The capital structure puzzle revisited

Corporate finance researchers have long been puzzled by lowcorporate debt ratios given debt's corporate tax advantage.This article recognizes that firm value typically reflects agrowing stream of earnings, while current debt reflects a nongrowingstream of interest payments. Debt to value is therefore a distortedmeasure of corporate tax shielding. Even with very small debt-relatedcosts, this may explain the observed magnitude and cross-sectionalvariation of debt ratios. Since this variation may be independentof tax shielding, debt ratios provide an inappropriate frameworkfor empirically examining the trade-off theory of capital structure.     

Trading volume with private valuation: evidence from the ex-dividend day

We test a theory of the interaction between investors' heterogeneity,risk, transaction costs, and trading volume. We take advantageof the specific nature of trading motives around the distributionof cash dividends, namely the costly trading of tax shields.Consistent with the theory, we show that when trades occur becauseof differential valuation of cash flows, an increase in riskor transaction costs reduces volume. We also show that the nonsystematicrisk plays a significant role in determining the volume of trade.Finally, we demonstrate that trading volume is positively relatedto the degree of heterogeneity and the incentives of the variousgroups to engage in trading.     

The self-enforcing provisions of oil and gas unit operating agreements: theory and evidence

This article extends the existing theory and empirical investigationof unitization contracts. It highlights the importance of incentive-compatibilityand self-enforcement and the bargaining problems faced in achievingviable, long-term contracts. We argue that only if the partiesto a unitization contract have unit production shares that arethe same as their cost shares will the contract be incentivecompatible. Using a database of 60 unit operating agreements,we measure the industry's actual behavior against the principlesof production from a common pool. Our survey of units that haveonly one production phase and that are relatively homogeneousreveals that such equal sharing rules are always found and theyappear to encourage the parties to behave optimally. In morecomplex units with multiple production phases and/or separateconcentrations of oil and gas (gas caps) we find deviationsfrom the theoretical ideal. In the case of multiphase units,we find equal cost and production shares within phases, butnot across phases. A preset trigger for shifting from one productionphase to the next helps to maintain optimal behavior. For gascap units, however, we generally do not find the equal sharingrule. Conflicts and rent dissipation follow as illustrated bythe case of the Prudhoe Bay Unit. The article describes thedesirable contract rules for avoiding moral hazard. It alsoshows how the effects of those rules can be replicated in difficultsituations.     

How management teams can have a good fight

Top-level managers know that conflict over issues is natural and even necessary. Management teams that challenge one another's thinking develop a more complete understanding of their choices, create a richer range of options, and make better decisions. But the challenge--familiar to anyone who has ever been part of a management team--is to keep constructive conflict over issues from degenerating into interpersonal conflict. From their research on the interplay of conflict, politics, and speed in the decision--making process of management teams, the authors have distilled a set of six tactics characteristic of high-performing teams: They work with more, rather than less, information. They develop multiple alternatives to enrich debate. The establish common goals. They make an effort to inject humor into the workplace. They maintain a balanced corporate power structure. They resolve issues without forcing a consensus. These tactics work because they keep conflict focused on issues; foster collaborative, rather than competitive, relations among team members; and create a sense of fairness in the decision-making process. Without conflict, groups lose their effectiveness. Managers often become withdrawn and only superficially harmonious. The alternative to conflict is not usually agreement but rather apathy and disengagement, which open the doors to a primary cause of major corporate debacles: groupthink.     

Prices, liquidity, and the information content of trades

We investigate the effect of asymmetric information on pricesand liquidity by analyzing trades, quotes, spreads, and depths.Information content should increase with trade size and theinformation asymmetry of the trading period. Results show thatprice and liquidity effects are significantly associated withinformation content as measured by both trade size and timingrelative to information events. Results are stronger for purchasesthan sales. Quoted prices are better measures of informationeffects than transaction prices, because they control for bid-askbounce. Finally, trades that a priori contain no informationhave no impact on prices and liquidity, despite their largesize.     

HAYEKIAN ECONOMIC INFRASTRUCTURE AS A FOUNDATION FOR SUSTAINED PROSPERITY

Rather than debate whether technical advances have created a ‘new economy’, economists should focus on the more interesting and useful question: How do we create the sort of environment in which innovation and the productive use of new technology thrive, thereby creating economic prosperity? Such an environment is the product of government laying the appropriate infrastructure, manifested in the culture of the institutions it supports. This article discusses the features governments must incorporate into their institutions in order to build an economic infrastructure that promotes prosperity.     

Measurement effects and the variance of returns after stock splits and stock dividends

This article examines the relation between two factors affectingstock returns, the bid-ask spread and price discreteness, andthe increase in return variance after ex-dates of stock splitsand stock dividends. Controlling for these effects, the varianceof daily returns still increases significantly. The varianceof weekly returns also increases significantly, and the varianceof returns for a control sample of nonsplitting firms showsno significant increase. Variance ratio tests show that bid-askerrors are small for these stocks and therefore cannot explainthe large increase in variance. Spreads and price discretenessdo not explain increased variance after stock distributions.