Articles Flashcards
Which articles discuss topic 1 debt policy/ if capital structure matter?
Modigliani and Miller 1956
Titman 2001- market efficiency
Which articles discuss topic 2? how much should a firm borrow
Modigliani and Miller 1956- static tradeoff theory cap structure depends on benefits from tax shield and cost of financial distress
Miller - optimal debt level of debt for tax savings is where interest = EBIT
Which articles discuss topic 3? financing preferences 5
Myer and Majluf 1984 - Pecking Order, managers act in existing shareholders interests, info asymmetry, adverse selection costs
Stulz 1990 - over and underinvestment, managers are self interested (management discretion/agency costs)
Berger Ofek and Yermack 1997 - entrenched managers dislike debt because it disciplines
Shyam Sunder and Myers 1988 - large firms prefer pecking order
Frank and Goyal (2002) small and large companies → trade-off theory ○ smaller firms do not have the resources to analyse their firm to provide information to the public
Which articles discuss topic 5? Convertible debt
Mayers (2000) free lunch / expensive lunch if stock increase/decrease in value
- 2 period straight debt x2 amount- risk over investment or cheaper finance
- sequential debt - removes over investment, face with higher financing costs
- CB - bad=debt good = equity
Which articles discuss topic 6? Dividend policy
Linter 1956 , long term div policy, reluctant to change, only change after longterm sustainable earnings. investors know how managers act, therefore interpret div changed as signals
Modigliani and Miller 1956 div irrelevant, firms should adopt residual value div policy, not paying divs due to investment shouldn’t have signalling costs
La Porta- outcome and substitute model
Julio and Ikenberry- why dividends reappear, tax cuts, maturity of firms, investment ops less for mature firms, reduced investor confidence i.e. Enron, catering theory
Which articles discuss topic 7? IPOs
The Rock’s Model 1986- winners curse, market has informed and uninformed investors. need uninformed investors to participate in market therefore underprice
Loughran and Ritter (2004)
a. changing risk composition hypothesis → risky IPOs tend to be more undervalued,
b. realignment of incentives hypothesis willing to accept underpricing
c. changing issuer objective hypothesis: publicity/hot-topic
Which articles discuss topic 8? Executive Comp
Yermack 1997 - 1. timing of awards coincide with favourable movements in company stock prices
a. incentive compensation might motivate managers to make better decisions
b. managers might have influence over the timing of their own compensation, stock options in advance of anticipated stock price rises
RULED OUT INSIDER TRADING
incentives for manaagers to take risk
Which articles discuss topic 9? ICM
Stein 1997 - winner picking, credit constrained, divisional mgmt self interested, HQ has control rights.
more diversification many segments unrelated projects benefits bondholders reduces risk
less diversification few segments related projects benefits shareholders i.e. increased risk
Gartner Scharfstein and Stein 1994 - 2benefits and 1 cost of ICM, more monitoring /better asset redeployment / lack on mgmt entrepreneurialism
