We survey 392 CFOs about the cost of capital, capital budgeting, and capital structure. Large firms rely heavily on present value techniques and the capital asset pricing model, while small firms are relatively likely to use the payback criterion. We find that a surprising number of firms use their firm risk rather than project risk in evaluating new investments. Firms are concerned about maintaining financial flexibility and a good credit rating when issuing debt, and earnings per share dilution and recent stock price appreciation when issuing equity. We find some support for the pecking-order and trade-off capital structure hypotheses but little evidence that executives are concerned about asset substitution, asymmetric information, transactions costs, free cash flows, or personal taxes. Key words: capital structure, cost of capital, cost of equity, capital budgeting, discount rates, project valuation, survey. 1 We thank Franklin Allen for his detailed comments on the survey instrument and the overall project. We

We test the pecking order theory of corporate leverage on a broad cross-section of publicly traded American firms for 1971 to 1998. Contrary to the pecking order theory, net equity issues trackthe financing deficit more closely than do net debt issues. While large firms exhibit some aspects of pecking order behavior, the evidence is not robust to the inclusion of conventional leverage factors, nor to the analysis of evidence from the 1990s. Financing deficit is less important in explaining net debt issues over time for firms of all sizes.

This paper reviews the theory and evidence regarding the impact of taxation on corporate financial policy. Starting from a basic characterization of the classical corporate income tax and its effects, the analysis focuses on three areas of research: equity policy, debt-equity decisions, and choices regarding ownership structure and organizational form. The discussion stresses the distinction between nominal and more fundamental financial differences for example, in the relationship between borrowing and leasing and that financial policy involves choices not only among different underlying policies but also among characterizations of a given policy. The final section offers some brief reflections on the implications of continuing financial innovation.

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There are relatively few direct tests of the economic effects of asymmetric information because of the difficulty in identifying exogenous information measures. We propose a novel exogenous measure of information based on the quality of property tax assessments in different regions and apply this to the U.S. commercial real estate market. We find strong evidence that information considerations are significant. Market participants resolve information asymmetries by purchasing nearby properties, trading properties with long income histories, and avoiding transactions with informed professional brokers. The evidence that the choice of financing is used to address information concerns is mixed and weak. We thank Michael Arabe, John Edkins, and Peggy McNamara as well as COMPS.com for providing commercial real estate data. We are grateful to Stephen Cauley for his assistance and advice and have benefitted from the

This paper examines the interaction between a firm's volatility and dividend policies and capital structure and maturity policies. The firm is permitted to costlessly and continuously select any asset volatility and dividend yield, within bounds. Simple and intuitive rules are derived for the firm's optimal dividend and volatility choices. It is found that the firm always optimally selects either the maximal or minimal dividend yield and asset volatility and that these decisions depend, respectively, only upon the delta and gamma of the firm's equity. These optimal dividend and volatility policies are then implemented within the context of the Leland and Toft (1996) capital structure model. It is found that firms will optimally select a low dividend yield and a low asset volatilityover a greater range of firm asset values the shorter is the maturity of the firm's debt. Anticipating this behavior, bondholders will demand a smaller credit spread for short-term debt when the firm has great leewayinchoosing its asset volatility. In turn, this may induce a firm to optimally issue short-term debt. It is also found that the better is a firm's ability to hedge, the more frequently it will refrain from paying dividends. This confirms the well-known result that risk management mitigates incentives for underinvestment. Here it is shown to apply ex-post as well as ex-ante.

We analyze whether board structure and director independence in closed-end investment companies are related to shareholder interests in ways that are consistent with boards being effective monitors. We report that funds with relatively low expense ratios, one measure of board effectiveness, have smaller boards, a higher proportion of board members who are legally considered independent, relatively low director compensation, and charter provisions that specify remedial action if discounts become large. Evidence from our analysis of major fund restructuring decisions, including share repurchases, open-ending proposals and right offerings, is largely consistent with the expense ratio analysis. Overall, board characteristics that we identify with effective board independence are associated with lower expense ratios and value-enhancing restructurings.

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. In this article, rationales for the widespread existence of commercial real estate leasing are examined. Given the tendency of tenants to abuse property to their own advantage, there must be powerful incentives on the other side to encourage landlords and property managers to participate in the widespread practice of leasing. We suggest that common leasing practices are the consequence of many rationales, including the ability of the landlord to solve free-rider problems in maintaining property desirability and informational asymmetries that exist between landlords and tenants. A lessor's natural response to tenants' tendency to abuse or overuse rental property (see Henderson and Ioannides, 1983; Miceli, 1989; and Kanemoto, 1990; and Benjamin, de la Torre and Musumeci, 1995) is to raise the rent. If would-be tenants can buy property, however, the result may be failure of the leasing market (Benjamin et al. 1995). Yet since World War II we have witnessed a virtual explosion in ...