Does the Pecking Order Hypothesis Explain the Dividend Payout Ratios of Firms in the UK?

This study tests the pecking order hypothesis on data of 224 firms in the UK over the period 1993–96 inclusive. Evidence observed supports the prediction of the hypothesis that there is a negative interaction between the long term value of dividend payout ratio and investment. The evidence also indicates that financial leverage has a positive interaction with dividend payout ratio but no significant interaction with investment. While investment has a significant positive influence on financial leverage, financial leverage does not have a significant influence on investment. It is also observed that irrecoverable advance corporation tax (ACT) has a positive, albeit weak, influence on dividend payout ratio and that overseas profit has a negative influence on the ratio. The results of the study agree with the previous evidence with regard to the influence of dividend payout ratio on investment and financial leverage, and the influence of investment on financial leverage. However, the results contradict the previous evidence reported by Baskin (1989) and Allen (1993) about the influence of financial leverage on investment. While the previous studies observed that financial leverage has a positive influence on investment, this study finds that financial leverage does not have a significant influence on investment. The main contributions of the study are that (1) it provides some evidence that there is a negative interaction between dividend payout ratio and investment and a positive interaction between dividend payout ratio and financial leverage, (2) it provides some evidence about the effects of overseas profit and irrecoverable ACT on dividend payout and (3) its results suggest that the recent abolition of the refund of ACT is justified on the ground that it may affect investment and growth in the UK.     

Do Firms Manage Fair Value Estimates? An Examination of SFAS 142 Goodwill Impairments

Abstract:  I find that goodwill write-offs under Statement of Financial Accounting Standards No. 142 (SFAS 142) are associated with future expected cash flows as mandated by the standard. However, there are indications that goodwill write-offs lag behind the economic impairment of goodwill. Additional analysis reveals that the association between goodwill write-offs and future cash flows is insignificant for firms with contemporaneous restructuring. I hypothesize that this finding is due to agency-based motives. Finally, I examine a sample of non-impairment firms in which there are indications that goodwill is impaired. I fail to find convincing evidence that these firms are opportunistically avoiding impairments.     

The Role of Ownership Concentration and Debt in Downturns: Evidence from Brazilian Firms During the 2008–9 Financial Crisis

This article aims to reconcile conflicting literature about the role of ownership concentration in the responsiveness of stock prices to macroeconomic shocks. We modified a previous theoretical model, adding leverage as a disciplining device. An important implication of our model is that only in deep crises ownership concentration plays a role in attenuating the effect of macroeconomic shock on firm value. We test this hypothesis using a sample of Brazilian firms during distinct phases of the 2008–9 crisis. Our empirical analyzes shows that only in the most critical part of the crisis, ownership concentration reduced the negative effects of the financial crisis.     

Do Board Characteristics Influence the Shareholders' Assessment of Risk for Small and Large Firms?

This paper investigates the association between board characteristics and shareholders' assessment of their exposure to economic and agency risks as reflected in the volatility of stock returns. Our hypotheses incorporate prior evidence that small and large firms have ‘dramatically’ different board structures, reflecting the firms' different monitoring and advising needs. We hypothesize and find evidence that only the shareholders of well‐established large firms are able to generate positive net benefits, in the form of lower equity risk, from independent boards and well‐connected independent directors with multiple directorships. We also find professional and formal industry degree qualifications on the board are associated with shareholders' risk assessment for some small firms consistent with the focus of small firms on building growth and scale. While we find evidence that formal industry professional affiliations (weak evidence) and MBAs provide benefits for the shareholders of large firms, there is limited evidence that financial expertise on the board systematically influences shareholders' risk assessments for small or large companies. The key conclusion from the evidence in this paper is that a ‘one size fits all’ approach to governance in relation to the board of directors may not meet the diverse needs of companies at different stages of economic development.     

Do Corporate Venture Capitalists Add Value to Start-Up Firms? Evidence from IPOs and Acquisitions of VC-Backed Companies

We present evidence that corporate venture capitalists (CVCs) add value to start-up companies only when the start-ups have a strategic fit with the parent corporations of CVCs. We find that CVCs provide a variety of services and support that suit the specific needs of start-ups operating in different industries. CVC-backed start-ups are able to obtain higher valuations at the IPO than non-CVC-backed ones, and the value added by CVCs concentrates in start-ups with a strategic overlap with CVC parents. Entrepreneurial companies with strategic CVC backing also receive higher takeover premiums when they become acquisition targets .     

How Do Firm Characteristics Influence the Relationship between R&D and Firm Value?

This paper focuses on how a firm's characteristics affect the market valuation of its research and development (R&D) spending. We derive a valuation model based on the capital market arbitrage condition. Using the generalized method of moments and data from the Eurozone countries to estimate this model yields interesting results. Several firm characteristics (size, firm growth, and market share) positively affect the relationship between firm value and R&D spending, while others (free cash flow, dependence on external finance, labor intensity, and capital intensity) exert a negative effect. Therefore, we conclude that the effectiveness of R&D spending depends on firm characteristics.     

Legal Institutions,Ownership Concentration,and Stock Repurchases Around the World: Signal Mimicking?

One of the central puzzles of signaling theory is how to assess signal quality, in particular the potential for signal mimicking. Our study provides evidence of signal mimicking in the context of stock repurchases. Employing an ex-ante proxy for the likelihood of mimicking stock repurchases and data on open market stock repurchases from 30 countries, we find that long-term operating and market performance following stock repurchases improve less for suspected mimicking firms. This finding contradicts the conventional characterization that managers use stock repurchases to signal undervaluation and enhanced future performance. We find that mimicking firms have smaller capital investments, need greater external financing, buy back fewer shares, and issue more new shares (and/or resell more treasury shares) in the year of the repurchase. Our analysis further shows that mimicking is more likely in countries with weak investor protections and in firms with higher ownership concentration. Further, mimicking associated with concentrated ownership is mitigated in countries with stronger investor protections and by the adoption of International Financial Reporting Standards (IFRS). Altogether, our findings provide evidence of signal mimicking in stock repurchases in international data that is influenced by market, ownership, legal, and financial reporting characteristics of countries.     

Does Family Control Shape Corporate Capital Structure? An Empirical Analysis of Eurozone Firms

This study investigates the relationship between family control and corporate capital structure considering the dynamic nature of the debt policy and the ownership structure of family firms. Our results show that the sensitivity of debt to fluctuations in cash flow is less pronounced in family firms and highlight that family control increases the speed of adjustment toward target debt. Four dimensions of the family business model explain these results: deviations of voting from cash flow rights, the presence of a second blockholder in the company, involvement of family members in management, and the generation in charge of the business. The weaker negative impact of cash flow on debt is driven by family firms with no control‐enhancing mechanisms, companies with active family participation in management and family businesses that are still controlled by the first generation. By contrast, the more severe agency conflicts between owners and creditors in family firms with a second blockholder lead to more pronounced pecking order behaviour. Furthermore, the higher flexibility in corporate decision‐making of family firms managed by the family and under the influence of the first generation explains why family companies are able to rebalance their capital structure faster.     

Real Estate Ownership, Leasing Intensity, and Value: Do Stock Returns Reflect a Firm’s Real Estate Holdings?

Little is known about the effects of real estate ownership and leasing on the stock return characteristics of public firms. In this study, we first examine the sensitivity of retail firm returns to a real estate factor over the period 1998?C2008. The retail industry is chosen because of the significant use of real estate in a typical retail firm??s production function. Consistent with our expectations, retail stocks exhibit positive real estate risk exposure, even after controlling for sensitivity to general market risk as well as other standard risk factors. The second part of our analysis examines whether the intensity of real estate ownership and the use of off-balance operating leases to finance real property holdings are reflected in the market and real estate betas of retail stocks. We find that greater use of off-balance sheet operating leases is associated with higher market betas. In fact, the use of operating leases appears to have a larger impact on sensitivity to market risk than does the use of on-balance sheet debt. Our findings also confirm our hypothesis that real estate intensive firms display significantly greater exposure to a real estate factor. Moreover, our results strongly suggest that investors are fully aware of the risk associated with off-balance sheet operating leases.     

Market Liquidity,Investor Participation,and Managerial Autonomy: Why Do Firms Go Private?

We focus on public-market investor participation to analyze the firm's decision to stay public or go private. The liquidity of public ownership is both a blessing and a curse: It lowers the cost of capital, but also introduces volatility in a firm's shareholder base, exposing management to uncertainty regarding shareholder intervention in management decisions, thereby affecting the manager's perceived decision-making autonomy and curtailing managerial inputs. We extract predictions about how investor participation affects stock price level and volatility and the public firm's incentives to go private, providing a link between investor participation and firm participation in public markets.     

Borrow Cheap,Buy High? The Determinants of Leverage and Pricing in Buyouts

Private equity funds pay particular attention to capital structure when executing leveraged buyouts, creating an interesting setting for examining capital structure theories. Using a large, international sample of buyouts from 1980 to 2008, we find that buyout leverage is unrelated to the cross‐sectional factors, suggested by traditional capital structure theories, that drive public firm leverage. Instead, variation in economy‐wide credit conditions is the main determinant of leverage in buyouts. Higher deal leverage is associated with higher transaction prices and lower buyout fund returns, suggesting that acquirers overpay when access to credit is easier.     

Why Do Firms Evade Taxes? The Role of Information Sharing and Financial Sector Outreach

Tax evasion is a widespread phenomenon across the globe and even an important factor in the ongoing sovereign debt crisis. We show that firms in countries with better credit information–sharing systems and higher branch penetration evade taxes to a lesser degree. This effect is stronger for smaller firms, firms in smaller cities and towns, firms in industries relying more on external financing, and firms in industries and countries with greater growth potential. This effect is robust to instrumental variable analysis, controlling for firm fixed effects in a smaller panel data set of countries, and many other robustness tests.     

Do Women and Ethnic Minority Directors Influence Firm Value? Evidence from Post‐Apartheid South Africa

Previous studies on the value relevance of board gender and ethnic diversity have produced mixed results. This paper re‐examines this relationship using hand‐collected data of 245 South African listed firms over the period 2008–2013. We document a positive and significant effect of both board gender and ethnic diversity on firm value. We also find that the increase in firm value is greater when boards have three or more women directors. In contrast, ethnic minority directors contribute less to firm value when there are three or more on the board. Furthermore, we document that ethnicity has a concave relationship with firm value, but gender does not. We demonstrate that in better‐governed firms, ethnic diversity is more value relevant than gender diversity. Our results also suggest that financial crisis is associated with the propensity to restructure boards along gender and ethnicity. This paper sheds new light on the effect of board diversity in South African firms as the government increasingly pursues policies aimed at eradicating the effects of apartheid. Our results are robust after controlling for self‐selection and various forms of endogeneity.     

Is Gold a Hedge or a Safe Haven? An Analysis of Stocks,Bonds and Gold

Is gold a hedge, defined as a security that is uncorrelated with stocks or bonds on average, or is it a safe haven, defined as a security that is uncorrelated with stocks and bonds in a market crash? We study constant and time‐varying relations between U.S., U.K. and German stock and bond returns and gold returns to investigate gold as a hedge and a safe haven. We find that gold is a hedge against stocks on average and a safe haven in extreme stock market conditions. A portfolio analysis further shows that the safe haven property is short‐lived.     

Too Dispersed to Monitor? Ownership Dispersion,Monitoring, and the Prediction of Bank Distress

This paper conducts an empirical assessment of the theories stating that ownership concentration improves the quality of shareholders’ monitoring. In contrast with other studies, we do not use regressions of risk/performance on ownership concentration. Instead, we build an early warning model of bank distress that includes a leading indicator derived from banks’ share price, the Merton‐KMV distance to default (DD). The significance of this indicator depends on the efficacy of shareholders’ monitoring. On a sample of European banks, we show that the predictive power of the DD is satisfactory only when banks’ shareholding is characterized by the presence of blockholders.     

When Do International Operations Lead to Improved Performance? An Analysis of Property‐Liability Insurers

In recent decades, insurers have been increasing their exposure to international markets. This article seeks to investigate the relationship between property-liability insurers' international operations and their risk-adjusted returns using cross-section and time-series data for the years 1992 through 2000. Our findings indicate that the relationship between international operations and performance is contingent upon the degree of product diversification. Insurance companies with focused operations in terms of product lines achieve higher risk-adjusted performance as they increase their exposures to international markets. However, insurers who are highly diversified across product lines face declining returns with greater exposure to international markets.     

Do investors still benefit from culturally home-biased diversification? An empirical study of China, Hong Kong, and Taiwan

Due to the continual economic integration and the accumulation of wealth in China, Hong Kong, and Taiwan, understanding portfolio strategies and the benefits of diversification for these countries is an indispensible element in managing global assets. Using weekly industry-level data, we analyze culturally home-biased diversification strategies and find that local investors still benefit from regional investments. The time-varying benefits of diversification exist even as the economies of this region have become increasingly integrated. Our analysis suggests that stricter weighting bounds reduce the economic values of diversification but enhance the feasibility of the optimal portfolio allocations. The larger benefits gained by Chinese investors suggest that international diversification is more advantageous to investors in emerging economies than to those in richer, developed markets. The robustness tests generate similar findings when we evaluate the out-of-sample effectiveness and the benefits of diversification under various parameter estimation windows.