Postmodern Corporate Finance

One of the core tenets of modern finance theory is that corporations create value by producing operating rates of return on capital that are greater than the cost of capital. “Postmodern” corporate finance, while reaffirming the importance of earning an adequate return on capital, also attempts to restore at least part of the traditional corporate emphasis on top-line growth that prevailed before the intense focus on returns by modern shareholder value advocates. One important reason for the heightened emphasis on growth in addition to returns is that most rate-of-return measures used by companies and investors are based on conservative accounting practices that make old assets look more profitable than new ones, thereby discouraging investments in growth. This article introduces a new return measure called “Gross Business Return” that, when evaluated against a Required Return framework that reflects the level of current stock prices, has a stronger correlation with how companies are valued by the stock market. Moreover, in reviewing historical returns over time for both the market and specific industries, the author's research suggests that the market appears to demand considerably lower current returns than those implied by traditional weighted average cost of capital (WACC) approaches. And to the extent corporate executives rely on WACC, they could be passing up valuable growth opportunities. To help evaluate tradeoffs between growth and return, the author introduces a cash-based measure of corporate economic profit called Residual Cash Earnings. Unlike most traditional return and economic profit measures, Residual Cash Earnings, when expressed as a percentage of sales, provides a way for corporate managers to identify growth opportunities that, while producing current returns lower than WACC, are likely to add value over a multi-year time horizon. These new measures and analytical tools are suitable for strategic planning, budgeting, resource allocation, performance measurement, and rewards. Consistent application of these principles across these management processes provides a framework for constantly rebalancing the emphasis on growth and return to adapt to changes in the economy, industry, and competitive landscape.     

Corporate Governance and Expected Stock Returns: Evidence from Germany

Recent empirical work shows evidence for higher valuation of firms in countries with a better legal environment. We investigate whether differences in the quality of firm‐level corporate governance also help to explain firm performance in a cross‐section of companies within a single jurisdiction. Constructing a broad corporate governance rating (CGR) for German public firms, we document a positive relationship between governance practices and firm valuation. There is also evidence that expected stock returns are negatively correlated with firm‐level corporate governance, if dividend yields are used as proxies for the cost of capital. An investment strategy that bought high‐CGR firms and shorted low‐CGR firms earned abnormal returns of around 12% on an annual basis during the sample period.     

Corporate financing decisions, managerial market timing, and real investment

Both market timing and investment-based theories of corporate financing predict under-performance after firms raise capital, but only market timing predicts that the composition of financing (equity compared with debt) should also forecast returns. In cross-sectional tests, we find that the amount of net financing is more important than its composition in explaining future stock returns. In the time series, investment-based factor models explain abnormal stock performance following a variety of corporate financing events that previous studies link to market timing. At the aggregate level, the amount of new financing is also more important for future market returns than its composition. Overall, our joint tests reveal that measures of real investment are correlated with future returns and measures of managerial market timing are not.     

Corporate Investment and Asset Price Dynamics: Implications for the Cross-section of Returns

We show that corporate investment decisions can explain the conditional dynamics in expected asset returns. Our approach is similar in spirit to Berk, Green, and Naik (1999) , but we introduce to the investment problem operating leverage, reversible real options, fixed adjustment costs, and finite growth opportunities. Asset betas vary over time with historical investment decisions and the current product market demand. Book‐to‐market effects emerge and relate to operating leverage, while size captures the residual importance of growth options relative to assets in place. We estimate and test the model using simulation methods and reproduce portfolio excess returns comparable to the data.     

The Real and Financial Implications of Corporate Hedging

We study the implications of hedging for corporate financing and investment. We do so using an extensive, hand‐collected data set on corporate hedging activities. Hedging can lower the odds of negative realizations, thereby reducing the expected costs of financial distress. In theory, this should ease a firm's access to credit. Using a tax‐based instrumental variable approach, we show that hedgers pay lower interest spreads and are less likely to have capital expenditure restrictions in their loan agreements. These favorable financing terms, in turn, allow hedgers to invest more. Our tests characterize two exact channels—cost of borrowing and investment restrictions—through which hedging affects corporate outcomes. The analysis shows that hedging has a first‐order effect on firm financing and investment, and provides new insights into how hedging affects corporate value. More broadly, our study contributes novel evidence on the real consequences of financial contracting.     

Shareholder Value Maximization—Is There a Role for Corporate Social Responsibility?

Although often viewed as inconsistent with the corporate goal of value maximization, the corporate social responsibility (CSR) movement can add value by helping companies develop and maintain their reputations for fair dealing with each of their important non-investor stakeholder groups, including employees, suppliers, and local communities. Such "reputational capital" in turn helps reinforce the commitment of those stakeholders through what amount to informal or implicit contracts—contracts that are often critical to a company's long-run success.
Nevertheless, the importance and difficulty of balancing stakeholder interests against the overarching goal of efficiency and value maximization cannot be overstated. As with any corporate investment, each dollar of investment in a corporate stakeholder group should be justified by at least a dollar of expected return over a finite time horizon. By practicing this kind of "enlightened value maximization," to borrow Michael Jensen's phrase, management is likely to end up increasing not only its returns to shareholders, but the size of the corporate pie that is divided among all its stakeholders. Viewed in this light, CSR and value maximization have the potential to be complementary undertakings that result in a virtuous circle in which "doing good" helps companies do well, and doing well provides the wherewithal to do more good.     

Quality of Corporate Governance and Cost of Equity in Brazil

Common sense suggests that the adoption of better corporate governance practices, which enable greater transparency, more protection against capital expropriation, and greater rights for investors, should have the effect of reducing the risk perceived by shareholders and so lead to lower required returns. This article investigates the existence of an inverse relationship between the quality of corporate governance and the cost of equity capital for Brazilian companies. The authors begin by constructing a broad index of corporate governance quality that combines four key aspects of corporate governance: (1) transparency and disclosure; (2) structure of the board of directors; (3) ownership and control structure; and (4) shareholder rights. To estimate the cost of equity, the CAPM was applied by using ex ante market premiums calculated with a simple discounted‐dividend method. On the basis of a sample of 67 Brazilian companies traded at the São Paulo Stock Exchange (Bovespa) during the period 1998–2008, the study concludes that there is a significant inverse relationship between the cost of equity and a number of proxies for effective governance, particularly those representing transparency and disclosure. Closer inspection of the reductions in cost of capital associated with improvements in the specific governance quality index components suggests that companies would benefit the most from prompt submission of information to regulators and full disclosure of executive pay.     

Capital Deployment Roundtable: A Discussion of Corporate Investment and Payout Policy

U.S. companies are now reportedly earning record‐high operating returns on capital while at the same time continuing to set new records both for corporate cash holdings and distributions to investors in the form of dividends and stock repurchases. But are most of these companies really maximizing value? And what role, if any, do these large distributions play in creating value? These are the two main questions that are addressed by a small group that includes two senior corporate executives and two representatives of well‐known activist investors. A number of panelists suggest that many companies, in misguided efforts to maximize returns on capital, have been using hurdle rates that are too high and so sacrificing value‐adding investment opportunities. As evidence for this claim, they cite evidence that, in recent years, the companies that have achieved the highest stock market returns appear to have made conscious decisions to reduce their returns on capital to pursue higher growth. Another increasingly common charge against U.S. companies is their tendency to pay out excessive capital to investors, especially in the form of stock repurchases at prices that turn out to be too high. But this last practice, however widespread, may not be as troubling as it has been made out to be. Although it involves a wealth transfer from existing to selling shareholders, overall investor value is lost only if such buybacks lead to corporate underinvestment. But, as a number of panelists (including the activist investors) point out, such payouts of capital have generally functioned as a demonstration of corporate managers' commitment to investing and operating with the optimal, or value‐maximizing, level of capital—neither too much nor too little.     

中国上市企业投资的资本成本敏感性估计

企业投资对资本成本的敏感性是识别货币政策利率传导渠道是否畅通以及IS曲线斜率的重要参数。本文基于新古典投资模型框架,使用2004-2017年中国上市公司非平衡面板数据,估计了中国上市企业投资的资本成本敏感性,并侧重检验了融资约束对企业投资资本成本敏感性的影响。估计结果显示:(1)上市企业投资的加权资本成本弹性显著为负,且已具有较强敏感性(长期弹性系数为-0.16～-0.27),价格型货币政策工具的传导条件在上市公司投资环节正逐渐具备 ;(2)对加权资本成本的结构性估计显示,企业投资主要对债务资本成本的变动较为敏感且系数显著为负,而对股权资本成本的变动敏感程度较低且不稳定;(3)与传统观点相反的是,非国有控股上市企业投资的资本成本敏感性显著低于国有控股上市企业;较强的融资约束是导致非国有控股上市企业投资的资本成本敏感性较低的重要原因,应重视民营经济面临较强的融资约束对价格型货币政策工具传导机制的负面影响。本文的研究为中国货币政策框架的转型以及价格型货币政策传导机制的有效性提供了微观经验证据的支持。     

Corporate Governance and Value: Evidence from “Close Calls” On Shareholder Governance Proposals

The authors summarize the findings of their recent study of the effects of specific corporate governance provisions on firm value. Using a sample of governance provisions that were subjected to shareholder votes during the period 1997–2011, this study analyzes cases in which shareholder‐sponsored corporate governance proposals were either rejected or passed by a small margin (no more than 5% of the vote). By so doing, this study helps correct two limitations of the existing governance literature: (1) that the effects of expected governance changes are already incorporated in share prices (the “expectations” problem); and (2) that governance policies are often a consequence rather than a cause of other variables such as corporate performance and are thus correlated with many other firm characteristics (the “endogeneity” problem). The authors' findings show that expected improvements in corporate governance through the adoption of particular corporate governance provisions—particularly the removal of anti‐takeover provisions—is associated with both positive abnormal stock returns and improvements in long‐term firm operating performance. The authors estimate that the adoption of such governance proposals increases shareholder value by 2.6%, on average. Moreover, these returns are consistent with, and thus accurate predictors of, future changes in corporate investment (reductions of capital spending, in most cases) and improvements in operating performance.     

地方公共债务与资本回报率——来自新口径债务数据和三重机制检验的经验证据

资本回报率对于理解我国经济运行具有重要意义。本文通过匹配2006-2015年地级市层面的新口径债务数据和资本回报率数据,实证检验了地方公共债务扩张对资本回报率的影响效应及其地区异质性表现,并从宏观、中观和微观三个角度开展作用机制分析。研究发现:第一,地方公共债务扩张对我国宏观资本回报率产生了负面影响,此影响在经过一系列稳健性检验后依然存在;第二,地方公共债务的扩张通过降低基础设施投资效率、提高房地产业投资占比和挤出企业投资产生影响;第三,上述负面影响在非城市群、非大中城市和土地融资依赖度更高的城市表现更为突出。以上结论为深化地方政府投融资体制改革提供了政策参考,未来应注重债务资金的绩效管理和使用效率,促进经济高质量发展。     

Value‐Added Per Share (VAPS): A Value‐Relevant Corporate Performance Metric

The authors introduce Value Added Per Share (VAPS) as a value‐relevant metric that is intended to complement earnings per share (EPS) in helping corporate managers and analysts understand and overcome the limitations of GAAP‐based reporting. VAPS discounts a firm's past and projected cash flows at its “cost of capital,” allowing companies to avoid the subjective accounting accrual process and other practices that often make EPS misleading. A company's VAPS is calculated in three main steps: (1) estimate the change in the capitalized value of after‐tax operating cash flow by taking the net change (plus or minus) of the firm's operating cash flow after taxes and dividing that number by the firm's cost of capital; (2) subtract total investment expenditures; and (3) divide by the number of shares outstanding. By capitalizing the change in after‐tax operating cash flow, one finds the net change in a firm's current operations value. By subtracting investment expenditures from that change in current operations value, the analyst gets a clearer picture of the benefit to shareholders net of the funds used to create that benefit. Consistent with basic theory, VAPS is positive when a company earns a return at least equal to its cost of capital and negative otherwise. Because of their fundamental differences, EPS and VAPS are likely to send different signals, and VAPS is expected to provide greater insight into stock price changes. The authors provide the findings of statistical tests showing the superior explanatory power of VAPS and recommend that companies publish statements of VAPS along with standard GAAP results, especially since the former can be readily calculated using the available income statement, balance sheet, and cash flow statement data.     

Inflation,real returns and capital investment

We find evidence for the hypothesis of Mundell (1963) and Tobin (1965) that the expected real return component of interest rates is negatively related to the expected inflation component. In the Mundell-Tobin model, the variation in expected real returns is caused by the variation in expected inflation. Our evidence suggests, however, that the variation in expected real returns is more fundamentally an outcome of the capital expenditures process. Equilibrium expected real returns vary directly with capital expenditures in order to induce equilibrium allocations of resources between consumption and investment. This positive relation between expected real returns and real activity, which comes out of the real sector, combines with a negative relation between expected inflation and real activity, which is traced to the monetary sector, thus inducing the negative relation between expected inflation and expected real returns predicted by Mundell and Tobin but explained in terms of a model much different from theirs.     

Corporate fraud and investment distortions in efficient capital markets

Inefficient investment allocation induced by corporate fraud, where informed insiders strategically manipulate outside investors' beliefs, has been endemic historically and has recently attracted much attention. We reconcile corporate fraud and investment distortions with efficient capital markets, building on shareholder‐manager agency conflicts and investment renegotiation in active takeover markets. Because investments that are ex post inefficient are not renegotiation proof, the optimal renegotiation‐proof contract induces overstatements by managers, accompanied by overinvestment in low return states and underinvestment in high return states by rational investors. Our framework also helps explain why easy access to external capital appears to facilitate corporate fraud.     

Corporate Governance and Development

The literature shows that good corporate governance generallypays—for firms, for markets, and for countries. It isassociated with a lower cost of capital, higher returns on equity,greater efficiency, and more favorable treatment of all stakeholders,although the direction of causality is not always clear. Thelaw and finance literature has documented the important roleof institutions aimed at contractual and legal enforcement,including corporate governance, across countries. Using firm-leveldata, researchers have documented relationships between countries’corporate governance frameworks on the one hand and performance,valuation, the cost of capital, and access to external financingon the other. Given the benefits of good corporate governance,firms and countries should voluntarily reform more. Resistanceby entrenched owners and managers at the firm level and politicaleconomy factors at the level of markets and countries partlyexplain why they do not.      

A South African Success Story: Excellence in the Corporate Use of Capital and Its Social Benefits

South African companies have made great progress in improving corporate profitability since the nation became a full democracy in 1994. Using the “Cash Flow Return on Investment” (CFROI) method, the authors demonstrate that South African listed companies have been generating world‐beating levels of inflation‐adjusted return on capital over the past decade. But not all parts of the South African economy have benefited from this corporate success. Despite the impressive corporate returns, economic growth remains lackluster, constrained by confused labor and government policies. The authors recommend that South African policy makers aim to minimize uncertainty for the private sector by refraining from interventions with agendas that have little to do with expanding output or employment growth. Using terminology borrowed from Thomas Piketty's recent book, the two authors argue that what South Africa needs is not some way to limit investors' return on capital (r) but rather sound economic approaches to liberate growth (g). The authors would like to see the country's companies continue to generate high “r” while reinvesting their profits to produce more wealth‐creating “g.”     

财政压力、企业要素投入扭曲与经济绩效

本文利用中国取消农业税改革作为准自然实验,探讨区县级政府财政压力对政府决策和微观企业资源配置的影响,进而分析由此带来的宏观经济绩效影响效应。研究发现:地方政府行为受到财政压力的影响,农业税改革带来的财政压力使企业资本要素投入的边际收益和边际成本的缺口上升5.72%,企业资本要素投入不足情况加剧,而对劳动要素投入的影响并不显著;进一步的机制分析表明,财政压力对企业资本要素投入的扭曲效应更多源于税收征管提高、环境规制放松、交易费用增加和企业规模分布变异,这一干扰效应最终导致经济总量生产率平均下降约19.32%。     

Risk and return in real estate

Basic information is provided on the returns and risks from 1978 through 1985 for unleveraged equity real estate compared with stocks and bonds. Data sources include the Russell-NCREIF index, the Evaluation Associates index, and the Goldman Sachs equity real estate investment trust index. Findings reveal that the aggregate return for the publicly traded equity real estate investment trust index in nearly twice that of the other real estate series, and more than twice that of the Standard & Poor index. The equity real estate investment trust is far more volatile than the other two real estate series. Neither the Goldman Sachs nor the other two indexes exactly measure the returns or risks on equity real estate. The volatility of the equity real estate investment trust leads it to overstate the risk of this investment category, while the other two indexes are not return indexes. Estimates from this study indicate that real estate risk lies plausibly midway between that of stocks and bonds, in the 9 percent to 13 percent range.     

Putty-clay technology and stock market volatility

Firms' first-order conditions imply that stock returns equal investment returns from the production technology. Much applied work uses the adjustment cost technology, which implies that the realized return is high when the investment-capital ratio is high. This paper derives, for an arbitrary stochastic discount factor, the investment return implied by the putty-clay technology. The combination of capital heterogeneity and irreversibility creates a novel channel for return volatility. The investment return is high when the ratio of investment to gross job creation is low. Empirically, the putty-clay feature helps account for U.S. stock market data.     

企业筹资风险成因分析及防范

对于企业来说,在扩大规模的时候往往面临资金链条的截断,企业自身没有足够的现金流就需要依赖外部资金。外部资金常常伴随着企业资产的抵押,是否可以进行合理的偿还或回报取决于企业所投资项目盈利状况。这个过程具有较高风险。本文针对企业筹资风险的主要构成原因,分析论述企业筹资风险的防范措施。