Sunday, Jan. 8, 2017 10:15 AM – 12:15 PM
Sheraton Grand Chicago, Sheraton Ballroom III
- Chair: Mark Leary, Washington University-St. Louis
Corporate Capital Structure Actions
AbstractExisting empirical models of corporate leverage do a good job of predicting the cross section pattern of debt and equity repurchases. However, they do a poor job predicting debt and equity issuing. To improve the performance we use a large number of macroeconomic variables in reduced rank regression to estimate leverage targets based on firm-specific sensitivities to four common factors. This model gets the correct cross section patterns of issuing and repurchasing. The four factors load heavily on asset tangibility, taxation, corporate overhead, and volatility. The model performs particularly well for larger, profitable, and dividend paying firms. Smaller, high growth, and technology firms are
not as well predicted by the model.
Financing Intangible Capital
AbstractFirms finance intangible investment through employee compensation contracts. In a dynamic model in which intangible capital is embodied in a firm's employees, we analyze the firm's optimal decisions of intangible capital investment, employee compensation contracts, and financial leverage. Employee financing is achieved by delaying wage payments in the form of future claims. We document that intangible capital investment is highly correlated with employee financing, but not with debt issuance or regular equity refinancing. In the quantitative analysis, we show that this new channel of employee financing explains the cross-industry differences in leverage and financing patterns.
Understanding Precautionary Cash at Home and Abroad
AbstractIn the presence of market frictions, it is optimal for firms to stockpile cash to fund investment projects which may arise in the future. Prior work has documented that firm’s precautionary savings motives predict variation in the size of firm’s cash stockpile. The dramatic run up in cash stockpiles raises the question of why these precautionary motives have increased. In the presence of repatriation taxes, foreign and domestic cash are imperfect substitutes. We show that although precautionary motives explain variation in the level of cash held domestically, they provide little explanatory power for the level of foreign cash. Multinational firm’s foreign cash balances are instead explained by low foreign tax rates and the ability to transfer profits within the firm through related party sales. The firms with the greatest incentive and ability to transfer income to low tax jurisdictions do, and this results in stockpiles of cash trapped in their foreign subsidiaries.
University of Southern California
Arizona State University
- G3 - Corporate Finance and Governance