version of a cash-in-advance asset- pricing model. The growth rates of the endowment and monetary transfer evolve according to a VAR. The equity price is a geometric distributed lead of log–normally distributed random variables; an algorithm to express the price as an explicit function of the state variables is described.
TL;DR: The mean-variance model as mentioned in this paper offers a structural model of the demand for money and other financial assets, but it introduces a large number of structural parameters, estimates of which are often ill conditioned.
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TL;DR: This article analyzed the relation of stock volatility with real and nominal macroeconomic volatility, financial leverage, stock trading activity, default risk, and firm profitability using monthly data from 1857-1986.
Abstract: This paper analyzes the relation of stock volatility with real and nominal macroeconomic volatility, financial leverage, stock trading activity, default risk, and firm profitability using monthly data from 1857-1986. An important fact, previously noted by Officer [l973], is that stock return variability was unusually high during the 1929-1940 Great Depression. Moreover, leverage has a relatively small effect on stock volatility. The amplitude of the fluctuations in aggregate stock volatility is difficult to explain using simple models of stock valuation.
TL;DR: In this article, the double leverage method is shown to be mistaken and only under unlikely conditions does the double-leverage method correctly assess the cost of capital correctly, and the stand alone method, according to generally accepted financial theory, is a superior procedure.
Abstract: The excess return argument is widely accepted as the most compelling plea in favor of the double leverage method of assessing the cost of capital for certain utilities. The argument is shown to be mistaken. Moreover, only under unlikely conditions does the double leverage method assess the cost of capital correctly. The stand alone method, according to generally accepted financial theory, is a superior procedure.
01 Aug 1988
TL;DR: This article examined the impact of increased capital requirements on bank portfolio behavior and found that although the variance of earnings and the incentive to increase leverage are reduced with risk-and leverage-related interest rates, the impact on portfolio behavior is generally ambiguous.
Abstract: An examination of the impact of increased capital requirements on bank portfolio behavior, finding that although the variance of earnings and the incentive to increase leverage are reduced with risk- and leverage-related interest rates, the impact of increased capital requirements on portfolio behavior is generally ambiguous.
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TL;DR: In this paper, the authors present Indian evidence on empirical-based classification of financial ratios, and examine the intertemporal stability/change of classification of ratios so obtained for the 20 year period of 1965-66 to 1984-85.
Abstract: The objectives of the study were: (a) to present Indian evidence on empirical-based classification of financial ratios, and (b) to examine the intertemporal stability/change of classification of ratios so obtained for the 20 year period of 1965-66 to 1984-85. The study used data of 612 Indian companies belonging to 61 manufacturing and processing industries. The statistical methods employed included factor analysis, differential R factor analysis, correlation and percentage mean absolute deviations. The study has obtained eleven factors: (i) return on investment, (2) sales efficiency, (3) equity intensiveness, (4) short-tern liquidity, (5) current asset intensiveness, (6) cash position, (7) activity, (8) earnings appropriation, (9) financial structure, (10) interest coverage, and (11) long-term capitalisation. Thus it was indicated that there were multiple dimensions of financial phenomena traditionally grouped under liquidity, profitability, activity, and leverage. It was also shown that financial ratio patterns were reasonably stable over years.