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 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.     

求新求变创造价值

银行业长期的发展历程表明,创新是银行核心竞争力的源泉,也是提升金融服务能力的有效手段。在经济和产业转型过程中,新业态的不断涌现意味着银行的服务对象将会大大拓展,金融服务需求也会日趋多元化和个性化。面对这些全新的领域,银行只有积极推进金融创新,提升自身的金融服务水平,才能增强自身综合竞争力。作为一家服务企业,工商银行始终把服务作为立行之本,     

SOME NEW EVIDENCE ON WHY COMPANIES USE CONVERTIBLE BONDS

The popular argument for convertibles holds that they provide issuers with "cheap" debt and allow them to sell equity at a premium over current value. Objecting to the "free lunch" implied by such an argument, financial economists have offered other explanations that show how the combination of debt and equity built into convertibles can serve to reduce information and agency costs faced by companies and their investors.
In this article, the authors use the results of their recent study to reconcile the two positions. Following Jeremy Stein's view of convertibles as "backdoor equity," the authors argue that convertible bond financing is an attractive alternative for companies that have large growth potential but find both conventional debt and equity financing very costly. Such companies are often deterred from funding their capital investments with straight public bonds by their high risk, relatively short track records, and high expected costs of financial distress. At the same time, the information "asymmetry" between management and outside investors can make equity very expensive in such cases. In layman's terms, management may feel that the company's share price does not accurately reflect its growth prospects, or be concerned that the mere announcement of a new equity offering will cause the share price to fall sharply.
To the extent the stock market is persuaded that management's choice of convertibles is based on this combination of promising growth prospects with limited financing options, it is likely to respond more favorably to the announcement of a new convertible offering. The authors furnish evidence in support of this argument by reporting that the market reacts less negatively to those convertible issuers with higher post-issue capital expenditures and higher market-to-book ratios, but with lower credit ratings and higher (post-offering) debt-equity ratios.     

让优点创造价值

大部分致力于对员工弱点进行改造的行为,都是对组织的伤害,让人的长处得到发挥。又使人的短处不起作用,这才是组织最重要的特性。     

CAN INEFFICIENT TRADERS CREATE VALUE?

I examine the aggregate expected profit generated by informed traders of diverse ability in a competitive market. I assume that efficient traders get perfect information on asset values whereas inefficient traders get noisy information. In the presence of order size restrictions, I show that the aggregate expected profit generated by efficient and inefficient traders together can be higher than that generated by efficient traders alone. Thus, inefficient traders can create value in a constrained trading environment.     

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.     

DESIGNING CAPITAL STRUCTURE TO CREATE SHAREHOLDER VALUE

In the past decade, many U.S. companies have launched aggressive share repurchase programs with the expectation that value can be created by returning excess capital to shareholders and moving the firm closer to its optimal capital structure. But how much capital does a company really need to support its business activities? This article presents an economic framework or “model” that can be used to simulate the effect of various capital structure choices on shareholder value. The fundamental insight underlying the model is that judicious use of debt can add value by reducing corporate taxes and strengthening management incentives to increase efficiency, but that too much debt can result in a loss of business and perhaps a costly reorganization. Indeed, one of the key findings of the authors' recent research is that companies with highly leveraged balance sheets suffer disproportionately large losses in market share and value during industry downturns. As illustrated in a case study of a hypothetical general merchandiser, the model makes it possible to identify an optimal debt-equity ratio (and percentage of fixed- versus floating-rate debt)—one that balances the value of the tax shield from debt against the increased risk of financial distress.     

EVIDENCE OF THE EFFECT ON SHAREHOLDER WEALTH OF CORPORATE SPINOFFS: THE CREATION OF ROYALTY TRUSTS

Corporate spinoffs and divestitures cause positive revaluation of the firm by the market. This paper examines a particular kind of spinoff, one of mineral interests into a royalty trust. Royalty trusts are associated with abnormal returns that come from positive market revalution and from special tax incentives inherent to trusts.     

A NEW MODEL FOR ESTIMATING RISK PREMIUMS (ALONG WITH SOME EVIDENCE OF THEIR DECLINE)

This article uses the Gordon growth model with a novel method for forecasting dividend growth rates to estimate the equity cost and associated risk premium for a sample of Canadian telecommunications companies. The results suggest that the Telco risk premium has declined significantly since the early 1980s. Moreover, this decline is accentuated when measured over long Canada yields, rather than over similarly taxed, longterm preferred yields.
The findings of this study also suggest that the inverse relationship between utility risk premium and market interest rates reported by studies of U.S. utilities does not hold in Canada. If anything, the Telco risk premium has tended to vary directly with the level of market interest rates, with risk premium falling along with the general decline in rates. The main reason for these results seems to be the significant increase in interest rate risk, which has caused the long Canada yield to be a very poor proxy for the longterm, riskfree rate.
One practical implication of this finding is that companies that estimate equity costs as a premium over longterm government bond yields are probably seriously overestimating the cost.     

EVIDENCE THAT GREATER DISCLOSURE LOWERS THE COST OF EQUITY CAPITAL

The effect of corporate disclosure on the cost of equity capital is a matter of considerable interest and importance to both corporations and the investment community. However, the relationship between disclosure level and cost of capital is not well established and has proved difficult for researchers to quantify. As described in this article, the author's 1997 study (published in The Accounting Review) was the first to measure and detect a direct relationship between disclosure and cost of capital. After examining the annual reports of 122 manufacturing companies, the author concluded that companies providing more extensive disclosure had a lower (forward‐looking) cost of equity capital (measured using Value Line forecasts with an EBO valuation formula that derives from the dividend discount model). For companies with extensive analyst coverage, differences in disclosure do not appear to affect cost of capital. But for companies with small analyst followings, differences in disclosure do appear to matter. Among this group of companies, the firms judged to have the highest level of disclosure had a cost of equity capital that was nine‐percentage points lower than otherwise similar firms with a minimal level of disclosure. Closer analysis of some of the specific disclosure practices also suggests that, for small firms with limited analyst coverage, there are benefits to providing more forward‐looking information, such as forecasts of sales, profits, and capital expenditures, and enhanced disclosure of key non‐financial statistics, such as order backlogs, market share, and growth in units sold. In closing, the article also discusses an interesting new study (by Lang and Lundholm) that suggests there is an important distinction between effective corporate disclosure and “hyping the stock.” The findings of this study show that while higher levels of disclosures are associated with higher stock prices, sudden increases in the frequency of disclosure are viewed with skepticism.     

PRICING NIKKEI PUT WARRANTS: SOME EMPIRICAL EVIDENCE

The newly created Nikkei put warrants represent a recent innovation in security development. These privately issued puts enable investors to hedge or speculate on price movements in the Japanese market. Understanding the pricing behavior of these new securities provides U.S. investors and issuers with valuable information to assess potential benefits and costs. In this research two alternative pricing models are used to explain the observed prices of several privately issued Nikkei put warrants. While results from the two models indicate some pricing biases, pricing errors are very small overall.