bluuebunny/crossref_metadata_2025_split huggingface dataset:
USING PROJECT FINANCE TO FUND INFRASTRUCTURE INVESTMENTS
Authors: Brealey Richard A. , Cooper Ian A. , Habib Michel A. 
Published: April 2005

For much of the past century, there has been an increased tendency for large infrastructure projects to be funded and operated by governments. Since the early 1980s, however, private‐sector financing and management of such projects have experienced a dramatic revival. In some cases, this revival has taken the form of the “privatization” of an entire industry. But another, increasingly common, form has been the use of project finance to fund instrastructure investments. Besides being widely used in infrastructure investments like telecommunications and power generation in developing countries, the use of project finance has recently been extended by the U.K.'s Private Finance Initiative to fund public enterprises as diverse as the construction and operation of prisons, hospitals, subway cars, and the National Insurance computer system.In a project financing, the project is managed by a separate company that is owned by a project sponsor (or sponsors) who usually takes an active role in the management of the project. The project company enters into a complex series of contracts with multiple parties, including the host government, the project's customers and suppliers, and the banks that typically provide most of the debt financing.This paper argues that the equity investment by the project's operators works together with high debt ratios and the web of contractual arrangements to reduce “agency” problems in the management of large projects. It also shows how the contracts shift the various project risks to those parties best able to appraise and control them. Finally, it discusses why most project financing takes the form of limited recourse bank loans to the project company rather than, say, public bonds with full recourse to the sponsors.
BEHIND THE CORPORATE HEDGE: INFORMATION AND THE LIMITS OF “SHAREHOLDER WEALTH MAXIMIZATION”
Authors: Hu Henry T. C. 
Published: April 2005

The article begins by setting out three alternative conceptions of the corporate objective function. Relying on this framework, it shows that legal analyses tend to neglect conflicts between the interests of the corporate entity and the interests of shareholders over the amount of corporate risk‐taking. Financial analyses tend to ignore both constraints on managerial discretion imposed by law and a fundamental ambiguity the author identifies in the “shareholder wealth maximization” assumption that underlies such analyses.This ambiguity arises in part from market “frictions”–particularly, the investor uncertainty and heightened price volatility that stem from informational “asymmetry.” Such an information gap between management and outside investors (along with market “irrationality”) can cause material disparities between the actual trading price and the intrinsic value (or what the author calls the “blissful price”) of a company's shares. As a consequence, corporate hedging that maximizes actual share values may not maximize intrinsic values (and vice versa), thus giving rise to a managerial dilemma.Previous analyses have also failed to give adequate consideration to the expectations of shareholders. If, for example, the shareholders of a natural resource company are seeking a relatively “pure play” on that resource–in part because they believe the company's management has no comparative advantage in managing price risks–corporate hedging that increases shareholder wealth may re‐duceshareholder welfare. In this sense, the usual “shareholder wealth maximization” directive is not only ambiguous, but also incomplete.These problems stem not only from informational asymmetry, but from other institutional realities (such as the “political” taint associated with reported derivative losses of any kind) that raise the information costs of using derivatives. The article concludes with some suggestions for improving disclosure of corporate risk management “philosophy.” Better disclosure may not only help reduce such information costs, but could also encourage corporations to find–and stick to–their derivatives niche.
INCORPORATING COUNTRY RISK IN THE VALUATION OF OFFSHORE PROJECTS
Authors: Lessard Donald R. 
Published: April 2005

Offshore projects, especially those in emerging economies, are generally viewed as more risky, and thus as contributing less to shareholder value, than otherwise comparable domestic investments. Emerging economies are typically more volatile than the economies of industrialized countries. They also present a greater array of risks that are (perceived as being) primarily of a downside nature, such as currency inconvertibility, expropriation, civil unrest, and general institutional instability. Further, because such risks are relatively unfamiliar to the investing companies, the companies are likely to make costly errors in early years and to require more time to bring cash flows and rates of return to acceptable steady‐state levels.To reflect these higher risks and greater unfamiliarity, many companies include an extra premium in the discount rate they apply to offshore and, particularly, emerging‐market projects. However, the basis for these discount rate adjustments is often arbitrary. Such adjustments do not properly reflect objective information available about either the nature of these risks, or about the ability of management to manage them. Nor do they take into account the reality that the risks stemming from unfamiliarity fall over time as the firm progresses along the learning curve.As a result, companies often “over discount” project cash flows in compensating for these risks, and thus unduly penalize offshore projects. More important, adjusting for country risk using arbitrary adjustments to the discount rate fails to focus management's attention on strategic and financial actions can be taken to reduce risk—notably, actions capable of transferring some of the company's exposures to specific risks to different parties with comparative advantages in bearing those risks.This paper outlines a four‐step procedure for assessing overseas risks that integrates these various aspects:

Classify risks in terms of various stakeholders' comparative advantage in risk‐taking based on their: (a) existing portfolio of assets; (b) access to information; and (c) capabilities for reducing risk.
Allocate risk through project structuring and financial engineering to exploitthese comparative advantages.
Adjust resulting cash flows (relative to their most‐likely levels) for (a) the impact of “asymmetric” risks; (b) learning effects; and (c) potential competitive options and/or barriers to entry resulting from comparative advantage in dealing with risks.
Discount resulting expected cash flows at a risk‐adjusted discount rate that reflects the covariance of the cash flows with the benchmark portfolio.
AN ARGUMENT AGAINST HEDGING BY MATCHING THE CURRENCIES OF COSTS AND REVENUES
Authors: Harris Trevor S. , Melumad Nahum D. , Shibano Toshi 
Published: April 2005

One way for multinationals to manage their exposures to foreign currency fluctuations is by matching the currencies of costs and revenues, a practice sometimes referred to as “natural hedging.” Proponents of this risk‐management technique argue that matching currencies decreases profit variability.Using the example of a U.S. firm competing with a French firm for sales in France, the authors analyze the desirability of the U.S. firm's matching currencies of costs and revenues by sourcing in France rather than in the U.S. They find that in such settings with limited competition, while matching reduces profit variability, it also causes a reduction in expected profitability–a potential drawback that appears to have been overlooked in previous discussions.The authors demonstrate that the U.S. firm, by choosing not to match currencies, retains the strategic flexibility to adjust its prices and quantities in order to exploit the competitive cost differentials caused by exchange rate shifts. The expected profit effects of matching depend on the tradeoff between expected cost savings, if any, of sourcing abroad versus the reductions in expected profits due to the loss of strategic flexibility. They argue that the benefits of strategic flexibility associated with sourcing in the U.S. can yield an increase in expected profits that may outweigh the cost savings and hedging benefits of currency matching.
TO OWN OR TO FRANCHISE?: THE INTERNATIONAL CONTROL DECISION FOR SERVICE COMPANIES
Authors: Fladmoe‐Lindquist Karin , Jacque Laurent L. 
Published: April 2005

Franchising, which accounts for a significant share of the U.S. domestic service industry, has also become a major strategic alternative in the international expansion of U.S. service firms. This article attempts to explain the international franchising and control decision by U.S.‐based service firms in terms of a theoretical framework that borrows from agency theory and transaction‐cost analysis. Specifically, it attempts to answer the following question: Why would a well‐established service firm choose to operate in certain countries through a franchising agreement whereas in others it would set up a wholly‐owned subsidiary?In their empirical test of a sample of over 10,000 international service units that were either owned or franchised by 12 U.S. multinational service companies, the authors find that the most important determinants of the decision to franchise rather than own are the following four: (1) geographical distance from headquarters; (2) extent of cultural differences; (3) years of international experience; and (4) degree of concern about reputation or brand name. Greater geographic and cultural distance make service companies more likely to franchise, as do greater experience and familiarity with international business settings. Greater concern about brand name, by contrast, makes companies more likely to own than franchise. Measures of political and exchange risk have no detectable effect.
EXPLAINING PREMIUMS AND DISCOUNTS ON CLOSED‐END EQUALITY COUNTRY FUNDS
Authors: Arshanapalli Bala , Choi Jongmo Jay , Clagget E. Tyler , Doukas John , Lee Insup 
Published: April 2005

Over the past decade or so, the surge of interest among U.S. investors in international investing has led to the creation of numerous foreign equity country funds. Like U.S. closed‐end mutual funds, the prices of such closed‐end country funds fluctuate widely in relation to their underlying net asset values (NAVs).In this paper, the authors summarize the major findings of their recent study of the performance of 28 country funds relative to their NAVs over the period 1978–1995. While 20 of the 28 funds traded at average discounts to their net asset values, the discounts for the country funds were smaller than those of the average U.S. fund, and over a quarter of the funds sold at premiums.In an attempt to explain such premiums or discounts, the authors examined primarily three factors: (1) the sensitivity of country‐fund returns (relative to that of local market indices) to U.S. returns; (2) the possible effects of local government investment restrictions; and (3) the impact of exchange rate changes. Although most of the eight funds that traded at average premiums represented countries with significant restrictions on capital flows and foreign ownership, there were also a number of funds with similar restrictions trading at significant discounts. In exploring the reasons for such discounts, the authors noted that the returns to the country funds were “surprisingly sensitive” to U.S. market conditions, thus reducing the extent of their diversification benefits for U.S. investors. The article also raises the possibility that if such country funds are not “priced at the margin” by globally diversified investors, U.S investors' “country‐risk sentiments” could cause such funds to trade at discounts.
GAMBLING, SPECULATION, AND INSURANCE: WHY THEY CONTINUE TO BE CONFUSED AND CONDEMNED
Authors: Brenner Reuven 
Published: April 2005

Governments and the media have often attacked financiers for “speculating” in their countries' currencies, thereby forcing them to make drastic and sometimes painful changes in monetary and fiscal policies. This article argues that such accusations have no basis in economic theory, and that “such rhetoric should be seen for what it is: an attempt by politicians and policy‐makers to divert attention and blame from their own mismanagement.”More generally, the author argues that the failure of the general public to understand the social benefits of financial activies such as trading in government bonds, commodity futures, and, more recently, financial derivatives has led throughout history to “prejudice, bad laws, and bad regulations.” Much as the charging of interest and certain forms of insurance were proscribed by the medieval Church, agricultural commodity futures were attacked in the 19th century (and in much of the 20th as well) in the U.S. and elsewhere as thinly disguised forms of gambling.Moreover, the same restrictions that were imposed on gambling and futures markets during the 19th and early 20th centuries are now imposed in many Third‐World countries. Instead of encouraging the use of forward markets by small producers and traders, and promoting the development of organized commodity markets and banks in local centers, most less‐developed countries today support national and international “stabilization” measures such as buffer stocks and regulations like price floors, price ceilings, and crop quotas. Meanwhile, in Western nations, governments continue to accuse financial markets of “destabilizing speculation” and of a myopic obsession with short‐term profitability—even as the U.S. IPO market continues to assign record values to companies that have yet to show profits. Viewed in this light, the media and regulatory assaults on the junk bond markets in the late 1980s and on derivatives in the early 1990s are only the latest in a long line of misguided attacks on financial innovation.
PERFORMANCE LEVERAGE, AND OWNERSHIP STRUCTURE IN REVERSE LBOs
Authors: Holtbausen Robert W. , Larcker David F. 
Published: April 2005

Previous studies have provided convincing evidence of improvements in the performance of companies that undergo leveraged buyouts (LBOs). This article presents evidence from the authors' recent study of the performance of 90 “reverse LBOs–LBO firms that go public again in an IPO—after they return to public ownership. The aim of the study was to track the performance of reverse LBOs and to reveal any association between operating performance and changes in leverage and equity ownership.Among the principal findings of the study were the following: Despite a substantial decline in leverage ratios and equity ownership by insiders at the time of the IPOs, equity ownership of reverse LBOs remained more concentrated and leverage higher than that of public companies in the same industries.The operating performance of reverse LBOs was significantly better than that of the median firm in their industries in the year prior to and in the year of the IPO. Although there is some evidence of a deterioration in the performance of the reverse‐LBO firms, they continue to outperform their industry competitors for at least four full fiscal years after the IPO.Greater reductions in the percentage equity owned by managers and other insiders at the time of the reverse LBO are associated with larger declines in operating performance.The stock price performance of reverse LBOs after going public appears more “rational” than that of other IPOs—that is, there is less initial under pricing and no sign of the negative, longer‐term abnormal returns reported by recent studies of IPOs.
DESIGNING CAPITAL STRUCTURE TO CREATE SHAREHOLDER VALUE
Authors: Opler Tim C. , Saron Michael , Titman Sheridan 
Published: April 2005

In the past decade, many U.S. companies have launched aggressive share repurchase programs with the expectation that value can be created by returning excess capital to shareholders and moving the firm closer to its optimal capital structure. But how much capital does a company really need to support its business activities?This article presents an economic framework or “model” that can be used to simulate the effect of various capital structure choices on shareholder value. The fundamental insight underlying the model is that judicious use of debt can add value by reducing corporate taxes and strengthening management incentives to increase efficiency, but that too much debt can result in a loss of business and perhaps a costly reorganization. Indeed, one of the key findings of the authors' recent research is that companies with highly leveraged balance sheets suffer disproportionately large losses in market share and value during industry downturns. As illustrated in a case study of a hypothetical general merchandiser, the model makes it possible to identify an optimal debt‐equity ratio (and percentage of fixed‐ versus floating‐rate debt)—one that balances the value of the tax shield from debt against the increased risk of financial distress.
A PRACTICAL APPROACH TO CAPITAL STRUCTURE FOR BANKS
Authors: Davis Donald , Lee Kevin 
Published: April 2005

Like U.S. companies in many industries. American's bank's attention to capital structure is reflected in their high level of stock repurchases in recent years. But, if banks are responding to some of the same economic forces that are driving industrial firms to shed excess capital, there are some important differences between banks and industrials that complicate the process of establishing appropriate capital levels for banks. The most important difference comes from regulation. Since the implementation by FDICIA of risk based capital guidelines in the early 1990s, the capital ratios of U.S. banks have increased substantially. In fact, most U.S. banks today carry considerably more capital than is required by the regulators. This tendency to exceed regulatory capital levels is especially pronounced for smaller institutions, which can in turn be explained by the riskier profile of smaller banks: While such banks have the highest proportion of the lowest‐risk assets (such as cash, mortgages, and marketable securities), they also have a much greater degree of concentration (and co‐variance) among their riskier assets.This article recommends using a quantitative economic approach (such as a RAROC model) to generate a lower bound on the amount of necessary capital. This estimate can then be translated into a target capital structure by taking account of a variety of practical, qualitative considerations, including banks' preference to maintain capital levels that provide a comfortable margin above bank regulators' “well capitalized” levels. Although such considerations will vary in importance from one bank to another, they will generally include management's risk tolerance, regulatory constraints, market pressures (as reflected in peer group capital levels), the bank's prospects and investment plans, and, for larger banks, rating agency requirements.
ASSET BACKED COMMERCIAL PAPER: GET WITH THE PROGRAM
Authors: Stone Charles A. , Zissu Anne 
Published: April 2005

Asset backed commercial paper, or ABCP for short, is commercial paper that is issued by a special purpose corporation against undivided interests in corporate receivables, including retail, trade, or export receivables. Since the inception of the market in 1983, the volume of ABCP has grown to represent about 16% of the total commercial paper market.ABCP is a valuable source of liquidity for companies that generate a steady flow of quality receivables. Many ABCP programs restrict purchases to companies with investment grade ratings. For such companies, ABCP may help diversify funding sources and allow the firms to lower their funding costs by arbitraging different markets. But ABCP programs can also prove a low‐cost source of funding for companies that either do not have access to the CP market through their own balance sheets or have used up their prime CP and bank borrowing capacity. ABCP is also an important source of funds for smaller companies requiring liquidity to support rapid growth.ABCP programs can be viewed as “synthetic” revolving bank credit facilities in the sense that they can provide the same flow of funds as revolving credits by using a vehicle constructed specifically to refinance pools of receivables. The benefits of ABCP relative to bank lines of credit may take the form of either lower interest rates, less restrictive financial covenants, or both. Although ABCP is at best a partial substitute for bank credit, the liquidity provided by an asset backed commercial paper program can be used to hold down the costs of bank borrowing.
PRIVATE EQUITY: SOURCES AND USES
Authors: Bradford Travis , Smith Roy C. 
Published: April 2005

Private equity capital is playing a large and growing role in the funding of small to medium‐sized, high‐growth businesses. Today's private equity investment typically takes the form of purchase of a minority interest in a post‐start‐up, high‐technology company followed by an IPO a few years later. A large number of such investors are scouring the markets for new investment possibilities and the competitive pressures are growing.Although private equity investors can and often do add significant value to a company, private equity is potentially expensive, in terms of both loss of ownership and loss of control over long‐term strategic decisions of the company. Owner‐managers who want to retain as much of both as possible are advised to install more formalized business procedures, expand the company's outside relationships, and become more familiar with the company's financial needs and options. These changes should reduce capital needs, reduce the costs of private equity funding, and increase negotiating leverage when dealing with large, sophisticated private capital investors.
USING EXCHANGE‐TRADED EQUITY FLEX PUT OPTIONS IN CORPORATE STOCK REPURCHASE PROGRAMS
Authors: Angel James J. , Gastineau Gary L. , Weber Clifford J. 
Published: April 2005

Casual evidence suggests that as many as 10% of the companies repurchasing their stock over the past decade have used the sale of puts on the company's stock as part of the repurchase program. This article describes a new instrument for such corporate stock buybacks recently introduced by the American Stock Exchange: Equity Flex puts on the issuer's stock. When and if the puts are exercised, the company's shares are retired—often on better terms and with better cash flow timing than the company could achieve with a conventional stock repurchase program.To date, such stock repurchase programs have been conducted primarily using over‐the‐counter put options. The new Equity Flex puts promise to eliminate the relative advantages of OTC transactions and offer stock repurchasers better pricing and increased liquidity. Use of exchange markets can also help overcome any reluctance a financial officer might have to rely on prices offered by a single dealer.