Morgan Stanley Roundtable on Capital Structure and Payout Policy

A group of finance academics and practitioners discusses a number of topical issues in corporate financial management: Is there such a thing as an optimal, or value‐maximizing, capital structure for a given company? What proportion of a firm's current earnings should be distributed to the firm's shareholders? And under what circumstances should such distributions take the form of stock repurchases rather than dividends? The consensus that emerged was that a company's financing and payout policies should be designed to support its business strategy. For growth companies, the emphasis is on preserving financial fl exibility to carry out the business plan, which means heavy reliance on equity financing and limited payouts. But for companies in mature industries with few major investment opportunities, more aggressive use of debt and higher payouts can add value by reducing taxes and controlling the corporate “free cash flow problem.” Both leveraged financing and cash distributions through dividends and stock buybacks represent a commitment by management to shareholders that the firm's excess cash will not be wasted on projects that produce growth at the expense of profitability. As for the choice between dividends and stock repurchases, dividends appear to provide a stronger commitment to pay out excess cash than open market repurchase programs. Stock buybacks, at least of the open market variety, preserve a higher degree of managerial fl exibility for companies that want to be able to capitalize on unpredictable investment opportunities. But, as with the debt‐equity decision, there is an optimal level of financial fl exibility; too little can mean lost investment opportunities but too much can lead to overinvestment.     

MORGAN STANLEY ROUNDTABLE ON Capital Structure and Payout Policy

A group of distinguished finance academics and practitioners discuss a number of topical issues in corporate financial management: Is there such a thing as an optimal, or value‐maximizing, capital structure for a given company? What proportion of a firm's current earnings should be distributed to the firm's shareholders? And under what circumstances should such distributions take the form of stock repurchases rather than dividends? The consensus that emerges is that a company's financing and payout policies should be designed to support its business strategy. For growth companies, the emphasis is on preserving financial flexibility to carry out the business plan, which means heavy reliance on equity financing and limited payouts. But for companies in mature industries with few major investment opportunities, more aggressive use of debt and higher payouts can add value both by reducing taxes and controlling the corporate free cash flow problem. In such cases, both leveraged financing and cash distributions through dividends and stock buybacks signal management's commitment to its shareholders that the firm's excess cash will not be wasted on projects that produce low‐return growth that comes at the expense of profitability. As for the choice between dividends and stock repurchases, dividends provide a stronger commitment to pay out excess cash than open market repurchase programs. Stock buybacks, at least of the open market variety, preserve more flexibility for companies that want to be able to capitalize on unpredictable investment opportunities. But, as with the debt‐equity decision, there is an optimal level of financial flexibility: too little can mean lost investment opportunities, but too much can lead to overinvestment.     

Why do CEOs reciprocally sit on each other's boards?

The reciprocal interlocking of chief executive officers is a non-trivial phenomenon: among large companies in 1991, about one company in seven was in a relationship whereby the CEO of one company sat on a second company's board and the second company's CEO sat on the first company's board. We develop hypotheses to distinguish whether this practice furthers the interests of shareholders or the private interests of the CEOs. Using a sample of large companies, we employ a probit model to test these hypotheses. Our empirical findings are that these reciprocal CEO interlocks primarily benefit the CEOs rather than their shareholders.     

Corporate governance and incentives in German companies: Evidence from top executive turnover and firm performance

This paper examines executive turnover—both for management and supervisory boards—and its relation to firm performance in the largest companies in Germany in the 1980s. Turnover of the management board increases significantly with poor stock performance and particularly poor (i.e. negative) earnings, but is unrelated to sales growth and earnings growth. These turnover-performance relations do not vary with measures of stock ownership and bank voting power. Supervisory board appointments and turnover also increase with poor stock performance, but are unrelated to other measures of performance.     

市场行情影响投资者的股利偏好吗?

基于2005-2017年A股上市公司的数据,研究了在不同的市场行情中,投资者对于股利政策的偏好差别。研究发现：对于现金股利而言,在上涨和下跌的市场行情中,投资者更偏好不发放现金股利的上市公司;在平稳行情中,投资者更偏好发放现金股利的上市公司。对于股票股利而言,在上涨行情中,投资者更偏好发放股票股利的上市公司;在下跌行情中,投资者更偏好不发放股票股利的上市公司;在平稳行情中,投资者对于是否发放股票股利没有显著的偏好差异。在上涨和下跌的市场行情中,超能力派现和高送转不会改变投资者的偏好;在平稳行情中,只有正常派现和正常送转才能赢得投资者的青睐,超能力派现行为无益于上市公司,高送转还会损害公司价值。     

WHAT DO WE KNOW ABOUT STOCK REPURCHASES?

Stock repurchases by U.S. companies experienced a remarkable surge in the 1980s and ‘90s. Indeed, in 1998, the total value of all stock repurchased by U.S. companies exceeded for the first time the total amount paid out as cash dividends. And the U.S. repurchase movement has gone global in the past few years, spreading not only to Canada and the U.K., but also to countries like Japan and Germany, where such transactions were prohibited until recently. Why are companies buying back their stock in such amounts? After dismissing the popular argument that stock repurchases boost earnings per share, the authors argue that repurchases serve to add value in two main ways: (1) they provide managers with a tax‐efficient means of returning excess capital to shareholders and (2) they allow managers to “signal” to investors their view that the firm is undervalued. Returning excess capital is value‐adding for two reasons: First, it helps prevent companies from pursuing growth and size at the expense of profitability and value. Second, by returning capital to investors, repurchases (like dividends) play the critically important economic function of allowing investors to channel their investment from mature or declining sectors of the economy to more promising ones. But if stock repurchases and dividends serve the same basic economic function, why are repurchases growing more rapidly? Part of the explanation is that, because repurchases are taxed as capital gains and dividends as ordinary income, repurchases are a more tax‐efficient way of distributing excess capital. But perhaps even more important than their tax treatment is the flexibility that (at least) open market repurchases provide corporate managers‐flexibility to make small adjustments in capital structure, to exploit (or correct) perceived undervaluation of the firm's shares, and possibly even to increase the liquidity of the stock, which could be particularly valuable in bear markets. For U.S. regulators, the growth in open market stock repurchases raises some interesting issues. Perhaps most important, companies are not required to (and rarely do) furnish their investors with details about a given program's structure, execution method, number of shares repurchased, or even its duration. Policy regulators (and corporate executives as well) should consider some of the benefits provided by other systems, notably Canada's, which provide greater transparency and more guidelines for the repurchase process.     

Liquidity,the Value of the Firm,and Corporate Finance

The theory of corporate finance has been based on the idea that a company's market value is determined mainly by just two variables: the company's expected after‐tax operating cash flows or earnings, and the risk associated with producing them. The authors argue that there is another important factor affecting a company's value: the liquidity of its own securities, debt as well as equity. The paper supports this argument by reviewing the large and growing body of evidence showing that differences—and changes—in liquidity can have major effects on the pricing of corporate stocks and bonds or, equivalently, on investors' required returns for holding them. The authors also suggest that the liquidity of a company's securities can be managed by corporate policies and actions. For those companies whose value is likely to be increased by having more liquid securities—which is by no means true of all companies (mature firms that don't need outside capital may well benefit from having more concentrated ownership and hence less liquidity)—management should consider actions such as reducing leverage and substituting dividends for stock repurchases as well as measures designed to increase the effectiveness of their disclosure and investor relations program and the size of their investor base.     

Blockholders Are More Common in the United States Than You Might Think*

Finance scholars have long characterized the large publicly traded U.S. company as having a fragmented ownership structure with a diffuse shareholder base—significantly more diffuse than comparable companies in most other countries. But the findings of the author's recent study, which incluudes large amounts of “hand-collected data” on the share ownership of U.S. companies, are strikingly at odds with this characterization. As reporteed in the study, 96% of a sample of 375 randomly chosen, publicly traded U.S. corporations—including companies like American Express and McDonald's—had at least one shareholder who owned at least 5% of the firm's common stock. In fact, such blockholders as a group owned almost 40% of the typical U.S. company. There was, to be sure, an inverse relation between ownership concentration and firm size, but ownership was unexpectedly concentrated even among the largest companies, with 89% of the S&P 500 companies in the sample having at least one 5% blockholder. What's more, the ownership concentration of U.S. public companies turned out to be remarkably similar to the average ownership concentration of large samples of listed companies from 22 European and East Asian countries. More specifically, the ownership structure of U.S. companies—after controlling for differences in company size—appears to all in the middle of the distribution of those countries, whether one looks at the proportion of companies with block-holders or the blockholders' average percentage holdings.     

An analysis of majority owner‐managed companies in the UK

This paper investigates the characteristics of 73 UK companies in which managers have an ownership stake of greater than 50 per cent. We find that majority owner‐managed companies make less use of alternative corporate control systems and are less likely to remove their chief executive officer or other board members following poor performance. However, our sample firms actually outperform diffusely held companies of similar size in the same industry. The determinants of majority control appear more closely related to the characteristics of the controlling shareholders rather than the firm's operating environment. Changes in the ownership structure of our sample companies owe more to changes in owner‐specific characteristics and security issuance than they are related to changes in the company's operating environment or company performance. We conclude that despite the obvious agency costs of managerial entrenchment for closely held companies, for the present sample at least the incentive alignment benefits of large director shareholdings are beneficial to outside shareholders.     

Book Reviews

This paper examines the extent to which executives in the largest UK non-financial companies served as non-executives in other companies prior to the governance reforms of the mid-1990s. The paper also seeks to identify factors that affected the holding of additional directorships by executives. The results reported here suggest that possession of non-executive directorships by executives was not widespread. The average number of additional directorships held by each executive was 0.15 with CEOs being the principal holder of such positions possessing an average of 0.33. Indeed, 89.5% of executives (76.4% of CEOs) held no additional directorships. The holding of additional directorships was positively related to the level of non-executive representation on the board of the executive's company, executive tenure and company size but negatively related to executive ownership. The presence of CEO duality had a positive impact on the holding of additional directorships by CEOs.     

Is Economic Growth Good for Investors?1

When measured over long periods of time, the correlation of countries' inflation‐adjusted per capita GDP growth and stock returns is negative. This result holds for both developed countries (for which the correlation coefficient is –0.39 using data from 1900–2011) and emerging markets (the correlation is –0.41 over the period 1988–2011). And this means that investors would have been better off investing in countries with lower per capita GDP growth than in countries experiencing the highest growth rates. This seems surprising since economic growth is generally assumed to be good for corporate profits. In attempting to explain this finding, the author begins by noting that economic growth can be achieved through increased inputs of capital and labor, which don't necessarily benefit the stockholders of existing companies. Growth also comes from technological advances, which do not necessarily lead to higher profits since competition among firms often results in the benefits accruing to consumers and workers. What's more, it's important to recognize that growth has both an expected and an unexpected component. And one explanation for the negative correlation between growth and stock returns is the tendency for investors to overpay for expected growth. But there is another—and in the author's view, a more important—part of the explanation. Along with the negative correlation between long‐run average stock returns and per capita growth rates, the author also reports a strong positive association between (per share) dividend growth rates and overall stock returns. Such an association is not surprising since unusual growth in dividends is a fairly reliable predictor of increases in future earnings. But another effect at work here is the role of dividends—and, in the U.S., stock repurchases too—in limiting what might be called the corporate “overinvestment problem,” the natural tendency of corporate managers to pursue growth, if necessary at the expense of profitability. One of the main messages of this article is that corporate growth adds value only when companies reinvest their earnings in projects that are expected to earn at least their cost of capital—while at the same time committing to return excess cash and capital to their shareholders through dividends and stock buybacks.     

Liquidity,the Value of the Firm,and Corporate Finance*

The theory of corporate finance has been based on the idea that a company's market value is determined mainly by just two variables: the company's expected aftertax operating cash flows or earnings, and the risk associated with producing them. The authors argue that there is another important factor affecting a company's value: the liquidity of its own securities, debt as well as equity. The paper supports this argument by reviewing the large and growing body of evidence showing that differences—and, perhaps even more important, sudden changes—in liquidity can have major effects on the pricing of corporate stocks and bonds or, equivalently, on investors' required returns for holding them. The authors also suggest that the liquidity of a company's securities can be managed by corporate policies and actions. For those companies whose value is likely to be increased by having more liquid securities—which is by no means true of all companies (for example, mature firms with little need for outside equity are likely to benefit from having more concentrated ownership and hence less liquidity)—management should consider actions such as reducing leverage and substituting dividends for stock repurchases as well as measures designed to increase the effectiveness of their disclosure and investor relations program and the size of their retail investor base.     

The Effects of Cash,Debt, and Insiders on Open Market Share Repurchases

The findings of the authors' recent study suggest, on balance, that stock repurchases function much like tax‐efficient special dividends, increasing when free cash flow is large and when debt levels are low, but not replacing regularly scheduled dividends. Repurchasing companies experience median event returns of about 2% around the repurchase announcements, with a related mean effect of roughly 3%. Companies with greater free cash flow and less debt are more likely than otherwise comparable companies to repurchase their shares. Furthermore, repurchasing companies that exhibit substandard preannouncement stock price returns and seek to buy back higher percentages of shares tend to elicit more positive stock price reactions. At the same time, the study provides some evidence that corporate managers attempt to use their inside information to profit from buybacks. For example, managing insiders in repurchasing firms decrease their selling activity and increase their buying activity two weeks before repurchase announcements to a greater extent than non‐managing insiders. But perhaps the most remarkable finding from this part of the study is how little insiders as a group seem to profit from their short‐term trading behavior—a finding that suggests that the market appears to anticipate much of this behavior.     

The Evolution of Executive Pay Policy at General Motors, 1918–2008

This article documents the gradual movement of General Motors away from the partnership concept that dominated U.S. corporate pay policy in the first half of the 20th century and toward the “competitive pay” concepts that have prevailed since then. The partnership concept was achieved by paying managers bonuses in the form of GM shares, with the amounts paid out of a single company‐wide bonus pool and based on a fixed share of profit (after subtracting a charge for the cost of capital). Thanks to this “EVA‐like” bonus scheme, GM's managers effectively became “partners” with the company's shareholders, sharing the wealth in good times but also the pain in troubled times. What's more, the authors also show that, from the establishment of the program in 1918 through the 1950s, the directors went to great lengths—including several bouts of innovative (and often complex) problem‐solving—to achieve their compensation objectives while maintaining such fixed‐share bonuses. But the sharing philosophy and associated compensation practices were gradually supplanted by competitive pay practices from the 1960s onward. The authors show that by the late 1970s, GM had a board of directors with modest shareholdings, in contrast to the board in the early post‐war period, whose directors had large stakes. As a consequence, directors began acting less like stewards of capital and more like employees whose financial rewards came not from returns on GM's stock but from the fees they received for their services. This fundamental change in board compensation almost certainly contributed to the gradual abandonment of fixed‐profit sharing for GM's managers. In its place, the board implemented competitive pay policies that, while coming to dominate executive pay policy in the U.S. and abroad, have largely divorced executive pay from changes in shareholder wealth. In the case of GM, this growing separation of pay from performance was accompanied by a significant decline in corporate returns on operating capital as well as stock returns over time.     

STERN STEWART ROUNDTABLE ON CAPITAL STRUCTURE AND STOCK REPURCHASE

This roundtable brings together a small group of finance theorists and practitioners to discuss two important—and in most companies closely related—financial policy decisions: (1) the optimal mix of debt and equity and (2) the amount (and form) of cash distributions to shareholders. The result is an interesting set of comments and exchanges that show current theory and corporate practice to be consistent in some respects, but at odds in others. In the first part of this two‐part discussion, the University of Rochester's Clifford Smith presents a broad theoretical framework in which companies set leverage targets by weighing tax and other benefits of debt against potential costs of financial distress, particularly in the form of underinvestment. According to this theory, mature companies with stable cash flows and limited investment opportunities should make extensive use of debt, while growth companies should be funded primarily (if not entirely) with equity. But, as becomes clear in the case study of PepsiCo that follows the opening discussion, putting theory into practice is far from straightforward. Consistent with the theory, Pepsi does have a target leverage ratio, and management has attempted to adhere to that target through a policy of regular stock repurchase. But if the company's decision‐making process appears consistent with the framework mentioned above, it also relies on conventional ratingagency criteria to an extent that surprises some of the panelists. Moreover, Pepsi's policy of maintaining a single‐A credit rating sets off an interesting debate about the value of preserving access to capital markets “under all conditions.” In the second part of the discussion, Rice University's David Ikenberry begins by offering four main corporate motives for stock repurchases: (1) to increase (or at least maintain) the target corporate leverage ratio; (2) to distribute excess capital and so prevent managers from destroying value by reinvesting in low‐return projects; (3) to substitute for dividends, thereby providing a more flexible and tax efficient means of distributing excess capital; and (4) to “signal” and, in some cases, profit from undervaluation of the firm's shares. As in the first part of the discussion, the case of Pepsi largely supports the theory. Assistant Treasurer Rick Thevenet notes that, in 2000, the company generated free cash flow of $3 billion, of which $800 million was paid out in dividends and another $1.4 billion in stock buybacks. And each of the four motives cited above appears to have been at work in the design or execution of Pepsi's buyback policy. There is also some discussion of a fifth motive for buybacks—the desire to boost earnings per share. Although this motive is perhaps the most widely cited by corporate managers, the idea that EPS considerations should be driving corporate buyback programs is shown to rest on flawed reasoning. Moreover, questions are raised about what appears to be an EPS‐driven phenomenon: the corporate practice of attempting to buy back as many shares at the lowest price possible—and the lack of disclosure that often surrounds such a practice. In closing, Dennis Soter offers the novel suggestion that corporate buyback policy should not be designed to transfer wealth from selling to remaining shareholders, but rather to “share the gains from value‐creating transactions.” Through more and better disclosure about their repurchase activities (and Pepsi's policy appears to be a model worth emulating), companies are likely to establish greater credibility with investors, thereby increasing the liquidity and long run value of their shares.     

FINANCIAL STRATEGY FOR MIDDLE MARKET COMPANIES: a ROUNDTABLE DISCUSSION

Dennis Soter begins with the provocative observation that “U.S. companies, private as well as public, are systematically underleveraged,” and goes on to suggest that debt‐financed stock repurchases may help address the current valuation problems faced by many middle market companies (and by many larger firms in basic industries as well). Soter makes his case by presenting two case histories. In the first, Equifax, the Atlanta‐based provider of credit information services, combined a leveraged Dutch auction stock repurchase with a multi‐year series of open market repurchase programs and an EVA incentive plan to produce large increases in operating efficiency and shareholder value. In the second, FPL Group (the parent of Florida Power and Light) became the first profitable utility to cut its dividend, substituting a policy of ongoing stock repurchase for its 33% reduction in dividend payments. Following Soter, John Brehm, the CFO of IPALCO Enterprises (the parent of Indianapolis Power and Light), explains the rationale for his company's decision to become the first utility to do a leveraged recap (while also cutting its dividend by a third). As in the case of Equifax, IPALCO's dramatic change in capital structure (also combined with an EVA incentive plan) was associated with major operating improvements and a positive stock market response. But, of course, high leverage is not right for all companies. And, to reinforce that point, James Perry, CEO of Argosy Gaming, recounts his harrowing experience of having to raise new equity shortly after taking charge of his overleveraged company. By arranging an infusion of convertible preferred, Argosy was able not only to stave off bankruptcy, but to fund major new investment and engineer a remarkable turnaround of its operations. Finally, William Dutmers, Chairman of Knape & Vogt, a small midwestern manufacturing company, discusses the role of debt‐financed stock repurchases and an EVA management approach in his company's recent operating improvements.     

EQT: Private Equity with a Purpose

The primary factors driving the remarkable growth of private equity have been the industry's attractive and stable returns in combination with its active ownership model. Nevertheless, critics have been questioning whether the PE industry can maintain its historic returns, and challenging its fee and incentive structures as well as its notable lack of transparency and diversity. And the alleged systemic effects of the industry on social problems like income inequality and climate change have become large enough to create a perceived threat to PE's long‐term “license to operate.” In this article, the authors discuss the commitment of EQT, the publicly listed and Stockholm‐headquartered private markets firm (and eighth largest PE fundraiser in the world), to the “future‐proofing” of both its portfolio companies and the company itself. The company envisions itself as undertaking a “journey” toward sustainability and positive impact and, in so doing, furnishing a model that other PE firms might find useful in helping “future‐proof” the entire industry. As part of that commitment, EQT recently published a “Statement of Purpose” signed by its the board of directors that focuses a societal impact lens on its entire portfolio of companies and assets, reinforces its public commitments to diversity and other “clean and conscious” practices, and aims to leverage digital technologies to enhance financial returns and real‐world outcomes. Transparency and a mindset focused on achieving positive impact are the keys to PE's earning high and stable returns and to securing its long‐term license to operate.     

上市公司超能力派现与公司治理结构的实证研究

本文选取2003～2005年沪市和深市的1748家上市公司为样本,研究我国上市公司超能力派现与公司治理结构之间的关系.研究发现,第三大股东持股比例与超能力派现正相关,监事会规模、资产负债率和净资产收益率与超能力派现负相关.第一大股东持股比例与超能力正相关没有通过显著性检验,反映我国前几大股东可能合谋实现超能力派现.我国迫切需要优化公司治理结构争完善法制来制止超能力派现的发生.     

CEO Pay and Corporate Governance in the U.S.: Perceptions,Facts, and Challenges

This article brings a broad range of statistical studies and evidence to bear on three common perceptions about the CEO compensation and governance of U.S. public companies: (1) CEOs are overpaid and their pay keeps increasing; (2) CEOs are not paid for their performance; and (3) boards do not penalize CEOs for poor performance. While average CEO pay increased substantially during the 1990s, it has declined since then— by more than 30%—from peak levels that were reached around 2000. Moreover, when viewed relative to corporate net income or profits, CEO pay levels at S&P 500 companies are the lowest they've been in the last 20 years. And the ratio of large‐company CEO pay to firm market value is roughly similar to its level in the late 1970s, and lower than the levels that prevailed before the 1960s. What's more, in studies that begin with the late '70s, private company executives have seen their pay increase by at least as much as public companies. And when set against the compensation of other highly paid groups, today's levels of CEO pay, although somewhat above their long‐term historical average, are about the same as their average levels in the early 1990s. At the same time, the pay of U.S. CEOs appears to be reasonably highly correlated with corporate performance. As evidence, the author cites a 2010 study reporting that, over the period 1992 to 2005, companies with CEOs in the top quintile (top 20%) of realized pay in any given year had generated stock returns that were 60% higher than the average companies in their industries over the previous three years. Conversely, companies with CEOs in the bottom quintile of realized pay underperformed their industries by almost 20% in the previous three years. And along with lower pay, the CEOs of poorly performing companies in the 2000s faced a significant increase in the likelihood of dismissal by their own boards. When viewed together, these findings suggest that corporate boards have done a reasonably good job of overseeing CEO pay, and that factors such as technological advances and increased scale have played meaningful roles in driving the pay of both CEOs and others with top incomes—people who are assumed to have comparable skills, experience, and opportunities. If one wants to use increases in CEO pay as evidence of managerial power or “board capture,” one also has to explain why the other professional groups have experienced similar, or even higher, growth in pay. A more straightforward interpretation of the evidence reviewed in this article is that the market for talent has driven a meaningful portion of the increase in pay at the top. Consistent with this conclusion, top executive pay policies at roughly 97% of S&P 500 and Russell 3000 companies received majority shareholder support in the Dodd‐Frank mandated “Say‐on‐Pay” votes in 2011 and 2012, the first two years the measure was in force.     

Unintended consequences of compensation peer groups on corporate innovation

When companies select and use compensation peers to determine chief executive officer (CEO) compensation, they create unintended peer effects on corporate innovation due to the similarities between these companies and their compensation peers in terms of product markets, CEO characteristics, and compensation schemes. After controlling for industry and geography peer groups, the findings confirm that the average innovation activity of compensation peers is a significant and distinct predictor of corporate innovation. Further analysis showed that (1) the peer effect is stronger in firms and compensation peers that pay their CEOs using long-term compensation, in firms with stronger labor market competition and board monitoring, and in peer companies that experience higher innovation competition and are closer to the median peer company in the peer group; (2) the obtained results are likely not attributable to the knowledge spillover mechanism and are more consistent with the peer pressure mechanism; and (3) the Securities and Exchange Commission's 2006 executive compensation disclosure rules may have generated peer effects.