Capital Structure Dynamics And Stock Returns

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Capital Structure Dynamics and Stock Returns

Author : Jie Cai
Publisher :
ISBN 13 :
Total Pages : 37 pages
Book Rating : 4.:/5 (129 download)

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Book Synopsis Capital Structure Dynamics and Stock Returns by : Jie Cai

Download or read book Capital Structure Dynamics and Stock Returns written by Jie Cai and published by . This book was released on 2013 with total page 37 pages. Available in PDF, EPUB and Kindle. Book excerpt: Many finance theories predict that the capital structure affects firm value, which implies that the changes in leverage have an impact on stock returns. Most of the existing literature however has been focusing on the determinants of the capital structure. Using a sample of U.S. public firms during 1975-2002, we document a significantly negative effect of leverage changes on next-quarter stock returns. This effect remains significant after controlling for other firm characteristics such as ROE, book-to-market, firm size, and past returns. We propose and test several hypotheses to explain the observed effect. We find that the negative effect is stronger for the firms with a higher leverage level. This is consistent with a dynamic view of the pecking-order model that an increase in leverage reduces firms' debt capacity and may lead to future underinvestment. Further tests confirm the negative effect of current leverage change on future investment. In contrast, our results cannot be explained by the trade-off theory, default premium, the market timing theory, or the operational signaling story. Specifically, we find that deviation from the target leverage ratio has no impact on the stock returns, inconsistent with the trade-off theory (which implies an optimal, or partially optimal, leverage ratio). In addition, the change of long-term debt affects stock returns more than the change of short-term debt, and the one-year expected return following leverage change does not increase, both of which are inconsistent with the default risk premium hypothesis. Our results are not driven by firms' market timing activities. A firm times the market by issuing new equity (repurchasing stocks) when its equity is over- (under-) valued, which implies a positive relation between the leverage change and stock return. We also do not find support for the view that leverage increase signals poor future operating performance. Finally, we show that the return effect of leverage change contains information that cannot be explained by the popular pricing factors. This sheds new light on the link between capital structure choice and empirical asset pricing.

Capital Structure and Stock Returns

Author : Ivo Welch
Publisher :
ISBN 13 :
Total Pages : 35 pages
Book Rating : 4.:/5 (129 download)

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Book Synopsis Capital Structure and Stock Returns by : Ivo Welch

Download or read book Capital Structure and Stock Returns written by Ivo Welch and published by . This book was released on 2003 with total page 35 pages. Available in PDF, EPUB and Kindle. Book excerpt: U.S. corporations do not use their debt and equity issuing and repurchasing activities to counteract the mechanistic effects of stock returns on their debt equity ratios. Thus, over 1-5 year horizons, stock returns can explain about 40% of debt ratio dynamics. Although corporate (net) issuing activity is lively, and although it can explain the remaining 60% of debt ratio dynamics (long-term debt issuing activity being most capital structure relevant), corporate issuing motives remain largely a mystery. When stock returns are accounted for, taxes, bankruptcy costs, and many other proxies used in the literature, play at best a very modest role in explaining capital structure.

Business Environment and Firm Entry

Author : Leora Klapper
Publisher : World Bank Publications
ISBN 13 :
Total Pages : 60 pages
Book Rating : 4./5 ( download)

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Book Synopsis Business Environment and Firm Entry by : Leora Klapper

Download or read book Business Environment and Firm Entry written by Leora Klapper and published by World Bank Publications. This book was released on 2004 with total page 60 pages. Available in PDF, EPUB and Kindle. Book excerpt: "Using a comprehensive database of firms in Western and Eastern Europe, we study how the business environment in a country drives the creation of new firms. Our focus is on regulations governing entry. We find entry regulations hamper entry, especially in industries that naturally should have high entry. Also, value added per employee in naturally "high entry" industries grows more slowly in countries with onerous regulations on entry. Interestingly, regulatory entry barriers have no adverse effect on entry in corrupt countries, only in less corrupt ones. Taken together, the evidence suggests bureaucratic entry regulations are neither benign nor welfare improving. However, not all regulations inhibit entry. In particular, regulations that enhance the enforcement of intellectual property rights or those that lead to a better developed financial sector do lead to greater entry in industries that do more R & D or industries that need more external finance"--National Bureau of Economic Research web site.

Capital Structure and Firm Performance

Author : Arvin Ghosh
Publisher : Routledge
ISBN 13 : 1351530178
Total Pages : 140 pages
Book Rating : 4.3/5 (515 download)

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Book Synopsis Capital Structure and Firm Performance by : Arvin Ghosh

Download or read book Capital Structure and Firm Performance written by Arvin Ghosh and published by Routledge. This book was released on 2017-07-05 with total page 140 pages. Available in PDF, EPUB and Kindle. Book excerpt: Capital structure theory is one of the most dynamic areas of finance and forms the basis for modern thinking on the capital structure of firms. Much controversy has resulted from comparisons of the theory of capital structure originally developed by Franco Modigliani and Merton Miller to real-world situations. Two competing theories have emerged over the years, the optimal capital structure theory and the pecking order theory.Arvin Ghosh begins with an overview of the controversies regarding capital structure theories, and then statistically tests both the optimal capital structure and pecking order theories. Using the binomial approach he analyzes the determinants of capital structure while discussing the role of market power in determining capital structure decisions. Ghosh probes the questions of new stock offerings and stockholders' returns, and analyzes capital structure and executive compensation. He then looks into debt financing ownership structure, and the controversal relationship between capital structure and firm profitability. Finally, he discusses the latest developments in the field of capital structure.A concise overview of a major issue in business economics and finance, this volume provides a fuller understanding of capital structure influence on the financial performance of firms, and will certainly stimulate further debate. While hundreds of scholarly articles have been written on the subject this is the first book to test competing theories against measurements of firms' performance and their underlying capital structure.

Capital Structure and Stock Returns

Author : Wolfgang Drobetz
Publisher :
ISBN 13 :
Total Pages : 27 pages
Book Rating : 4.:/5 (129 download)

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Book Synopsis Capital Structure and Stock Returns by : Wolfgang Drobetz

Download or read book Capital Structure and Stock Returns written by Wolfgang Drobetz and published by . This book was released on 2007 with total page 27 pages. Available in PDF, EPUB and Kindle. Book excerpt: Using a panel of 425 European firms over the period from 1990 to 2005, we revisit Welch's (2004) finding that stock returns are the primary determinant of capital structure changes and that the corporate motives for issuing activities remain largely unexplained. We document that about half of the variation in leverage can be explained by stock return-induced effects over both 1-year and 5-year horizons. In contrast to the US evidence, corporate issuing activities are not as pronounced in our European sample, but they seem nevertheless sufficient for firms to maintain a target debt ratio in the long run. Therefore, our results are also consistent with recent evidence for dynamic rebalancing of the capital structure within a target range in the presence of adjustment costs. In a horse race with stock returns, traditional capital structure variables are inferior in explaining corporate leverage ratios and readjustment in response to return-induced changes in the short run, but they retain a significant role in the long run.

Handbook Of Financial Econometrics, Mathematics, Statistics, And Machine Learning (In 4 Volumes)

Author : Cheng Few Lee
Publisher : World Scientific
ISBN 13 : 9811202400
Total Pages : 5053 pages
Book Rating : 4.8/5 (112 download)

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Book Synopsis Handbook Of Financial Econometrics, Mathematics, Statistics, And Machine Learning (In 4 Volumes) by : Cheng Few Lee

Download or read book Handbook Of Financial Econometrics, Mathematics, Statistics, And Machine Learning (In 4 Volumes) written by Cheng Few Lee and published by World Scientific. This book was released on 2020-07-30 with total page 5053 pages. Available in PDF, EPUB and Kindle. Book excerpt: This four-volume handbook covers important concepts and tools used in the fields of financial econometrics, mathematics, statistics, and machine learning. Econometric methods have been applied in asset pricing, corporate finance, international finance, options and futures, risk management, and in stress testing for financial institutions. This handbook discusses a variety of econometric methods, including single equation multiple regression, simultaneous equation regression, and panel data analysis, among others. It also covers statistical distributions, such as the binomial and log normal distributions, in light of their applications to portfolio theory and asset management in addition to their use in research regarding options and futures contracts.In both theory and methodology, we need to rely upon mathematics, which includes linear algebra, geometry, differential equations, Stochastic differential equation (Ito calculus), optimization, constrained optimization, and others. These forms of mathematics have been used to derive capital market line, security market line (capital asset pricing model), option pricing model, portfolio analysis, and others.In recent times, an increased importance has been given to computer technology in financial research. Different computer languages and programming techniques are important tools for empirical research in finance. Hence, simulation, machine learning, big data, and financial payments are explored in this handbook.Led by Distinguished Professor Cheng Few Lee from Rutgers University, this multi-volume work integrates theoretical, methodological, and practical issues based on his years of academic and industry experience.

Stock Return Anomalies, Industry Risk and Capital Structure

Author : Engin Kose
Publisher :
ISBN 13 :
Total Pages : 131 pages
Book Rating : 4.:/5 (795 download)

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Book Synopsis Stock Return Anomalies, Industry Risk and Capital Structure by : Engin Kose

Download or read book Stock Return Anomalies, Industry Risk and Capital Structure written by Engin Kose and published by . This book was released on 2012 with total page 131 pages. Available in PDF, EPUB and Kindle. Book excerpt: My dissertation studies several topics related to the anomalous behavior of stock returns in the time series and cross section. It includes three parts. The first part investigates the relation between leverage and stock returns. First, we provide the first empirical evidence that this relation is masked by maturity: stocks with higher short-maturity debt earn significantly higher returns, but stocks with higher long-maturity debt earn lower returns. The opposite directions separated by maturity help explain why the relation between leverage and returns has been mixed. We further show that the positive short-maturity return spread is significant, persistent, and not explained by well-known risk factors (such as size or book to market). Second, we also provide the first theoretical model to explain the relation between maturity-related leverage and stock returns by endogenizing debt maturity; Firms optimally choose the maturity of their debt by trading off the cost of long term maturity with its financial risk on equity. Firms with lower credit quality find it more expensive to borrow long term, so they optimally have debt with shorter maturity. In equilibrium, firms with higher short-term debt or lower long-term debt are riskier firms and earn higher expected returns. We show that the empirical evidence we uncover can be consistent with theoretical predictions. In the second part; my co-authors, Long Chen, Ohad Kadan and I demonstrate an inconsistency of the momentum and reversal effects in explaining stock return dynamics. We argue that a two-way sorting based on long-term and recent performance can accommodate the two effects by distinguishing between fresh and stale winners and losers. Building on this idea, we propose a 'fresh momentum' strategy which invests in fresh winners and fresh losers only. This strategy generates a fresh momentum profit of 5.1\% per year even after controlling for the Carhart four-factor model (including momentum). To explain the phenomenon, we argue that investors mistakenly respond to shocks to firm fundamentals as if they are going to continue in the long run, and these mistakes are exacerbated for fresh momentum stocks, presumably generating the abnormally large returns over the short run. This hypothesis is strongly supported by evidence from earnings shocks, analyst forecast revisions, and post-earnings announcement returns. In the third part, my co-author, Long Chen and I provide one of the first papers to document extensive stock return anomalies at the industry level. We find smaller industries, industries with lower investment and industries with lower inventory changes have bigger average industry returns. Value industries have lower industry returns in contrast to higher average returns of value firms. These anomalies are robust to even controlling for known (firm-level sorted) risk factors. We further explore the relation between these anomalies and business cycles. We find consistent business cycle dynamics with the return spreads associated with these anomalies.

Empirical Capital Structure

Author : Christopher Parsons
Publisher : Now Publishers Inc
ISBN 13 : 160198202X
Total Pages : 107 pages
Book Rating : 4.6/5 (19 download)

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Book Synopsis Empirical Capital Structure by : Christopher Parsons

Download or read book Empirical Capital Structure written by Christopher Parsons and published by Now Publishers Inc. This book was released on 2009 with total page 107 pages. Available in PDF, EPUB and Kindle. Book excerpt: Empirical Capital Structure reviews the empirical capital structure literature from both the cross-sectional determinants of capital structure as well as time-series changes.

Far Can Be

Author : Angel Mary Anoop
Publisher : Xlibris Corporation
ISBN 13 : 1669886638
Total Pages : 29 pages
Book Rating : 4.6/5 (698 download)

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Book Synopsis Far Can Be by : Angel Mary Anoop

Download or read book Far Can Be written by Angel Mary Anoop and published by Xlibris Corporation. This book was released on 2022-03-04 with total page 29 pages. Available in PDF, EPUB and Kindle. Book excerpt: “Far can be” by Angel Mary Anoop describes her thoughts about the world, life and it's possibilities. This book illustrates the speakers view on nature, people, beauty, and dreams through poems . The writers perspective on following dreams to achieve success, reminds the responsibility on nature, accept the people in the way they are, and finally a humorous outlook on the pandemic. It is clear that the readers gets astonished from this poetry by knowing the authors age.

A Theory of Capital Structure, Price Impact, and Long-Run Stock Returns Under Heterogeneous Beliefs

Author : Onur Bayar
Publisher :
ISBN 13 :
Total Pages : 68 pages
Book Rating : 4.:/5 (13 download)

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Book Synopsis A Theory of Capital Structure, Price Impact, and Long-Run Stock Returns Under Heterogeneous Beliefs by : Onur Bayar

Download or read book A Theory of Capital Structure, Price Impact, and Long-Run Stock Returns Under Heterogeneous Beliefs written by Onur Bayar and published by . This book was released on 2016 with total page 68 pages. Available in PDF, EPUB and Kindle. Book excerpt: We study an environment with short sale constraints and heterogeneous beliefs among outsiders and between insiders and outsiders. Firm insiders choose between equity, debt, and convertible debt to raise external financing. We analyze two settings: one where heterogeneous beliefs is the only market imperfection and another where there are significant security issue and financial distress costs. Our model generates a pecking order of external financing different from asymmetric information models, and new predictions for capital structure, sequential tranching of securities, the price impact of security issues, and long-run stock returns. It also provides a new rationale for convertible debt issuance.

Corporate Capital Structures in the United States

Author : Benjamin M. Friedman
Publisher : University of Chicago Press
ISBN 13 : 0226264238
Total Pages : 404 pages
Book Rating : 4.2/5 (262 download)

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Book Synopsis Corporate Capital Structures in the United States by : Benjamin M. Friedman

Download or read book Corporate Capital Structures in the United States written by Benjamin M. Friedman and published by University of Chicago Press. This book was released on 2009-05-15 with total page 404 pages. Available in PDF, EPUB and Kindle. Book excerpt: The research reported in this volume represents the second stage of a wide-ranging National Bureau of Economic Research effort to investigate "The Changing Role of Debt and Equity in Financing U.S. Capital Formation." The first group of studies sponsored under this project, which have been published individually and summarized in a 1982 volume bearing the same title (Friedman 1982), addressed several key issues relevant to corporate sector behavior along with such other aspects of the evolving financial underpinnings of U.S. capital formation as household saving incentives, international capital flows, and government debt management. In the project's second series of studies, presented at the National Bureau of Economic Research conference in January 1983 and published here for the first time along with commentaries from that conference, the central focus is the financial side of capital formation undertaken by the U.S. corporate business sector. At the same time, because corporations' securities must be held, a parallel focus is on the behavior of the markets that price these claims.

The Debt/equity Choice

Author : Ronald W. Masulis
Publisher :
ISBN 13 :
Total Pages : 168 pages
Book Rating : 4.4/5 (91 download)

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Book Synopsis The Debt/equity Choice by : Ronald W. Masulis

Download or read book The Debt/equity Choice written by Ronald W. Masulis and published by . This book was released on 1988 with total page 168 pages. Available in PDF, EPUB and Kindle. Book excerpt:

Determinants and Dynamics of Capital Structure in the UK

Author : Isaya Jayambo Jairo
Publisher :
ISBN 13 :
Total Pages : 0 pages
Book Rating : 4.:/5 (141 download)

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Book Synopsis Determinants and Dynamics of Capital Structure in the UK by : Isaya Jayambo Jairo

Download or read book Determinants and Dynamics of Capital Structure in the UK written by Isaya Jayambo Jairo and published by . This book was released on 2004 with total page 0 pages. Available in PDF, EPUB and Kindle. Book excerpt: Despite considerable theoretical progress, the understanding of the determinants of a firm's capital structure remains incomplete and there are still numerous empirical issues to be resolved. The number of determinants of capital structure identified by theoretical reasoning keeps increasing, and as a result their analysis has become more and more complex. The primary contribution of this thesis is to provide some empirical tests of hypotheses suggested by theoretical models and reasoning. In the search for the most important determinants of capital-structure. This study uses a panel of 651 listed UK firms (9,486 firm-year observations) to compare structural equation, modelling (SME) and OLS-regression methodologies in both its cross-sectional and dynamic analyses. In addition, the study uses a set of implied gearing ratios to disentangle the impact of equity market timing behaviour from that of stock returns on capital structure. The evidence shows that, following an increase in stock returns, managers of UK firms issue more equity despite the fall in the debt-equity ratio and the consequent increase in debt carrying capacity. This practice has a statistically significant impact on capital structure, as UK firms do not appear to re-adjust their gearing thereafter. The study reveals that stock returns are the most important capital structure determinant. Though the effects of other firm-specific characteristics and equity market timing are persistent and statistically significant, compared to the stock returns effect, their economic role is negligible. Stock returns drive gearing mechanistically for a longtime, up to ten years. The findings imply that managers do not strive to adjust their capital structure towards some optimal debt ratio. This casts doubt on theories that advocate a degree of optimisation like the static trade-off theory of capital structure.

The COVID-19 Impact on Corporate Leverage and Financial Fragility

Author : Sharjil M. Haque
Publisher : International Monetary Fund
ISBN 13 : 1589064127
Total Pages : 51 pages
Book Rating : 4.5/5 (89 download)

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Book Synopsis The COVID-19 Impact on Corporate Leverage and Financial Fragility by : Sharjil M. Haque

Download or read book The COVID-19 Impact on Corporate Leverage and Financial Fragility written by Sharjil M. Haque and published by International Monetary Fund. This book was released on 2021-11-05 with total page 51 pages. Available in PDF, EPUB and Kindle. Book excerpt: We study the impact of the COVID-19 recession on capital structure of publicly listed U.S. firms. Our estimates suggest leverage (Net Debt/Asset) decreased by 5.3 percentage points from the pre-shock mean of 19.6 percent, while debt maturity increased moderately. This de-leveraging effect is stronger for firms exposed to significant rollover risk, while firms whose businesses were most vulnerable to social distancing did not reduce leverage. We rationalize our evidence through a structural model of firm value that shows lower expected growth rate and higher volatility of cash flows following COVID-19 reduced optimal levels of corporate leverage. Model-implied optimal leverage indicates firms which did not de-lever became over-leveraged. We find default probability deteriorates most in large, over-leveraged firms and those that were stressed pre-COVID. Additional stress tests predict value of these firms will be less than one standard deviation away from default if cash flows decline by 20 percent.

Capital Structure Response to Stock Return Fluctuations

Author : Anastasia A. Sergeeva
Publisher :
ISBN 13 :
Total Pages : 42 pages
Book Rating : 4.:/5 (855 download)

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Book Synopsis Capital Structure Response to Stock Return Fluctuations by : Anastasia A. Sergeeva

Download or read book Capital Structure Response to Stock Return Fluctuations written by Anastasia A. Sergeeva and published by . This book was released on 2012 with total page 42 pages. Available in PDF, EPUB and Kindle. Book excerpt:

Inefficient Markets

Author : Andrei Shleifer
Publisher : OUP Oxford
ISBN 13 : 0191606898
Total Pages : 225 pages
Book Rating : 4.1/5 (916 download)

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Book Synopsis Inefficient Markets by : Andrei Shleifer

Download or read book Inefficient Markets written by Andrei Shleifer and published by OUP Oxford. This book was released on 2000-03-09 with total page 225 pages. Available in PDF, EPUB and Kindle. Book excerpt: The efficient markets hypothesis has been the central proposition in finance for nearly thirty years. It states that securities prices in financial markets must equal fundamental values, either because all investors are rational or because arbitrage eliminates pricing anomalies. This book describes an alternative approach to the study of financial markets: behavioral finance. This approach starts with an observation that the assumptions of investor rationality and perfect arbitrage are overwhelmingly contradicted by both psychological and institutional evidence. In actual financial markets, less than fully rational investors trade against arbitrageurs whose resources are limited by risk aversion, short horizons, and agency problems. The book presents and empirically evaluates models of such inefficient markets. Behavioral finance models both explain the available financial data better than does the efficient markets hypothesis and generate new empirical predictions. These models can account for such anomalies as the superior performance of value stocks, the closed end fund puzzle, the high returns on stocks included in market indices, the persistence of stock price bubbles, and even the collapse of several well-known hedge funds in 1998. By summarizing and expanding the research in behavioral finance, the book builds a new theoretical and empirical foundation for the economic analysis of real-world markets.

Required Return on Equity when Capital Structure is Dynamic

Author : Na Dai
Publisher :
ISBN 13 :
Total Pages : 54 pages
Book Rating : 4.:/5 (13 download)

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Book Synopsis Required Return on Equity when Capital Structure is Dynamic by : Na Dai

Download or read book Required Return on Equity when Capital Structure is Dynamic written by Na Dai and published by . This book was released on 2019 with total page 54 pages. Available in PDF, EPUB and Kindle. Book excerpt: We explore the firm's required return on equity when it has a target debt ratio (TDR). We show that a firm's expected return is increasing in the product of the distance between its debt ratio (DR) from its TDR (E[TDR-DR]), its speed of adjustment, and the spread of its tax benefits of debt over its bankruptcy costs of debt. Our empirical tests validate that high distance firms' returns outperform those of low distance firms.