Showing papers on "Leverage (finance) published in 1990"
TL;DR: In this paper, the authors investigated small business longevity using a nationwide random sample of males who entered self-employment between 1976 and 1982 and found that highly educated entrepreneurs are most likely to create firms that remained in operation through 1986.
Abstract: Small business longevity is investigated utilizing a nationwide random sample of males who entered self-employment between 1976 and 1982. Highly educated entrepreneurs are most likely to create firms that remained in operation through 1986. Owner educational background, further, is a major determinant of the financial capital structure of small business startups. Financial capital endogeneity notwithstanding, firms with the larger financial investments at startup are consistently overrepresented in the survivor column. Firm leverage, finally, is trivial for delineating active from discontinued businesses. Reliance upon debt capital to finance business startup is clearly not associated with heightened risk of failure. Copyright 1990 by MIT Press.
1,033 citations
TL;DR: In this article, the authors show that public and private debt agreements filed at the SEC yield a more comprehensive set of accounting constraints than annual reports or Moody's, and that measures of proximity to leverage, net worth, and working capital constraints are significantly correlated to leverage.
496 citations
TL;DR: In this paper, the authors report on 72 firms which went public since 1983 but previously underwent a full or divisional LBO, and the evidence is consistent with the hypothesis that the change in the governance structure of these firms towards more concentrated residual claims created a new organizational structure which is more efficient than its predecessor.
Abstract: This paper is a report on 72 firms which went public since 1983 but previously underwent a full or divisional LBO. Accounting measures of performance reveal significant improvements in profitability which resulted mainly from these firms' ability to reduce costs. Firms experience dramatic increases in leverage at the LBO, but the leverage ratios are gradually reduced. The evidence is consistent with the hypothesis that the change in the governance structure of these firms towards more concentrated residual claims created a new organizational structure which is more efficient than its predecessor. GOING-PRIVATE TRANSACTIONS, OR leveraged buyouts (LBOs), have become an important method of corporate restructuring. In a typical going-private transaction, incumbent management acquires all outstanding publicly-traded shares of a corporation and merges the assets of the firm with a newly organized, privatelyheld shell corporation that it controls. Outside equity participants or buyout specialists often share equity ownership in the new private entity with management and help arrange financing for the buyout with lending institutions (DeAngelo, DeAngelo, and Rice (1984)). A variation on the going-private transaction is the divisional management buyout. In a divisional buyout, a division or subsidiary of a public corporation is acquired from the parent company by divisional executives and/or parent company managers (Hite and Vetsuypens
449 citations
TL;DR: In this article, the authors provide evidence that all-equity firms exhibit higher levels of managerial stockholdings, more extensive family relationships among top management, and higher liquidity positions than a matched sample of levered firms.
Abstract: This paper provides evidence that all-equity firms exhibit greater levels of managerial stockholdings, more extensive family relationships among top management, and higher liquidity positions than a matched sample of levered firms. Further, top managers of all-equity firms with family involvement in corporate operations have greater control of corporate voting rights than managers of all-equity firms without family involvement. These findings are consistent with the interpretation that managerial control of voting rights and family relationships among senior managers are important factors in the decision to eliminate leverage. OVER 100 CORPORATIONS LISTED ON major U.S. stock exchanges use no longterm debt. This paper provides evidence on factors influencing the capital structure decision of these firms by comparing their financial, managerial, and ownership characteristics with those of a control sample of levered firms. We find that all-equity firms exhibit greater equity ownership by top managers and more extensive family involvement in corporate operations than levered firms. Managerial ownership in all-equity firms is positively related to the extent of family involvement. All-equity firms are also characterized by greater liquidity positions than levered firms. Overall, the evidence suggests that managerial choice of an all-equity capital structure may be aimed at reducing the risk associated with large undiversifiable investments of personal wealth and family human capital in these firms. The paper is organized as follows: Section I provides the sample selection criteria and data; Section II reports the empirical tests and results; and Section III concludes the analysis.
249 citations
TL;DR: In this paper, the authors investigated whether the recent wave of corporate restructuring in the United States has had a negative impact on research arid development investment by industrial firms and concluded that leveraged buyouts do not occur in RD rather, the evidence seems consistent with an agency cost and cash flow-driven model of buyouts.
Abstract: This paper investigates whether the recent wave of corporate restructuring in the United States has had a negative impact on research arid development investment by industrial firms. Using a newly constructed sample of about 2500 manufacturing firms from 1974 to 1987, I examine three major classes of restructuring events: leveraged buyouts and other "going private" transactions, mergers and acquisitions in general, and substantial increases in leverage. The major conclusions are first, that leveraged buyouts do not occur in RD rather, the evidence seems consistent with an agency cost and cash flow-driven model of buyouts. Second, major increases in leverage are followed by substantial declines in the R&D intensity of the firms in question, and the effect takes at least three years to work through. Finally, although the evidence on acquisitions by publicly traded firms is mixed, the basic conclusion is that any declines in the R&D intensity of acquiring firms relative to their past history appear to be associated with the leverage structure of the transaction rather than the acquisition itself.
228 citations
TL;DR: In this paper, the authors demonstrate how the incentive of managers to substitute toward riskier assets, commonly referred to as the "asset substitution problem," is related to the level of observable risk in the firm.
Abstract: This paper demonstrates how the incentive of manager-equityholders to substitute toward riskier assets, commonly referred to as the "asset substitution problem," is related to the level of observable risk in the firm. When observable and unobservable risks are sufficiently positively correlated, increases (decreases) in observable risk generate the incentive for manager-equityholders to increase (decrease) unobservable risk. Thus, credible commitments to hedge observable risk can benefit the firm's manager-equityholders by reducing the incentive to shift risk and the associated agency cost of debt. This provides a positive rationale for hedging diversifiable risk at the firm level. IN THE LAST FEW years, a sizeable literature has emerged which is devoted to explaining how shareholders can benefit from hedging undertaken by the firm. Such hedging may include the purchase of insurance, the use of financial futures and options, and even diversification at the level of the firm. Four lines of reasoning have been pursued in the literature. Smith and Stulz (1985) and Campbell and Kracaw (1987) rely on the fact that under optimal contracting between managers and shareholders managers are less diversified than are shareholders. Hedging by the firm which reduces the manager's exposure to risk can improve on the optimal compensation contract between the manager and equityholders. This argument may be applied to a firm with any capital structure or any degree of leverage. The other arguments apply to firms which are financed with risky debt. Smith and Stulz show that hedging may be useful in reducing expected bankruptcy costs. They also show, as does MacMinn (1985), that hedging by the firm may reduce the probability that depreciation tax shields may be lost due to financial distress. Finally, Diamond (1984) has shown that monitoring costs may be reduced through diversification. MacMinn's result is of particular interest. Part of his analysis is based on an earlier paper by Green and Talmor (1985) which demonstrates that the equityholders of a levered firm will have an incentive to underinvest in risky assets if the firm cannot capture its interest and depreciation tax shields with certainty. In Green and Talmor's analysis, the firm has no mechanism to reduce or hedge the uncertainty surrounding its tax shields other than to alter its investment decisions. However, as MacMinn argues, if the firm is allowed to hedge its risks,
126 citations
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TL;DR: In this article, the authors present evidence that increases in leverage at the firm level are associated with increased volatility in capital expenditures and employment growth rates, implying that an increase in the average level of indebtedness across firms may cause the economy to become more vulnerable to macroeconomic shocks and more sensitive to changes in monetary policy.
Abstract: The rising indebtedness of the U.S. business sector raises some issues for macroeconomic stabilization policy.1 Recent studies have investigated whether this rise in corporate leverage has increased the risk of bankruptcies or liquidations in economic downturns.2 This article presents evidence that increases in leverage at the firm level are associated with increased volatility in capital expenditures and employment growth rates. Such a relationship implies that an increase in the average level of indebtedness across firms may cause the economy to become more vulnerable to macroeconomic shocks and more sensitive to changes in monetary policy. The potential effects of leverage are assessed in this article by comparing investment and employment patterns of firms with different average levels of indebtedness. The highly leveraged firms are shown to have experienced greater than average volatility in their
97 citations
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01 May 1990
84 citations
TL;DR: The comparative financial performance of cooperatives and investor-owned firms (IOFs) in the fruit and vegetable processing and the dairy industries was analyzed for the years 1976 through 1987 as mentioned in this paper.
Abstract: The comparative financial performance of cooperatives and investor-owned firms (IOFs) in the fruit and vegetable processing and the dairy industries was analyzed for the years 1976 through 1987. Contrary to theoretical expectations, the cooperatives in both industries were found to perform as well as or better than the comparable IOFs by profitability, leverage, and interest coverage measures. No clear evidence was found of the hypothesized overinvestment in fixed assets or pronounced moral hazard behavior in cooperatives. The lack of significant differences in profitability between the two types of firms suggests that cooperatives may be following goals similar to IOFs.
84 citations
TL;DR: The use of debt financing by U.S. corporations continued to increase, even among firms not involved in ownership changes or major restructurings as mentioned in this paper, and the increase in corporate leverage has caused some concern to policymakers responsible for the stability of the US financial system.
Abstract: THE YEARS 1987 and 1988 saw some dramatic developments in U.S. financial markets. The 1987 stock market crash was followed in 1988 by intense corporate restructuring activity, including a record volume of stock repurchases and leveraged buyouts.I Meanwhile the use of debt financing by U.S. corporations continued to increase, even among firms not involved in ownership changes or major restructurings. The increase in corporate leverage has caused some concern to policymakers responsible for the stability of the U.S. financial system. Federal Reserve Board Chairman Alan Greenspan testified in January 1989 to the Senate Finance Committee that "the spate of mergers, acquisitions, leveraged buyouts, share repurchases, and divestitures in
71 citations
TL;DR: In this article, Duke and Hunt and Press and Weintrop show that leverage is significantly related to the existence of, and closeness to, accounting-based debt covenants.
TL;DR: In this paper, the authors consider the capital structure and debt maturity choice for a value-maximizing corporation and show that optimal debt maturity does not always approach zero in the absence of transaction costs and is increasing in the volatility of the assets of the firm.
Abstract: This paper considers the capital structure and debt maturity choice for a value-maximizing corporation. In the model, interest expense is tax deductible, bankruptcy is costly, and debt is fairly priced at issue. In contrast to the results of Kane, Marcus, and McDonald (1985), optimal debt maturity does not always approach zero in the absence of transaction costs, and is increasing in the volatility of the assets of the firm. The model predicts a positive association between the value of leverage and total risk in some circumstances.
TL;DR: In this article, the effect of technology on the exploitation of real options by a levered firm is examined and the analysis provides a framework for a direct test of the agency cost of debt hypothesis using cost data.
Abstract: This paper analyzes the effect of the firm's technology on the agency costs of debt. It is shown that for an important class of technologies agency costs are not a uniformly rising function of leverage. For these technologies relatively high leverage can be consistent with a small tax subsidy. The effect of technology on the exploitation of real options by a levered firm is examined. The analysis provides a framework for a direct test of the agency cost of debt hypothesis using cost data.
01 Jan 1990
TL;DR: In the UK regulation of banks has involved the supervisor, the Bank of England, issuing guidelines on the adequacy of capital funds and on the risks of large and connected exposures to particular borrowers.
Abstract: Financial intermediaries in many countries are subject to special forms of regulation over the structure of their balance sheets. In the UK regulation of banks has involved the supervisor, the Bank of England, issuing guidelines on the adequacy of capital funds and on the risks of large and connected exposures to particular borrowers. The Financial Services Act has resulted in new forms of regulation for a wide range of non-bank financial intermediaries. Analysis of the risks of portfolios held by market-makers, securities dealers and other intermediaries who take open positions will form a key part of the job of the new teams of regulators. Draft guidelines on minimum levels of capital, or maximum leverage, are already being produced by these new regulatory bodies.
01 Jul 1990
TL;DR: In this article, the authors present an empirical analysis of the determinants of the leverage ratios (the book value of liabilities divided by the total of the book values of liabilities' and the market value of equity) for 232 bank holding companies for December 1986, June 1987, and December 1987.
Abstract: This paper presents an empirical analysis of the determinants of the leverage ratios (the book value of liabilities divided by the total of the book value of liabilities' and the market value of equity) for 232 bank holding companies for December 1986, June 1987, and December 1987. Many theoretical models of bank behavior assume that bank capital requirements will be binding, and empirical research has generally shown that almost all- banks will meet capital guidelines. However, if the optimal leverage ratios differ among banks, then banks' responses to changes in capital requirements or to changes in factors that influence their optimal leverage ratio may vary in a cross section. the theoretical framework is a variant of the one developed in Bradley, Jarrell , and Kim (1984) . the optimal' leverage ratio balances the tax advantage of debt with the costs of bankruptcy. in addition to considering nondebt tax shields and tax rates as determinants of the optimal ratio, we analyze the simultaneity between leverage and investment in municipal securities (munis). Previous research indicates that banks utilize munis to' minimize tax liabilities.
TL;DR: In this article, the debt-capacity decision is made primarily from the creditor's point of view, specifically dealing with the narrow question of the adequacy of a firm's cash flows to support various levels of debt financing.
Abstract: problem, however, may be to break down the leveraging decision into some of its basic elements. This article addresses the debt-capacity decision primarily from the creditor's point of view, specifically dealing with the narrow question of the adequacy of a firm's cash flows to support various levels of debt financing. The goal in this case is to see how the level and riskiness of a firm's cash flows influence the amount of debt a creditor would be willing to supply. The specification of a minimum threshold return and maximum shortfall probability can be used to define the maximum amount of leverage the firm's cash flows will support.
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TL;DR: In this paper, the authors present an empirical analysis of the determinants of the leverage ratios (the book value of liabilities divided by the total of the book values of liabilities' and the market value of equity) for 232 bank holding companies for December 1986, June 1987, and December 1987.
Abstract: This paper presents an empirical analysis of the determinants of the leverage ratios (the book value of liabilities divided by the total of the book value of liabilities' and the market value of equity) for 232 bank holding companies for December 1986, June 1987, and December 1987. Many theoretical models of bank behavior assume that bank capital requirements will be binding, and empirical research has generally shown that almost all- banks will meet capital guidelines. However, if the optimal leverage ratios differ among banks, then banks' responses to changes in capital requirements or to changes in factors that influence their optimal leverage ratio may vary in a cross section. The theoretical framework is a variant of the one developed in Bradley, Jarrell, and Kim (1984). The optimal leverage ratio balances the tax advantage of debt with the costs of bankruptcy. In addition to considering nondebt tax shields and tax rates as determinants of the optimal ratio, we analyze the simultaneity between leverage and investment in municipal securities (munis). Previous research indicates that banks utilize munis to' minimize tax liabilities.
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TL;DR: In this paper, the authors examine a general equilibrium model of asset prices in the presence of a simple informational imperfection, and show that asset prices are productive only when combined with managerial services.
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TL;DR: In this article, the authors developed a method for testing hypotheses about two types of hidden capital: the misvaluation of on-balance-sheet items and intangible values that the General Accepted Accounting Principles (GAPP) currently designates to be unbookable off-balance sheet items.
Abstract: Japanese banks are promising sources of capital for developing countries wishing to finance a balance of payments gap. This paper shows that Japanese banks are highly capitalized in terms of market value; much of their capital is"hidden capital,"the divergence between accounting and stock market estimates. The authors developed a method for testing hypotheses about two types of hidden capital: the misvaluation of on-balance-sheet items and intangible values that the General Accepted Accounting Principles (GAPP) currently designates to be unbookable off-balance-sheet items. They construct a model that explains changes in both types of capital functions of holding-period returns earned in Japan on stocks, bonds, yen, and real estate. They apply the model to annual data for 1975-89 and a four-class size/charter participation of the Japanese banking system. For each type of hidden capital and each class of bank, the model develops estimates of the stock market, interest rate, foreign exchange, and real estate sensitivities of returns to bank stockholders. Only the stock market sensitivities prove significant, at 5 percent. Time-series regressions show that the large Japanese banks have developed stock market betas over two and that the value of the bank's beta has come to increase with measures of its size and accounting leverage.
TL;DR: The DeAngelo-Masulis tax shield hypothesis is tested by Bowen, Daley, and Huber as discussed by the authors, and the results are not supportive of the DeAngelo and Masulis hypothesis.
Abstract: N Miller [11] includes personal and corporate taxes but not nondebt tax shields in his model of the firms' capital structure decision On the contrary, DeAngelo and Masulis [6] incorporate personal and corporate taxes as well as nondebt tax shields, such as depreciation and investment tax credits, into their model, and they find that an optimal capital structure exists at the firm level A central testable hypothesis of the DeAngelo and Masulis model, hereafter referred to as their tax shield hypothesis, is that a ceteris paribus decrease (increase) in a firm's nondebt tax shields results in an increase (decrease) in the optimal amount of debt that the firm employs The DeAngelo-Masulis tax shield hypothesis is tested by Bowen, Daley, and Huber [3], Bradley, Jarrell, and Kim [4], Boquist and Moore [2], and Titman and Wessels [16]; the results are not supportive of the hypothesis For several reasons, the results of existing empirical studies do not necessarily refute DeAngelo and Masulis' hypothesis of a negative relationship between the levels of nondebt tax shields and leverage at the firm level First, the DeAngelo-Masulis tax shield hypothesis only holds, ceteris paribus, at the firm level DeAngelo and Masulis hypothesize that, other factors held constant, a firm which experiences a reduction in nondebt tax shields will increase its usage of debt financing This does not imply a negative relationship between the levels of leverage and nondebt tax shields across firms, unless those firms are identical in all respects except for their levels of leverage and nondebt tax shields Thus, there is the possibility of an omitted variables problem in a cross-sectional study of the relationship between the levels of nondebt tax shields and leverage, because other firm-specific factors besides nondebt tax shields determine leverage ratios For instance, Myers [12] hypothesizes that the agency costs The author thanks three anonymous referees and the participants in the 1989 Eastern Finance Association Meetings for helpful comments on earlier drafts of this paper
01 Jan 1990
TL;DR: In this paper, the authors use cross-section data from the 1984 HUS database to study the portfolio composition of Swedish households with special emphasis on housing, and find marginal taxes of little significance in explaining portfolio patterns.
Abstract: We use cross‐section data from the 1984 HUS database to study the portfolio composition of Swedish households with special emphasis on housing. One issue is the effect of taxes. In contrast with some earlier studies we find marginal taxes of little significance in explaining portfolio patterns. Another issue is wealth effects, where our records indicate that the number of assets held increases with wealth. When looking at portfolio composition given the number of assets we see that the share of net wealth held in most assets and liabilities are decreasing functions of net wealth, i.e. the leverage is typically lower for wealthier households. A third issue is the impact of current labour income. This variable does not exert a significant effect on any asset holdings, but significantly increases the probability of holding debt. This may reflect that current income acts as a signal of future income.
TL;DR: In this article, the role of asset management in the UK water industry is described and an asset management plan is directed to capital works and other expenditure associated with maintaining the condition and performance of the utility's assets.
Abstract: The paper describes the role of asset management in the UK water industry. An asset management plan is directed to capital works and other expenditure associated with maintaining the condition and performance of the utility's assets
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TL;DR: In this article, five sets of questions puzzle observers of Japanese financial markets, particularly from the U.S. viewpoint: the apparently low corporate cost of capital, low real interest rates, high equity prices, high land prices, and the rising real yen.
Abstract: Five sets of questions puzzle observers of Japanese financial markets, particularly from the U.S. viewpoint. They concern: the apparently low corporate cost of capital, low real interest rates, high equity prices, high land prices, and the rising real yen. The paper surveys writings on these issues, in brief enough form that one can see how the questions fit together. Topics covered include: the leverage of Japanese firms, dividend payout, equity price/earnings ratios, corporate taxation, cross-ownership, land price/rental ratios, speculative bubbles, the household saving rate, international capital mobility, expected real appreciation of the yen, the lower cost of financing investment internally and through "main bank" relationships, and the move to a more market-oriented system as these relationships break down. Conclusions include: (1) the real interest rate in Japan may remain below that in the United States, despite international arbitrage, (2) the main relevant effect of the internationalization in Japan may have been to accelerate the process whereby corporate finance becomes market-oriented, so that (3) affiliated firms are losing the special privilege of borrowing at a cheaper rate, while (4) unaffiliated firms are able to borrow more cheaply than before, and (5) the increased availability of funds for asset-market arbitrage allowed the great run-up in equity and land prices in the 1980s.(This abstract was borrowed from another version of this item.)(This abstract was borrowed from another version of this item.)(This abstract was borrowed from another version of this item.)(This abstract was borrowed from another version of this item.)(This abstract was borrowed from another version of this item.)(This abstract was borrowed from another version of this item.)(This abstract was borrowed from another version of this item.)(This abstract was borrowed from another version of this item.)
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