refinancing profitability and capital structure abstract we revisit the well established puzzle that leverage is negatively correlated with measures of profitability in contrast we find that at times when firms are at or close to their optimal level of leverage the cross sectional correlation between profitability and leverage is positive at other times it is negative these results are consistent with dynamic trade off models in which infrequent capital structure rebalancing is optimal the time series of market leverage and profitability in the quarters prior to rebalancing events match the patterns predicted by these models our results are not driven by investment layouts market timing payout or mechanical mean reversion of leverage

debt in industry equilibrium this article shows 1 how entry and exit of firms in a competitive industry affect the valuation of securities and optimal capital structure and 2 how given a trade off between tax advantages and agency costs a firm will optimally adjust its leverage level after it is set up we derive simple pricing expressions for corporate debt in which the price elasticity of demand for industry output plays a crucial role when a firm optimally adjusts its leverage over time we show that total firm value comprises the value of discounted cash flows assuming fixed capital structure plus a continuum of options for marginal increases in debt article published by oxford university press on behalf of the society for financial studies in its journal the review of financial studies

persistent expected and innate poverty estimates for semi arid rural south india 1975 1984 this paper uses nine years of panel data on 170 rural households in southern india to calculate intertemporal measures of poverty these include measures of 1 expected poverty that identify households likely to remain poor on average during any year 2 innate poverty that identify households that are poor owning to deep rooted characteristics that cannot easily be changed in the short run and 3 persistent poverty that identify households whose incomes fall below a fixed poverty line over a number of years the poverty rates estimated for the sample with the three measures are 61 percent 48 percent and 22 percent respectively c 1993 academic press inc copyright 1993 by oxford university press

can the trade off theory explain debt structure we examine the optimal mixture and priority structure of bank and market debt using a tradeoff model where banks have the unique ability to renegotiate outside formal bankruptcy flexible bank debt offers a superior tradeoff between tax shields and bankruptcy costs ease of renegotiation limits bank debt capacity however optimal debt structure hinges upon which party has bargaining power in private workouts weak firms have high bank debt capacity and utilize bank debt exclusively strong firms lever up to their lower bank debt capacity augment with market debt and place the bank senior therefore the tradeoff theory offers an explanation for i why young small firms use bank debt exclusively ii why large mature firms employ mixed debt financing and iii why bank debt is senior the tradeoff theory also generates predictions consistent with international evidence in countries where the bankruptcy regime entails soft tough enforcement of contractual priority bank debt capacity is low high implying greater less reliance on market debt

ideological segregation online and offline we use individual and aggregate data to ask how the internet is changing the ideological segregation of the american electorate focusing on online news consumption offline news consumption and face to face social interactions we define ideological segregation in each domain using standard indices from the literature on racial segregation we find that ideological segregation of online news consumption is low in absolute terms higher than the segregation of most offline news consumption and significan tly lower than the segregation of face to face interactions with neighbors co workers or family members we find no evidence that the internet is becoming more segregated over time

risk and insurance in a rural credit market an empirical investigation in northern nigeria credit contracts play a direct role in pooling risk between households in northern nigeria repayments owed by borrowers depend on realizations of random shocks by both borrowers and lenders the paper develops two models of state contingent loans the first is a competitive equilibrium in perfectly enforceable contracts the second permits imperfect information and equilibrium default estimates of both models indicate that quantitatively important state contingent payments are embedded in these loan transactions but that a fully efficient risk pooling equilibrium is not achieved the research is based on a year long survey in zaria nigeria conducted by the author

optimal capital structure and bankruptcy choice dynamic bargaining versus liquidation abstract we model a firm s optimal capital structure decision in a framework in which it may later choose to enter either chapter 11 reorganization or chapter 7 liquidation creditors anticipate equityholders ex post reorganization incentives and price them into the ex ante credit spreads using a realistic dynamic bargaining model of reorganization we show that the off equilibrium threat of costly renegotiation can lead to lower leverage even with liquidation in equilibrium if reorganization is less efficient than liquidation the added option of reorganization can actually make equityholders worse off ex ante even when they liquidate on the equilibrium path

how big is the debt overhang problem abstract i re examine the debt overhang problem where the flexible investment level rather than the irreversible decision whether or not to operate is used to measure the underinvestment caused by debt financing i measure a large overhang cost with long term debt or short term debt as is standard underinvestment with long term debt is more severe when investment opportunities are poor and is mitigated as opportunities improve in contrast underinvestment with short term debt remains significant even when investment opportunities are good firms lever up as opportunities improve to take advantage of tax shields so that equity claimants still face the incentive to underinvest

consumption and income seasonality in thailand many households in developing countries rely on seasonal agriculture for their incomes this paper investigates whether household consumption expenditure tracks income across seasons using data from thailand i contrast the seasonal consumption patterns of households with different seasonal income patterns and estimate the responsiveness of seasonal consumption to seasonal income i find little evidence that consumption tracks income over the course of the year the findings suggest that observed seasonal consumption patterns are the result of seasonal variations in preferences or prices common to all households rather than an inability of households to use savings behavior to smooth consumption

how big is the tax advantage to debt this paper uses an option valuation model of the firm to answer the question what magnitude tax advantage to debt is consistent with the range of observed corporate debt ratios we incorporate into the model differential personal tax rates on capital gains and ordinary income we conclude that variations in the magnitude of bankruptcy costs across firms can not by itself account for the simultaneous existence of levered and unlevered firms when it is possible for the value of the underlying assets to jump discretely to zero differences across firms in the probability of this jump can account for the simultaneous existence of levered and unlevered firms moreover if the tax advantage to debt is small the annual rate of return advantage offered by optimal leverage may be so small as to make the firm indifferent about debt policy over a wide range of debt to firm value ratios the observed range of debt to firm value ratios in the u s economy is roughly speaking from zero to 60 percent traditional explanatory models of capital structure have focused on the tradeoff between the tax shield and bankruptcy costs arising from the use of debt finance 2 9 10 18 19 other

option pricing when the underlying asset earns a below equilibrium rate of return a note in their classic paper black and scholes 2 present two derivations of the european call option pricing formula the first which we will refer to as the replication derivation relies on the fact that the returns from the option can be replicated by holding a continuously revised position in the underlying asset and bonds this implies that if an option is not priced according to the blackscholes formula there is a sure profit to be made by some combination of either short or long sales of the option and underlying asset this argument is seemingly independent of considerations relating to capital market equilibrium the second derivation which we will call the equilibrium derivation evolves from the requirement that the option earn an expected rate of return commensurate with the risk involved in holding the option as an asset this note considers the pricing of a call option on an asset which earns an expected rate of return lower than that necessary to induce investors to hold it we show in this case that even if the replication strategy is feasible it is inefficient a consequence of this is that the correct option pricing formula is different than the black scholes formula unlike the black scholes formula our formula requires as an input the difference between the expected rate of return on the underlying asset and that expected rate of return which would be required to induce holding of the asset other papers have made a similar point constantinides 3 and cox et al 4 have argued that in equilibrium the prices of traded contingent claims must satisfy a partial differential equation which is identical to the black scholes partial differential equation only when the underlying asset pays no dividends and earns a rate of return sufficient to induce holding of the asset more recently ingersoll 5 has noted that commodities often pay a nonpecuniary service yield the value of which must be taken into account in deriving the option price none of these authors however explain why the black scholes formula is sometimes inappropriate the purpose of this note is to demonstrate why the black scholes formula needs modification even if replication is feasible we provide an intuitive derivation of the correct formula and discuss why divergences of the equilibrium price from the black scholes formula do not result in arbitrage opportunities

expected poverty under risk induced welfare variability two of the most widely accepted stylised facts about agriculture in south asia sub saharan africa and elsewhere are that income is highly uncertain from one year to another and that deep and widespread poverty exists and yet there has been very little analysis of the joint problems of poverty and risk this paper offers a methodological approach to the issue of how risk affects poverty and applies it to household level data for dry areas of rural india the following questions are addressed under what conditions can one expect an increase in the riskiness of an income or consumption stream to increase poverty how should one measure the contribution of risk to poverty and what long term benefits in terms of reduced poverty can be expected from policies aimed at stabilising incomes of the poor such policies have been widely discussed in the indian subcontinent of late and their effect on rural

taxes and capital structure evidence from firms response to the tax reform act of 1986 while the theoretical relation between taxes and capital structure has been extensively analyzed the empirical evidence on this issue has thus far been inconclusive one of the main difficulties confronting previous empirical studies of the cross sectional relationship between taxes and leverage was the control of intervening variables the tax reform act of 1986 tra which drastically changed the tax regime provides a unique opportunity to assess the interaction between taxes and leverage decisions in a controlled environment the authors test the relationship between leverage and certain tax related variables for a large sample of companies in the years surrounding the enactment of tra the results support the tax based theories of capital structure the findings indicate that there exists a substitution effect between debt and nondebt tax shields and that both corporate and personal tax rates affect leverage decisions coauthors are dan givoly aharon r ofer and oded sarig article published by oxford university press on behalf of the society for financial studies in its journal the review of financial studies

a simple test of the nutrition based efficiency wage model abstract in the nutrition based efficiency wage model wages in labor markets in developing countries are rigid because lowering them would reduce worker productivity and increase the cost per efficiency unit i evaluate this claim using data from rural india i find that contrary to what has been assumed in these models a wage cut should lower the cost per efficiency unit of labor

income portfolios in rural ethiopia and tanzania choices and constraints the article analyses the different income portfolios of households using survey data from rural ethiopia and rural tanzania it suggests that the different portfolios held by households cannot be e

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

horses and rabbits trade off theory and optimal capital structure this paper examines optimal capital structure choice using a dynamic capital structure model that is calibrated to reflect actual firm characteristics the model uses contingent claim methods to value interest tax shields allows for reorganization in bankruptcy and maintains a long run target debt to total capital ratio by refinancing maturing debt using this model we calculate optimal capital structures in a realistic representation of the tra ditional trade off model in contrast to previous research the calculated optimal capital structures do not imply that firms tend to use too little leverage in practice we also esti mate the costs borne by a firm whose capital structure deviates from its optimal target debt to total capital ratio the costs of moderate deviations are relatively small suggesting that a policy of adjusting leverage infrequently is likely to be reasonable for many firms

debt policy and the rate of return premium to leverage equilibrium in the market for real assets requires that the price of those assets be bid up to reflect the tax shields they can offer to levered firms thus there must be an equality between the market values of real assets and the values of optimally levered firms the standard measure of the advantage to leverage compares the values of levered and unlevered assets and can be misleading and difficult to interpret we show that a meaningful measure of the advantage to debt is the extra rate of return net of a market premium for bankruptcy risk earned by a levered firm relative to an otherwise identical unlevered firm we construct an option valuation model to calculate such a measure and present extensive simulation results we use this model to compute optimal debt maturities show how this approach can be used for capital budgeting and discuss its implications for the comparison of bankruptcy costs versus tax shields

vulnerability seasonality and poverty in ethiopia most studies examining the dynamics of welfare have found large fluctuations in consumption over relatively short periods suggesting substantial short run movements in and out of poverty the consequence is that cross section poverty research may not be able to identify the poor in this study we explore this short run variability further we use a data set on a panel of 1450 households in different communities in rural ethiopia surveyed thrice over 18 months on average year to year poverty is very similar however we find high variability in consumption and poverty over the seasons and year by year econometric analysis suggests that consumption is affected by idiosyncratic and common shocks including rainfall and household specific crop failure while households respond to seasonal incentives related to changing labour demand and prices the results imply that a larger number of households are vulnerable to shocks than implied by the standard poverty statistics while some of the non poor in the

on the measurement of poverty official statistics in the united states and the united kingdom show a rise in poverty between the 1970 s and the 1980 s but scepticism has been expressed with regard to these findings in particular the methods employed in the measurement of poverty have been the subject of criticism this paper re examines three basic issues in measuring poverty the choice of the poverty line the index of poverty and the relation between poverty and inequality one general theme running through the paper is that there is a diversity of judgments which enter the measurement of poverty and that it is necessary to recognize these explicitly in the procedures adopted there is likely to be disagreement about the choice of poverty line affecting both its level and its structure in this situation we may only be able to make comparisons and not to measure differences and the comparisons may lead only to a partial rather than a complete ordering the first section of the paper discusses the stochastic dominance conditions which allow such comparisons illustrating their application by reference to data for the united states the choice of poverty measure has been the subject of an extensive literature and a variety of measures have been proposed in the second section of the paper a different approach is suggested considering a class of measures satisfying certain general properties and seeking conditions under which all members of the class which includes many of those proposed give the same ranking those sceptical about measures of poverty often assert that poverty and inequality are being confounded the third section of the paper distinguishes four different viewpoints and relates them to theories of justice and views of social welfare