Capital structure dynamics and transitory debt

Firms deliberately but temporarily deviate from permanent leverage targets by issuing transitory debt to fund investment. Leverage targets conservatively embed the option to issue transitory debt, with the evolution of leverage reflecting the sequence of investment outlays. We estimate a dynamic capital structure model with these features and find that it replicates industry leverage very well, explains debt issuances/repayments better than extant tradeoff models, and accounts for the leverage changes accompanying investment “spikes.” It generates leverage ratios with slow average speeds of adjustment to target, which are dampened by intentional temporary movements away from target, not debt issuance costs.     

并购目标识别:来自中国证券市场的证据

如何利用公开信息在并购公告发布前识别并购目标是并购研究的热点问题之一。本文以中国A股市场2001年至2008年股权并购且控制权转移的目标公司为样本,采用单因素方差分析、多重共线性诊断和Logistic回归技术筛选变量并建立并购目标预测模型。研究发现,中国市场上的并购目标公司具有高财务杠杆、低偿债能力、盈利能力差、增长乏力、股权分散且股份流动性强等特点。虽然该模型解释能力较强,但其预测准确率不高,说明在中国市场上预测并购目标是难以实现的。     

Relative Choice Models for Income Drawdown in a Defined Contribution Pension Scheme

Abstract

This paper extends a target-based model of income drawdown developed in Gerrard et al. (Insurance: Mathematics and Economics 35: 321–342 [2006]) (GHV) for the distribution phase of a defined contribution pension scheme. The optimal investment strategy of the pension fund and the optimal drawdown are found using linear-quadratic optimization, which minimizes the deviation of the fund and the drawdown from prescribed targets. The GHV model is modified by nondimensionalizing the loss function, so that there is a relative choice between outcomes.

Using this model, three classes of target are studied. Endogenous deterministic targets are suggested from the form of the optimal controls, while exogenous deterministic targets can be stated without knowledge of the optimization problem. The third class of stochastic targets is similar to recent annuity products, which incorporate investment risk. Each scheme represents a trade-off between investment risk and return, and this is illustrated by numerical simulation with reference to a canonical example. A particularly attractive form of income drawdown is given by an implied rate of return target. This yields a reasonable investment strategy and a robust consumption profile with age. In addition, it can be easily explained to pension scheme members.     

Do firms have leverage targets? Evidence from acquisitions

In the context of large acquisitions, we provide evidence on whether firms have target capital structures. We examine how deviations from these targets affect how bidders choose to finance acquisitions and how they adjust their capital structure following the acquisitions. We show that when a bidder's leverage is over its target level, it is less likely to finance the acquisition with debt and more likely to finance the acquisition with equity. Also, we find a positive association between the merger-induced changes in target and actual leverage, and we show that bidders incorporate more than two-thirds of the change to the merged firm's new target leverage. Following debt-financed acquisitions, managers actively move the firm back to its target leverage, reversing more than 75% of the acquisition's leverage effect within five years. Overall, our results are consistent with a model of capital structure that includes a target level and adjustment costs.     

Inflation Band Targeting and Optimal Inflation Contracts

In this paper we provide a theoretical treatment of how inflation target ranges cope with the time-inconsistency problem arising from incentives for the monetary policymaker to exploit the short-run trade-off between employment and inflation to pursue short-run employment objectives, as in a Barro-Gordon (1983) model. Inflation band targets are able to achieve many of the benefits that arise under practically less attractive solutions such as the conservative central banker and optimal inflation contracts. Our theoretical model also shows how an inflation targeting range should be set and how it should respond to changes in the nature of shocks to the economy.     

Partial acquisitions,the acquisition probability hypothesis,and the abnormal returns to partial targets

The acquisition of a partial stake in a target firm has been positively linked to the likelihood that the target will be involved in a follow on full acquisition involving either the original bidder or a third party bidder. Existing studies provide only suggestive evidence of this linkage by comparing the abnormal returns to partial targets that are ultimately acquired to those that are not. Using a sample of partial acquisitions, we identify characteristics that impact the probability of a full acquisition and provide a tangible link between partial target gains and the ex ante probability of acquisition. Partial targets experience positive announcement effects, and the gains are greater for subsequently acquired targets. Partial bids initiated by corporate bidders are more likely to result in a full acquisition, and the size of the acquired stake and the level of institutional ownership are positively linked to the probability of acquisition. Further, the partial target gains are positively linked to the ex ante probability of acquisition even after controlling for any increased monitoring and discipline that the partial bidder is expected to impose. The findings are robust across various time horizons and model specifications.     

Financial Ratio Adjustment: Industry-Wide Effects or Strategic Management

This paper proposes an alternative model for analyzing financial ratio behavior. The model postulates that (1) firms' financial ratios reflect unexpected changes in industry conditions; and (2) managers attempt to move their financial ratio toward the long-run desirable target. This model is employed to assess the relative weights of financial ratio movement that are associated with these two forces. The results show that changes in financial ratios can be due to both external shocks and strategic adjustment by management. The amount of financial ratio smoothing due to strategic adjustment appears to be substantial. Furthermore, the speed of convergence toward the optimal targets varies across industries and firms of different size.     

Do targets grab the cash in takeovers: The role of earnings management

Extant research on Mergers and Acquisitions (M&A) provides evidence that acquirers underperform subsequent to the takeover completion. Such evidence is more unequivocal for acquirers that finance the acquisition by issuing equity relative to those that use cash. Current literature recognizes various reasons for this underperformance, most of which suggest overvaluation of the acquirers and/or overpayment for the targets at the time of acquisition announcement. Alternatively, this paper aims to investigate whether acquirers' post-takeover abnormal return is also attributed to target firms' real and/or accrual earnings management. Our results indicate that, on average, targets manage earnings upwards using real transactions rather than accruals, during the year preceding the takeover. More specifically, we find evidence of earnings management through sales among targets of cash acquisitions and that it is significantly and negatively related to the post-acquisition performance of the acquirers. These findings suggest that there is an association between the method of financing in acquisitions and earnings management in target firms, which could impact the post-takeover performance of acquirers.     

Corporate Mergers and Shareholder Wealth Effects: 1977-1986

The paper investigates the distribution of returns to shareholders of UK companies involved in acquisitions during the period 1977-1986. Three control models were used in the analysis: the market model with parameters identified through OLS regression, a model based on adjusted betas, and finally an index-relative model. Abnormal returns were identified around both bid announcement and outcome dates for bidders and targets in completed and abandoned bids. Examination was also made of the distribution of wealth changes for bidders and targets separately and for both in combination. The results demonstrate that, although there is no net wealth decrease to shareholders in total as a result of takeover activity, shareholders of bidder firms do suffer wealth decreases. By contrast, shareholders in target firms obtained significant, positive wealth increases in both completed and abandoned bids.     

企业财务管理的目标及其选择

目标是组织预期要达到的目的或结果，具有预测性、可计量性和激励性等特点。就财务管理而言，判断一项财务决策是否有效率，必须依据某种标准，而要使财务管理有效率、企业必须一些目标。选择什么样的财务目标关系到企业理财的重点及努力方向，关系到财务管理的成效。因此，财务管理目标的选择对企业发展具有重要影响。本文将对企业财务管理的目标及其选择谈一下自己的看法。     

通胀目标调整、政策可信度与宏观调控效应北大核心

本文通过构建包含范式转变特征的DSGE模型,对通胀目标调整过程中的结构性变化以及政策可信度如何影响这一结构转变进行研究,并在此基础上分析通胀目标调整过程中政策可信度对宏观经济波动的调控效应。本文分析得到:在政策当局做出政策目标调整后,如果市场预期这一政策可信,那么主要经济变量将会在政策调整期内达到目标均衡水平;反之,如果市场预期这一政策不可信,那么市场预期和政策目标之间的分歧将使得主要经济变量偏离目标均衡水平,导致政策调整无法实现其既定目标。同时,政策可信度不仅有助于实现既定的政策目标,还能降低政策实施过程中的经济波动,具有较好的宏观调控效应,从而降低政策实施成本。特别是,政策可信度对宏观经济波动的这一稳定效应在中长期内更为明显。本文分析为理解经济结构性转变过程中的政策信用和预期管理等问题提供了一些新的思路和方法。     

How to identify targets in the M&A banking operations? Case of cross-border strategies in Europe by line of activity

During the last decades, the European banking system has known some deep changes. They have led to mergers and acquisitions (M&As). The available studies show that the failure rate of theses M&As is relatively high. Cross-border operations are more exposed to this risk. The high failure rate is due to the cultural and contextual differences between the M&A participants, differences which make the process of integration particularly difficult. Thus, the success of M&As depends on the choice of adequate M&A targets. This choice constitutes the main challenge for company leadership. The aim of this paper is therefore to determine the factors which permit to identify the M&A targets. Our contribution compared to that of previous research is that we study M&As and the identification of targets by line of bank activities. On the basis of a sample made up of 1071 European banks, between 2000 and 2006, we use a Logit Multinomial Model. Our main results show that the target banks tend to be specialized in investment and market activities while the acquiring banks tend to approach themselves to the universal bank model.     

An investigation of how the informal communication of firm preferences influences managerial honesty

This study investigates the effectiveness of informal firm communication at motivating managerial honesty. Specifically, it focuses on the effectiveness of informal cost targets, which communicate firms’ specific cost preferences to managers without tying managers’ compensation to reporting costs that meet those targets. I develop predictions about how the tightness of an informal cost target influences the effect that a cost target has on managers’ reporting honesty. Using an experimental setting, I examine three levels of target tightness—loose, moderate, and tight—within a uniformly distributed cost range and where participants’ financial incentives are to ignore the cost target and fully misreport their cost information. I find that both moderate and loose cost targets, on average, increase honesty relative to when the firm does not communicate a specific target or it communicates a tight target. Tight targets have no significant effect, positive or negative, on honesty. Whereas prior research focuses only on the potential benefits of firms communicating their general preferences, my study provides important insights regarding the potential incremental effectiveness of communicating specific preferences.     

Corporate real estate's impact on the takeover market

This article explores the issues and problems associated with corporate real estate ownership as viewed through the takeover market. The perception held by managers is that corporate real estate assets are unique, specialized assets. This perception conflicts with financial theory which states that the market values all corporate assets based only on their expected future cash flows. Thus corporate real estate assets are priced according to their cash flows and are like other corporate assets. This study tests the hypothesis that corporate real estate is a specialized asset by examining the impact real estate assets have on the takeover market. The study uses a logit regression model in order to attempt to predict which firms become takeover targets. If corporate real estate in general is a specialized asset, then real estate is expected to be an important variable in predicting takeover targets. Although the logit model has little predictive accuracy, results from the prediction model suggest that corporate real estate plays a significant part in determining the likelihood of a firm's becoming a takeover target. The greater the real estate holdings, the greater the likelihood of a firm's becoming a takeover target.     

Value impact of debt issuances by targets of withdrawn takeovers

An existing finance theory predicts that managers of takeover targets will increase leverage to enhance managerial control which can, in turn, allow target managers to thwart a takeover attempt altogether. We find that targets significantly increase leverage, not only by issuing more debt, but also by repurchasing more equity. We also find that debt issuances by poorly performing target managers made between takeover announcement and withdrawal result in significantly negative abnormal returns at the time of the issuance, consistent with the entrenchment role of debt. On the other hand, debt issued by high-performing target managers is not found to result in these same negative returns. Additionally, we document that debt-increasing, poorly performing targets experience significantly more negative returns at withdrawal announcement, also followed by significantly negative post-withdrawal stock performance, while these negative effects are offset for high-performing targets. Overall, our findings suggest that managerial motivations to block takeover attempts with increased debt issuance differ and that these differences in motivation are recognized by the market.     

Takeover targets and the probability of bid success: Evidence from the Australian market

The excess returns earned by takeover targets raises questions of efficiency in the market for corporate control. Brown and Raymond and Samuelson and Rosenthal explain the target share pricing process as a function of the probability of success of the takeover bid. We highlight weaknesses in this work, propose an alternative model, and apply it to 245 Australian takeovers from 1980 to 1993. We find, for targets of successful bids, considerable non-convergence to the bid price. This is consistent with speculative trading models whereby the reduction in dispersion of traders' beliefs leads to the evaporation of market liquidity.     

Balancing difficulty of performance targets: theory and evidence

We examine how firms balance difficulty of performance targets in their annual bonus plans. We present an analytical model showing that managerial allocation of effort is a function of not only relative incentive weights but also the difficulty of performance targets. We find that relative incentive weights and target difficulty can either be complements or substitutes in motivating effort depending on the extent to which managers have alternative employment opportunities. To test the predictions of our model, we use survey data on performance targets in annual bonus plans. Our sample of 877 survey respondents consists primarily of financial executives in small- and medium-size private companies where annual bonuses are important both for motivation and retention. Consistent with our model, we find that relative incentive weights are negatively (positively) associated with perceived target difficulty when concerns about managerial retention are high (low). It follows that performance measures included in annual bonus plans have sometimes easy and other times challenging targets depending on their relative incentive weights and retention concerns.     

Inflation Announcements and Social Dynamics

We propose a new framework for understanding the effectiveness of central bank announcements when firms have heterogeneous inflation expectations. Expectations are updated through social dynamics and, with heterogeneity, not all firms choose to operate, putting downward pressure on realized inflation. Our model rationalizes why countries stuck at the zero lower bound have had a hard time increasing inflation without being aggressive. The same model also predicts that announcing an abrupt target to disinflate will cause inflation to undershoot the target, whereas announcing gradual targets will not. We present new empirical evidence that corroborates this prediction.     

Relative equity market valuation conditions and acquirers’ gains

We examine whether the relative equity market valuation conditions (EMVCs) in the countries of merging firms help acquirers’ managers to time the announcements of both domestic and foreign targets. After controlling for several deal- and merging firm-specific features we find that the number of acquisitions and acquirers’ gains are higher during periods of high-EMVCs at home, irrespective of the domicile of the target. We also find that the higher gains of foreign target acquisitions realized during periods of high-EMVCs at home stem from acquiring targets based in the RoW (=World-G7), rather than the G6 (=G7-UK) group of countries. We argue that this is due to the low correlation of EMVCs between the UK (home) and the RoW group of countries. However, these gains disappear or even reverse during the post-announcement period. Moreover, acquisitions of targets domiciled in the RoW (G6) countries yield higher (lower) gains than acquisitions of domestic targets during periods of high-EMVCs at home. This suggests that the relative EMVCs between the merging firms’ countries allow acquirers’ managers to time the market and acquire targets at a discount, particularly in countries in which acquirers’ stocks are likely to be more overvalued than the targets’ stocks.     

Dealing with Time Inconsistency: Inflation Targeting versus Exchange Rate Targeting

Adopting a single instead of multiple targets can be an effective way to overcome the classic time‐inconsistency problem. The choice of a single mandate depends on the trade openness and the credibility. Reduced‐form empirical results show as central banks become less credible, they are more likely to adopt a pegged exchange rate, and the tendency to peg depends on trade openness. In a model with “loose commitment,” as credibility falls, either an inflation target or a pegged exchange rate is more likely to be adopted. A relatively closed (highly open) economy would adopt an inflation target (exchange rate peg).