when do high stock returns trigger equity issues abstract one of the most prominent stylized facts in corporate finance is that equity issues tend to follow periods of high stock returns we document that firms exhibit such timing behavior only in response to high returns that coincide with strong institutional investor demand when not accompanied by institutional purchases stock price increases have little impact on the likelihood of equity issuance the results highlight the importance of market reception for the timing of equity issues

optimal monopolist pricing under demand uncertainty in dynamic markets we examine pricing policy for a monopolist facing uncertain demand in a market characterized by dynamics on the demand side such as diffusion or saturation effects and or on the cost side experience curve effects our model explicitly incorporates the impact of demand uncertainty and thus allows us to analyze the implications of uncertainty on the optimal price path by contrasting the stochastic policy with the corresponding deterministic policy we begin with an analysis of the general model and then focus on several special cases based on well known demand specifications to gain more specific insights and to suggest directional guidelines for dynamic pricing decisions in an uncertain environment in general the interaction among uncertainty demand and or cost dynamics and firm s discount rate thus farsighted firms operating under dynamic market conditions with high demand uncertainty such as high tech companies with innovative products for consumer or industrial markets should attach partic

a pure financial explanation for trade credit this paper provided a pure financial explanation for the existence of trade credit and for the values of the credit terms offered to customers two motives for extending trade credit were identified the pure operating flexibility motive arises because the opportunity to change credit policy provides the seller an efficient way to respond to fluctuations in demand this motive was eliminated from consideration in this paper by assuming constant demand the seller must hold a liquid reserve when the financial markets are imperfect and the desire to earn an excess rate of return on this reserve explains the pure financial intermediary motive for trade credit the pure financial incentive to lend this liquid reserve to customers was examined by viewing a market borrowing rate of interest that exceeds the market lending rate of interest as a hindrance to trade or equivalently as a financial market tariff this tariff imposes a wedge between the market prices paid and received for the product plus a loan and thereby inflicts a loss of surplus on the seller and buyers trade credit lending enables the seller and or the buyers to recapture at least part of this loss when the source of the tariff does not apply to direct loans to customers financial market tariffs caused by transactions costs fulfill this requirement because the trade credit lender s familiarity with its customers and product provide it with information and collection cost advantages over financial intermediaries tariffs caused by financial intermediary rents fulfill this requirement as well because the parties to a trade credit loan do not employ the services of a financial intermediary increasing opportunity costs and financial market imperfections in addition to the ones described above establish the limits of credit policy the optimal amount of accounts receivable is derived from the condition that the marginal revenue of trade credit lending is equal to the marginal cost this condition combined with factoring costs produces a unique finite optimal credit period accrual accounting for income tax purposes imposes an additional restriction because the firm is taxed on the recovery of its opportunity costs these limitations on credit policy were examined separately in this paper for clarity but they are in effect simultaneously in practice

closing the regional equity capital gap the role of informal venture capital there is evidence from a number of countries that small firms encounter a shortage of long term investment finance particularly at start up and initial growth expansion of the institutional venture capital industry has done little to fill this equity gap on account of its preference for making large investments in established companies and management leveraged buyouts moreover the supply of venture capital exhibits a high level of spatial concentration initiatives by state provincial and local governments most notably in economically lagging regions to increase the supply of risk capital for start ups and early stage businesses have at best provided a very partial and often costly solution a more appropriate approach to increasing the supply of start up and early stage finance is to facilitate the more efficient operation of theinformal venture capital market informal investors or business angels are private investors who provide risk capital directly to new and growing businesses in which they have no family connection most business angels are unable to find sufficient investment opportunities and so have substantial uncommitted funds available there is also considerable scope for expanding the population of business angels the most cost effective means of closing the equity gap is therefore for the public sector to underwrite the operating costs of business introduction services whose objective is to overcome the two main sources of inefficiency in the informal venture capital market namely the invisibility of business angels and the high search costs of angels seeking investment opportunities and entrepreneurs seeking investors by the provision of a channel of communication between informal investors and entrepreneurs seeking finance

developing the informal venture capital market a review of the department of trade and industry s informal investment demonstration projects 1 this paper summarizes the key findings from the final review and evaluation of five informal investment demonstra tion projects department of trade and industry crown copyright is reproduced with the permission of thecontroller of hmso

a note on merton s optimum consumption and portfolio rules in a continuous time model in the paper optimum consumption and portfolio rules in a continuous time model by r c merton j econ theory 3 1971 373 413 solutions obtained in cases when marginal utility at zero consumption is finite are not feasible while they do satisfy the hamilton jacobi bellman equations they do not represent appropriate value functions because the boundary behavior near zero wealth is not satisfactorily dealt with in this note we specify the boundary behavior and characterize optimal solutions journal of economic literature classification numbers 022 213

the resolution of financial distress most models of financial structure embody an assumption about financial distress that causes debt to be costly to the issuing firm this approach has been criticized on the grounds that the assumed costs could be avoided by a costless financial reorganization in this article we show that despite the possibility of costless reorganization it may be rational for firms to incur significant costs in the resolution of financial distress the main assumptions that give rise to our results are the existence of asymmetric courts to impose a reorganization on the claimants of a firm article published by oxford university press on behalf of the society for financial studies in its journal the review of financial studies

the relationship between the level of capital expenditures and firm value when a firm s management needs to raise external capital in order to finance an invest ment project it is likely to have better information about the project s future return than do potential investors in such a case as has been shown in the literature management may be able to signal its information through the use of certain financial variables how ever the possibility that management may be able to use the level of investment in the project itself to signal their information has not been considered the purpose of this paper is to examine this possibility it is shown here that the level of capital investment may be able to perfectly reveal management s information with a higher input level signalling more favorable information it is further demonstrated that even in this equilibrium finan cial variables still play an important role among other results it is shown in contrast to a conclusion of a study by leland and pyle that in this setting the number of shares held by management may be negatively correlated with the favorableness of their information

r d management and corporate financial policy the hypothesis that firms simultaneously determine their research and development investment dividend and new debt policies generally is substantiated in the financial literature the determinants of research and development dividend investment and financing decisions of 140 firms are estimated econometrically during the 1978 1982 period management gains insights into the interactions of pursuing research and development expenditures paying dividends and undertaking investments

bankruptcy risk and optimal capital structure this study finds shortcomings in empirical tests of the capital structure irrelevance hypothesis the alternative hypothesis is that firms choose value maximizing mixes of debt and equity on account of bankruptcy costs and the tax deductibility of interest payments based upon the cross sectional implications of the tax shelter bankruptcy cost hypothesis an alternative test of the irrelevance hypothesis is performed the test examines the relationship between failure rates and leverage ratios for 36 lines of business the results are inconsistent with the irrelevance hypothesis in their landmark paper modigliani and miller 26 demonstrate that under certain assumptions the market value of a firm is independent of its capital structure these assumptions include the absence of taxes transactions costs and bankruptcy costs recently miller 24 has argued that the introduction of corporate and personal taxes does not alter the capital structure irrelevance result in the absence of bankruptcy costs 1 the inclusion of bankruptcy costs generally considered in conjunction with the tax deductibility of interest payments has led others to conclude that capital structure will affect the value of the firm 2 in this case value maximizing firms may choose optimal capital structures consisting of both debt and equity there have been numerous attempts to discriminate empirically between the miller irrelevance mi hypothesis and the tax shelter bankruptcy cost ts bc hypothesis several are discussed in section i of this paper there it is argued that studies attempting to measure directly the effect of changes in capital structure on firm values are subject to serious complications and are unable to discriminate between the mi and ts bc hypotheses other studies focus on cross sectional implications of the mi and ts bc hypotheses the cross sectional tests are based on the assertion that bankruptcy costs may tend to induce firms with greater business risk to include less debt in their capital structures whereas the mi hypothesis does not predict such a relationship unfortunately the existence of positive bankruptcy costs is not sufficient to ensure that the ts bc hypothesis will predict the inverse relation

the debt equity choice when firms adjust their capital structures they tend to move toward a target debt ratio that is consistent with theories based on tradeoffs between the costs and benefits of debt in contrast to previous empirical work out tests explicitly account for the fact that firms may face impediments to movements toward their target ratio and that the target ratio may change over time as the firm s profitability and stock price change a separate analysis of the size of the issue and repurchase transactions suggests that the deviation between the actual and the target ratios plays a more important role in the repurchase decision than in the issuance decision

how does financial distress affect small firms financial structure this paper provides new evidence on the financial structure of small firms by emphasizing the role played by financial distress we specify a model of debt adjustments that allows us to investigate the specific nature of the adjustment process towards target debt levels in small firms which is then extended to account for the effect of financial distress on financial structure decisions our models were estimated by the generalized method of moments on a data panel of small portuguese firms during a period of recession in which a substantial proportion of the companies analyzed faced a financial distress situation we find that small firms do adjust their debt ratios towards target levels the speed of adjustment being faster in the shorter term our results also indicate that there are major differences in the determinants of long term and short term debt highlighting the role played by debt maturity in explaining a firm s financial structure finally random behavior is observed in financially distressed firms who seem to be disoriented when making their financial structure decisions

financing the small firm this study presents a framework to delineate financing the small firm special consideration is given to small firms unique financing sources such as trade and bank credit entrepreneur s own resources informal investment and venture capital the small firm has limited or no access to many traditional debt and equity markets that supply long term financing to the corporate world and therefore operates in segmented and imperfect financial markets the links between small firms financing opportunities and managerial goals are traced from the start up stage through establishing a mature firm as the small firm matures it operates in a broader financial market this study establishes the foundation for future empirical research

trade credit and informational asymmetry commonly used trade credit terms implicitly define a high interest rate that operates as an efficient screening device where information about buyer default risk is asymmetrically held by offering trade credit a seller can identify prospective defaults more quickly than if financial institutions were the sole providers of short term financing the information is valuable in cases where the seller has made nonsalvageable investments in buyers since it enables the seller to take actions to protect such investments traditional explanations for the widespread use of trade credit fall into two categories the financing motive holds that capital market imperfections enable sellers to finance buyer purchases at lower cost than financial institutions ferris 4 argues that trade credit provides payment flexibility and thus reduces the overall need for buyers and sellers to maintain precautionary balances emery 3 contends that noncompetitive rents of financial institutions can be circumvented by sellers and buyers through provision of trade credit however the financing motive is not sufficient to explain why small suppliers offer trade credit the wide cross sectional variation in terms or why large buyers often take the prompt payment discount late a second set of explanations is best described as pricing motivations for trade credit provision nadiri 10 argues that availability of alternative payment terms can increase product demand but does not indicate why the offered terms could not be duplicated by financial institutions schwartz and whitcomb 14 argue that trade credit is used to circumvent robinson patman and similar prohibitions on price discrimination the correctness of this position depends on the charge to users of trade credit exceeding the cost of provision by the seller although the explanation is possible in principle an empirical question remains as to why variations in actual credit terms appear to be based on product market rather than buyer characteristics the literature also contains analyses of the impact of changing macroeconomic conditions on trade credit terms and aggregate credit flows schwartz 13 for example employs a financing motive for trade credit to conclude that restrictive monetary policy can be partly mitigated by liberalization of trade credit terms by firms with relatively easy access to capital markets however a microeconomic

are observed capital structures determined by equity market timing contrary to baker and wurgler 2002 i find that the importance of historical average market to book ratios in leverage regressions is not due to past equity market timing al though equity transactions may be timed to equity market conditions they do not have sig nificant long lasting effects on capital structure debt transactions exhibit timing patterns that are unlikely to induce a negative relation between market to book ratios and leverage i also find that historical average market to book ratios have significant effects on current financing and investment decisions implying that they contain information about growth opportunities not captured by current market to book ratios

business angel networks and the development of the informal venture capital market in the u k is there still a role for the public sector business angel networks bans provide a channel of communication between private venture capital investors business angels and entrepreneurs seeking risk capital most operate locally on a not for profit basis with their costs underwritten by the public sector however the recent establishment of bans by private sector organisations in the u k has led to a questioning of the government s continuing role in the financing of bans this paper demonstrates that there are significant differences between public sector and other not for profit bans and private sector commercially oriented bans in terms of the investments that they facilitate private sector bans are primarily involved with larger later stage deals whereas investments made through not for profit bans are generally smaller involve start ups and other early stage businesses and are local the emergence of private sector bans has therefore not eliminated the need for public sector support for locally oriented networks

a model of capital structure when earnings are mean reverting a multiperiod model of optimal capital structure is developed under the assumption that earnings follow an autoregressive process firm value and leverage vary through time and at each date the firm achieves an optimal debt level that is a function of the full state contingent debt policy the reversion parameter of the earnings series is shown to be positively related to various measures of variability and negatively related to leverage if earnings processes are not homogeneous across firms then standard earnings risk measures in capital structure studies do not adequately represent crosssectional differences in variability in firm value

determinants of target capital structure the case of dual debt and equity issues abstract we examine whether market and operating performance affect corporate financing behavior because they are related to target leverage our focus on firms that issue both debt and equity enhances our ability to draw inferences consistent with dynamic trade off theories dual issuers offset the deviation from the target resulting from accumulation of earnings and losses our results also imply that high market to book firms have low target debt ratios on the other hand consistent with market timing high stock returns increase the probability of equity issuance but have no effect on target leverage

seniority and maturity of debt contracts abstract this paper provides a model of how borrowers with private information about their credit prospects choose seniority and maturity of debt increased short term debt leads lenders to liquidate too often it also increases the sensitivity of financing costs to new information although better than average borrowers desire information sensitivity the model implies that short term debt will be senior to long term debt and that long term debt will allow the issue of additional future senior debt the model also has implications on the structure of leveraged buyouts and on how various types of lenders respond to potential defaults

taxes and corporate debt policy in canada an empirical investigation this paper explores the implications of asymmetric corporate taxes for firms debt policy the focus is on the effects of two dynamic tax provisions loss carry forward and loss carry back on net debt issues an effective tax variable is first estimated using a tobit framework accounting for the fact that firms losses for tax purposes are censored this effective tax variable and other explanatory factors are employed to explain net debt issues heteroskedasticity caused by the firm size effect is also corrected using a panel of 128 firms between 1979 and 1989 this paper finds that corporate taxes have significant effects on firms debt policy

callable bonds reinvestment risk and credit rating improvements role of the call premium we identify the call premium in nonconvertible callable bonds as an effective contracting provision to address agency conflict due to reinvestment risk and credit rating improvements we analyze 4 495 bonds issued between 1980 and 2012 when interest rates are high a majority of investment grade issues and almost the entire subset with long maturities 20 years include a call premium when interest rates are low virtually all investment grade issues with long and short maturities are callable at par high yield issues are limited to short maturities by about 4 1 they include a call premium regardless of interest rate levels

retirement saving with contribution payments and labor income as a benchmark for investments abstract in this paper we study the retirement saving problem from the point of view of a plan sponsor who makes contribution payments for the future retirement of an employee the plan sponsor considers the employee s labor income as investment benchmark in order to ensure the continuation of consumption habits after retirement we demonstrate that the demand for risky assets increases at low wealth levels due to the contribution payments we quantify the demand for hedging against changes in wage growth and find that it is relatively small we show that downside risk measures increase risk taking at both low and high levels of wealth

the importance of incomplete information in explaining the existence of costly bankruptcy the standard theory of capital structure argues that firms trade off the tax advantage of debt against ba nkruptcy costs r a haugen and l w senbet 1978 pointed out that there is a problem with this theory if bankruptcy involves deadweig ht costs shareholders and bondholders have an incentive to renegotia te before it occurs since in this way bankruptcy and its costs can be avoided this implies costly bankruptcy will not occur and casts d oubt on the validity of the standard theory this paper uses noncoope rative bargaining theory to formally model this idea it then shows t hat if there is incomplete information costly bankruptcy can occur copyright 1987 by the review of economic studies limited

optimal portfolio choice under loss aversion this paper analyzes the optimal investment strategy for loss averse investors assuming a complete market and general ito processes for the asset prices the loss averse investor follows a partial portfolio insurance strategy when the investor s planning horizon is short less than 5 years he or she considerably reduces the initial portfolio weight of stocks compared to an investor with smooth power utility the empirical section of the paper estimates the level of loss aversion implied by historical u s stock market data using a representative agent model we find that loss aversion and risk aversion cannot be disentangled empirically

capital structure and small public firms abstract most analyses of capital structure from both a theoretical and an empirical viewpoint focus on large corporations as a result of data availability problems empirical studies deal with large corporations theoretical frameworks typically use illustrations and casual empirical evidence involving large firms only limited amounts of research focus on small growing entrepreneurial corporations and the factors affecting the capital structures of these firms much of current theory in capital structure deals with factors that are not easily and objectively quantified by outside researchers these factors include items such as expected bankruptcy costs information asymmetries between management and the financial marketplace agency costs of monitoring management and managerial risk preferences this paper reports on a survey sent to over 400 small high growth corporations questions on the survey were derived from various strands of the theoretical financial literature on capital structure over 27 of the surveys were completed and returned and give insight into the motivations and preferences of chief financial officers from over 100 small high growth corporations examination of the responses shows that contrary to financial theory factors dealing with bankruptcy costs agency costs and information asymmetries play little if any major role in affecting capital structure policy rather the responding financial officers seem to follow a pecking order in financing their firm s needs use internal cash as much as possible issue debt if necessary issue equity only as a last resort while being concerned with market conditions and their own preferences the following are implications of these findings first financial theory which is more and more focusing on micro factors while still theorizing efficient macro markets may be incorrectly ignoring the effect that management risk perceptions and preferences play in making capital structure decisions thus additional work is necessary to include the management in theories of capital structure second this survey allows outsiders to peer inside the managerial black box and gain insight into the factors that motivate and impact capital structure decisions it provides an empirical basis to help determine which influences are important third managers of entrepreneurial firms and investors in venture capital can compare their own beliefs perceptions and motivations against the mean results obtained from our sample of high growth firms

the effect of capital structure on a firm s liquidation decision abstract a firm s liquidation can impose costs on its customers workers and suppliers an agency relationship between these individuals and the firm exists in that the liquidation decision controlled by the firm as the agent affects other individuals the customers workers and suppliers as principals the analysis in this paper suggests that capital structure can control the incentive conflict problem of this relationship by serving as a pre positioning or bonding mechanism appropriate selection of capital structure assures that incentives are aligned so that the firm implements the ex ante value maximizing liquidation policy

goal setting for effective corporate planning the hypothesis that firms simultaneously determine their research and development investment dividend and new debt policies generally is substantiated in the financial literature the strategic planning model advocated in this study offers an alternative to the generally accepted goals of maximizing the return on equity or growth in earnings per share

bankruptcy and agency costs their significance to the theory of optimal capital structure we support and generalize our original results 1978 in light of potential impediments to a pure market solution to agency problems and potential causal links between liquidation and bankruptcy in the case of bankruptcy costs market impediments are easily elimi nated through the inclusion of simple provisions in corporate charters and bond inden tures further we demonstrate that recent attempts to link liquidation costs to capital structure are without merit if the firm is to be liquidated on the basis of a rule other than one that maximizes the total value of all the claimants arbitrage profits arise and informal reorganization will discipline management to follow the liquidation rule that is optimal for existing securityholders also we find that the pure market solution is not readily generalizable to other classes of agency problems particularly the risk incentive problem how ever the alternative solution of the risk incentive problem through complex financing contracting may be useful in explaining complexities in contemporary financial contracts in a previous paper 1978 we employed arbitrage arguments to show that in a well functioning market bankruptcy costs are an insignificant determinant of a firm s capital structure we also pointed out that the decision to liquidate and its associated costs can be separated from the event of bankruptcy moreover any costs actually associated with the event of bankruptcy must be limited to the costs associated with an informal reorganization of the capital structure in the capital market prior to default these results were argued to hold under a com plex environment with multiple periods multiple securities and heterogeneous expectations we concluded that bankruptcy costs would be a significant deter minant of capital structure only in the face of irrationality on the part of market participants or unavoidable impediments to the arbitrage process since the publication of our paper there has been an accumulation of the

explicit solution of a general consumption portfolio problem with subsistence consumption and bankruptcy this paper solves a general continuous time single agent consumption and portfolio decision problem with subsistence consumption in closed form the analysis allows for general continuously differentiable concave utility functions the model takes into consideration that consumption must be no smaller than a given subsistence rate and that bankruptcy can occur thus the paper generalizes the results of karatzas lehoczky sethi and shreve 1986

financing preferences evidence from the korean market we investigate the financing decisions of korean firms during the period of 1996 2015 korean firms follow a matching strategy for funding their cash needs cash inflows from investing activities a

financial contracting and the choice between private placement and publicly offered bonds the financial contracting in private placement bonds and publicly offered bonds are different our data show that private placement bonds are more likely to have restrictive covenants than public bonds private placement bonds are also more likely to be issued by smaller and riskier firms for investment grade firms that issue bonds in both markets our analysis shows that firms select the bond type to minimize financing costs we find significant differences in the pricing of private placement and publicly offered bonds and some of these differences appear to be related to the different institutional features between the two markets

the relative tax benefits of alternative call features in corporate debt this paper examines the differential tax treatment of the borrower and lender at the time debt is called as a potential explanation for the widespread existence of call provisions in corporate debt this tax effect alone cannot explain the standard call feature because greater tax benefits may be derived for bonds callable at market prices the equilibrium implications of the model allowing for tax arbitrage opportunities both at the corporate level and the individual level also are considered

merton s portfolio problem including market frictions a closed form formula supporting the shadow price approach abstract this paper formulates a portfolio optimization in a friction market as a suitable stochastic control problem with hyperbolic absolute risk aversion utility functions under a specific functional form of the amount of wealth invested in the risky asset inspired by the merton optimal dynamics the state variable is the amount of wealth invested in the risky asset while the control variable is the share rate this formulation has two advantages first it provides a portfolio where the optimality is obtained by minimizing the probability of large changes in the portfolio composition with consequently low frictions while allowing for an explicit solution to the optimal control problem second with this formulation it can be proven that this optimal solution is the optimal solution of the frictionless merton problem for corrected price dynamics the corrected dynamics shows that the market friction increases the risk premium by an additional term that is an elementary function of the risk associated with the market frictions as well the price of the risk which also depends on the risk aversion of the investor in addition the corrected dynamics supports the existence of a shadow price in friction markets as already shown in kallsen and muhle karbe 2010 finally an empirical analysis to assess the model performance is illustrated on five minute data of four major traded stocks three market indexes and four exchange rates including the bitcoin usd rate

modelling renewable energy impact on the electricity market in india renewable power generation development most notably for wind and solar has taken off at a rapid pace in india especially in the last 4 years while these developments have many positive aspects a rapid shift in balance of baseload and intermittent generation must be assessed carefully to ensure the share of renewable power generation increases without compromising system security and economics seasonal and spatial variability of wind and to a lesser extent that of solar can render these resources to have low availability for a significant part of the year leading to an increase in unserved energy i e deteriorate system reliability the intermittency of generation also impacts on inter state power flows and lead to higher congestion in the grid climate model results provide a rich set of information on the nature of solar wind variability that can be embedded in an electricity market simulation tool to assess these impacts on prices generation dispatch and power flows we have developed a modelling analysis for the indian national electricity market informed by csiro climate model results we have assessed the added costs arising from intermittency to put in perspective the true costs and benefits of renewable power we have focused on the near term developments in 2017 to show how some of the high renewable growth scenarios included in the indian national electricity plan may imply significant pressure on inter state region transfer capability and lead to a significant worsening of system reliability the outcome of our modelling analysis suggests that a more orderly and balanced development of renewable and conventional power generation capacity is needed with a stronger focus on system economics and security

the determinants of the maturity of corporate debt issues we document the determinants of the term to maturity of 7 369 bonds and notes issued between 1982 and 1993 our main finding is that large firms with investment grade credit ratings typically borrow at the short end and at the long end and of the maturity spectrum while firms with speculative grade credit ratings typically borrow in the middle of the maturity spectrum this pattern is consistent with the theory that risky firms do not issue short term debt in order to avoid inefficient liquidation but are screened out of the long term debt market because of the prospect of risky asset substitution traditionally capital structure research has focused on how much of a firm s future cash flows should be paid out to debtholders instead of equityholders an equally important issue is when future cash flows should be paid out to debtholders a firm that finances its projects with short term debt risks serious financial difficulty if the debt cannot be extended similarly a firm that finances its activities with long term debt can sacrifice profits by needlessly risking mismanagement of resources after cash flows are returned from investments but before they are due to debtholders this study investigates the factors that firms consider when choosing the maturity of their liabilities we document the determinants of the maturity of 7 368 public debt issues made by u s corporations between 1982 and 1993 our empirical tests are based on existing theoretical models that relate the maturity of a firm s borrowings to the riskiness of its cash flows the time until investments pay off the quality of information held by outsiders the expected

optimal consumption and portfolio policies when asset prices follow a diffusion process abstract we consider a consumption portfolio problem in continuous time under uncertainty a martingale technique is employed to characterize optimal consumption portfolio policies when there exist nonnegativity constraints on consumption and on final wealth we also provide a way to compute and verify optimal policies our verification theorem for optimal policies involves a linear partial differential equation unlike the nonlinear partial differential equation of dynamic programming the relationship between our approach and dynamic programming is discussed we demonstrate our technique by explicitly computing optimal policies in a series of examples in particular we solve the optimal consumption portfolio problem for hyperbolic absolute risk aversion utility functions when the asset prices follow a geometric brownian motion the optimal policies in this case are no longer linear when nonnegativity constraints on consumption and on final wealth are included by these examples one can see that our approach is much easier than the dynamic programming approach

opportunistic underinvestment in debt renegotiation and capital structure abstract this paper models debt renegotiation as a bargaining game between debtholders and shareholder oriented management in which management credibly threatens to run down firm assets to force concessions from the creditors creditors anticipate this opportunistic behavior by management creating an upper bound on debt capacity that is less than the value of the firm if an advantage to debt is introduced such as favorable tax treatment an interior optimal capital structure obtains even in the absence of realized bankruptcy costs our model also explains variations in debt equity ratios and the use of certain puzzling debt covenants

asset substitution and the agencycosts of debt financing agency costs of debt have been advanced in the literature as an important consideration foroptimal corporate debt policies recently there have been some doubts concerning the theoretical foundations of the notion that these costs increase as the firm employs more debt in this paper we examine explicitly the incentive for asset substitution by solving endogenously for the optimal risk policy the results support the notion that more debt aggravates shareholders incentives to take risk we also investigate the marginal agency cost function and discuss conditions for interior optimal capital structure

target behavior and financing how conclusive is the evidence the notion that firms have a debt ratio target that is a primary determinant of financing behavior is influential in finance yet how definitive is the evidence we address this issue by generating samples where financing is unrelated to a firm s current debt ratio or a target we find that much of the available evidence in favor of target behavior based on leverage ratio changes can be reproduced for these samples taken together our findings suggest that a number of existing tests of target behavior have no power to reject alternatives

anatomy of initial public offerings of common stock initial public offerings of common stocks ipos are typically underpriced in this paper the author develops and tests the hypothesis that underpricing serves as a form of insurance against legal liability and the associated damages to the reputations of investment bankers the empirical results based on samples of ipos that were brought to the market before and after the securities act of 1933 provide considerable support for the implicit insurance hypothesis specifically gross underpricing and market segmentation between prestigious and fringe investment bankers in originating unseasoned new issues appear to be peculiar to the post 1933 era a number of studies have documented that unseasoned common stocks typically garner large positive abnormal returns during a short period following the initial offering in his recent review of the empirical evidence on the initial returns of common stock offerings smith 36 concluded that the returns from offer price to after market price have exceeded fifteen percent his calculations did not include some of the earlier results obtained by mcdonald and fisher 23 and logue 20 when their samples are combined with those in smith s review the initial returns of unseasoned equity offerings appear even larger over seventeen percent these results imply that underwriters consistently offer the securities at substantial discounts from their values that are set in the after market in other words initial public offerings ipos appear to be underpriced what is even more puzzling is the fact that in some time periods underpricing appears to be systematically larger than in other periods ibbotson and jaffe 15 and ritter 29 have documented that during the postwar era there have been a number of periods in which the initial returns of common stocks have been extremely high ritter for example reported that the average return from the offer price to the first after market price was over forty eight percent for ipos in 1980 and 1981 1 similarly the initial returns of unseasoned issues of common stock brought to the market in 1950 1951 1961 and 1968 were unusually large these periods in which ipos were grossly underpriced are referred to as the hotissue markets why do investment bankers underprice ipos why do issuers

macroeconomic effects and frailties in the resolution of non performing loans resolution of non performing loans is a key determinant of bank credit default losses this paper analyzes macroeconomic and systematic frailty effects of the default resolution time for a sample of 17 395 defaulted bank loans in usa great britain and canada we find that frailties have a huge impact on the resolution times in a representative sample portfolio median resolution times more than double in a recession when compared to an expansion this leads to highly skewed distributions of losses and considerable systematic risk of the bank portfolio

callable bonds a risk reducing signalling mechanism a comment the existence of callable bonds has been somewhat of a puzzle the call feature provides firms with a valuable interest rate option but the value of this option should be exactly offset by the creditor s demand for a higher interest rate as compensation one explanation for the call provision from myers 4 bodie and taggart 3 and barnea haugen and senbet 2 is that callable bonds may be used to reduce some agency costs another explanation from robbins and schatzberg 5 is that callable bonds can signal a firm s better prospects in the presence of asymmetric information one possible problem with the agency cost and signalling explanations of callable bonds is that short term debt may serve the same functions in all four studies indeed short term debt is equivalent to long term debt in the theoretical sections of the agency cost studies however robbins and schatzberg hereafter rs suggest that short term debt fails to provide the risk sharing opportunities inherent in callable bonds thus they suggest that a signalling explanation provides a unique role for callable bonds one limitation of rs s results is that they are based on an example that makes a series of strong assumptions about a two stage lottery faced by good news and bad news firms in order for their model to have general applicability it would be desirable to demonstrate that their results hold under more general assumptions the results of this study suggest that their findings cannot be generalized without further assumptions callable bonds do not yield a separating equilibrium result when only a minor change is made in two of the lottery probabilities suggesting that their results are far from robust to minor changes in assumptions moreover callable bonds may fail to generate a separating equilibrium even for some good news firms that conform to rs s original model because bad news firms that do not meet their assumptions may attempt to mimic good news firms that do the risk sharing result is also very sensitive to the specific assumptions made by robbins and schatzberg specifically callable bonds increase the risk borne by management if one change is made in the numeric values of one of the lottery payouts the paper begins with a review of the relevant portions of robbins and schatzberg s model section ii provides a counterexample in which callable bonds fail to provide a separating equilibrium section iii provides a counterexample in which callable bonds fail to provide risk sharing debt and the paper concludes with a summary

the role of target leverage in security issues and repurchases the paper examines whether security issues and repurchases adjust the capital structure toward the target the time series patterns of debt ratios imply that only debt reductions are initiated to offset the accumulated deviation from target leverage the importance of target leverage in earlier debt equity choice studies is driven by the subsample of equity issues accompanied by debt reductions unlike debt issues and reductions equity issues and repurchases have no significant lasting effect on capital structure therefore even firms that have target debt ratios can engage in timing the equity market

callable bonds a risk reducing signalling mechanism a reply robbins and schatzberg 3 hereafter rs argued that callable bonds constitute a risk reducing signalling mechanism wall 6 hereafter wall responds that there exist examples quite similar to the one presented in rs for which short term debt proves to be a superior instrument in wall s first example short term debt can signal good prospects although callable bonds cannot a second example purports to show strictly superior risk reduction capabilities when either short term debt or callable bonds can signal wall contends therefore that the class of problems for which callable bonds serve as a risk reducing signalling mechanism lacks generality in this reply we restrict our notion of what it means for securities offering to be risk reducing at the same time that it signals in doing so we find that wall s first example is one from a broad class of problems for which it is impossible both to reduce risk and to signal the fact that callable bonds are not optimal for this problem is thus quite consistent with the idea that callable bonds constitute a risk reducing signalling mechanism furthermore we demonstrate that no power should be ascribed to wall s second example for it rests upon failure to note a subtle point in rs short term debt is strictly superior in the second example only if we do not allow the firm to overcapitalize its investment project if as in rs we do allow securities offerings that raise excess capital the excess to be placed in a riskless investment opportunity we can obtain a callable bonds contract that equals the performance of short term debt if we introduce new corporate strategic behavior that seeks additional enhancement of the corporate manager s decision making namely selling off risky projects once information about prospects becomes symmetric callable bonds prove strictly superior before providing these results we begin by demonstrating that wall s assertions are automatically questionable because short term debt is equivalent to a degenerate subclass of callable bonds

callable bonds a risk reducing signalling mechanism the theory of financial economics has failed to distinguish advantages of callable bonds from those of short term debt this paper shows that either type of borrowing can signal a firm s better prospects but that short term debt does so at the cost of weakened risk sharing with capital markets by issuing either equity or long term non callable debt a firm with poor investment opportunities will not pool its prospects with those of a better firm but equity produces superior risk sharing perhaps this explains the almr ost complete absence of long term non callable bonds from observed corporate capital structures financial theory has found only moderate success in explaining the routine inclusion of call provisions among the covenants of corporate bonds in the absence of market imperfections or incompleteness the incremental compensation promised to bondholders should exactly offset the value of the call provision retained by equityholders indifference should obtain 1 nevertheless it is hard to accept indifference as an explanation given the near universality of call provisions in corporate bond contracts in this paper we argue that in the presence of asymmetric information about investment quality corporate managers can signal their firm s better prospects by issuing bonds that include call provisions our major result shows that this signalling mechanism can be more attractive to risk averse managers than would be the choice of short term debt which could also serve to signal furthermore we demonstrate that non callable corporate debt is a dominated security that is both it and equity signal bad news but equity provides risk sharing this finding helps to explain the relative absence of long term non callable debt from corporate financial markets previous attempts to explain the prevalence of call provisions in corporate bond contracts fall into four categories two categories involve pure wealth transfers from bondholders to stockholders in these constant sum environments a gain to one group constitutes a loss to the other in the first category managers possess private information with regard to future interest rate movements issuing callable bonds will capture gains for stockholders when anticipated drops

a multi area linear programming approach for analysis of economic operation of the indian power system the paper discusses the major planning issues pertaining to economic operation of power systems in india viz integrated operation of the state electricity boards sebs through formation of the national grid optimal sharing of central sector generation by the sebs time of day pricing policy for power trading among the sebs optimal expansion of national grid and streamlining the coal production and transportation for optimal system operation a multi area linear programming lp model natgrid is developed to quantify the benefits from national grid operation suggest optimal sharing norms for central sector generation and formulate time of day pricing scheme for interutility power trading four interregional transmission projects are identified by exploiting the duals of the lp problem for expansion of national grid the bottlenecks in coal production and transportation systems are indicated and the system cost savings from removing them are quantified the analysis aims at encouraging and motivating the utilities to accept the idea of co operation and making investment more cost effective

canadian interregional electricity trade analysing the gains from system integration during 1990 2020 abstract using a multiperiod multiregional linear programming model of canadian electric power supply allowing for technology choice and power transmission we estimate the long term gains from interregional trade in electrical energy measured in terms of supply cost reduction these gains are substantial in absolute terms but proportionately small about 5 other performance measures however such as aggregate coal consumption uranium consumption nuclear capacity expansion and plant capital costs vary considerably between self sufficiency for each region and complete interregional supply integration alternative objectives to minimum supply costs therefore acquire greater importance for selecting a socially optimal degree of regional cooperation

tax exempt debt and the capital structure of nonprofit organizations an application to hospitals the availability of tax exempt financing provides nonprofit np organizations with their own tax based incentives to issue debt in this article we develop a theoretical model in which nps gain an indirect arbitrage from tax exempt debt issuance constrained by 1 the requirement that fixed investment exceed tax exempt debt flows the project financing constraint and 2 the constraint against share issuance these constraints cause them to impute tax benefits to projects that afford access to the tax exempt bond market empirical tests indicate that np hospitals behave as if they have target levels of tax exempt debt debt targeting is constrained by the availability of capital projects while excess debt capacity stimulates investment financial theorists have generally been reluctant to apply the tenets of corporate finance to nonprofit institutions in particular there has been little or no follow up to the important work of fama and jensen on the relationships between agency contracting and ownership written over a decade ago current understanding of the financial basis and behaviors of nonprofit institutions is limited to three basic insights provided by their prior work 1 the attenuation of residual claims characteristic of nonprofit organizations addresses the agency problems associated with private donations fama and jensen 1983b 2 like other organizations nonprofits require decision systems that separate the processes of management and control fama and jensen 1983a and 3 given certain preconditions investment opportunities available to nonprofits can be evaluated with the net present value rule using discount rates defined by outside capital markets fama and jensen 1985 these observations comprise much of what is currently known about nonprofit corporate financial behavior foremost among the set of unresolved issues is the theory of debt issuance by nonprofits an area not explicitly addressed by the fama and jensen

the role of venture capital in financing small business abstract venture capital is a primary and unique source of funding for small firms because these firms with sales and or assets under 5 million have very limited access to traditional capital markets venture capital is a substitute but not a perfect substitute for trade credit bank credit and other forms of financing for small firms small businesses are not likely to be successful in attracting venture capital unless the firms have the potential to provide extraordinary returns to the venture capitalist this study provides an analysis of a survey of venture capital firms that participate in small business financing the survey participants are venture capital firms that were 1986 members of the national venture capital association nvca the largest venture capital association in the united states the average size of the venture capital firms responding to the survey is 92 million dollars in assets with a range from 600 thousand to 500 million twenty three percent of the respondents have total assets below 20 million and 27 have assets above 100 million the venture capitalists investment assets held in small firms delineate the supply of venture capital to small firms sixty three of the 92 venture capitalists have more than 70 of their assets invested in small firms the venture capitalists were asked how their investment plans might change with changes in the tax law that were projected in the spring of 1986 fifty four percent expected to increase their investments in small firms and 38 did not expect to change these activities venture capitalists are very selective in allocating their resources the average number of annual requests that a venture capitalist receives is 652 and the median number is 500 only 11 5 of the respondents receive more than 1 000 proposals per year

corporate behavior in adjusting to capital structure and dividend targets an econometric study this study of financing decisions by u s corporations examines the issuance of long term debt issuance of short term debt maintenance of corporate liquidity issuance of new equity and payment of dividends given costs and imperfections inherent in markets a firm s financial behavior is characterized as partial adjustment to long run financial targets individual firm data are used so that speeds of adjustment are allowed to vary by company and over time the results suggest that financial decisions are interdependent and that firm size interest rate conditions and stock price levels affect speeds of adjustment this study of financing decisions by u s corporations examines the issuance of long term debt short term debt and equity the maintenance of corporate liquidity and the payment of dividends the firm s financial behavior is characterized as partial adjustment to long run financial targets and individual firm data 1966 1978 are used to estimate firm specific time varying speeds of adjustment the results suggest that financial decisions are interdependent and that firm size interest rate conditions and stock price levels affect speeds of adjustment also the estimated coefficients are more plausible than the very small taggart 28 or very large spies 26 values found in earlier studies section i of the paper introduces the general model in section ii a tractable empirical model is developed section iii presents the data to be used in the study and discusses econometric issues in section iv results and conclusions are offered

optimal saving under poisson uncertainty abstract this paper studies optimal saving and investment behaviour of a household that can either invest in a riskless or a risky saving technology when risk results from a poisson process the focus is on behaviour of households in a general equilibrium setup poisson processes are introduced since they allow us to understand and model endogenous cycles jointly with long run growth it turns out that a very simple intuitive and tractable characterization of equilibrium is possible journal of economic literature classification numbers c61 o33 o41

resolving the agency problems of external capital through options this paper investigates the role of stock options in resolving the agency problems of external capital as originally identified by jensen and meckling 1976 these problems are precipitated by managerial incentives a to consume excessive non pecuniary benefits or perquisites beyond the optimal level for sole ownership and b to engage in risk shifting in productive decisions so as to transfer wealth from external capital contributors these incentive problems can be resolved through a strategy that judiciously combines call and put options retained by the owner manager and external financiers respectively the resolution of the agency problems through this mechanism provides an economic rationale for the existence of managerial stock options and convertible debt the work by jensen and meckling 7 has brought more realism to the theory of the firm in their paper jm address agency problems in the context of a firm which is viewed as a nexus of contracts among various factors of production the contractual relationships involve incentive conflicts arising from the pursuit of self interest by limiting themselves to an entrepreneur or owner manager who retains complete control of the firm jm have demonstrated that financing through the issuance of common stock or debt to outsiders engenders costs these costs are precipitated in part by the manager s propensity to consume nonpecuniary benefits or perquisites perks by employing certain resources in excess of their optimal usage 1 and by his propensity to engage in high risk investment projects so as to transfer wealth from bondholders to stockholders 2

determinants of small firm debt ratios an analysis of retail panel data in this paper the relevance of some debt ratio determinants from the recent theory of finance is empirically investigated in a small business sector the data used in this study consist of average financial data of 27 shoptypes in 20 different years covering a period of 24 years the panel character of the data facilitates the use of analytical techniques aimed at reducing or avoiding the biasing effect of omitted variables on the outcomes the main conclusion is that the theoretical determinants appear indeed to be relevant for the small business sector investigated here but the influences encountered in the analyses are far less straightforward than the hypothesized effects in the theory influences on total debt are frequently found to be the net effects of opposite influences on long and short term debt and some variables show large time and industry specific effects further distinct patterns in the time specific effects were found

the relation between risk and optimal debt maturity and the value of leverage 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

debt maturity and asymmetric information evidence from default risk changes asymmetric information models suggest that a borrower s choice of debt maturity depends on its private information about its default probabilities that is borrowers with favorable information prefer short term debt while those with unfavorable information prefer long term debt we test this implication by tracing the evolution of debt issuers default risk following debt issuances we find that short term debt issuance leads to a decline inborrowers asset volatility and an increase in their distance to default the opposite is true for long term debt issues the results suggest that borrowers private information about their default risk is an important determinant of their debt maturity choices

on the adjustment speed of smes to their optimal capital structure the aim of this paper is to analyse the speed of adjustment of small and medium sized enterprises smes to the target leverage by applying a system gmm technique to spanish panel data collected during the period 1995 2005 we estimate a partial adjustment model in which both target leverage and speed of adjustment are simultaneously endogenized we provide empirical evidence on the determinants of target leverage and the speed of adjustment more specifically the rate of financial flexibility growth opportunities and size are positively related to the speed of adjustment whereas the distance to the optimal ratio of debt shows a negative impact our findings demonstrate that in terms of sample mean a high percentage of spanish smes adjust rationally to their target additionally the smes analysed appeared to be over levered and fairly motivated to adjust annual adjustment speed 26

investment incentives debt and warrants abstract this paper models and characterizes investment incentive problems associated with debt financing the decision problem of residual claimants is explicity formulated and their investment policies are characterized the paper also analyzes the use of conversion features and warrants to control distortionary incentives these claims reverse the convex shape of levered equity over the upper range of the firm s earnings and this mitigates the incentive to take risk it is shown that under certain conditions such claims can be constructed to restore net present value maximizing incentives and simultaneously meet the financing requirements of the firm

the call sinking fund and term to maturity features of corporate bonds an empirical investigation do bond issuing firms attempt to choose the call sinking fund and term to maturity features of bonds to improve shareholder wealth this paper develops and tests two hypotheses about the determinants of bond features using a conditional logistic model the model is estimated on a sample of bonds issued between 1982 and 1986 model estimates show that a bond s call sinking fund and term to maturity features are statistically related to the issuing firm s retention ratio ratio of convertible to long term debt two year change in net operating income and whether the firm is listed on the nyse and included in the s p400 these findings support the view that firms financing highquality projects but facing information asymmetries choose shorter term medium term callable bonds with and without the sinking fund feature

dept and input misallocation of agricultural supply and marketing cooperatives kim and maksimovic provide an empirical model to examine the effect of dept on a firm their model is adopted to examine agricultural supply and marketing cooperatives using a short run variable cost function we find firm efficiency decreases as dept increases a us 1 increase in indebtedness increases total short run variable costs by us 0 0167 or roughly 1 67 dept tends to shift input usage away from labour inputs a test developed by conrad and unger is applied to determine whether the agricultural supply and marketing cooperatives are at a long run equilibrium capacity it is found that most of the cooperatives were overinvested in capacity however dept does not explain this overinvestment finally the effect of dept on total productivity over the study period is examined it is found that dept has had a small positive impact on total factor productivity growth scale economics and non optimal capacity had large impacts on total factor productivity although dept is associated with short run misal

deviations from optimal ceo ownership and firm value abstract the transaction cost theory of managerial ownership and firm value predicts that deviations from optimal managerial ownership reduce firm value this paper empirically tests the transaction cost theory by studying the relation between deviations on either side of optimal ceo ownership and firm value we find that both above optimal and below optimal deviations reduce firm value we find that a change in ceo ownership is associated with a higher lower abnormal return if it moves the ownership towards away from the optimal level these findings are consistent with the transaction cost theory of managerial ownership and firm value

impatience impoverishment and risk abstract a stochastic growth theory model is presented in which the less well off are impatient to consume but are also relatively less risk averse they can therefore maintain their consumption rates without eventually becoming impoverished unlike in the certainty case

similarities and differences in small and large corporation beliefs about capital structure policy theoretical researchers posit many factors that affect a firm s capital structure decisions theory also suggests that these influences will have different impacts on small and large firms however empiricists face difficulties in testing these hypotheses due to problems of quantifying the motivations expectations and preferences prevalent in the various theories

a comparison of census nsf r d data vs compustat r d data in a financial decision making model abstract this paper reports the results of a project in which r d data drawn from national science foundation and census bureau studies were substituted in several financial models for r d data drawn from the 1975 1982 compustat tapes the result using the compustat data did not differ significantly from that based on the nsf census data in the aggregate but significant differences were observed for certain industries and certain years the purpose of this paper is to discuss the financial models and determinants of corporate r d expenditures using the different databases and to suggest further questions for research financial support was provided by the center for innovation management studies at lehigh university and the national science foundation

financial structure of farm businesses under imperfect capital markets recent finance studies have considered whether gaps between a firm s costs of internal and external sources of investment funds arising from capital market imperfections influence its investment behavior and funding preferences this study tests the applicability of the pecking order and partial adjustment theories of financial structure to farm businesses by fitting a set of simultaneous financial equations with farm panel data from illinois model results indicate that illinois farms adjust to long run financial targets for equity debt and leasing but that additional financing needs follow a pecking order that is stronger for farms with greater asymmetric information problems copyright 2000 oxford university press