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Author: Dongmei Li Publisher: ISBN: Category : Corporations Languages : en Pages : 41
Book Description
We document that the value, net stock issues, investment, and asset growth anomalies tend to be stronger in financially more constrained firms than in less constrained firms. This effect of financial constraints is distinct from that of financial distress on anomalies. Intuitively, costly external finance makes marginal costs of investment more sensitive to investment in more constrained firms, giving rise to a stronger negative correlation between investment and the discount rate.
Author: Dongmei Li Publisher: ISBN: Category : Corporations Languages : en Pages : 41
Book Description
We document that the value, net stock issues, investment, and asset growth anomalies tend to be stronger in financially more constrained firms than in less constrained firms. This effect of financial constraints is distinct from that of financial distress on anomalies. Intuitively, costly external finance makes marginal costs of investment more sensitive to investment in more constrained firms, giving rise to a stronger negative correlation between investment and the discount rate.
Author: Frederico Belo Publisher: ISBN: Category : Assets (Accounting) Languages : en Pages : 60
Book Description
The ability of corporations to finance its operations by issuing new equity varies with macroeconomic conditions, because the time varying macroeconomic conditions affect investors' (or workers') willingness to pay for new equity. We document that an empirical proxy of the shocks to the cost of equity issuance captures systematic risk in the economy, even controlling for the impact of aggregate productivity (or stock market) shocks. Exposure to this shock helps price the cross section of stock returns including book-to-market, size, investment, debt growth, and issuance portfolios. We then propose a dynamic investment-based model that features an aggregate shock to the firms' cost of external equity issuance, and a collateral constraint. Our central finding is that time-varying external financing costs are important for the model to quantitatively capture the joint dynamics of firms' real quantities, financing flows, and asset prices. Furthermore, the model also replicates the failure of the unconditional CAPM in pricing the cross-sectional expected returns.
Author: Chris Hennessy Publisher: ISBN: Category : Languages : en Pages : 44
Book Description
This paper estimates costs of external finance, applying indirect inference to a dynamic structural model where the corporation endogenously chooses investment, distributions, lever ageand default. The corporation faces double taxation, costly state verification indebt markets, and linear-quadratic costs of external equity. Consistent with direct evidence on under writer fee schedules, behavior is best explained by rising marginal costs of external equity, starting at 3.9%. Contrary to the notion that corporations are debt conservative, leverage is consistent with small (12.2%) bankruptcy costs. Investment-cash flow sensitivities are not a sufficient statistic for financing costs. The cash flow coefficient decreases in external equity costs and increases in bankruptcy costs. When the model is simulated using our parameter estimates, the cash flow coefficient across Fazzari, Hubbard, and Petersen's dividend classes is U-shaped. The difference between cash flow coefficients across dividend classes actually decreases as costs are increased.
Author: Matthew T. Billett Publisher: ISBN: Category : Languages : en Pages : 35
Book Description
Segmented capital markets may allow firms to reduce their cost of capital by increasing their reliance on the relatively cheaper market. However, this potential benefit is attenuated by the firm's costs of accessing the markets. This paper models a firm with access to two segmented capital markets, and illustrates howhigher costs of accessing either market lead to lower firm values. While access costs clearly impact the firm's ability to arbitrage the two markets, we focus on a more subtle effect. Access to multiple markets may reduce the value loss arising from uncertainty in internally generated funds. The model also suggests a methodology for measuring access costs to segmented markets, allowing us to test our model on a sample of large banking firms. We label banks with relatively lower costs of accessing the two markets as more quot;financially flexible.quot; Our two key findings are 1) banks with greater financial flexibility have greater value, and 2) banks with greater financial flexibility devote a smaller percentage of assets to cash and marketable securities, consistent with the notion that financial flexibility reduces the sensitivity of firm profits to internal wealth shocks, thus reducing the firm's need to carry financial slack.
Author: Chul W. Park Publisher: ISBN: Category : Languages : en Pages : 34
Book Description
Under the assumption that capital markets are imperfect due to transactions costs and investor-manager information asymmetries, internally generated funds should be less costly than funds raised by issuing shares (Myers and Majluf 1984). This suggests that the mix of firms' sources of shareholders equity should affect the discount rates the market applies to unexpected earnings. In particular, the discount rate should be lower for firms using a higher proportion of internal funds relative to externally obtained equity, and, accordingly, such firms should have larger earnings response coefficients. Furthermore, this effect should be magnified for high growth firms where the disparity between inside information and publicly available information is greatest (i.e., high growth firms have a larger portfolio of positive NPV projects to fund and can reduce their cost of equity capital at a greater rate by using internally generated funds). We test these predictions using a sample of 14,955 firm-year observations. The results of pooled regressions and annual cross-sectional regressions support both predictions after controlling for other determinants of earnings response coefficients.
Author: Ilya A. Strebulaev Publisher: Now Pub ISBN: 9781601985804 Category : Business & Economics Languages : en Pages : 174
Book Description
The goals of this monograph are to explain the models and techniques and make it more accessible, introduce the main strands of this literature, and explain how dynamic models can be taken to the data and estimated, providing a guide to 3 methodologies: generalized method of moments, simulated method of moments, and maximum simulated likelihood.
Author: Dongmei Li Publisher: ISBN: Category : Languages : en Pages : 0
Book Description
In a frictionless world, investment is perfectly elastic to changes in the discount rate. With financial frictions, investment is less elastic, meaning that a given magnitude of change in investment is associated with a higher magnitude of change in the discount rate. Equivalently, investment is a more powerful predictor of future stock returns. Consistent with this prediction, we document that the asset growth, external finance, and accrual anomalies in the cross-section of stock returns are much stronger in financially more constrained firms than in financially less constrained firms. Further tests show that this effect of financial constraints is distinct from the effect of financial distress and the effect of limits of arbitrage on the magnitude of the anomalies.
Author: Heitor Almeida Publisher: ISBN: Category : Languages : en Pages : 36
Book Description
There is ample empirical evidence of a negative relation between internal funds (profitability) and the demand for external funds (debt issuance). This negative relation has been interpreted as evidence for external financing costs arising from capital market frictions such as asymmetric information (e.g., the pecking order theory). We show, however, that the negative effect of internal funds on the demand for external financing is concentrated among firms that are QTR{em}{least likely} to face high costs of external finance (firms that distribute large amounts of dividends, that are large, and whose bonds and commercial papers are rated). For firms in the other end of the spectrum (low payout, small, and unrated), external financing is insensitive to innovations to internal funds. These cross-firm differences hold separately for debt and outside equity financing, and are magnified in the aftermath of macroeconomic movements that tighten financial constraints. We argue that the greater degree of complementarity between internal funds and external finance for constrained firms is a consequence of the interdependence of their financing and investment decisions. Our findings suggest that the negative relation between internal funds and external financing should not be interpreted as evidence for external financing costs.
Author: C. Edward Fee Publisher: ISBN: Category : Languages : en Pages :
Book Description
Recent theoretical work suggests that outside equity monitoring and control come with costs as well as benefits, especially in small, entrepreneurial firms. These costs arise when outside investors undervalue any private benefits of control that may accrue to an entrepreneur. The resulting hold-up problems may reduce the entrepreneur's incentives to invest personal effort into the firm. This paper investigates the financing of individual motion pictures in light of a tradeoff between better monitoring and better creative effort. Filmmakers have the choice of using studio funds (and giving up control) or of obtaining independent financing (and retaining control.) Consistent with arguments in the literature on investor control, I find that independent motion picture finance is more common when a filmmaker's private artistic stake in the film is high and for films requiring a high level of creative effort. This paper also investigates the role of several other factors, the most important of which is reputation, in financial contracting. I find that a filmmaker's commercial reputation affects the amount of resources independent investors, without control, are willing to provide. In contrast, studio investors, who maintain high levels of monitoring and control, appear relatively less concerned about reputation.
Author: Dongmei Li
Author: Dongmei Li
Author: Frederico Belo
Author: Chris Hennessy
Author: Matthew T. Billett
Author: Juan Pablo Medina Guzman
Author: Chul W. Park
Author: Ilya A. Strebulaev
Author: Dongmei Li
Author: Heitor Almeida
Author: C. Edward Fee