Investment Decisions of Nonprofit Firms: Evidence from Hospitals

This paper examines investment choices of nonprofit hospitals. It tests how shocks to cash flows caused by the performance of the hospitals’ financial assets affect hospital expenditures. Capital expenditures increase, on average, by 10 to 28 cents for every dollar received from financial assets. The sensitivity is similar to that found earlier for shareholder‐owned corporations. Executive compensation, other salaries, and perks do not respond significantly to cash flow shocks. Hospitals with an apparent tendency to overspend on medical procedures do not exhibit higher investment‐cash flow sensitivities. The sensitivities are higher for hospitals that appear financially constrained.     

CEO Preferences and Acquisitions

This paper explores the impact of target CEOs’ retirement preferences on takeovers. Using retirement age as a proxy for CEOs’ private merger costs, we find strong evidence that target CEOs’ preferences affect merger activity. The likelihood of receiving a successful takeover bid is sharply higher when target CEOs are close to age 65. Takeover premiums and target announcement returns are similar for retirement‐age and younger CEOs, implying that retirement‐age CEOs increase firm sales without sacrificing premiums. Better corporate governance is associated with more acquisitions of firms led by young CEOs, and with a smaller increase in deals at retirement age.     

Programming Solutions to Capital Rationing Problems

Mathematical programming approaches to the choice of capital expenditure projects under conditions of funds constraint have been widely advocated in the literature of finance. The present paper takes exception to such suggestions, and concludes that programming is not only excessively costly and complex for most practical applications, but is frequently incorrect in the decisions it implies. A technique for allocating funds via an adjusted Excess Present Value Index is developed and proposed as a superior analytical framework.     

Security Issue Timing: What Do Managers Know,and When Do They Know It?

We study put option sales on company stock by large firms. An often‐cited motivation for these transactions is market timing, and managers' decision to issue puts should be sensitive to whether the stock is undervalued. We provide new evidence that large firms successfully time security sales. In the 100 days following put option issues, there is roughly a 5% abnormal stock return, with much of the abnormal return following the first earnings release date after the sale. Direct evidence on put option exercises reinforces these findings: exercise frequencies and payoffs to put holders are abnormally low.     

Debt Management under Corporate and Personal Taxation

The presence of long-term debt in a corporation's capital structure is shown to give rise to a valuable tax-timing option that can be exercised by the firm on behalf of its shareholders. This option, which is not available if the firm is fully equity financed, implies that leverage will have a positive tax effect on total firm value even if there is no such effect associated with the tax deductibility of the coupon interest payments on debt. The more volatile interest rates and bond prices are, the more valuable the tax-timing option and the larger the favorable impact of debt on shareholder wealth.     

Evidence on Tax-Motivated Securities Trading Behavior

Tax-loss selling by investors in common stocks near the end of calendar years has been proposed as an explanation for the turn-of-the-year effect in stock returns. Past analyses of this hypothesis have relied on inferential data. We provide here some direct data from a compilation of over 80,000 actual common stock investment round trips by a sample of 3000 individual investors. We find strong evidence of a concentration of loss-taking trades late in the year and milder evidence of a concentration just prior to the dates when investments become eligible for long-term tax treatment.     

On the Matter of Parity among Financial Obligations

The lessons of the leasing literature concerning the impact of leases on the debt capacity of a firm are reviewed and summarized to establish an approach to the analysis of the corporate bond refunding decision. A general proposition regarding financial obligation parity is established, and from that a clear bond refunding decision rule is developed. Previous debates in the literature about appropriate discount rates and about the appropriate cash flows to be discounted for refunding decisions are clarified.     

The Effects of Oil Supply and Demand Shocks on U.S. Consumer Sentiment

This paper investigates how the University of Michigan's Index of Consumer Sentiment responds to oil price shocks. While oil supply shocks play only a limited role, the effect of aggregate demand shocks is positive for the first few months and negative thereafter. A typical other oil demand shock has a significant negative impact for up to 2 years. By studying the responses of individual survey questions, we find that expectations of future inflation and a change in real household income as well as perceived vehicle and house buying conditions are the main transmission channels of oil supply and demand shocks.