Lecture 2 Spring 2019.pptx-FINA6278 LECT...
Lecture_2_Spring_2019.pptx-FINA6278 LECTURE 2 – CORPORATE LEVERAGE
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Lecture 2 Spring 2019.pptx-FINA6278 LECTURE 2 – CO...
Lecture_2_Spring_2019.pptx-FINA6278 LECTURE 2 – CORPORATE LEVERAGE
Lecture 2 Spring 2019.pptx-FINA6278...
Lecture_2_Spring_2019.pptx-FINA6278 LECTURE 2 – CORPORATE LEVERAGE
Page 39
Agency Problems and Debt
However, this also implies that debt may handcuff
managers from engaging in some value-enhancing projects
as well
Since not all cash flows can be reinvested in order to pay the debt
interest, some NPV posive projects may have to be foregone.
Loss of flexibility for the manager
Debt may crowd out good investments

Page 40
Empirical Evidence

Page 41
Stylized Fact #1
Corporate leverage is remarkably stable over long periods
of me (Frank and Goyal, 2008)

Page 42
Stylized Fact #2
Leverage rao (Debt/Market Value of Assets) has been about
This remarkable stability in leverage across various tax regimes,
economic condions, job outlooks, etc poses a big challenge to
both pecking-order and trade-off theory of debt
Why doesn’t leverage fluctuate when these other factors change?

Page 44
Small versus large firms
Small public firms seem to rely on equity issuance more
than large firms
Large public firms rely more on debt issuances to fill
investment needs
Large public firms tend to be more profitable
Is this consistent with pecking order theory?

Page 46
Factors that affect a firm’s
Median industry leverage
Tangibility of assets: ((Inventory+ PP&E)/Book Asset)
Firm size (log of book assets)
Expected inflaon
Market-to-book rao
Profits (ROA)

Page 47
Leverage Data in WRDS
Go to WRDS and access CRSP -> CRSP/Compustat merged database -> Fundamentals
Download data for all firms in year 2016. Key variables:
AT – Assets – Total
DLTT – Long Term Debt – Total
DLC – Debt in Current Liabilies – Total
CSHO – Common Shares Outstanding
PRCC_F – Price Close Annual Fiscal
INVT – Inventories – Total
PPENT – PP&E Total (Net)
Use condional statement builder to restrict (AT>0 and PRCC_F >0)

Page 48
Discussion of Research Articles...
(me perming)

Page 49
Homework 1 due in 2 weeks
All instrucons on Blackboard
Email me if any quesons!

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