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Lecture 2 Spring 2019.pptx
Lecture_2_Spring_2019.pptx
Showing 39-49 out of 49
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 posive 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 rao (Debt/Market Value of Assets) has been about
0.32
This remarkable stability in leverage across various tax regimes,
economic condions, 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
leverage
Median industry leverage
Tangibility of assets: ((Inventory+ PP&E)/Book Asset)
Firm size (log of book assets)
Expected inflaon
Market-to-book rao
Profits (ROA)
Page 47
Leverage Data in WRDS
Go to WRDS and access CRSP -> CRSP/Compustat merged database -> Fundamentals
Annual
Download data for all firms in year 2016. Key variables:
AT – Assets – Total
DLTT – Long Term Debt – Total
DLC – Debt in Current Liabilies – Total
CSHO – Common Shares Outstanding
PRCC_F – Price Close Annual Fiscal
INVT – Inventories – Total
PPENT – PP&E Total (Net)
Use condional statement builder to restrict (AT>0 and PRCC_F >0)
Page 48
Discussion of Research Articles...
(me perming)
Page 49
Homework 1 due in 2 weeks
All instrucons on Blackboard
Email me if any quesons!
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