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Browsing by Author "Keown, Arthur J."

Now showing 1 - 20 of 41
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    The agency cost of financial decision making: an empirical analysis
    Crutchley, Claire Elaine (Virginia Polytechnic Institute and State University, 1987)
    Jensen and Meckllng in "Theory of the Firm: Managerial Behavior and Capital Structure" [1976] introduced the concept that managers choose their ownership in the firm and leverage ratio to minimize agency costs. Easterbrook [1984] and Rozeff [1982] extended this notion with the hypothesis that dividends are paid to reduce equity agency costs. Myers [1977] explained debt agency costs as being a possible underinvestment problem with risky debt, and Jensen [1986] hypothesized that increases in debt could control the free cash flow agency problem. This dissertation will be a comprehensive test of Jensen and Meckling’s agency theory including extensions by Rozeff, Easterbrook, Myers and Jensen. To test agency theory a contemporaneous three equation model determining managerial ownership, leverage and dividends is specified. The exogenous variables include variables which are expected to impact upon agency costs, diversification measures, and variables registering non-agency explanations of leverage and dividends. This dissertation provides critically needed empirical evidence on the agency problem and a specific test of Jensen and Meckling.
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    Athletic Practice Facility Site Evaluation Committee Final Report
    Randolph, John; Bork, Dean R.; DiSalvo, Rick; Dodson, Kara; Gabbard, Tom; Karpanty, Sarah M.; Keown, Arthur J.; Killough, Larry; LaClair, Leigh; Lyons, Maxine; Reynolds, Glenn; Walters, Jeffrey R.; Wilkinson, Emily; Wise, Chris; Wiseman, P. Eric (Virginia Tech APFSEC Committee, 2012-05-30)
    The Athletic Practice Facility Site Evaluation Committee (APFSEC) was established in January 2012 to help Virginia Tech resolve a controversy surrounding the proposal to build a 2.1 acre indoor athletic practice facility in part of a designated Environmental Greenway known as Stadium Woods. After four months of data gathering and biweekly meetings, the Committee recognized that its siting decision was a matter not simply about whether or not to build in the woods, but also about the design of the campus built environment, disruption and mitigation of existing and prospective campus facilities and uses, and accommodating the development of the athletic facility at a suitable location and a workable cost. The demonstrated social importance of Stadium Woods became the determining factor in the Committee’s deliberations and the consensus report. This summary and recommendations introduces the issue, describes the Committee’s process, discusses the site evaluation, and offers five recommendations:
    1. Designate Stadium Woods as a Reserve and develop a protection, management, and use planfor the Woods.
    2. Relocate the proposed facility site from the Woods site to the Washington Street tennis court site and develop a site orientation and design that considers cost, aesthetics, mitigation of existing uses, and minimal impact on the Woods.
    3. Commence construction of replacement tennis courts and roller hockey rink displaced by the Washington St. site before the existing facilities are closed.
    4. Allocate incremental costs associated with the site relocation, which are a measure of the preservation value of the Woods, to funding sources other than Athletics and Recreational Sports.
    5. Review procedures for assessing variance with the Master Plan to safeguard against future controversies of this type.
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    Bankruptcy outcome after the point of filing
    Lynch, Larry Allen (Virginia Polytechnic Institute and State University, 1987)
    The subject of corporate bankruptcy has been of interest to financial academicians and practitioners alike. Researchers have directed most of their attention to accounting-based models for predicting bankruptcy filings. Although some research has attempted to estimate the probability and costs of bankruptcy, a very limited amount is centered around the outcome of bankruptcy proceedings. Specifically, little is known about the circumstances that determine whether the firm will liquidate, successfully reorganize, or become an acquisition of another firm after filing for court protection. Given the potentially large losses to both creditors and stockholders, the determinants of bankruptcy outcome should be of considerable interest. The focus of this research is threefold. First, the factors that should have an effect on the disposition of the firm after the bankruptcy filing are examined for their influence on the disposition. Second, since there is some dispute as to the appropriate classification of acquired firms, the correct classification of acquired (or merged) firms is determined. Third, the effect of a major change in the bankruptcy law is examined.
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    Capital structure theory and flotation costs: an empirical analysis of utility debt and equity decisions
    Fuller, Beverly R. (Virginia Polytechnic Institute and State University, 1987)
    This research investigates which theory -- an optimal, irrelevance, or modified pecking order -- best explains a firm's capital structure. A sample of 457 debt and equity utility offerings made from 1973-1982 is used in logit regression analysis to test the predictions of the different theories and the relevance of flotation costs to the financing decision. Target leverage ratios are constructed as averages from industry and firm-specific data. These ratios change over time suggesting that leverage targets are moving in response to general economic conditions. Miller's irrelevance and the modified pecking order theories (if utilities operate well below their debt capacity) are supported. In spite of using leading and lagging targets, no support is found for an optimal capital structure theory. Also, there is no support for flotation costs when measured as the savings from issuing debt rather than equity. An anomalous finding that overlevered firms continue to lever with their next financing decision seems to be robust to the different measures of a target leverage ratio. This finding is inconsistent with the three capital structures theories tested.
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    Causes and consequences of external blockholdings
    Singh, Sudhir (Virginia Tech, 1992)
    This dissertation seeks to investigate empirically the determinants and implications of large block shareholdings. Specifically, it attempts to answer the following questions : (1) Why do some firms have blocks and others not ? (2) What are the valuation consequences of large block creations ? (3) What are the cross-sectional relationships between the market response and characteristics of the firm and of the blockholder ? and, finally, (4) What are the time series (and control-firm-adjusted) changes in firm performance measures and operating variables attributable to large shareholder monitoring ? The above questions are addressed by recognizing, firstly, that the incidence of large block shareholdings is rational only when the gains from a blockholding exceed the costs of foregone diversification-of-portfolio opportunities. The potential sources of gains to the blockholder are identified as resulting from firm-value-increasing reductions in the agency costs of free cash flow and other non-free-cash-flow-related equity agency costs, equity-value-increasing potential for wealth transfers from bondholders, firm-value-increasing expectation of synergy gains in the case of corporate blockholdings, as well as equity-value-reducing gains such as the potential for insider trading, and the expectation of a greenmail premium. It is hypothesized that the net valuation impact of these gains to the blockholder is positive. Event study results support this hypothesis. Cross-sectional regression results suggest that announcement period abnormal returns are reliably explained by the potential for wealth transfers from bondholders, as proxied by the level of discretionary assets in the firm. Further, consistent with theory, announcement excess returns are positively related to the size of the blockholding and the identity of the blockholder. There is no evidence that blockholders play a valuable role in limiting managerial discretion over free cash flow. Firm-specific risk also appears to have no valuation impact; this suggests that the potential benefits from blockholder monitoring may be offset by the potential costs resulting from insider trading. Finally, a pre- and post-block matched-pair comparison of key performance measures and operating variables between the sets of sample firms and control firms provides weak support for the monitoring role of the large block shareholder. A time-series tracing of blockholder affiliation with the target firms reveals that in only a small fraction of firms does the blockholder obtain a seat on the target firm’s board of directors - a virtual requirement for effective monitoring to occur. Overall, these findings do not support theoretical arguments that envisage blockholder monitoring as a long-term incentive-alignment mechanism between managers and shareholders.
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    Differential information, divergence of opinion, and security returns in an efficient market
    Bolster, Paul J. (Virginia Polytechnic Institute and State University, 1985)
    Although there is ample evidence of the heterogeneity of investors' expectations of security returns (Cragg and Malkiel, 1982), few studies have attempted to relate this divergence of investor opinion directly to security returns. Barry and Brown (1984) argue that divergence of investor opinion results from differing levels of estimation risk across securities. Furthermore, their model shows that the OLS estimate of beta, used in most empirical studies requiring excess returns, underadjusts for a security's systematic risk when investors' expectations are highly dispersed and overadjusts when such divergence of opinion is low. This hypothesis is tested in the present study using various measures of divergence of analysts‘ forecasts of earnings per share for individual firms. The results of exhaustive data analysis strongly reject the notion of such a bias in the OLS derived excess returns or in actual returns. Market reaction to revisions in the mean and standard deviation of analysts' firm-specific forecasts of earnings per share is also examined. Security prices do not appear to react in a systematic manner to revisions in the standard deviation of analysts' forecasts. However, there is evidence of a reaction to revisions in the mean of such forecasts both before and after the publication of this information suggesting that new information is contained in consensus forecasts of earnings per share when released to subscribers.
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    Differential information, expectations, and the small firm effect
    Neustel, Arthur D. (Virginia Polytechnic Institute and State University, 1984)
    An empirical study of the effects of differential information and the expectations of investors is undertaken to test the differential information theory of Barry and Brown (1983). The theory is tested using the small firm effect. The excess returns found using ex post data are regressed against proxies for differential information and expectations. The residuals from these regressions are then tested to determine if the small firm effect is still observed. The results of this study are: 1. The tests provided empirical evidence that is consistent with the theory of Barry and Brown (1983) when a suitable proxy for differential information is used. 2. For the sample studied, the differential information effect on perceived risk by investors largely explained the small firm effect, when a suitable proxy was used. 3. Evidence was found that the small firm effect is composed of two parts supporting the findings of Keim (1983). One is a January effect, and the other during the remainder of the year, with the January effect still observed. 4. The proxy chosen to represent heterogeneous expectations must be selected with care. In this study the one selected did not prove suitable. Reasons are provided which indicate that the proxy chosen was the principal cause of the failure of these tests to support the theory.
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    Does CEO Duality Matter: An Integrative Approach
    Kwok, Julia Shuk Ying II (Virginia Tech, 1998-02-06)
    Some firms allow their CEO to hold the position of Chair of the Board of Directors while other firms choose to split those two positions between two different individuals. This dissertation first examines whether agency control mechanisms, agency problems, and other firm characteristics are related to the observed choice of one or two individuals in the two positions. The empirical research is based on the hypothesis that having the positions split between two individuals is a means of controlling agency problems when used in concert with (either as a substitute for or as a complement to) other mechanisms for controlling agency problems. Firms are thus viewed as evaluating the costs and benefits of split positions as well as of other agency control mechanisms. They choose the most cost effective means of addressing the problems they face. If split positions are more cost effective, then the firm should choose to split positions other things equal. The very high predictive power of the estimated logistic model confirms the hypothesis that the probability of choosing split positions is related to control mechanisms and agency problems as well as to size and other factors. Some agency control mechanisms perform as complementary agency control mechanisms and some as substitutes for split positions. The results suggest that firms with higher agency costs of debt and equity are more likely to have chosen to split positions. The results are thus consistent with the view of the choice of split positions as a means of managing agency problems in concert with other mechanisms in an integrative decision framework. The second part of the dissertation examines the linkage between the CEO-Chair choice and the performance of the company (as measured by returns or operating efficiency). Shareholder activists argue that poor performance results when the CEO serves simultaneously as the Chair of the Board of Directors, so called "CEO duality." This dissertation examines whether firms that split these positions experience higher accounting performance than firms that do not split the positions. Several hypotheses are tested regarding the effects on firms with split positions. The empirical model indicates that firms that have split positions exhibit, on average, no lower or higher performance than other firms after integrating into the model industry effects, the role of other agency control mechanisms, the size of agency problems, and other firm characteristics. This is consistent with an irrelevance hypothesis as well as with the possibility that firms choose their policies optimally once other factors are accounted for. However, the firms with split positions do exhibit a different relationship between information asymmetry and performance as well as between other agency control mechanisms and performance. The use of agency control mechanisms, for example as measured by the proportion of the firm held by institutional investors, have a greater effect on performance for non-split than for split firms. Overall the results support the notion that firm and management characteristics (such as the level of agency problems, information asymmetry, ownership structure, and the existence of other agency control mechanisms) influence the choice to split positions and influence the role and effectiveness of split positions. The vast majority of firms' choice can be predicted by using such characteristics in an integrated model of the decision. The results imply that the benefits of split positions may be firm specific, that split positions are only appropriate for some firms, and that a net benefit will not be captured by all firms that simply enact a policy of split positions independent of their fundamental characteristics.
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    An empirical examination of price behavior on the Hong Kong stock market
    Guo, Enyang (Virginia Tech, 1990-07-18)
    This dissertation examines stock price behavior on the Hong Kong stock market in terms of normality of returns and the efficiency of that market. The results reveal that the Hong Kong stock market is efficient, although the degree of efficiency is somewhat different from what has been found for securities traded in the U.S. market. Moreover, it was found that as a small but active stock market, the Hong Kong market is sensitive and highly vulnerable to international events. The study also analyzes the relationship among different national equity markets, i.e., the U.S., the U.K., Japan, and Hong Kong. The results show that a substantial amount of multi-lateral interaction is present among national equity markets. In addition, some common seasonal patterns of stock price movements appear across the different national markets, and innovation transmissions from market to market are significant and efficient. The study provides added support to the hypothesis of an integrated world financial market.
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    An empirical investigation of high end-of-day transaction returns between 1978-1985
    Gosnell, Thomas Francis (Virginia Polytechnic Institute and State University, 1987)
    Using a random sample of transactions data from the time period of September 1, 1978 through August 31, 1985, the high end-of-day transaction returns noted by Wood, Mclnish and Ord and by Harris were examined to determine their persistence over time and their relationship to a commonly used measure of daily security performance. Additionally, final transactions were classified by type of price change-reversal or continuation-in order to document whether the high end-of-day returns are the result of security price appreciation or the result of increases in transactions at the ask price. New information provided by this study can be summarized as follows: 1. The end-of-day anomaly persisted over the time period of the study and appeared to be strongest in the last three years. 2. A Friday effect was found in that the mean return to the final transaction on Friday was at least as great or greater than the mean final transaction returns on the other days of the week. 3. A relationship was found to exist between CRSP excess return level (good day/bad day) and the final transaction return, and there was evidence that the final transaction may have had a large impact on the CRSP excess return. 4. Reversals are more frequent than continuations on the final trade, particularly after 3:56pm, and the mean return to reversals is greater than the mean return to continuations.
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    An empirical study of equity repurchase decisions and market reaction
    Shao, John Jianping (Virginia Tech, 1991)
    This study is an empirical investigation of the managements’ motivations behind corporate equity repurchases in the open market, via private repurchase, or through self tender offer. The hypotheses concerning motivations for stock repurchases investigated in this dissertation include (1) signalling undervaluation of stock prices; (2) free cash flows; and (3) increasing leverage. A series of statistical analysis and tests are conducted against the empirical implications concerning the three decision variables in a repurchase decision process: (1) whether to repurchase; (2) what method (self tender, open market, and private repurchase) to use; and (3) the size and the price of repurchase under each motivational hypothesis, using the sample of all repurchases announced from January, 1986 through April, 1989. The motivational proxies are (1) the percentage changes of the median (and mean) earnings forecasts in the first, second, third months after the announcement of a repurchase program from the month prior to the repurchase for signalling hypothesis; (2) Tobin’s Q, the ratio of a firm’s total market value to the market-value replacement costs of its assets, based on the Lindenburg-Ross Algorithm for the free cash flow hypothesis (another measure is also used in this dissertation, that is, the net cash flow after taxes and dividends relative to the market value of a firm’s common stock); arid (3) the market-value based debt-equity ratios for the increasing leverage hypothesis. The empirical portion of this study is composed of four sections: (1) a comparison study of subsamples of repurchases with their control samples of non-repurchasing firms constructed by the criteria of data availability in both the /B/E/S and the COMPUSTAT database, three-digit industry code, and the market value of common stocks; (2) a comparison study of the three repurchasing methods; (3) the determination of the terms of repurchases; and (4) the market reaction to the announcement of repurchase and its relationship with the motivational proxies. The major conclusions of this study are as follows: 1. The signalling hypothesis is supported for the sample of open market repurchases which occurred over the 1987 crash period (from October 19 to November 9, 1987). 2. The free cash flow hypothesis is supported for the sample of ordinary open market repurchases which occurred outside the 1987 crash period. 3. None of the three motivations investigated in this study is supported for the sample of private repurchases. 4. The results are not conclusive for the sample of self tender offers, though the signalling hypothesis and the free cash flow hypothesis are not rejected.
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    An Examination of Seasoned Equity Offer Placement Effort
    Altınkılıç, Oya (Virginia Tech, 2001-04-19)
    Altınkılıç and Hansen (2000) show that underwriter spreads in seasoned equity offerings (SEOs) overwhelmingly reflect variable costs. This research attempts to begin filling the gap created by this result, as to what are the important constituents of the variable costs. In particular, I investigate the hypothesis that an important part of underwriter compensation is partial payment for anticipated market making activities in the secondary market, once the offer begins. I show that lead underwriter market making activities following an SEO are partly paid through the spread. The lower bound cost estimates show that the spreads for firms likely to require the most market making services are on average 100 basis points higher than those requiring the least services. On average, the compensation for market making activities amounts to 20% of the lead underwriter's total compensation. The results are robust to several considerations.
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    An examination of tax and agency costs rationales for long-term leasing
    Torregrosa, Paul T. (Virginia Polytechnic Institute and State University, 1988)
    The focus of this dissertation is on tax and agency costs rationales for the use of long term leases. While much attention has been given to the valuation effects of debt and equity financing, the literature is surprisingly scant on the valuation effects of lease financing. This research develops a model that demonstrates that lease contracts can create wealth in two ways: one, by partially alleviating the Myers' underinvestment problem created by the issuance of risky debt and the other, by effectively transferring tax shields from low income lessees to high income lessors. The implications of the model are formulated into testable hypotheses which are empirically tested in both financial leases and sale and leaseback transactions. Several new empirical findings are reported in the study. Evidence presented indicates that the market reacts favorably to lease announcements by lessees involved in either sale and leaseback transactions or financial leases. No general conclusions could be drawn for the valuation impact for lessors. In addition, the results suggest that tax motives are of primary importance in explaining the use of lease financing. However, the agency cost rationale is not confirmed by the data.
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    Industry characteristics, agency theory, and the interaction of capital structure and dividend policy
    Noronha, Gregory Mario (Virginia Tech, 1990)
    The literature on agency theory has generally modelled and tested the firm’s dividend and capital structure decisions separately. In this dissertation, a model is developed based on agency cost considerations and dividends as a means of controlling equity agency costs, which simultaneously determines the optimal capital structure and payout rate for firms. However, to the extent that alternative, non-dividend mechanisms exist across industries and industry groups that may either diminish or nullify the effect of dividends in controlling equity agency costs, simultaneity is not predicted to be universal but a function of industry characteristics. This central hypothesis is tested on three industry groups: industrial firms, banks and electric utilities. Banks and utilities are regulated. Industrials are not regulated but are subject to other equity agency cost controlling mechanisms like the threat of takeover and incentive-based compensation packages. As hypothesized, the results for industrials show no simultaneity in the subsample where these other mechanisms are present, and simultaneity in the subsample where dividends are the dominant mechanism. For banks and utilities no simultaneity is found since regulation, through its effect on the debt agency cost curve of firms in these industries effectively precludes its occurrence.
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    Interactions of investment opportunities and financing decisions
    Sarin, Atulya (Virginia Tech, 1992)
    This study examines how the investment opportunity set of the firm affects financing choices the firm makes. In a two-period, one decision, no-tax model, we show that firms characterized by a high level of investment opportunities in future periods issue equity and convertible securities while firms with fewer investment opportunities in future periods issue straight debt. Our empirical design improves upon previous studies in two important ways. First, we treat convertible debt separately from straight debt. Second, in addition to examining the correlation between investment opportunity and debt-asset ratios, we examine the incremental financing decision using discrete choice analysis. We find that the level of investment opportunities of firms making public issues of equity and convertible debt are higher than those issuing straight debt. Also, there is a negative correlation between investment opportunities and debt-asset ratios. We interpret these results to mean that investment opportunities are an important determinant of the firm’s financing policy. The direction of this relationship is the same as that predicted by the tax models of DeAngelo and Masulis (1980) and Dotan and Ravid (1985), and agency models of Myers (1977), Jensen (1986) and Stulz (1990).
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    Internal Control Mechanisms and Forced CEO Turnover: An Empirical Investigation
    Jagannathan, Murali (Virginia Tech, 1996-02-23)
    The dissertation empirically examines the efficacy of internal control mechanisms by analyzing 94 forced turnovers of chief executive officers (CEOs). It seeks to answer two primary questions: One, do governance-related characteristics influence the promptness with which poorly-performing CEOs are removed from office; and two, are removals of CEOs followed by changes in internal control mechanisms? The results suggest that poorly performing managers are removed more quickly in firms that have a larger percentage of independent outside directors on their board, that have higher equity ownership by the non-CEO directors and lower equity ownership by the CEO, and that separate the positions of CEO and chairperson. The results also suggest that the removal of the CEO provides both the opportunity and the incentive to alter internal governance systems. There is significant turnover of board members and the new boards generally have a higher fraction of independent outside directors and are more likely to separate the positions of CEO and chairperson. In addition, the sensitivity of CEO compensation to firm performance increases significantly following turnover. These post-turnover improvements in monitoring and incentive schemes are more significant in those firms that require a crisis in the product and/or capital market before they remove their CEOs. However, there is no evidence of short-term improvement in operating performance following changes in CEOs and governance systems. Overall, the results suggest that board and ownership characteristics do influence the effectiveness of internal monitoring systems and that CEO turnover is associated with broad changes in monitoring and incentive systems.
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    An investigation of the acquisition process in the market for corporate control
    Sen, Nilanjan (Virginia Tech, 1990)
    The dissertation explores the determinants of the choice between friendly mergers and hostile tender offers as alternative acquisition methods in the market for corporate control. The theoretical model focuses on the target management's firm specific human capital as a primary determinant of the choice. The model predicts that firm characteristics like low insider holdings and high debt, indicating the presence of incumbent management's firm specific human capital, increase the likelihood of a friendly merger as opposed to a hostile tender offer. Other firm characteristics that influence the choice of acquisition method emerge from Jensen's (1986) free cash flow theory. The empirical testing of the hypotheses uses state-based sampling and conditional maximum likelihood estimation of logit models. The results provide strong evidence in support of the theoretical model developed in the dissertation and Jensen’s free cash flow theory.
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    An investigation of the effects of organizational factors and personal characteristics on top executives perceiving a strategic issue as an opportunity or a threat
    Amann, Robert J. (Virginia Polytechnic Institute and State University, 1985)
    The strategic management literature makes frequent references to the need for directing the firm's responses to perceived opportunities or threats in the environment. The purpose of this study is to determine if the top executives from different firms view an important environmental development differently, in terms of it being an opportunity or threat, and, if so, do these perceptions relate to organizational factors and to personal characteristics of the top executive? A model is proposed and includes organizational strategy, organizational structure, executive locus of control and behavioral response repertoire. Fourteen operational hypotheses are formulated. Thirty-six top executives of firms in the metalworking machinery and equipment industry are polled for their opinions of flexible manufacturing systems (PMS) developments. PMS refers to technology that is only now becoming available and consists of the integration of computer facilities and robotics mechanisms. Predecessors of PMS include numerically controlled machinery (NCM), computer aided design (CAD) and computer aided manufacturing (CAM). The effect of locus of control on PMS perceptions is not analyzed because of measurement problems. Correlation analyses reveal that organizational strategy, some aspects of organizational structure, and certain characteristics of the top executive are related to PMS perceptions at close-to-significant levels. Cluster analysis is applied to the data on strategy and structure to identify groups of firms on the basis of the similarity in their strategy-structure features. Executives' perceptions of PMS are compared across groups, and certain combinations of strategy type and structural characteristics relate to more opportunistic perceptions, although not at significant levels. The results of the statistical findings are discussed and an interpretation offered. Suggestions for future research on strategic issue perceptions are proposed.
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    Investment-Cash Flow Sensitivity Under Changing Information Asymmetry
    Chowdhury, Jaideep (Virginia Tech, 2011-07-12)
    Most studies of the investment-cash flow sensitivity hypothesis in the literature compare estimates of the sensitivity coefficients from cross sectional regressions across groups of firms classified into more or less financially constrained groups based on some measure of perceived financial constraint. These studies report conflicting results depending on the classification scheme used to stratify the sample. They have been criticized on conceptual and methodological grounds. In this study we mitigate some of these problems reported in the literature by using the insights from Cleary, Povel and Raith (2007) in a new research design. We test for the significances of the changes in the investment-cash flow sensitivity, in a time-series rather than cross sectional framework, for the same set of firms surrounding an exogenous shock to the firms' information asymmetry. The CPR (2007) model predicts an unambiguous increase (decrease) in investment-cash flow sensitivity when information asymmetry of the firm increases (decreases). Further, by examining the differences in the sensitivity coefficients we expect some of the biases in the coefficient from measurement errors in Q to cancel out. The two events we study are (i) the implementation of SOX which is expected to decrease information asymmetry from improved and increased disclosure and (ii) the deregulation of industries which is expected to increase information asymmetry largely from the lifting of price controls and entry barriers. We report that information asymmetry decreases following SOX and that there is a commensurate decrease in the investment-cash flow sensitivity, pre- to post SOX. The hypothesis that a greater change in investment cash flow sensitivity is associated with a greater change in information asymmetry is only weakly supported by the data. We also report that information asymmetry increases following deregulation with a commensurate increase in investment cash flow sensitivity, pre to post deregulation. The hypothesis of a greater increase in the sensitivity for subsamples with a greater increase in information asymmetry is not supported by the data. Overall, however, the study supports the investment-cash flow sensitivity hypothesis using a research design that corrects for some of the problems identified in the existing literature on the hypothesis.
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    The leverage changing consequences of convertible debt financing
    Janjigian, Vahan (Virginia Polytechnic Institute and State University, 1985)
    Dann and Mikkelson (1984) report that the common stockholders of firms issuing convertible debt realize significantly negative returns upon the announcement of such financing. They further state that this observation is not consistent with the leverage hypothesis nor with the new financing models of Myers and Majluf (1984) and Miller and Rock (1982). This study also documents negative returns to the stockholders of convertible debt issuing firms on the announcement date. However, Dann and Mikkelson's assumption that the issuance of convertible debt increases financial leverage is questioned. A new convertible bond valuation model is proposed which valuates a convertible bond as the sum of its market perceived equity and straight debt components. Convertible bond rates of return are regressed on common stock and straight debt rates of return to demonstrate that convertible bonds have a large and significant equity component; often large enough to cause leverage decreasing changes to the issuing firm's capital structure. Furthermore, the perceived change in leverage is shown to be significant in explaining the announcement period excess returns realized by the stockholders of convertible issuing firms. In this way, negative announcement period excess returns are shown to be consistent with the leverage hypothesis. In addition, the results support the new financing model developed by Myers and Majluf.