Disequilibrium Structures and Financing Decisions in the Firm

The business firm confronts interdependent decision problems in production, investment, and finance. Emphasis is here placed on the firm's decision criteria in disequilibrium situations or at infra-optimum structural planning and decision points. The operative cost of capital is shown to be 'the full marginal cost of relaxing the money capital availability constraint'. The popular 'weighted average cost of capital' is shown to be an 'equilibrium datum' which has operative significance only at optimum structural positions. It does not offer adequate guidance to financing and investment decisions in disequilibrium situations.     

Taxes, Financing Decisions, and Firm Value

We use cross-sectional regressions to study how a firm's value is related to dividends and debt. With a good control for profitability, the regressions can measure how the taxation of dividends and debt affects firm value. Simple tax hypotheses say that value is negatively related to dividends and positively related to debt. We find the opposite. We infer that dividends and debt convey information about profitability (expected net cash flows) missed by a wide range of control variables. This information about profitability obscures any tax effects of financing decisions.     

税率锚定效应与企业投资决策

已有文献证实了高管过度自信等非理性因素对企业投资决策的影响,但尚未有文献研究锚定心理在投资决策中的作用。税收政策连续性不足会使得企业实际税率充满不确定性,高管在预测未来实际税率时很可能会非理性地锚定当期的高税率,进而产生税率锚定行为。本文研究这种非理性的税率锚定行为对企业投资决策的影响,结果发现:企业投资决策中存在显著的税率锚定行为,对高税率的锚定显著降低了企业未来的投资支出,且内在锚效应(纵向对比)强于外在锚效应(横向对比)。进一步地,我们发现经验更丰富的高管有助于缓解投资中的税率锚定效应,但更大的税率波动性加剧了这种效应,最终降低了公司业绩和价值。本文研究表明,控制投资中的税率锚定行为,有利于提高投资效率和企业价值,同时也表明保持宏观税收政策连续性有利于促进企业健康可持续发展。     

Managerial Incentives and Corporate Investment and Financing Decisions

This paper examines the relationship between common stock and option holdings of managers and the choice of investment and financing decisions by firms. The authors find support for the hypothesis of a positive relationship between the security holdings of managers and the changes in firm variance and in financial leverage. This conclusion is based on samples of acquiring and divesting firms. The findings are consistent with the hypothesis that executive security holdings have a role in reducing agency problems.     

Tax Rate Uncertainty, Investment Decisions, and Tax Neutrality

This article deals with the effects of tax rate uncertainty (TRU) on individual investment behavior. We show that under risk neutrality as well as under risk aversion, increased TRU has an ambiguous impact on investment, depending on the investment project's structure of cash flows and depreciation deductions. Although the investment effects are small the popular view that tax policy uncertainty depresses real investment is rejected. Further, tax neutrality in the light of tax policy uncertainty is defined more precisely. Neutrality results for the Johansson-Samuelson tax and the cash flow tax that are known from certainty are confirmed under TRU.     

税制改革对企业投资决策影响的实证分析

税制变化将对企业投资带来重大的影响,企业在投资决策中必须充分考虑税制变动因素的制约。新一轮的税制改革将提高投资项目的预期绝对收益水平和相对收益水平,从而给企业增加项目选择的机会,增加了企业的投资商机。     

On the Interaction of Real and Financial Decisions of the Firm Under Uncertainty

This study analyzes the interaction between the optimal level of investment and debt financing. For this purpose, a model is structured in which a firm, facing an uncertain price, has to decide on its optimal level of investment and debt. The amount of investment sets a limit on output whose optimal level is determined after price is realized. The debt involved is risky (there exists a possibility of bankruptcy). The analysis proves that investment and its optimal financing have to be simultaneously determined and that a negative relationship exists between operating and financial leverage. We also demonstrate that as the tax rate increases, optimal capacity decreases and optimal leverage increases. An analysis of the impact of changes in the expected price shows that under some conditions, an increase in expected price would lead to an increase in optimal investment (firm size) and a decrease in optimal debt.     

The Effect on a Firm's Financing and Investment Decisions of Differential Taxation as Barriers to International Investment

The effect of barriers to international investment (in the form of differential taxation) upon a firm's investment and financing decision is analyzed through a newly derived international capital asset pricing model. A firm using an improper project selection criterion which fails to account for the effect of barriers to international investment may reject a desirable project with high systematic risk, whereas it may incorrectly accept an undesirable project with low systematic risk. The financial risk premium under barriers is greater than that in the absence of barriers to international investment. In addition, the lower is the degree of barriers to international investment, the more domestic securities will gain, even when both countries impose a tax on investors of different nationality.     

Interactions of Corporate Financing and Investment Decisions: A Dynamic Framework

This article analyzes the interaction between a firm's dynamic investment, operating, and financing decisions in a model with operating adjustment and recapitalization costs. Using numerical analysis, we solve the model for cases that highlight interaction effects. We find that higher production flexibility (due to lower costs of shutting down and reopening a production facility) enhances the firm's debt capacity, thereby increasing the net tax shield value of debt financing. While higher financial flexibility (resulting from lower recapitalization costs) has a similar effect, production flexibility and financial flexibility are, to some extent, substitutes. We find that the impact of debt financing on the firm's investment and operating decisions is economically insignificant.     

Hedging,Financing and Investment Decisions: A Simultaneous Equations Framework

We empirically investigate the interactions among hedging, financing, and investment decisions. We argue that the way in which hedging affects a firm's financing and investing decisions differs for firms with different growth opportunities. We find that high growth firms increase their investment, but not leverage, by hedging. However, we also find that firms with few investment opportunities use derivatives to increase their leverage.     

The Interactions between the Investment, Financing, and Dividend Decisions of Major U.S. Firms

This paper uses 114 responses to a June 1988 mail questionnaire survey of the financial managers of the 1,000 largest U.S. firms to examine Modigliani and Miller's “separation principle”. The opinions of practicing financial managers were found to be consistent with Modigliani and Miller as well as with the work of other empirical researchers. Almost without exception, the direction of causality between investment and financing decisions was found to run from the former to the latter, and dividend decisions were found to be driven by profits and prior year's dividends rather than by the firm's investment and financing actions. Clearly, the beliefs of practicing financial managers seem to reflect acceptance of Modigliani and Miller's “separation principle.”     

Corporate Financing Decisions and Non-Debt Tax Shields: Evidence from Italian Experiences in the 1990s

Between 1995 and 1999, Italy experienced three episodes of fiscal reform during which different categories of non-debt tax shields were introduced, including a classical investment tax credit, a system of dual income taxation, and an investment tax credit restricted to equity financed investments. Using the balance sheets of a large sample of Italian companies, we construct a data set which allows us to evaluate the impact of the different fiscal interventions. We apply MacKie-Mason's (1990) method to study incremental financing decisions using discrete choice analysis. The analysis shows that the measures introduced were successful in reducing the advantage of debt financing relative to equity financing. We relate the findings to the current literature on the determinants of capital structure. JEL Code: G32, H25     

Trust‐Preferred Securities and Insurer Financing Decisions

We analyze insurance holding company (IHC) issuance of trust‐preferred securities (TPS) from 1994 to 2013. We find that larger and more financially levered IHCs issued TPS in 1996 and 1997, as well as those that obtained financial strength ratings from A.M. Best. Abnormal stock price returns are positively related to financial distress costs, growth opportunities, and tax burden, but negatively related to size. Consistent with the pecking order theory, intent to use TPS proceeds to retire debt is positively related to abnormal stock returns, whereas intent to use proceeds to retire preferred equity is negatively related to abnormal stock returns.     

Hedging Affecting Firm Value via Financing and Investment: Evidence from Property Insurance Use

I provide evidence about the value effects of alternative risk management by examining corporate purchase of property insurance, a commonly used pure hedge of asset-loss risks. Using an insurance data set from China, I find that there is an inverted U-shape effect of the extent of property insurance use on firm value measured by several versions of Tobin's Q. Therefore, the use of property insurance, to a certain degree, has a positive effect on firm value; however, over insurance appears detrimental to firm value. Given that the inflection points occur at relatively high levels of the observed insurance spending, insurance use appears beneficial to the majority of my sample firms. The estimated average hedging premium is about 1.5%. I demonstrate that an avenue for insurance to create value in China is that it helps firms secure valuable new debt financing and enhance investment.     

Corporate Governance and Corporate Financing and Investment during the 2007‐2008 Financial Crisis

We examine the impact of the 2007‐2008 financial crisis on nonfinancial firms’ financing and investment activities and the role of corporate governance in alleviating the adverse consequences of the external capital supply shock. Employing a difference‐in‐differences research design, we find that better governance mitigates the disruption caused by the bank credit supply shock to firms’ financing and investment activities. A variety of robustness tests suggest that our findings are unlikely to be driven by an endogeneity problem. We obtain similar results when we extend the sample period to include the delayed spillover from the banking sector to other capital market sectors.     

The Role of Investment,Financing and Dividend Decisions in Explaining Corporate Ownership Structure: Empirical Evidence from Spain

This paper analyses the determinants of ownership structure by focusing on the role played by investment, financing and dividend decisions. The use of the Generalised Method of Moments allows us to provide new evidence on this important corporate governance topic, since it controls for the endogeneity problem. Our most relevant findings show that: i) increases in debt lead insiders to limit the risk they bear by reducing their holdings; ii) monitoring by large outside owners substitutes for the disciplinary role of debt; and iii) both inside and outside owners are encouraged to increase their stakes in the firm in view of higher dividends. Our results hold after controlling for equity issues and share repurchases.