SOME NEW EVIDENCE ON EVA COMPANIES

The study of companies using EVA and EVA-like systems discussed in the previous article provides evidence of changes in managerial behavior, such as reduced capital expenditures, increased share repurchases, and increased residual income, but stops short of concluding that such changes have increased shareholder value. This article presents evidence that directly addresses the issue: Do companies adopting EVA add more value for their shareholders than their industry competitors? The author reports that U.S. companies adopting EVA during the period 1987–1996 outperformed the median firms with the same SIC codes by 28.8% during the four-year period including and following the year of adoption. This paper also provides evidence of significant operating improvements that help explain such increases in shareholder value. But, in contrast to the finding of the Wallace study cited above, the capital expenditures of EVA companies increase (although at a slower rate than for S&P 500 companies) after going on to EVA.     

SOME EMPIRICAL EVIDENCE ON THE USE OF FINANCIAL LEASES

In this paper, the impact of certain firm-specific factors on the level of financial leases used by corporations is examined. An industry analysis indicates that firms in certain industries tend to lease more than other firms. A Tobit analysis of the degree to which approximately 600 firms lease assets indicates that certain factors—including the debt ratio, presence of mortgage debt, level of subordinated debt, presence of restrictions on leasing, number of bonds in a firm's capital structure, and the firm's debt rating—are significantly related to the degree of leasing. Other factors, including the firm's tax rate, were not found to be significant, contrary to popular expectations.     

VALUATION OF PRIMARY ISSUE CONVERTIBLE BONDS

Little empirical evidence is available on the nature of the trade-offs between the debt- and equity-like components of convertible bonds. Such information would be useful to firms considering the issuance of convertible bonds. Furthermore, complete understanding of the leverage implications of convertible bond issuance depends on the market's view of the proportions of the implicit debt/equity mix. The current study develops a two-equation model that estimates the relative contributions made to the value of primary issue convertible bonds by the debt and implicit warrant components. The model's distinct approach affords an opportunity to evaluate the empirical relationship between the value of the implicit warrant and the theoretical determinants of that value by isolating the individual components of the convertible bond's value.     

WHY HEDGE? SOME EVIDENCE FROM OIL AND GAS PRODUCERS

Despite the prevalence of corporate risk management, there are no widely accepted explanations for why companies hedge or how shareholders benefit from hedging. This article provides some evidence on these issues by reporting the results of a study of the risk management policies of 100 oil and gas producers from 1992 to 1994.
The first notable finding is the considerable variety of the hedging policies of the oil and gas producers. For example, in 1993 slightly more than half of the companies did not hedge, while a quarter of the firms in the sample hedged more than 28' of their production, and some firms hedged almost 100'. The second main finding was that the extent of hedging was related to a variety of factors, largely those related to financing costs. In particular, companies with higher leverage—and thus presumably facing greater difficulties in accessing the capital markets—tended to hedge a larger fraction of their output than firms with lower leverage ratios. This result is consistent with the idea that corporations manage risks to help ensure they have sufficient capital to finance their investment opportunities and to reduce the likelihood that low oil and gas prices will push them into financial distress. Under either of these interpretations, financial theory would suggest that corporate hedging increases shareholder value. Whether it actually does so is a matter for future research.     

CONVERTIBLE BONDS: MATCHING FINANCIAL AND REAL OPTIONS

For companies whose value consists in large part of “real options”‐ growth opportunities that may (or may not) materialize‐convertible bonds may offer the ideal financing vehicle because of the matching financial options built into the securities. This paper proposes that convertible debt can be a key element in a financing strategy that aims not only to fund current activities, but to give companies access to low‐cost capital if and when their real investment options turn out to be valuable. In this sense, convertibles can be seen as the most cost‐effective solution to a sequential financing problem‐how to fund not only today's activities, but also tomorrow's growth opportunities (some of them not yet even foreseeable). For companies with real options, the ability of convertibles to match capital inflows with corporate outlays adds value by minimizing two sets of costs: those associated with having too much (particularly equity) capital (known as “agency costs of free cash flow”) and those associated with having too little (“new issue” costs). The key to the cost‐effectiveness of convertibles in funding real options is the call provision. Provided the stock price is “in the money” (and the call protection period is over), the call gives managers the option to force conversion of the bonds into equity. If and when the company's investment opportunity materializes, exercise of the call feature gives the firm an infusion of new equity (while eliminating the debt service burden associated with the convertible) that enables it to carry out its new investment plan. Consistent with this argument, the author's recent study of the investment and financing activities of 289 companies around the time of convertible calls reports significant increases in capital expenditures starting in the year of the call and extending three years after. The companies also showed increased financing activity following the call, mainly new long‐term debt issues (many of them also convertibles) in the year of the call.     

THE CHOICE AMONG DEBT,EQUITY, AND CONVERTIBLE BONDS

The hybrid nature of convertible bonds continues to interest corporate financial managers, investors, and economists. While much theoretical and empirical research examines an issuer's choice between using straight debt and equity, little research evaluates how an issuer chooses among debt, equity, and convertible bonds. This study extends Marsh's [ 13 ] research on the differences between debt and equity issuers in the United Kingdom by examining U.S. industrial firms that issue debt, equity, or convertible bonds. It also illustrates how various distinguishing features influence the probability that each security will be issued.     

WHERE'S THE CAT GOING? SOME OBSERVATIONS ON CATASTROPHE BONDS

This article provides an assessment of the current state of the market for catastrophe (or "Cat") bonds. Given the changes in insurance markets since September 11th, the demand for Cat bonds is likely to increase. For issuers, Cat bonds have the effect of transferring risks to the capital markets that would normally be underwritten by insurance or reinsurance companies. And as a substitute for insurance, Cat bonds have the potential to help issuers address problems such as lack of capacity and real risk transfer, cyclicality, and credit risk that are commonly associated with insurance and reinsurance markets. Investors value Cat bonds in part because of their low correlations with stocks and conventional bonds. Notable trends in the structuring of the products involve higher levels of risk transfer, longer-term contracts, and linkage to a portfolio of catastrophic risks.     

AN EMPIRICAL MODEL OF CAPITAL STRUCTURE: SOME NEW EVIDENCE

Using a general autoregressive distributed lag model, we estimate the longrun steady state determinants of corporate capital structure. We find that, in the long run, the leverage ratio is related positively to the corporate tax rate and firm size and negatively to future growth opportunities and stock returns. By contrast, there appears to be no relation between leverage and the corporate tax rate on a short-run year to year basis. Our results suggest that prior empirical evidence on capital structure is of questionable value precisely because of its failure to clearly separate the short-run relationship between leverage and its determinants from its long-run relationship.     

SOME EVIDENCE THAT BANKS USE INTERNAL CAPITAL MARKETS TO LOWER CAPITAL COSTS

To the extent raising external capital is especially costly for banks (as the preceding article suggests), bank managers have incentives to manage their internal cash flow in ways that minimize their need to raise external equity. One way to accomplish this is to establish bank holding companies that set up internal capital markets for the purpose of allocating scarce capital across their various subsidiaries. By “internal capital market” the authors mean a capital budgeting process in which all the lending and investment opportunities of the different subsidiaries are ranked according to their risk-adjusted returns; and all internal capital available for investment is then allocated to the highestranked opportunities until either the capital is exhausted or returns fall below the cost of capital, whichever comes first. As evidence of the operation of internal capital markets in bank holding companies, the authors report the following set of findings from their own recent studies:

• ? For large publicly traded bank holding companies, growth rates in lending are closely tied to the banks' internal cash flow and regulatory capital position.
• ? For the subsidiaries of bank holding companies, what matters most is the capital position and earnings of the holding companies and not of the subsidiaries themselves.
• ? The lending activity of banks affiliated with multiple bank holding companies appears to be less dependent on their own earnings and capital than the lending of unaffiliated banks.

The authors also report that, after being acquired, previously unaffiliated banks increase their lending in local markets. This finding suggests that, contrary to the concerns of critics of bank consolidation, geographic consolidation may make banks more responsive to local lending opportunities.     

ENVIRONMENTAL POLICIES OF MAJOR COMPANIES: AUSTRALIAN EVIDENCE

In the world-wide literature on business and the environment, the development of a Corporate Environmental Policy (CEP) is seen as an important step in becoming environmentally aware. Australian companies have been found to be developing CEPs, and this study investigates some of the major influences on them to do so. Environmental law appears to be the most persuasive mechanism in the greening of companies. CEPs also appear to be increasingly structured and many appear to contain a statement of objectives which supports the first element of the general framework developed by Grayet al. (1987) for social (environmental) reporting.