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  5. Corporate Finance: Capital Structure and Payout Policy
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Corporate Finance: Capital Structure and Payout Policy

Paper Session

Saturday, Jan. 6, 2024 10:15 AM - 12:15 PM (CST)

Marriott Rivercenter, Grand Ballroom Salon B
Hosted By: American Finance Association
  • Chair: Efraim Benmelech, Northwestern University

Modeling Managers As EPS Maximizers

Itzhak Ben-David
,
Ohio State University
Alexander Chinco
,
CUNY-Baruch College

Abstract

Textbook theory assumes that firm managers maximize the net present value of future cash flows. But when you ask them, the people running large public corporations say that they are maximizing something else entirely: earnings per share (EPS). Perhaps this is a mistake. No matter. We take managers at their word and show that EPS maximization provides a single unified explanation for a wide range of corporate policies such as leverage, share issuance and repurchases, M&A payment method, cash accumulation, and capital budgeting.

Managing Recession Risk

Ali Kakhbod
,
University of California-Berkeley
Dmitry Livdan
,
University of California-Berkeley
A. Max Reppen
,
Boston University
Tarik Umar
,
Rice University

Abstract

We develop a model with varying recession risk and find that the precautionary
actions of large firms “before the storm” are more sensitive to these changes. Smaller
firms take precautionary steps when recession risk is low to protect their attractive
investment program. Otherwise, investment decreases cash and increases liquidation
risk in a recession. By contrast, large firms postpone precautionary actions since they
invest at lower rates, allowing cash to accumulate. However, when a recession be-
comes more likely, large firms have less time to accumulate cash, so they cannot delay
precautionary measures. We provide empirical evidence to support these predictions.

Debt Maturity and Commitment

Andrea Gamba
,
University of Warwick
Alessio Saretto
,
Federal Reserve Bank of Dallas

Abstract

If firms can issue debt only at discrete dates, as opposed to on a continuous- time basis, debt maturity is an effective device against the commitment problem on future debt issuances that leads to leverage ratcheting in equilibrium. With a shorter debt maturity, leverage becomes less persistent because its upward adjustments are faster and its long-run level lower, which increases the value of future debt dynamics. A shorter maturity also alleviates the underinvestment problem by increasing the ex ante value of installed capital. In a decomposition of the credit spread consistent with equilibrium, we show that the component due to the commitment problem on future debt issuances is sizeable when leverage and default risk are low, and it is reduced by a shorter maturity.

Discussant(s)
Yaron Levi
,
University of Southern California
Juliana Salomao
,
University of Minnesota
Yunzhi Hu
,
University of North Carolina-Chapel Hill
JEL Classifications
  • G3 - Corporate Finance and Governance