Fluent Essays

Each article summary must list the citation(APA format) for the article being summarized and provide 800-1000 words i which the student summarizes the main questions and conclusions of the paper and explains how the conclusions of the paper are useful to someone working in financial management of a corporation in the students current or proposed career path. The text of each summary must be 12-point Times New  Roman font, with one-inch top, bottom, left, and right margins, and each summary must begin on a new page.Contents lists available at ScienceDirect Journal of Corporate Finance journal homepage: www.elsevier.com/locate/jcorpfin What is the role of institutional investors in corporate capital structure decisions? A survey analysis☆ Stephen Browna,c, Marie Dutordoirb, Chris Veldc,⁎, Yulia Veld-Merkoulovac a Stern School of Business, New York University, United States b Alliance Manchester Business School, University of Manchester, United Kingdom c Monash Business School, Monash University, Australia A R T I C L E I N F O Keywords: Capital structure Capital supply Institutional investors Security issuance Security design Financial constraints A B S T R A C T We survey institutional investors about their role in capital structure decisions and views on capital structure theories. Over 82\% of investors believe they influence corporate capital structure decisions, especially for smaller, younger, and more financially constrained firms. Unlike corporate managers, in- vestors consider agency costs of free cash flow important drivers of capital structure. Investors responses also support pecking order and market timing theories. Most investors find financial constraints im- portant, with components of the Kaplan–Zingales and Whited–Wu indexes dominating other proxies. Overall, our findings suggest a first-order impact of investor preferences on capital structure decisions. 1. Introduction Despite many years of research, the finance literature does not agree on whether there is an optimal capital structure or on the related question of how companies choose between different securities. Traditionally, most capital structure theories have focused on the corporate demand for capital. These rationales, which include static trade-off (Kraus and Litzenberger, 1983), pecking order (Donaldson, 1961; Myers and Majluf, 1984), and market timing theories (Stein, 1996; Baker and Wurgler, 2002) all reason from the point of view of companies trying to attract capital. Similarly, most empirical studies tend to focus on the corporate side, without finding conclusive evidence.1 https://doi.org/10.1016/j.jcorpfin.2019.05.001 Received 7 February 2019; Accepted 3 May 2019 ☆ We thank the following academic colleagues for their suggestions on the questionnaire design: Amedeo de Cesari, Abe de Jong, Vidhan Goyal, Campbell Harvey, Maria-Teresa Marchica, Konstantinos Stathopoulos, Norman Strong, and George Wang. In addition, we thank Yangyang Chen, Thomas Chemmanur, Kevin Davis, Petko Kalev, Frederik Schlingemann, Gary Twite, Van Vu, Betty Wu, Luana Zaccaria, and participants at research seminars at Banca dItalia, Rotterdam School of Management, University of Glasgow, University of Manchester, University of Melbourne, McMaster University, La Trobe University, the 8th Behavioral Finance and Capital Markets Conference, and the JCF Special Issue Conference on “The Role of Institutional Investors in Corporate and Entrepreneurial Finance” for their helpful comments and suggestJournal of Financial Economics 13 (1984) 187-221. North-Holland CORPORATE FINANCING AND INVESTMENT DECISIONS WHEN FIRMS HAVE INFORMATION THAT INVESTORS DO NOT HAVE* Stewart C. MYERS MIT/ NBER, Cumhridge, MA 02139, USA Nicholas S. MAJLUF Unioersidud Cutoiicu de Chile. Santiugo, Chile Received August 1982, final version received February 1984 This paper considers a firm that must issue common stock to raise cash to undertake a valuable investment opportunity. Management is assumed to know more about the firm’s value than potential investors. Investors interpret the firm’s actions rationally. An. equilibrium mode1 of the issue-invest decision is developed under these assumptions. The mode1 shows that firms may refuse to issue stock, and therefore may pass up valuable investment opportunities. The model suggests explanations for several aspects of corporate financing behavior, including the tendency to rely on internal sources of funds, and to prefer debt to equity if external financing is required. Extensions and applications of the model are discussed. 1. Introduction Consider a firm that has assets in place and also a valuable real investment opportunity. However, it has to issue common shares to raise part or all of the cash required to undertake the investment project. If it does not launch the project promptly, the opportunity will evaporate. There are no taxes, transac- tion costs or other capital market imperfections. Finance theory would advise this firm to evaluate the investment opportun- ity as if it already had plenty of cash on hand. In an efficient capital market, securities can always be sold at a fair price; the net present value of selling securities is always zero, because the cash raised exactly balances the present value of the liability created. Thus, the decision rule is: take every positive-NPV project, regardless of whether internal or external funds are used to pay for it. *This paper draws on Majluf (1978) and an earlier (1978) joint working paper. but it has undergone several major revisions and expansions. We thank Fischer Black, George Constantinides, Roger Gordon. Rene Stub and the referee, Harry DeAngelo. for valuable comments. The Office of Naval Research sponsored the initial work on this paper. 0304-405X/84/$3.OOQ 1984. Elsevier Science Publishers B.V. (North-Holland) 188 XC. Myers and N.S. Majluf Investment andfinancingpolic?, with deferential information What if the firm’s managers know more about the value of its assets and opportunities than outside investors do? As we will show, nothing fundamental is changed so long as managers invest in every project they know to have positive NPV. If they do this, the shares investors buy will be correctly priced on average, although a particular issue will be over or underpriced. The manager’s inside information creates a side bet between old and new stock- holders, but the equilibrium issue price is unaffected. H• ~ El.SEVIER Journal or Financial Economics 42 (1996) 159-185 JOURNAL OF Flnancial ECONOMICS Timing, investment opportunities, managerial discretion, and the security issue decision Kooyul Jung3, Yong-Cheol Kimb, Rene M. Stulz*·c,d •M.J. Neeley School of Business. Texas Christian UniL-ersity, Fort Worth, TX 76129, USA bCo/lege of Commerce and Industry. Clemson Unitiersity, Clemson, SC 29634, USA •Max M. Fisher College of Business. Ohio State University, Columbus, OH 432 /0, USA dNational Bureau of Economic Research, Cambridge, MA 0283/, USA (Received January 1995; final version received November 1995) Abstract This paper investigates the ability of the pecking-order model, the agency model, and the timing model to explain firms decisions whether to issue debt or equity, the stock price reaction to their decisions, and their actions afterward. We find strong support for the agency model. Firms often depart from the pecking order because of agency consider- ations. We fail to find support for the timing model. Key words: Security issue; Managerial discretion; Equity; Debt; Investment opportunities JEL classification: G32 1. Introduction Why is it that some firms raise new funds by issuing equity and others issue debt? There are three important explanations for this choice in the literature: • Corresponding author. We are grateful for useful comments to Steve Buser, K.C. Chan, David Denis, Harry DeAngelo, Thomas George, David Mayers, Kathy Kahle, Steve Kaplan, Tim Opler, John Persons, Patricia Reagan, Jay Ritter, David Scharfstein, Clifford Smith (the editor), Rick Smith, Chester Spatt, Robert Vishny, an anonymous rereree, and to the participants in the 1993 NBER Summer Institute, the 1995 American Finance Association meetings, and at finance seminars at Arizona State University, Hong Kong Institute of Science and Technology, University of British Columbia. Ohio State University and University of St. Gallen. The first author acknowledges financial support from the Charles Tandy American Enterprise Center at Texas Christian University. 0304-405X/96/$15.00 © 1996 Elsevier Science S.A. All rights reserved Pll S0304-405 X(96)00881- I 160 K. Jung et al./Journal of Financial Economics 42 (1996) 159-185 (1) the pecking-order model, (2) the agency model, and (3) the timing model. The pecking-order model is based on the view that information asymmetries be- tween new investors and managers who maximize the wealth of existing share- holders make equity issues more costly than debt issues and therefore imply a financing hierarchy. 1 Firms therefore prefer issuing debt to issuing equity, and experience a negative stock price reaction if forced to issue equity. The agency model relies on the argument that managers sometimes pursue their own objectives, such as firm growth, at the expense of shareholders. If management pursues growth objectives, equity issues are valuable for shareholders when undertARTICLE IN PRESS Journal of Financial Economics 84 (2007) 266–298 0304-405X/$ doi:10.1016/j $ This rese Business Scho Almeida, Luc Friedman, M Michael Ostr at the Univer Duke Univer McGill Unive Toronto, the National Bur � Correspo E-mail ad www.elsevier.com/locate/jfec Corporate financing decisions when investors take the path of least resistance $ Malcolm Baker a,b , Joshua Coval a,b , Jeremy C. Stein b,c,� a Harvard Business School, Boston, MA 02163, USA b National Bureau of Economic Research, Cambridge, MA 02138, USA c Harvard Economics Department, Harvard University, Cambridge, MA 02138, USA Received 6 April 2005; received in revised form 13 February 2006; accepted 17 March 2006 Available online 23 January 2007 Abstract We argue that inertial behavior on the part of investors can have significant consequences for corporate financial policy. One implication of investor inertia is that it improves the terms for the acquiring firm in a stock-for-stock merger, because acquirer shares are placed in the hands of investors, who, independent of their beliefs, do not resell these shares on the open market. In the presence of a downward-sloping demand curve, this leads to a reduction in price pressure and, hence, to cheaper equity financing. We develop a simple model to illustrate this idea and present supporting empirical evidence. r 2006 Elsevier B.V. All rights reserved. JEL classification: G32; G34 Keywords: Mergers; Inertia; Equity issuance - see front matter r 2006 Elsevier B.V. All rights reserved. .jfineco.2006.03.005 arch is supported by the National Science Foundation and the Division of Research at Harvard ol. Thanks to Lauren Cohen for supplying the data on insider ownership and to the referees, Heitor ian Bebchuk, Jon Bernstein, Rob Daines, Stefano DellaVigna, Peter DeMarzo, Darrell Duffie, John ark Garmaise, Peter Henry, David Laibson, Ulrike Malmendier, Rich Matthews, Stefan Nagel, ovsky, Jay Ritter, Andrei Shleifer, Ilya Strebulaev, Ivo Welch, Jeff Zwiebel, and seminar participants sity of California at Berkeley, Brown University, the University of Chicago, Columbia University, sity, the Federal Reserve Bank of New York, Harvard Business School, the University of Illinois, rsity, the University of Notre Dame, Stanford University, the University of Texas, the University of University of Southern California conference on financial economics and accounting, and the eau of Economic Research for helpful comments. nding author. dress: [email protected] (J.C. Stein). www.elsevier.com/locate/jfec dx.doi.org/10.1016/j.jfineco.2006.03.005 mailto:[email protected] ARTICLE IN PRESS M. Baker et al. / Journal of Financial Economics 84 (2007) 266–298 267 1. Introduction Much of finance theory rests on the assumption that investors continuously monitor their portfolios and condition their investment decisions on the most recently available information. Even in models with transaction costs (e.g., Journal of Financtal Economics 32 (1991) 263-192. North-Holland The investment opportunity set and corporate financing, dividend, and compensation policies* Clifford W. Smith, Jr. and Ross L. Watts Lirirersi~~~ yf‘ Rocl~vrer. Rodwsrrr. !V Y 146_‘7. LJ,4 Received August 1990. final version received August 1992 We examine explanations for corporate financing-. dividend-. and compensation-policy choices. We document robust empirical relations among corporate policy decisions and various firm character- istics. Our evidence suggests contracring theories are more important in explaining cross-sectional variation in observed financial. dividend. and compensation policies than either tax-based or signaling theories. 1. Introduction To date. there has been little empirical analysis of the cross-sectional structure of corporate financing, dividend, and compensation policies. Although much effort has been devoted to developing the theory of these basic corporate policies, empirical support for the models is largely anecdotal. Our primary objective in this paper is to examine whether there are robust empirical relations among corporate policy decisions and various firm characteristics. We believe a more balanced interaction between theory and testing in corporate finance will produce richer models and more powerful econometric methods of data analysis. A model of the cross-sectional variation in corporate policies requires speci- fication of the exogenous variables that drive policy selection. Many potential variables vary over time, but not across firms. For example, all firms have access to the same contracting technology (e.g., sinking funds, dividend covenants, Correspontlem~ to: Clifford W. Smith. Jr.. William E. Simon Graduate School of Business .Adminis- tration. University of Rochester. Rochester. NY 11677. US;\. *This work has been partially supported by the Simon School’s Bradley Policy Research Center. We thank Amy P. Sweeney for computational assistance. Previous drafts of this work uere titled: ‘The Structure of Executive Compensation and the Control of Management’. 0304405X 92 SOj.00 ( 1992-Elserier Science Publishers B.V. .All rights reserved executive stock options, cancelable leases). And. given well-functioning labor. capital. and product markets, all firms have access to any potential stockholder, bondholder. manager. lessor, or customer: they all have access to individuals with different risk preferences or personal tax rates. Thus. neither personal tax provisions, risk preferences, nor the contracting technology appear able to explain observed cross-sectional variation in corporate policies. In making investment and employment decisions. however, firms invest in specialized physical and human capital. These firm-specific investments result in variation in firms’ investment opportunity sets (i.e., their prospective investment opportunities and associated payoff distributions). Corpo