7. Corporate finance

Question 1

“Fintech and banking: What do we know?”
Thakor, Anjan, 2020

What is the definition of fintech?

Answer 1

Fintech – “technologically enabled financial innovation that could result in new business models, applications, processes, or products with an associated material effect on financial markets and institutions, and the provision of financial services.”

Question 2

“Fintech and banking: What do we know?”
Thakor, Anjan, 2020

Why is fintech needed, and what are its benefits?

Answer 2

The unit cost of financial intermediation in the US has remained at about 2% over the past 130 years.

Fintech helps with:

Lower search costs of matching transacting parties
Achieving economies of scale in gathering and using big data.
Achieving cheaper and more secure information transmission.
Reducing verification costs.

Question 3

“Fintech and banking: What do we know?”
Thakor, Anjan, 2020

Which countries typically invest more in fintech?

Answer 3

1) Financially developed countries
2) Countries with less competitive (more concentrated) banking systems
3) Countries with higher lending interest rates and lower deposit rates

Question 4

“Fintech and banking: What do we know?”
Thakor, Anjan, 2020

Which countries have higher usage of electronic payments?

Answer 4

The use of electronic payments is higher in countries where a higher fraction of the population holds an account with a financial institution.

Question 5

“Fintech and banking: What do we know?”
Thakor, Anjan, 2020

What are the key fintech services?

Answer 5

1) P2P (peer-to-peer) lending services
2) Shadow banks
3) Cryptocurrencies
4) HFT (high-frequency trading), copy trading, e-trading
5) Robo-advising
6) Big data (insurance)

Question 6

“Fintech and banking: What do we know?”
Thakor, Anjan, 2020

What is P2P lending?

Answer 6

P2P - non-intermediated finance, there is no bank between investors and borrowers:

1) Platform’s compensation comes in the form of loan origination fees and late payment fees,
2) Mostly unsecured, lighter regulatory burden.

Question 7

“Fintech and banking: What do we know?”
Thakor, Anjan, 2020

Describe shadow banks.

Answer 7

Shadow banks:

1) provide commercial banks services, but do not finance with deposits,
2) uninsured debt financing and securitization

Question 8

“Fintech and banking: What do we know?”
Thakor, Anjan, 2020

What is the advantage of cryptocurrencies?

Answer 8

Cryptocurrency provides an opportunity for those who are seeking funding for projects to raise financing through Initial Coin Offering (ICO) - a cryptocurrency version of funding.

Question 9

“Fintech and banking: What do we know?”
Thakor, Anjan, 2020

What is copy trading?

Answer 9

Copy trading - an investor (or several investors) shares publicly his moves on the financial market, and people can “copy” his moves by doing the same way he does.

Question 10

“Fintech and banking: What do we know?”
Thakor, Anjan, 2020

What is robo-advising and what are its benefits?

Answer 10

Robo advisors provide digital financial advice based on mathematical rules or algorithms with minimal human intervention.

Benefit:

1) robo adopters are more active and have greater assets under management
2) Investors adopting robo-advising experience diversification benefits, getting better returns with lower volatility.

Question 11

“Fintech and banking: What do we know?”
Thakor, Anjan, 2020

What is InsurTech and what are its benefits?

Answer 11

InsurTech is a branch of fintech dedicated to the insurance sector.

Main idea: connected devices (phones, watches, computers, etc.) in homes, cars and worn as personal gear gather huge amounts of personal information about individuals. This leads to “big data” that insurance companies can use to calculate risk more precisely and in a more dynamic way than they do at present.

Question 12

“Fintech and banking: What do we know?”
Thakor, Anjan, 2020

What are the incentive problems with P2P lending?

Answer 12

1) Concerns about the quality of screening => lack of trust
2) Could solve with the platform collecting part of repayment
3) In reality, it doesn’t work: origination fees provide incentives to grow aggressively and engage in overlending.

Question 13

“Fintech and banking: What do we know?”
Thakor, Anjan, 2020

What are the benefits of taking a loan in the bank/P2P platform?

Answer 13

Benefit of banks:
- Banks have an endogenous advantage over P2P lending platforms when it comes to being trusted to make good loans (relationship banking - build trust through low deposit rates)

Benefit of P2P:
- P2P platforms have lower operating costs than banks because banks have to pay for their deposit-gathering branch network, ATMs, and the cost of being more heavily regulated

Question 14

“Fintech and banking: What do we know?”
Thakor, Anjan, 2020

What does the author say - will P2P lending replace bank lending?

Answer 14

Yes and no.

Yes: For some forms of lending, where the risks and associated regulatory costs are high, we will continue to see a migration of lending from banks to P2P lenders. This effect will be stronger in countries in which fewer people use the banking system.

No: However, deposit insurance and the demand for safe assets will continue to give banks a funding cost and trust advantage over other forms of lending, and banks will continue to dominate in those areas. Moreover, where collateral is useful—in order to attenuate moral hazard and private information problems—banks will continue to have an advantage over P2P platforms

Question 15

“Fintech and banking: What do we know?”
Thakor, Anjan, 2020

What is the essence of smart contracts?

Answer 15

The essence of smart contracts is that they can enable agents who have no trust in each other to collaborate without having to go through a neutral central authority. That is, a smart contract replaces the need for a trusted intermediary like a bank to bring the contracting parties together.
The potential for smart contracts to improve efficiency and lower contracting and verification costs is substantial. This is because smart contracts remove the need for reconciliation between parties and speed up the settlement of trades

Question 16

“The COVID-19 pandemic crisis and corporate finance”
Ellul, Andrew, Isil Erel, and Uday Rajan, 2020

Compare the situation of banks during COVID-19 and GFC in 2008.

Answer 16

Banks entered this crisis in a significantly healthier position compared to the 2008–2009 financial crisis. The various policy interventions since the financial crisis have led to safer bank balance sheets and allowed banks to meet corporations’ funding needs when the COVID-19 pandemic hit.

Question 17

“The COVID-19 pandemic crisis and corporate finance”
Ellul, Andrew, Isil Erel, and Uday Rajan, 2020

How did location matter for banks?

Answer 17

Authors find much larger lending increases in banks located in communities that suffered the most from the COVID-19 outbreak.

Question 18

“The COVID-19 pandemic crisis and corporate finance”
Ellul, Andrew, Isil Erel, and Uday Rajan, 2020

Why were banks considered first line of defense?

Answer 18

1) Companies that were out of money came to banks to ask for loans.
2) Firms drew funds from preexisting lines of credit at an unprecedented scale, with large banks providing most of the required funding.

Question 19

“The COVID-19 pandemic crisis and corporate finance”
Ellul, Andrew, Isil Erel, and Uday Rajan, 2020

What was the role of the Fed during COVID-19?

Answer 19

Federal Reserve’s corporate bond purchases had a positive impact on firms’ ability to tap the bond market when equity issues may have been either very costly or impossible to carry out.

Question 20

“The COVID-19 pandemic crisis and corporate finance”
Ellul, Andrew, Isil Erel, and Uday Rajan, 2020

What are the best policies that should be put in place to help firms recover?

Answer 20

1) Debt could be raised in the short term.
2) In the long-term debt will lead to debt overhang and slow the recovery

Question 21

“The COVID-19 pandemic crisis and corporate finance”
Ellul, Andrew, Isil Erel, and Uday Rajan, 2020

What was found about the relations of the pandemic and corporate social responsibility of US firms?

Answer 21

• Firms in the United States with high environmental and social (ES) scores suffered lower stock price declines compared to other firms.
• Volatility of stock returns was lower for
  firms held by investors with a preference for ES scores
• Firms with high customer and investor loyalty experienced the strongest stock price performance during the widespread market declines caused by the pandemic.
  => higher operating profit margins of firms with high ES
  scores, even at a time when the economy as a whole was suffering

Question 22

“Equity valuation using multiples”
Liu, Jing, Doron Nissim, and Jacob Thomas, 2002

What is the aim of the paper?

Answer 22

The paper looks at how good are various multiples in explaining stock prices, and also applies traditional as well as more complicated methods in multiple estimation.

Question 23

“Equity valuation using multiples”
Liu, Jing, Doron Nissim, and Jacob Thomas, 2002

Describe the multiples approach.

Answer 23

• Multiples are a simple valuation technique that is used widely in practice but there is very little empirical research on it.
• Multiples approach bypasses explicit projections and present value calculations, but still, it relies on the same principles underlying the more comprehensive approach.
• Value is an increasing function of future payoffs and a decreasing function of risk.

Question 24

“Equity valuation using multiples”
Liu, Jing, Doron Nissim, and Jacob Thomas, 2002

What are value drivers, and how are they used in the study?

Answer 24

Measures of historical cash flow, and historical accrual-based measures, such as sales, earnings, and book value of equity. In addition, forward-looking measures derived from analysts’ forecasts are included.

The study documents the extent to which different value drivers serve as a summary statistic for the stream of expected payoffs, and comparable firms resemble the target firm along with important value attributes, such as growth and risk.

Question 25

“Equity valuation using multiples”
Liu, Jing, Doron Nissim, and Jacob Thomas, 2002

What are the results of the ABSOLUTE performance of different value drivers?

Answer 25

• Forward earnings perform the best, and performance improves if the forecast horizon lengthens
• Intrinsic value measures, based on current equity value and present value of future income, perform considerably worse than forward earnings.
• Among drivers derived from historical data, sales perform the worst, earnings perform better than book value.
• Using enterprise value, rather than equity value, for sales and EBITDA further reduces performance.

Question 26

“Equity valuation using multiples”
Liu, Jing, Doron Nissim, and Jacob Thomas, 2002

What are the results of the ABSOLUTE performance of different value drivers?

Answer 26

• Forward earnings measures describe actual stock prices reasonably well for a majority of firms.
• For 2-year out-forecasted earnings, approximately half the firms have absolute pricing errors of less than 16%
• Forward earnings contain considerably more value-relevant information than historical data, and they should be used as long as earnings forecasts are available.
• The dispersion of pricing errors increases substantially for multiples based on historical drivers, such as earnings and cash flows, and is especially large for sales multiples.

Question 27

“Equity valuation using multiples”
Liu, Jing, Doron Nissim, and Jacob Thomas, 2002

What are the specifications of the results of the study?

Answer 27

• Performance improves when multiples are computed using the harmonic mean.

1) Performance declines substantially when all firms in the cross-section each year are used as comparable firms.
2) Allowing for an intercept improves performance mainly for poorly-performing multiples.

*Relative performance is relatively unchanged over time and across industries.

Question 28

Capital Structure
Myers, Stewart, 2001

Describe Modigliani & Miller theory

Answer 28

If we live in perfect capital markets, the choice between EQUITY AND DEBT financing is IRRELEVANT- no material effect on the value of the firm or on the cost or availability of capital.

In the real world, the financing choice does matter because of taxes, difference in information, agency costs

Question 29

Capital Structure
Myers, Stewart, 2001

Name 3 theories that explain why capital structure matters

Answer 29

1) Trade-off theory → emphasizes taxes
2) Pecking order theory → emphasizes difference in information
3) Free cash flow theory → emphasizes agency costs

Question 30

Capital Structure
Myers, Stewart, 2001

How are companies financing themselves nowadays?

Answer 30

Most of the investment is financed from INTERNAL CASH FLOW (depreciation and retained earnings)

External financing is usually less than 20% of real investment, mostly consists of debt

Question 31

Capital Structure
Myers, Stewart, 2001

Describe the situation with stock issuance

Answer 31

Net STOCK ISSUES are frequently NEGATIVE:

shares are eliminated in acquisitions
shares are repurchased rather than issued
Only smaller, riskier and more rapidly growing firms rely heavily on stock issuance.

Question 32

Capital Structure
Myers, Stewart, 2001

Describe the situation with debt in companies

Answer 32

Industry debt ratios are low or negative when profitability and business risk are high (like now).

Pharmaceutical and many prominent growth companies typically operate at negative debt ratios (cash and marketable securities > debt) - probably because a lot of R&D is going on and you need cash.

Firms with valuable growth opportunities tend to have low debt ratios

Question 33

Capital Structure
Myers, Stewart, 2001

Describe tradeoff - theory

Answer 33

Increased leverage is good because you get tax shields, bad because of possible default costs.

The firm will borrow up to the point where the marginal value of tax shields on the additional debt is just offset by the increase in the costs of possible distress.

(marginal benefit of tax shields = marginal costs of financial distress)

Question 34

Capital Structure
Myers, Stewart, 2001

What are costs of financial distress?

Answer 34

1) Direct = the costs of bankruptcy or reorganization

2) Indirect = the agency costs that arise when the firm’s creditworthiness is in doubt

Question 35

Capital Structure
Myers, Stewart, 2001

What doesn’t the trade-off theory account for?

Answer 35

The most profitable companies tend to borrow the least (although they have more taxable income to shield)

The trade-off theory cannot account for the correlation between high profitability and low debt ratios.

Question 36

Capital Structure
Myers, Stewart, 2001

Explain Pecking order theory

Answer 36

Firms will firstly finance themselves from internal financing (retained earnings), then debt, then equity.
This is because of information asymmetry between managers and investors.

If firms issue stock, investors believe that managers have some private information about poor future prospects → that means that equity is overvalued → stock price drops after the announcement of an equity issue.
Also, debt suffers from adverse selection much less than equity, thus, will be issued first.

Question 37

Capital Structure
Myers, Stewart, 2001

What do firm’s debt ratios reflect?

Answer 37

Firms’ debt ratios reflect the cumulative need for external financing - if firms issue equity, they are really reallly in need of it.

Question 38

Capital Structure
Myers, Stewart, 2001

What doesn’t Pecking Order theory explain?

Answer 38

Why financing tactics are not developed to avoid the
financing consequences of managers’ superior information, e.g. use “deferred equity” - a debt, repayable in the firm’s shares in the future. It conveys no information because the manager cannot know whether in the future equity will be over- or undervalued.

Question 39

Capital Structure
Myers, Stewart, 2001

Describe Free Cash Flow Theory

Answer 39

FCF says that dangerously high debt levels will increase firm value, despite the threat of financial distress
(especially designed for mature firms which are prone to overinvest)

FCF is not really a theory predicting how managers will choose capital structures, but a theory about the
consequences of high debt ratios. Helps the trade-off theory explain why managers do not fully exploit
the tax advantages of borrowing.

The theory is based on agency costs. To avoid them, one could increase leverage, which would:
* Discipline managers and strengthen their incentives to maximize value to investors (e.g. covenants that restrict taking too large risks)
* Forces them to generate cash (to repay debt)
* Leveraged buyouts (LBOs) - in the first place considered to be attempts to cut back wasteful
investment and discipline the management

Question 40

“FINTECH AND ACCESS TO FINANCE”
paper by Bollaert, Helen, Florencio Lopez-de-Silanes, and Armin Schwienbacher, 2021.

What are the three problems with traditional markets that can prevent access to finance for some firms?

Answer 40

Information asymmetry, agency problems, and difficulties allocating residual control rights through contracts.

Question 41

“FINTECH AND ACCESS TO FINANCE”
paper by Bollaert, Helen, Florencio Lopez-de-Silanes, and Armin Schwienbacher, 2021.

How can the digitalization of finance overcome the issues with traditional markets?

Answer 41

The digitalization of finance provides opportunities to overcome the issues by creating new mechanisms such as peer-to-peer (P2P) lending, crowdfunding, and initial coin offerings (ICOs).

Question 42

“FINTECH AND ACCESS TO FINANCE”
paper by Bollaert, Helen, Florencio Lopez-de-Silanes, and Armin Schwienbacher, 2021.

What are the three new mechanisms developed to overcome the issues with traditional markets?

Answer 42

Peer-to-peer (P2P) lending, crowdfunding, and initial coin offerings (ICOs).

Question 43

“FINTECH AND ACCESS TO FINANCE”
paper by Bollaert, Helen, Florencio Lopez-de-Silanes, and Armin Schwienbacher, 2021.

Why is fintech funding gaining substantial traction in recent years?

Answer 43

Traditional ways of accessing finance are scarce, especially for seed-stage start-ups, leading to fintech funding gaining substantial traction in recent years.

Fintech funding sources, including crowdfunding and other P2P lending platforms, connect investors and firms directly, eliminating intermediaries and allowing for better financial inclusion. In addition, fintech lenders can offer lower risk-adjusted interest rates than traditional banks, creating better opportunities for marginal firms.

Question 44

“FINTECH AND ACCESS TO FINANCE”
paper by Bollaert, Helen, Florencio Lopez-de-Silanes, and Armin Schwienbacher, 2021.

What is the authors’ focus in their paper “FINTECH AND ACCESS TO FINANCE”?

Answer 44

The authors’ focus is to provide an up-to-date review of how the emergence of new digital technologies in finance affects the access to it.

Specifically, the paper explores the various fintech funding sources such as crowdfunding, fintech lending, and initial coin offerings (ICOs) and how these new types of financing provide better access to finance for different types of firms. The authors also discuss how fintech technologies democratize investments, allowing retail investors to gain exposure to asset classes that were previously only available to institutional or accredited investors. Additionally, the paper explores the issue of regulation in fintech and how it can help eliminate obvious risks associated with the lack of regulation. Finally, the authors conclude that fintech has had a big impact on the finance industry, but it is unlikely to replace the traditional system. The authors suggest that there is fertile and promising ground for future research in this area.

Question 45

“FINTECH AND ACCESS TO FINANCE”
paper by Bollaert, Helen, Florencio Lopez-de-Silanes, and Armin Schwienbacher, 2021.

What are the five main types of crowdfunding?

Answer 45

The five main types of crowdfunding are lending-based, reward-based, equity, royalty-based, and real estate.

Question 46

“FINTECH AND ACCESS TO FINANCE”
paper by Bollaert, Helen, Florencio Lopez-de-Silanes, and Armin Schwienbacher, 2021.

How do crowdfunding and other P2P lending platforms connect investors and firms directly?

Answer 46

Crowdfunding and other P2P lending platforms connect investors and firms directly by eliminating the intermediaries.

Question 47

“FINTECH AND ACCESS TO FINANCE”
paper by Bollaert, Helen, Florencio Lopez-de-Silanes, and Armin Schwienbacher, 2021.

What is an initial coin offering (ICO)?

Answer 47

An initial coin offering (ICO) is a fundraising method that utilizes Distributed Ledger Technology (DLT) to raise funds. Utility tokens are sold at a very early stage in an exchange for future services provided.

Question 48

“FINTECH AND ACCESS TO FINANCE”
paper by Bollaert, Helen, Florencio Lopez-de-Silanes, and Armin Schwienbacher, 2021.

What kind of firms can fintech funding provide a better access to?

Answer 48

Fintech funding can provide a better access to different firms, creating an opportunity to eliminate inefficiencies, where interesting projects lack funding.

Question 49

“FINTECH AND ACCESS TO FINANCE”
paper by Bollaert, Helen, Florencio Lopez-de-Silanes, and Armin Schwienbacher, 2021.

How can fintech lenders be better than traditional debt or equity providers?

Answer 49

Fintech lenders can be better than traditional debt or equity providers by offering lower costs and helping to create a better understanding of the product.

Question 50

“FINTECH AND ACCESS TO FINANCE”
paper by Bollaert, Helen, Florencio Lopez-de-Silanes, and Armin Schwienbacher, 2021.

Are fintech risk-adjusted interest rates higher or lower than those of traditional banks?

Answer 50

Fintech risk-adjusted interest rates are lower than those of traditional banks.

Question 51

“FINTECH AND ACCESS TO FINANCE”
paper by Bollaert, Helen, Florencio Lopez-de-Silanes, and Armin Schwienbacher, 2021.

Does fintech allow for better financial inclusion?

Answer 51

Yes, fintech allows for better financial inclusion, reaching firms that are credit-rationed or underserved, located in areas doing poorly economically, or where banks are more concentrated.

Question 52

“FINTECH AND ACCESS TO FINANCE”
paper by Bollaert, Helen, Florencio Lopez-de-Silanes, and Armin Schwienbacher, 2021.

Why may access to fintech investments not be great for international investment?

Answer 52

Access to fintech investments may not be great for international investment due to certain regulations, high minimum tickets, and a lack of information.

Question 53

“FINTECH AND ACCESS TO FINANCE”
paper by Bollaert, Helen, Florencio Lopez-de-Silanes, and Armin Schwienbacher, 2021.

Who are the majority of investors in crowdlending?

Answer 53

Institutional investors and hedge funds are the majority of investors in crowdlending.

Question 54

“FINTECH AND ACCESS TO FINANCE”
paper by Bollaert, Helen, Florencio Lopez-de-Silanes, and Armin Schwienbacher, 2021.

Does discrimination still exist in fintech?

Answer 54

Unfortunately, discrimination still exists in fintech, as investors seem to discriminate based on appearance and perceived trustworthiness.

Question 55

“FINTECH AND ACCESS TO FINANCE”
paper by Bollaert, Helen, Florencio Lopez-de-Silanes, and Armin Schwienbacher, 2021.

What is the current state of regulation in fintech?

Answer 55

Fintech suffers from a lack of regulation at the moment, which might lead to limited scalability of technological innovations and uncertainty.

Question 56

“FINTECH AND ACCESS TO FINANCE”
paper by Bollaert, Helen, Florencio Lopez-de-Silanes, and Armin Schwienbacher, 2021.

What restrictions should be implemented for a better project-level governance in firms?

Answer 56

Some restrictions should be implemented for a better project-level governance in firms that use Initial Coin Offerings (ICOs). Before ICOs, firms should be required to publish white papers to avoid scams, and some restrictions should be introduced to ensure a better project-level governance. Additionally, clear disclosure rules should be provided to firms, and intermediaries such as platforms should carry out checks on firm/project quality or investor profile.

Question 57

Is the US Public Corporation in Trouble?
Kathleen M. Kahle and René M. Stulz, 2017

What are the three main reasons for a public firm to delist?

Answer 57

The three main reasons for a public firm to delist are financial distress, acquisition, and voluntary delisting.

Question 58

Is the US Public Corporation in Trouble?
Kathleen M. Kahle and René M. Stulz, 2017

What is the average yearly number of initial public offerings after 2000 compared to that of 1980-2000?

Answer 58

The average yearly number of initial public offerings after 2000 is roughly one-third of the average from 1980 to 2000.

Question 59

Is the US Public Corporation in Trouble?
Kathleen M. Kahle and René M. Stulz, 2017

What is the dominant reason for delisting since the listing peak in 1997?

Answer 59

The dominant reason for delisting since the listing peak in 1997 is MERGERS.

Question 60

Is the US Public Corporation in Trouble?
Kathleen M. Kahle and René M. Stulz, 2017

What is the “listing gap” in the US economy?

Answer 60

The “listing gap” in the US economy refers to the phenomenon where there are fewer listed firms than expected. If variables that explain the number of listings per capita worldwide, like dimensions of economic development and institutions, are used to predict the number of listed firms in the United States, the prediction is roughly equal to the actual number prior to 1999. However, by 2012, the predicted number is more than double the actual number, indicating a significant gap.

Question 61

Is the US Public Corporation in Trouble?
Kathleen M. Kahle and René M. Stulz, 2017

How has the number of publicly listed firms in the US evolved since 1975?

Answer 61

The number of publicly listed firms in the US has evolved significantly since 1975. In 1975, the US economy had 4,819 listed firms, and this number increased rather steadily until 1997 when it reached 7,507 listed firms. After that, the number of listed firms fell rapidly until 2003 and then continued to fall at a slower pace, before leveling out around 2013. In 2015, there were 3,766 listed firms, a number that is over 20 percent lower than 40 years before. The US economy has developed a “listing gap” in that it has fewer listed firms than expected.

Question 62

Is the US Public Corporation in Trouble?
Kathleen M. Kahle and René M. Stulz, 2017

How is the financial development of a country measured?

Answer 62

The financial development of a country is often measured by comparing the aggregate market capitalization of stocks to GDP.

Question 63

Is the US Public Corporation in Trouble?
Kathleen M. Kahle and René M. Stulz, 2017

What is Tobin’s q and how does it evolve over time?

Answer 63

Tobin’s q is a valuation ratio for firms, which is the ratio of the market value of the firm’s assets to the replacement cost of the assets. Using the market value of assets divided by the book value of assets as a proxy for Tobin’s q, as is commonly done in corporate finance, Tobin’s q is 2.14 at the peak of the dot-com bubble in 1999. In contrast, it is 0.77 in 1975, 1.73 in 1995, and 1.64 in 2015.

Question 64

Is the US Public Corporation in Trouble?
Kathleen M. Kahle and René M. Stulz, 2017

What is the main argument of the paper?

Answer 64

The main argument of the paper is that while the number of public corporations in the US has declined over the past few decades, this does not necessarily indicate that there is a problem with the public corporation model. Instead, the authors argue that changes in the US economy, including the rise of private equity and the increasing importance of intangible assets, have contributed to the decline in the number of public corporations.

Question 65

Is the US Public Corporation in Trouble?
Kathleen M. Kahle and René M. Stulz, 2017

What is the role of private equity in the decline of public corporations?

Answer 65

Private equity firms have been a major factor in the decline of public corporations, as they have provided an alternative source of capital for firms that might otherwise have gone public. Private equity firms also typically have longer investment horizons than public markets, which allows them to focus on long-term growth rather than short-term performance. As a result, many firms have chosen to stay private or go private, rather than go public.

Question 66

Is the US Public Corporation in Trouble?
Kathleen M. Kahle and René M. Stulz, 2017

What are some of the challenges facing public corporations?

Answer 66

Public corporations face a number of challenges, including increased regulation and scrutiny, the need to satisfy the demands of shareholders and analysts, and the pressure to perform well in the short term. Public corporations also face the risk of hostile takeovers, which can put pressure on management to make short-term decisions that may not be in the best long-term interests of the company.

Question 66

Is the US Public Corporation in Trouble?
Kathleen M. Kahle and René M. Stulz, 2017

What are some of the benefits of going public?

Answer 66

Going public can provide firms with access to a large pool of capital, which can be used to fund growth initiatives and invest in new projects. Additionally, going public can increase a firm’s visibility and reputation, which can be valuable in attracting customers, employees, and partners. Going public can also provide liquidity for shareholders, allowing them to sell their shares in the company and realize a return on their investment.

Question 67

Is the US Public Corporation in Trouble?
Kathleen M. Kahle and René M. Stulz, 2017

How have changes in the economy impacted the public corporation model?

Answer 67

Changes in the economy, including the rise of private equity, the increasing importance of intangible assets, and the shift towards a knowledge-based economy, have all contributed to the decline in the number of public corporations. These changes have made it more difficult for firms to go public and have created alternatives to the public corporation model that are better suited to the needs of many firms.

Question 68

Is the US Public Corporation in Trouble?
Kathleen M. Kahle and René M. Stulz, 2017

What is the role of intangible assets in the decline of public corporations?

Answer 68

Intangible assets, such as intellectual property, brand value, and customer relationships, have become increasingly important in the US economy. However, these assets are often difficult to value and are not well-suited to the public markets. As a result, many firms with valuable intangible assets have chosen to stay private or go private, rather than go public.

Question 69

Is the US Public Corporation in Trouble?
Kathleen M. Kahle and René M. Stulz, 2017

What are some of the risks associated with private equity?

Answer 69

Private equity can be risky for investors, as it often involves investing in companies that are not yet profitable or are in need of significant restructuring. Private equity firms also typically have a longer investment horizon than public markets, which means that investors may have to wait several years to see a return on their investment. Additionally, private equity firms often use high levels of debt to finance their investments, which can increase the risk of bankruptcy if the investments do not perform as expected.

Question 70

Is the US Public Corporation in Trouble?
Kathleen M. Kahle and René M. Stulz, 2017

How have changes in technology impacted the public corporation model?

Answer 70

Technology changes have impacted the public corporation model by
- reducing the need for large amounts of capital to fund physical assets
- increasing the importance of intangible assets such as intellectual property.

This has led to more companies relying on intellectual property as a core component of their business, rather than physical assets.

Additionally, technology has made it easier for small and start-up companies to enter the market and compete with established corporations.

Question 71

Is the US Public Corporation in Trouble?
Kathleen M. Kahle and René M. Stulz, 2017

What is the main idea of the paper?

Answer 71

The main idea is to examine the current state of the US public corporation model and whether it is in decline. The authors evaluate various indicators such as the number of public companies, changes in ownership structure, and the financial performance of public corporations over time to draw conclusions about the health of the public corporation model. They also explore potential reasons for any changes and discuss the implications for policymakers, investors, and society as a whole.

Question 72

Is the US Public Corporation in Trouble?
Kathleen M. Kahle and René M. Stulz, 2017

What is the authors’ take on policymakers?

Answer 72

Policy makers should focus on creating an environment that encourages public corporations to innovate and grow rather than regulating them. The authors argue that while public corporations face challenges such as short-termism and the rise of alternative forms of corporate ownership, they remain a vital component of the US economy. The paper suggests that policy makers should consider implementing measures to reduce the regulatory burden on public corporations, facilitate access to capital, and promote long-term shareholder engagement.

Question 73

Is the US Public Corporation in Trouble?
Kathleen M. Kahle and René M. Stulz, 2017

What are the main conclusions of the paper?

Answer 73

1. The public corporation is not in trouble, but it is evolving. Despite a decline in the number of public corporations, the total market capitalization of public corporations has increased.
2. The decline in the number of public corporations is driven by several factors, including regulatory costs, changes in technology, and the availability of private capital.
3. The decline in the number of public corporations has important implications for capital formation and investor protection. Policy makers need to consider the costs and benefits of regulations that affect public corporations and other sources of capital.
4. The public corporation remains an important part of the US economy and is likely to remain so in the future. However, the public corporation model is not static and will continue to evolve in response to changing economic conditions and technological innovations.