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1、Why do companies go public?(Pagano,Panetta&Zingale,JF,1998)nPurposenAnalyze ex-ante characteristics of IPO decisionsnAnalyze ex-post consequences of IPO decisionsnDatan11 years:1982-1992nCompares firms eligible to go public vs firms went public n139 new listings on the Milan Stock ExchangenEliminate
2、d:bank,insurance,financial companiesnFinal sample:69 firms of which 29 are curve-outsSome empirical predictions(See:Table II)nInformation asymmetry hypothesisnThe probability of going public should be positively related with age,size of a firmnFinancing constraint hypothesisnThe probability of going
3、 public should be positively related with firms investments,leverage and growthnDiversification hypothesisnThe probability of going public should be positively related with the riskiness of a firmEmpirical ResultsnDeterminants of IPO decision:nTable IIInEffects of the IPO decision:nTable IVOwnership
4、 and Operating performance of IPO firms(Mikkelson,Partch&Shah:JFE 1997)nGoing public represents a decline in the(owner)managers stakes in the firm.nAgency theory predicts that there will be less alignment of shareholders interest with that of the managers.As such,firm performance will decline after
5、IPO.Empirical resultsnManagerial ownership declines substantially after IPO.Yet sizeable ownership stake remains.nA significant decline in operating performance only in the first year of IPO,but not later on.nOperating performance is unrelated to managerial ownership.nPrediction of agency theory doe
6、s not hold!nManagers continue to remain large shareholders nOther mechanisms(incentive compensation,takeover threat,etc.)play a more important role after IPO than ownership stakes.Capital StructurenHow should a company choose its debt-equity mix that makes its total market value as large as possible
7、?nDo capital structure changes matter?nWhy they matter?Are capital structure decisions relevant?nUnder the assumption of perfect capital market,capital structure decisions do not affect firm valuenBut,when the assumptions are not met,firm value varies with changes in the debt-equity mixnImperfection
8、s:Taxes,Financial distress costs,Agency costs,Asymmetric informationEmpirical issuesnHow to measure capital structure?nWhich factors determine capital structure?nWhy firms choose to issue a particular security?nWhat is the capital market reaction to the news of security offerings?nHow can we explain
9、 price reaction?nIs subsequent change in operating performance consistent with stock price change?Ways to empirically investigate capital structure issuesnAnalyze capital structure patternsn(Rajan et al.JF,1998)nRelate capital structure to firm/industry/institutional characteristicsn(Rajan et al.JF,
10、1998)nAnalyze the choice of capital structure decisionsn(Jung et al.,JFE,1997)nAnalyze the impact of capital structure decisionsn(Kabir and Roosenboom,JCF,2003)Balance Sheet of a firmHow do we define debt?Comparing capital structure internationallyWhat do we know about capital structure?(Rajan and Z
11、ingales,JF,1995)nComparing capital structure across countries becomes difficult due to lack of consistent information:differences in accounting and financing methods.nThree sources of differences in accounting practices:nNot all countries require firms to report consolidated balance sheetsnValuation
12、 of assets(at historical costs or current value)differnSome items are included/not included in balance sheet:Lease;Funded/Unfunded pension liabilities;Provisions;etc.Measures of Leveragen1.TL/TA Broadest definitionnUS,UK have lower leverage than Eur.countriesnIn market value terms,Japan is not more
13、leveredn2.Debt(STD+LTD)/TAnHere trade credit(non-debt liabilities)is not included;Lev looks lessnGermany&UK have low levels of leverage in both BV and MV levelsn3.LTD/Total capital(LTD+Equity)nShows the effect of long-term financingnNeither German and Japanese companies are very highly levered by US
14、 standardCountry specific featuresnGermany:nFirms show pension liabilities on the Balance Sheet,but no offsetting entry on pension assets;nReserves are reported separately from equity;these do not cover specific obligations,but serves as“equity for a rainy day”-to offset future drop in earningsnJapa
15、n:nLarge companies borrow and then lend to suppliers and related companies(they have offsetting loans)Adjustments to country-specific featuresnDo these findings remain same after adjustments(of accounting practices)?nProvisions for future liabilities are dubious;so add to equitynPensions liabilities
16、 deduct these from assetsnIntangible assets(goodwill from acquisitions)may exaggerate assets;so deduct from equitynDeferred taxes may have to be considered as part of shareholder equityExplaining capital structure differencesnCapital structure of firms from different countries could be explained by
17、taking into consideration the institutional differencesnTaxes(corporate,personal,local taxes)nBankruptcy law(US going concern;UK,Germany creditor rights,premature liquidation)nFinancial system:Bank versus Market-based countries(private financing,bank as underwriter,bank as equity provider)nOwnership structure(Large shareholders,Banks)