Empirical Papers Flashcards
What factors are explanatory for the leverage ratio (dependent variable) in Frank and Goyal’s (2009) paper?
- Industry mean gearing (+) - Supports TO theory
- Tangibility of assets (+) - Supports TO theory
- Profitability (-) - Supports PO theory.
How does Frank and Goyal (2003) paper test the pecking order theory?
Using a list of variables (asset tangibility, Market/book value (stock undervaluation), Sales, Profit and Deficit), they hypothesise that all these coefficients should be equal to zero apart from the deficit coefficient, which should be = 1, according to pecking order theory.
What are the findings in Frank and Goyal’s (2003) paper?
They find the change in equity is much larger than the change in debt and therefore in contrary to pecking order theory.
They find that all variables are significant and on average, reject the pecking order theory and instead strongly supports the trade-off theory.
In Frank and Goyal’s (2003) paper, why does industry median gearing support TO theory?
It reflects firm’s target gearing at an industry level and results in similar borrowing patterns. This optimal level of gearing supports TO theory.
In Frank and Goyal’s (2003) paper, why does tangibility of assets (positive) support TO theory?
Tangible assets are fixed assets and therefore easier for debt holders to evaluate companies relative to intangible assets. This results in high leverage ratio.
Contradicts pecking order theory, as low information asymmetry makes equity issuances less costly. So more equity less debt.
Who says that the use of options in CEO compensation are increasing?
Frydman and Jenter (2010).
What did Bernile and Jarrell (2009) find?
Backdating (the manipulating of documents, falsely asserting that at the money options were issued at an earlier time period).
Although it had little impact on cash flow, it had negative effects on firm’s value due to loss in trust and integrity.
What did Denis et al (2006) find?
They found that higher the option intensity with a firm (independent variable) the more likely they were to commit fraud (dependent variable).
What did Chen et al (2006) find?
Options make managers risky.
Investigates the relation between stock option based compensation (dependent variable) and risk taking. Findings: CEOs want to operate in a risky manner in order to benefit from the high price. They found this induced risk taking in the banking industry.
What did Ofek and Yermak (2000) find?
Giving too many options can lead managers to sell their stock. Findings: Board can use stock compensation (the distributing of stocks to managers) only up to a threshold levels, as when given too many stocks, they decide to hold less shares due to diversifying risk.
Jensen and Murphy (1990)
Pay to Performance sensitivity
Frydmen and Jenter (2010)
the use of options in CEO compensation is increasing
Yermack (1997)
Managers manipulate options to be awarded on low stock price day.
Bernile and Jarrel (2009)
Backdating of stock options, issuing stock and providing false documentation to say that the option was actually issued at an earlier date when the stock price was lower.
Acharya et al (2009)
Private Equity firms perform better on:
1) Strategic Leadership
2) Performance Management
3) Stakeholder Management
