The tax-efficient use of debt in multinational corporations

Affiliates of multinationals borrow a considerable amount from their parent company, even when the parent is located in a high-tax country. This is at odds with standard theories of a tax-efficient capital structure. We set up a model that analyzes the functioning of the internal capital market and investigates the trade-off between tax savings and capital market frictions within the group. We test the model on data of the universe of German multinationals. The empirical analysis largely supports our model in that: (i) smaller multinationals often rely on parental debt financing; (ii) larger multinationals are more likely to use internal banks; (iii) parental debt and external debt are substitutes and the mix depends on the relative cost of raising capital through the parent and the affiliates; (iv) local and within-group tax incentives play an important role in determining all three types of debt.     

Dividend policies across multinational and domestic corporations – an international study

This study examines whether the determinants of dividend payout ratios between Multinational (MCs) and Domestic corporations (DCs) vary across Australia, U.S., Japan, U.K. and Malaysia. Results show: (i) Australian, UK and Malaysian MCs pay significantly less dividends than their Domestic counterparts; however, the opposite holds for the U.S. firms; (ii) the factors that significantly explain the difference between DCs’ and MCs’ payout ratios vary across countries; (iii) firms operating in an imputation tax system and in a common law environment pay comparatively higher dividends relative to firms operating in a classical tax system and civil law regime.     

The capital structure of multinational corporations: Canadian versus U.S. evidence

Contrary to the U.S. evidence, we show that Canadian multinational corporations (MNCs) display higher leverage than domestic firms (DCs). This higher leverage is due to lower agency costs of debt associated with MNCs' U.S. operations. We also find that the Canadian firms with international bond market access have higher leverage than firms without such access. Comparison with a U.S. matched sample shows that the sensitivity of leverage to firm-specific factors differs between the two countries, especially for the MNCs samples. Our evidence indicates that capital structures of MNCs are a complex interaction of both home and host country factors and differences in leverage determinants across countries.     

Capital regulation and bank risk‐taking – new global evidence

This study investigates the link between capital regulation and bank risk‐taking. Using a sample of over 1,800 banks in 135 countries, I find that the relationship between capital regulation and bank risk‐taking (measured by z‐score) is an inverse ‘U’ shape. That is, as capital ratios increase, a bank will take less risk initially, then more risk. These results are robust to numerous additional tests, including estimation methods. I also find that more stringent regulations mitigate the effect of higher capital on lowering bank risk‐taking. Increased capital requirements, even when risk‐based, induce risk‐taking at higher levels, irrespective of whether banks are well‐ or under‐capitalised.     

Capital expenditures and firm performance: evidence from a cross‐sectional analysis of stock returns

Using a simple two‐period model of investment, we show that there should be a nonlinear relation between a firm's investment‐to‐capital ratio and its subsequent stock returns. This prediction finds substantial empirical support. The evidence indicates that the slope of the investment function is negative at low investment levels, close to zero at intermediate investment levels and negative at high investment levels. Our results, which are robust to the use of narrowly‐ and broadly‐defined measures of capital investment, pose a challenge to the hypothesis that the negative cross‐sectional correlation between investment and stock returns is attributable to some sort of overinvestment phenomenon.     

Internationalization and the capital structure of firms in emerging markets: Evidence from Latin America before and after the financial crisis

This study examines the impact of internationalization on the capital structure of firms in emerging markets before and after the financial crisis of 2008, with evidence from five countries in Latin America (Argentina, Brazil, Chile, Mexico, and Peru). We find that before the financial crisis, Latin American MNCs are characterized by lower debt levels than purely domestic firms. However, after the financial crisis, we find that the MNCs are characterized by higher debt levels. This finding suggests that after the financial crisis, the Latin American MNCs (like many firms) may be taking advantage of their access to low interest rates in the global capital markets.     

Capital gains tax,supply‐driven trading and ownership structure: direct evidence of the lock‐in effect

This study investigates the effect of differential capital gains tax rates on investor trading and share prices in a unique market setting that facilitates the resolution of conflicting prior evidence of holding period tax incentives. In particular, we examine whether the concessionary tax treatment of long‐term capital gains increases the supply of shares that qualify for long‐term status, thereby causing downward price pressure. We find evidence of abnormal seller‐initiated trading following the 12‐month anniversary of listing for IPO firms that appreciate in price (‘winners’) and report no such evidence for firms that decline in price (‘losers’). Consistent with the tax concessions being greater for individual than institutional investors, we report that abnormal seller‐initiated trading is mitigated by higher levels of ownership by institutional investors. We also report limited evidence, for winners, of declining share prices upon qualifying for long‐term tax status.     

Unexpected Inflation,Capital Structure,and Real Risk‐adjusted Firm Performance

Managers can improve real risk‐adjusted firm performance by matching nominal assets with nominal liabilities, thereby reducing the sensitivity of real risk‐adjusted returns to unexpected inflation. The net asset value of US equity real estate investment trusts (REITs) serves as a good proxy for nominal assets and, accordingly, we use a sample of US REITs to test our hypothesis. We find that for the firms in our sample: (i) their real risk‐adjusted performance, and (ii) their inflation‐hedging qualities are inversely related to deviations from this ‘matching‐nominals’ argument. In addition to providing managers with a vehicle to maximize real risk‐adjusted performance, our findings also provide investors with the tools to infer inflation‐hedging qualities of equity investments.     

Analysts' forecast error: a robust prediction model and its short‐term trading profitability

This paper contributes to the empirical evidence on the investment horizon salient to trading based on predicting the error in analysts' earnings forecasts. An econometric framework is proposed that accommodates the stylized fact of extreme values in the forecast error series. We find that between 1998 and 2010, the strategy of taking a long (short) position in stocks with the most pessimistic (optimistic) I/B/E/S forecast has an annual risk‐adjusted return of 16.56 per cent before transaction costs. The robust method used to predict this pessimism (optimism) and the one‐week investment horizon are the key drivers of the strategy's profitability.     

Capital structure and financing of SMEs: Australian evidence

This paper investigates the determinants of capital structure and use of financing for small and medium sized enterprises. Hypotheses utilising static trade-off and pecking order arguments are empirically examined using a series of firm characteristics including: size, asset structure, profitability, growth and risk. The hypotheses developed are tested using a large Australian nationwide panel survey. The results suggest that asset structure, profitability and growth are important determinants of capital structure and financing. For asset structure the direction of the influence is reliant upon the capital structure or financing measure employed. The results generally support static trade-off and pecking order arguments proposed by theoretical models.     

‘Hot’ Debt Markets and Capital Structure

This paper examines the motives of debt issuance during hot‐debt market periods and its impact on capital structure over the period 1970–2006. We find that perceived capital market conditions as favourable, an indication of market timing, and adverse selection costs of equity (i.e., information asymmetry) are important frictions that lead certain firms to issue more debt in hot‐ than cold‐debt market periods. Using alternative hot‐debt market issuance measures and controlling for other effects, such as structural shifts in the debt market, industry, book‐to‐market, price‐to‐earnings, size, tax rates, debt market conditions and adjustment costs based on debt credit ratings, we find that firms with high adverse selection costs issue substantially more (less) debt when market conditions are perceived as hot (cold). Moreover, the results indicate that there is a persistent hot‐debt market effect on the capital structure of debt issuers; hot‐debt market issuing firms do not actively rebalance their leverage to stay within an optimal capital structure range.     

Public and private spending for environmental protection: a cross‐country policy analysis

OECD data are used to investigate public and private environmental expenditures and, although they are more complete and consistent than other datasets, they are still poor. This is important in the context of measuring the benefits of environmental protection, when little is really known about its actual costs. Despite these limitations, this study demonstrates that there has been no shift towards an increasing private sector burden relative to the public sector over time. The paper also finds little evidence to show that environmental expenditures negatively impact on economic growth, although there is inconsistency between the ‘no effects’ finding of the competitiveness literature and the ‘negative effects’ finding of most of the productivity literature. Finally, the elasticity of expenditure with respect to income is found to be 1.2, lower than would be expected if the ‘environmental demand effect’ is significant in explaining the downward slope of the environmental Kuznets curve.     

Capital Structure and the Ex‐Dividend Day Return

We apply an option‐pricing framework to the ex‐dividend behavior of common stocks. The framework explains the observed behavior of positive returns on the ex‐dividend day and predicts that ex‐dividend day returns will be higher for firms with greater financial leverage. Empirical testing supports the prediction. In contrast to prior studies, we find that dividend‐capture activity has no significant impact on ex‐dividend behavior, and we offer an explanation based on the importance of tick intervals.     

Optimization of a firm's capital structure: A quantitative approach based on a probabilistic prognosis of risk and time of bankruptcy

This article develops a new probabilistic approach to the problem of optimization of a firm's capital structure. The main idea of the approach is straightforward. As a possible firm's bankruptcy is the principal factor restricting the amount of borrowed capital, we assess the probabilities of bankruptcy at various time horizons in the future dependent on the proportion of debt capital and other indices of a firm's current financial position and then calculate how these probabilities influence the firm's value.We identify a set of factors determining conditions of existence and the value of the optimal debt/equity ratio. These include the characteristics of a firm's debt (proportion of short-term component of the debt, cost of service, and maturity horizons of long-term component), characteristics of a firm's ability to pay the debt, and some macroeconomic factors.We represent dependencies of optimal debt/equity ratio and gains in a firm's value on the main influencing factors.The approach is based on real data of real firms and does not use superfluously formalized models. We believe it can be used in practical capital structure decisions although specific calculations must be fulfilled for each firm that needs such decision.     

Post‐merger strategy and performance: evidence from the US and European banking industries

The banking industry has one of the most active markets for mergers and acquisitions. However, little is known about the type of operational strategies adopted by banking firms in the years following a deal. For a sample of bidding banks in the USA and Europe, this study compares the design and performance implications of different post‐merger strategies in both geographical regions. Using accounting data, we show that European banks pursue a cost‐cutting strategy by increasing efficiency levels vis‐à‐vis non‐merging banks and by cutting back on both labour costs and lending activities. US banks, on the other hand, raise both interest and non‐interest income in the post‐merger period.     

A comparison of buy‐side and sell‐side analysts

There is very little research on the topic of buy-side analyst performance, and that which does exist yields mixed results. We use a large sample from both the buy-side and the sell-side and report several new results. First, while the contemporaneous returns to portfolios based on sell-side recommendations are positive, the returns for buy-side analysts, proxied by changes in institutional holdings, are negative. Second, the buy-side analysts' underperformance is accentuated when they trade against sell-side analysts' recommendations. Third, abnormal returns positively relate to both the portfolio size and the portfolio turnover of buy-side analysts' institutions, suggesting that large institutions employ superior analysts and that superior analysts frequently change their recommendations. Abnormal returns are also positively related to buy-side portfolios with stocks that have higher analyst coverage, greater institutional holding, and lower earnings forecast dispersion. Fourth, there is substantial persistence in buy-side performance, but even the top decile performs poorly. These findings suggest that sell-side analysts still outperform buy-side analysts despite the severe conflicts of interest documented in the literature.     

Asset Write‐offs in Private Firms – The Case of German SMEs

This paper finds that private firms make the decision to write off, and write off more in terms of total amount, if they are: (i) more profitable, (ii) have more financial debt, and (iii) pay dividends. Our findings are contrary to expectations based on accounting standards and the existing revaluation literature. They are, however, consistent with the codified, high book‐tax alignment economic setting in which sample private firms operate. This includes agency problems faced by private firms’ stakeholders. We use a comprehensive sample of German SMEs reporting in local GAAP, based on the German commercial code (Handelsgesetzbuch) in 2003–2006. We view write‐offs as corrections of departures of book values from their underlying economic values, in contrast to upward asset revaluations. This governs our choice of estimation – the tobit regression.