Abstract not found

We investigate the determinants of capital structure choice by analyzing the financing decisions of public firms in the major industrialized countries. At an aggregate level, firm leverage is fairly similar across the G-7 countries. We find that factors identified by previous studies as correlated in the cross-section with firm leverage in the U.S., are similarly correlated in other countries as well. However, a deeper examination of the U.S. and foreign evidence suggests that the theoretical underpinnings of the observed correlations are still largely unresolved.

Since 1973 technological, political, regulatory, and economic forces have been changing the worldwide economy in a fashion comparable to the changes experienced during the nineteenth century Industrial Revolution. As in the nineteenth century, we are experiencing declining costs, increaing average (but decreasing marginal) productivity of labor, reduced growth rates of labor income, excess capacity, and the requirement for downsizing and exit. The last two decades indicate corporate internal control systems have failed to deal effectively with these changes, especially slow growth and the requirement for exit. The next several decades pose a major challenge for Western firms and political systems as these forces continue to work their way through the worldwide economy.

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

No. This paper investigates the relationship between financing constraints and investment-cash flow sensitivities by analyzing the firms identified by Fazzari, Hubbard, and Petersen as having unusually high investment-cash flow sensitivities. We find that firms that appear less financially constrained exhibit significantly greater sensitivities than firms that appear more financially constrained. We find this pattern for the entire sample period, subperiods, and individual years. These results (and simple theoretical arguments) suggest that higher sensitivities cannot be interpreted as evidence that firms are more financially constrained. These findings call into question the interpretation of most previous research that uses this methodology. “Our financial position is sound... Most of the company’s funds are generated by operations and these funds grew at an average annual rate of 29 % [over the past 3 years]. Throughout the company’s history this self-financing concept has not been a constraint on the company’s growth. With recent growth restrained by depressed economic

In this paper, we show that Tobin's q and firm diversification are negatively related. This negative relation holds for different diversification measures and when we control for other known determinants of q. We show further that diversified firms have lower q's than equivalent portfolios of specialized firms. This negativerelation holds throughout the 1980s in our sample. Finally, it holds for firms that have kept their number of segments constant over a number of years as well as for firms that have not. In our sample, firms that increase their number of segments have lower q's than firms that keep their number of segment constant. Our evidence is consistent with the view that firms seek growth through diversification when they have exhausted internal growth opportunities. We fail to find evidence supportive of the view that diversification provides firms with a valuable intangible asset.

Abstract not found

I analyze financing policies in a firm owned by atomistic shareholders who observe neither cash flows nor management’s investment decisions. Management derives perquisites from investment and invests as much as possible. Since it always claims that cash flow is too low to fund all positive net present value projects. its claim is not credible when cash flow is truly low. Consequently, management is forced to invest too little when cash flow is low and chooses to invest too much when it is high. Financing policies, by influencing the resources under management’s control, can reduce the costs of over- and underinvestment. 1.

Abstract not found

It is well known that firms are more likely to issue equity when their market values are high, relative to book and past market values, and to repurchase equity when their market values are low. We document that the resulting effects on capital structure are very persistent. As a consequence, current capital structure is strongly related to historical market values. The results suggest the theory that capital structure is the cumulative outcome of past attempts to time the equity market.