Expected EPS and EPS Growth as Determinantsof Value

This paper develops a parsimonious model relating a firm’s price per share to, (i), next year expected earnings per share (or 12 months forward eps), (ii), short-term growth (FY-2 versus FY- l) in eps, (iii), long-term (asymptotic) growth in eps, and, (iv), cost-of-equity capital. The model assumes that the present value of dividends per share (dps) determines price, but it does not restrict how the dps-sequence is expected to evolve. All of these aspects of the model contrast sharply with the standard (Gordon/Williams) text-book approach, which equates the growth rates of expected eps and dps and fixes the growth rate and the payout rate. Though the constant growth model arises as a peculiar special case, the analysis in this paper rests on more general principles, including dividend policy irrelevancy. A second key result inverts the valuation formula to show how one expresses cost-of-capital as a function of the forward eps to price ratio and the two measures of growth in expected eps. This expression generalizes the text-book equation in which cost-of-capital equals the dps-yield plus the growth in expected eps.This revised version was published online in August 2005 with a corrected cover date.     

Earnings Quality and Market Values of Indonesian Listed Firms

We find that earnings quality (EQ) is reliably negatively correlated with the market values of equity of firms listed on the Jakarta Stock Exchange (IDX). The financial reporting process produces earnings viewed as increasingly ‘incomplete’ for valuation purposes by the capital market despite moves towards high‐quality financial reporting standards (IFRS) during the sample period 1995–2015. Time‐series analyses reveal that EQ decreases rather than increases through time. The role of earnings in valuation is replaced by other attributes, most notably net dividends. Firms that pay out dividends are valued significantly higher, and firms that issue equity are valued lower. These results are robust regardless of other accounting, market and governance controls. Large and closely held firms are valued higher than smaller firms, consistent with some aspects of the political cost hypothesis. Shares with higher idiosyncratic risk are valued higher, consistent with option value, as are shares where the volume of shares traded is more volatile. Collectively, the results indicate that the mere adoption of high‐quality accounting standards (IFRS) and other nominal changes in capital market regulations do not automatically increase the quality of the financial reporting process.     

Seasoned equity offerings and the short- and long-run performance of initial public offerings in the UK

In contrast to the US practice, rights issues is the predominant method of raising additional equity capital in the London market. the UK evidence for the period 1980-1991 provides no support to the hypothesis that IPO firms deliberately underprice to signal their quality and facilitate subsequent seasoned equity offerings. the level of initial returns is related neither to the size of the issue nor to the price response at the announcement of a rights issue. the results demonstrate, however, that firms with higher first day returns are quicker in returning to the market for additional equity capital. There is also strong evidence to suggest that the announcement of a seasoned equity offering follows a period of significant rises in the stock prices of reissuing firms. Such gains are, however, dissipated quickly in the 18 months after the announcement of the seasoned equity offering. the level of underperformance is particularly pronounced for firms that raised relatively small subsequent amounts of capital in relation to funds raised at the initial offering. Thus, the paper documents a pattern of post-issue behaviour which is fundamentally similar for both unseasoned and seasoned equity offerings.     

An Analysis of the Financing Decisions of REITs: The Role of Market Timing and Target Leverage

This paper examines the role of capital market conditions and target leverage on the marginal financing decisions of Real Estate Investment Trusts (REITs), which include both capital raising and capital reduction activities. We investigate the relevance of a hybrid hypothesis whereby REITs have target leverage, but they also choose and time their marginal financing decisions according to the capital market conditions. The empirical results suggest that target leverage behavior plays a secondary role to market timing behavior in the financing decisions of REITs. In particular, we find strong and consistent evidence that REITs exhibit market timing behavior in terms of when and what type of capital to issue or reduce. Such market timing practices, motivated by attempts to take advantage of capital market conditions, may shift the firms away from their target leverage. However, we observe that in the long run, most REITs do move their capital structure towards the target debt level.     

Evidence on the role of holding company acquisitions in the management of bank capital

This article addresses the issue of the impact of bank acquisitions on the capital positions of acquired banks. The hypothesis tested is that acquisition-related capital changes reflect divergent capital-related acquisition motives which induce significant infusion of capital into some acquired banks and significant withdrawals from others.This study confirms that,on average, bank holding company acquisitions reduce the relative capital position of acquired banks, but it also indicates that this average effect masks evidence that acquisitions contribute to relative increases in capital in a significant subset of acquired banks. The results herein demonstrate that results of prior studies regarding the impact of acquisition and/or holding company affiliation on bank capital positions suffer from misspecification.The finding that there are divergent implications of acquisition for capital growth is consistent with the notion that acquisitions by bank holding companies may be providing important financial synergies to the banking industry by serving as a mechanism for relatively efficient reallocation of equity capital among affiliated banks.The authors wish to acknowledge helpful comments and suggestions of Harold Black, Tom Boehm, Ronnie Clayton, Stephen Rhoades, and anonymous referees.     

Why do companies include warrants in seasoned equity offerings?

We analyze the reasons why companies issue units when they raise additional capital. We find that, in contrast to previous evidence, units are not offered to mitigate the agency conflicts or to signal security mispricing as they are predominantly issued during cold periods, in public rather than in rights offerings, and when the issue is underwritten. In addition, the results indicate that companies choose to offer units to increase their offer price flexibility and to underprice their seasoned equity offering so as to minimize the issue cost and the risk of failure of the issue. These results provide support for the net proceeds maximization hypothesis.     

Related-party transactions and corporate governance: The evidence from the Taiwan stock market

In this study we explore how corporate governance affects the level of related-party transactions (RPTs) and how it moderates the motives of using RPTs in Taiwan, an ownership-concentrated economy. The empirical results show that good corporate governance is effective in constraining RPTs with the negative relation being sustainable across different measures of RPTs (raw, residual and industry-adjusted RPTs) and across different types of RPTs (related sales, lending and guarantee, and related borrowings). The propping-up hypothesis indicates that the level of related sales is positively correlated with the condition that firms plan to issue seasoned equity next period and the condition of a decrease in the reported earnings. The internal capital market hypothesis indicates that the level of related lending and guarantee (related borrowing) is negatively (positively) correlated with the condition of an increase in capital expenditure and an increase in net working capital. The empirical results lend partial support to the two hypotheses. More importantly, we find that corporate governance moderates the relation between the motives and the level of RPTs.     

A Test of the Signaling Value of IPO Underpricing with REIT IPO-SEO Pairs

The asymmetric information hypothesis states that IPO underpricing signals superior firm value. During the post-IPO period, the market learns the firms true worth such that good quality firms issue seasoned equity at favorable prices and recoup the loss sustained at IPO. Since REITs have no special incentive to issue debt because of their tax-exempt status, and since they must pay out 95 percent of net income as dividends, REIT managers are hard pressed to raise capital through seasoned equity. Consequently, the signaling link between IPOs and SEOs is critical for REITs. Consistent with the signaling model, we find strong evidence that (1) REITs that underprice IPOs more are likely to sell seasoned equity sooner, (2) higher IPO underpricing results in larger joint amount of capital raised through an IPO-SEO pair, and (3) firms that underprice IPOs underprice SEOs as well. IPO underpricing does not mitigate the valuation loss associated with seasoned offerings, however.     

Partial anticipation, the flow of information and the economic impact of corporate debt sales

Corporate debt sales have been regarded as 'no news' eventsbecause there is no significant price reaction on average totheir announcement. We explore the hypothesis that this lackof average price reaction to debt sale announcements is explainedby the partial anticipation of debt offers. Theory suggeststhat the demand for debt capital is fundamentally related tochanges in the sources and uses of funds, and we find evidencethat earnings are significantly lower, investment growth issignificantly bigger, and, for some issuers, debt refundingrequirements are significantly greater in the period immediatelyprior to issue than in periods well before and after the issue.We find that this preissue information conditions investors'expectations of issue, thereby affecting the cross-sectionalannouncement date price reaction to debt sales in two ways.First, announcement date price reactions are negative, on average,for unanticipated offers or for those offers where prior informationsuggests that an issue is unlikely. Second, holding the probabilityof issue constant, announcement date price reactions are significantlymore negative for offers that raise more capital than investorsexpected. These results are consistent with cash flow signalingand asymmetric information models of corporate financings.     

The financing and growth of firms in China and India: Evidence from capital markets

This paper studies the extent to which firms in China and India use capital markets to obtain financing and grow. Using new data on domestic and international capital raising and firm performance, it finds that financial market activity has expanded less since the 1990s than aggregate figures suggest. Relatively few firms raise capital and even fewer attract most of the financing. Moreover, firms that issue equity or bonds are different and behave differently from other publicly listed firms. Among other things, they are typically larger and grow faster. The differences between users and nonusers exist before the capital raising, are associated with the probability of raising capital, and become more pronounced afterward. The size distribution of issuing firms shifts more over time than the distribution of those that do not issue, suggesting little convergence in size among listed firms.     

Motives for and Effects of Asset Revaluation: An Examination of South Korean Data

Examining a sample of South Korean firms, of which 201 revalued assets and 899 did not during the period 2008–2009, we find that the average debt cost, equity cost, and weighted average cost of capital (WACC) are higher among the firms that revalued. Firms with higher equity costs and leverage are more likely to revalue and the propensity has a negative relationship with profitability, cash flow, and Tobin’s q. Firms that engage in revaluation experience reductions in all capital costs from year ?1 to +1, comparable to those among firms that did not revalue. Our results support both the information hypothesis and the debt-cost hypothesis.     

New evidence on the impact of size and taxation on the seasonality of UK equity returns

The paper investigates the extent to which capital gains taxation and the portfolio rebalancing hypothesis may account for the seasonality of UK equity returns. The empirical results show that in small firm portfolios during the period of capital gains taxation, April but not January seasonality is consistent with the tax-loss selling hypothesis. The January seasonality, which is detected even before the introduction of capital gains taxation, is also consistent with the portfolio rebalancing hypothesis until the 1980s, when such seasonality becomes increasingly insignificant.     

SECURITIES OFFERINGS AND CAPITAL STRUCTURE THEORY

This paper analyzes a large sample of public security offerings to determine the motivation to issue debt or common equity. The results provide new evidence that the existence of asymmetric information plays a key role in firms' choice of security. Bankruptcy risk appears to affect the issue decision, but other traditional capital structure considerations do not. Variations in the determinants of security choice over time suggest a dynamic aspect to capital structure decisions not recognized in previous studies.     

Dividend reinvestment plans: An empirical analysis

This study examines the effect of initiating discount and no discount dividend reinvestment plans on shareholder wealth. The results show a negative response to DRP announcements, which is significantly smaller than that found in studies of new equity offerings. These results are consistent with the Scholes and Wolfson (1989) hypothesis that managers in need of equity capital use DRPs to mitigate the adverse stock price effects of new equity issue announcements. Furthermore, there is a significant difference in the price response of discount and no discount DRPs for industrial firms. This result is supportive of the signaling potential of discount DRPs. Supportive evidence is also found in the analysis of firm characteristics for industrial firms.     

Institutional affiliation and the role of venture capital: Evidence from initial public offerings in Japan

The presence of venture capital in the ownership structure of U.S. firms going public has been associated with both improved long-term performance and superior “certification” at the time of the initial public offerings (IPOs). Many of the major venture capital firms in Japan are subsidiaries of securities firms that may face a conflict of interest when underwriting the venture capital-backed issue. In Japan, we find the long-run performance of venture capital-backed IPOs to be no better than that of other IPOs, with the exception of firms backed by foreign-owned or independent venture capitalists. When venture capital holdings are broken down by their institutional affiliation, we find that firms with venture backing from securities company subsidiaries do not perform significantly worse over a 3-year time horizon than other IPOs. On the other hand, we find that IPOs in which the lead venture capitalist is also the lead underwriter have higher first-day returns than other venture capital-backed IPOs. The latter result suggests that conflicts of interest influence the initial pricing, but not the long-term performance, of IPOs in Japan.     

Exploitation of the internal capital market and the avoidance of outside monitoring

Internal capital markets (ICMs) provide firms an alternative to costly external financing; however, they also provide an avenue to avoid the monitoring associated with issuing external capital. We argue that firms operating inefficient internal capital markets will avoid outside financing. Consistent with this view, conglomerates that cross-subsidize divisions or engage in value-destroying investment avoid external capital market oversight by refraining from issuing both debt and equity. We further show that firms issuing bonds while engaging in value-destroying investment experience yield spreads that are, on average, 46 basis points higher than those of other diversified firms. They similarly experience yield spreads that are 18 basis points higher when they issue syndicated loans. Value-destroying conglomerates also witness SEO announcement returns that are, on average, 1% more negative than firms operating more efficient internal capital markets.     

SEASONED EQUITY OFFERINGS: THE CASE OF ALL-EQUITY FIRMS

Three theories have been widely proposed to explain the significant negative market response to the announcement of a new equity issue. By observing a similar negative effect in a sample of zero and near zero long-term debt firms, we are able to conclude that the capital structure hypothesis is not the sole explanation. Regressions of announcement period abnormal returns against subsequent cashflow change while controlling for price pressure effects provide evidence in support of the information hypothesis. Decomposition of the sample by issue purpose reveals a differential impact at the time of announcement consistent with an information-based explanation.     

Financial Reporting Environments and International Capital Mobility

We examine whether differences in international capital mobility across countries are related to country‐specific differences in financial reporting environments. We hypothesize that countries where financial accounting environments lead to greater disclosure of value‐relevant accounting information are more likely to have higher international capital mobility. The results of empirical tests are consistent with our hypothesis.     

Corporate social responsibility and bank liquidity creation

Under the stakeholder theory hypothesis, reputable corporate social responsibility (CSR) banks are expected to attract more loans and deposits, which in turn strengthens their ability to create liquidity. Our findings support this view. Further analyses reveal that the positive effect of CSR on liquidity creation differs depending on bank size, bank capital, and type of financial crisis. In addition, deposit growth, loan growth, lending rate, and funding rate are potential channels through which CSR influences bank liquidity creation. The findings are not driven by an endogeneity issue.     

Dancing in Shackles: Clawback and corporate innovation

This paper examines how clawback provisions, as an ex-post penalty scheme, affect corporate innovation intensity and strategies. On the one hand, innovation activities decline after clawback adoptions. On the other hand, clawback adopters tend to conduct fewer exploitative innovations but more exploratory innovations. These results hold for both voluntary clawback adoptions and mandatory clawback adoptions. The results support the capital market pressure hypothesis, which posits that after clawback adoption, managers become more careful about research and development spending and shift to exploratory innovations to meet capital markets’ expectations.