Irrelevance, Capital Structure and Interactions

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A Reading List:
A. Capital Structure:
Baxter, N.D. "Leverage, the Risk of Ruin and the Cost of Capital"

Journal of Finance, September 1967, 395 - 403.
Diamond and He, “A Theory of Debt Maturity: The Long and Short of Debt Overhang,” September 2010.
Givoly, D. C. Hayn A. Ofer and O. Sarig "Taxes and Capital Structure -Evidence from Firms' Responses to the Tax Reform Act of 1986" The Review of Financial Studies,1992, #2 331-353.
Grossman, S. and J. Stiglitz, "Stockholder Unanimity in Making Production and Financial Decisions," Quarterly Journal of Economics, May 1980, 44, 543-566.
Hennesey, C. And T. Whited , “Debt Dynamics” ,2005, Journal of Finance 60, 1129–1165.

Holmstrom, B. "Moral Hazard and Observability," Bell Journal of Economics, Spring 1979, 10, 74-91.
Hermalin, B. E. (2005), Trends in Corporate Governance. The Journal of Finance, 60: 2351–2384
Jensen, M. and W. Meckling, "Theory of the Firm: Managerial Behavior, Agency Costs, and Ownership Structure," Journal of Financial Economics, October 1976, 3, 305-360.
Jensen, M., "Agency Costs of Free Cash Flow, Corporate Finance, and Takeovers," American Economic Review, May 1986, 76, 323-329.
Kayhan, A. And S. Titman: AFirms= Histories and their Capital Structure@ Journal of Financial Economics,
Kraus, A. and R. Litzenberger " State Preference Model of Optimal Financial Leverage" Journal of Finance, September 1973, 911-922.
Leary, Mark T., and Michael R. Roberts, 2005, Do firms rebalance their capital structure, Journal

of Finance 60, 2575–2619.
Leland, Hayne E., 1998, Agency costs, risk management, and capital structure, Journal of Finance

53, 1213–1243.

Lemmon, M. M. Roberts and J. Zender : “Back to the Beginning- persistence and the Cross Section of Corporate Capital Structure”, Working paper, the Wharton School.
Masulis, R., 1983, The Impact of Capital Structure Change on Firm Value, Some Estimates,

Journal of Finance 38:1, 107-126.
McDonald, R. “Corporate Financial Policy When there are Tax Intermediating Dealers@ Working paper, Northwestern University, presented in the WFA 2004.
Miller, M., "Debt and Taxes," Journal of Finance, June 1977, 32, 261-276.
Modigliani, F. and M. Miller "The Cost of Capital, Corporation Finance and the Theory of Investment" American Economic Review, June 1958, 261-297.
Modigliani, F. and M. Miller "Corporate Income Taxes and the Cost of Capital" American Economic Review,June 1963, 433-443. Myers, S.C. "The Capital Structure Puzzle" Journal of Finance, July 1984, 575-592.
Myers, S.C. "Determinants of Corporate Borrowing" Journal of Financial Economics, November 1977,147-176.
Rajan, R. and L. Zingales : A What do we know about Capital Structure: Some Evidence from International Data@ Journal of Finance, 50(5) 1995, pp. 1421-1460.
Stiglitz, J., "On the Irrelevance of Corporate Financial Policy," American Economic Review, December 1974, 64, 851-866.
Sterbulaev, I.A. ADo Tests of Capital Structure Mean what they say? A Working paper, London Business School, presented at the WFA, 2004.
Sweeney, R.J., A. Warga and D. Winters "The Market Value of Debt, Market Vs. Book Value of Debt, and Returns to Assets" Financial Management, vol. 26, Spring 1997.
Titman, S. and R. Wessels AThe Determinants of Capital Structure@ Journal of Finance, 43(3) 1988, pp. 1-19.
Van Birsengen, J. J. Graham and J. Yang: "The Cost of Debt" Journal of Finance, December 2010, pp. 2089-2136.
Welch, I. AColumbus Egg: Stock Returns are the Real Determinant of Capital Structure@ Journal of Political Economy, 2004

B. Interactions
Myers,S.C.(1974)"Interaction of Corporate Financing and Investment Decisions-Implications for Capital Budgeting" Journal of Finance March, pp.1-25
Allen, F.(1987) "Capital Structure and Imperfect Competition in Product Markets" Discussion paper, University of Pennsylvania.
Brander, J. and T.R. Lewis(1986) "Oligopoly and Financial Structure: the Limited Liability Effect" American Economic Review December,pp.956-970.
Brander, J. and B. Spencer (1987) "Moral Hazard, Output Decisions and Financial Structure:Pure Competition and Monopoly" working paper, UBC.
Chevalier, J, A. :(1995a) Do LBO Supermarkets Charge More? An Empirical Analysis of the Effects of LBOs on Supermarket Pricing Journal of Finance; 50(4), September, pages 1095 1112.
Chevalier, J, A. :(1995b) Capital Structure and Product Market Competition: An Empirical Study of Supermarket LBO's American Economic Review; 85,June, pp. 415-435.
Clayton, M. and S. A. Ravid AThe impact of leverage on bidding - theory and evidence from the FCC auctions@ Review of Financial Studies, Fall 2002
Dammon, R. and L. Senbet(1988) "The Effects of Taxes on the Interaction between Production and Finance" Journal of Finance,June,pp.357-374
De-Angelo, H. and R.W. Masulis(1980) "Optimal Capital Structure Under Corporate and Personal Taxation"Journal of Financial Economics March,pp.3-29
Dotan, A. and S.A.Ravid(1985) "On the Interaction of Real and Financial Decisions of the Firm Under Uncertainty" Journal of Finance,June,pp.501-517.
Hite,G.L.(1979) "Leverage,Output Effects and the M-M Theorems",Journal of Financial Economics,March, pp.177-202
Parrino, R. and M.J. Weisbach AMeasuring Investment Distortions Arising from Stock-holder Bond-holder conflicts@ Journal of Financial Economics, Vol. 53 #1 July 1999.
Phillips, G.M. (1995) "Increased Debt and Industry Product Markets- An Empirical Analysis"

Journal of Financial Economics, 37, pp. 189-238.
Ravid, S.A. (1987) "Safety First, Bankruptcy and the Pricing and Investment Decisions of Firms", Economic Inquiry,October pp.695-706.

Ravid, S.A. (1988) "On Interactions between Production and Financial Decisions", Financial Management,Fall pp.87-99.

Ravid, S.A. and M. Spiegel "Renegotiation Proof Equilibria and Irrelevance Propositions" working paper, Columbia University, 1991.
Sarig,O.(1987) "Bargaining with a Corporation and the Choice of Capital Structure" working paper, Columbia University.
Spiegel, Y and D. Spulber "Capital Structure with Countervailing Incentives" Rand Journal of Economics, Spring 1997, Vol. 28.
Titman, S.(1984) "The Effect of Capital Structure on the Firm Liquidation Decision" Journal of Financial Economics,March, 13,#1,pp.137-152.
D: Game Theory.
Banks, J. and J. Sobel, "Equilibrium Selection in Signaling Games," Econometrica, May 1987, 55, 647-661.
Cho, I. and D. Kreps, "Signaling Games and Stable Equilibria," Quarterly Journal of Economics, May 1987, 179-221.
McAfee, J. and J. Mcmillan "Auctions and Bidding" Journal of Economic Literature, June 1987, 25, pp. 699 -738.
Milgrom, P. "Auctions and Bidding: A Primer" The Journal of Economic Perspectives, Summer 1989, vol.3 #3.
Riley, J. and W. Samuelson "Optimal Auctions" American Economic Review, June 1981, pp.381 -392.
Thakor, A., "Game Theory in Finance," Financial Management, Spring 1991, 71-94.
Osborne, M.J. and A.Rubinstein, Bargaining and Markets Academic Press,1990.
Rasmusen, E. Games and Information, Blackwell Publishing, 4th edition, 2007.
Tirole, J. "The Theory of Industrial Organization" MIT Press,1990.

E: Debt as a Signal in Models With Asymmetric Information.
Ross, S., "The Determination of Financial Structure: The Incentive Signalling Approach," Bell Journal of Economics, Spring 1977, 23-40.
Leland, H. and D. Pyle, "Information Asymmetries, Financial Structure, and Financial Intermediation," Journal of Finance, 32,1975 371-388.
Ravid, A., and O. Sarig "Financial Signalling by Committing to Cash Flows" Journal of Financial and Quantitative Analysis, June 1991, 165.

F. Debt Maturity and Structure.
Barnea, A. R. Haugen and L. Senbet "A Rationale for Debt Maturity Structure and Call provisions in the Agency Theory Framework" Journal of Finance, December 1980, 1223 -1243.
Barclay, M. and C. Smith "The Determinants of Corporate Debt Maturity Structure" Journal of Finance, 1994.
Brennan, M. and E. Schwartz "Corporate Income Taxes, Valuation and the Problem of Optimal Capital Structure" Journal of Business, January 1978, 103 -114.
Brick, I. and S.A. Ravid "On the Relevance of Debt Maturity Structure" Journal of Finance, December 1985, 1423-1437.
Brick, I.E. and S.A. Ravid "Interest Rate Uncertainty and the Optimal Debt Maturity Structure" Journal of Financial and Quantitative Analysis, March 1991, 63.
Bris, A. S. A. Ravid and R. Sverdlove: “Conflicts in Bankruptcy and the Sequence of Debt issuesWorking paper, presented at the AFA 2009.
Bris, Arturo, Ivo Welch, and Ning Zhu 2006, “The Costs of Bankruptcy: Chapter 7 Liquidation versus Chapter 11 Reorganization," Journal of Finance 61(3), 1253-1303.
Diamond, D. "Seniority and Maturity of Debt Contracts" Journal of Financial Economics, 33 1993, pp. 341-368.
Flannery, M. " Asymmetric Information and Risky Debt Maturity Choice" Journal of Finance, 41, March 1986.
Goswami, G. T. Noe and M. Rebello "Debt Financing under Asymmetric Information" Journal of Finance, June 1995 pp.633-659.
Guedes, J. and T. Opler " The Determinants of the Maturity of New Corporate Debt Issues ", Journal of Finance, 1995.
Hart, O and J. Moore: "A Theory of Debt Based Upon the Inalienability of Human Capital" Quarterly Journal of Economics, November 1994, pp.841-879.
Hart, O and J. Moore " Debt and Seniority: An Analysis of the Role of Hard Claims in Constraining Management" American Economic Review, June 1995, pp. 567-585
John, K. S. A. Ravid and N. Reisel, “The Notching Rule for Subordinated Debt and the Information Content of Debt Ratings" , Financial Management, volume 39, # 2, Summer 2010, pp. 489-514.
Kim, C. D, Mauer and M. Stohs "Corporate Debt Maturity Policy and Investor Tax Timing Options: Theory and Evidence" Financial Management, Spring 1995, vol.24 #1 p.33-45.
Leland, H. "Corporate Debt Value, Bond Covenants and Optimal Capital Structure" Journal of Finance, September 1994(a), pp. 1213-1251.
Leland, H. "Bond Prices, Yield Spreads and Optimal Capital Structure with Default Risk" Finance working paper # 240, Haas School of Business, University of California, Berkeley, November 1994(b).
Longstaff, F. and E. Schwartz "A simple approach to Valuing Risky Fixes and Floating Rate Debt" Journal of Finance, 1995, 50, #3 pp.789-820.
Morris, J. "On Corporate Debt Maturity Strategies" Journal of Finance,March 1976(a), 29-37.
G. Agency Theory, Incomplete Contracting, and Corporate Governance
1. Ross, S.A., "The Economic Theory of Agency: The Principal's Problem," American Economic Review, LXII, May 1973, 134-139.
2. Holmstrom, Bengt (1979). "Moral Hazard and Observability," Bell Journal of Economics 10, 74-91.
3. Jensen, Michael C. and William H. Meckling (1976). "Theory of the Firm: Managerial Behavior, Agency Cost and Ownership Structure," Journal of Financial Economics 3, 305-360.
4. Myers, S.C., "Determinants of Corporate Borrowing," Journal of Financial Economics, November 1977, 147-175.
5. Smith and Warner, "On Financial Contracting: An Analysis of Bond Covenants," Journal of Financial Economics, June 1979, 117-161.
6. John and Kalay, "Costly Contracting and Optimal Payout Constraints," Journal of Finance, May 1982, 457-470.
7. Green, Richard C. (1984). "Investment Incentives, Debt and Warrants," Journal of Financial Economics 13, 115-136.

8. T. A. John and K. John, "Top Management Compensation and Capital Structure", Journal of Finance, July 1993.

9. Elazar Berkovitch and Ronen Israel, "The Design of Internal Control and Capital Structure," The Review of Financial Studies, Spring 1996, 209-240.
10. Acharya, John and Sundaram, “On the Optimality of Resetting Executive Stock Options, Journal of Financial Economics, July 2000, 65-101.( Download from Kose John’s website).
11. Park, C.,” Monitoring and Structure of Debt Contracts,” Journal of Finance, Oct 2000, 2157-2195.

  1. John, K. and S. Kedia "Design of Corporate Governance: Role of Ownership Structure, Takeovers, Bank Debt and Large Shareholder Monitoring," NYU Working Paper, 1997.

  1. John, K. and S. Kedia “Institutions, Markets and Growth: A Study of Comparative Corporate Governance”, NYU Working Paper, 2001.

Survey: Harris and Raviv, "The Theory of Capital Structure," The Journal of Finance, March 1991, 297-353.
Survey: F. Allen and A. Winton, "Corporate Financial Structure, Incentives and Optimal Contracting," In Handbooks in Operations Research and Management Science, Volume 9: Finance, eds. R.A. Jarrow, V. Maksimovic, and W.T. Ziemba, North Holland, New York.
Survey: Kose John and Lemma W. Senbet, "Corporate Governance and Board Effectiveness," Journal of Banking and Finance, 22 (1998), 371-403.
Survey: Andrei Shleifer and Robert W. Vishny, "A Survey of Corporate Governance," Journal of Finance, June 1997, 737-783.
E1. Rafael La Porta, Florencio Lopez-de-Silanes, Andrei Shleifer, and Robert W. Vishny, "Legal Determinants of External Finance," Journal of Finance, July 1997, 1131-1150.
E2. Comment, R., and G.A. Jarrell, 1995, "Corporate Focus and Stock Returns," Journal of Financial Economics 37, 67-87.
E3. John, K., and E. Ofek, 1995, "Asset Sales and Increase in Focus," Journal of Financial Economics 37, 105-126.
E4. Lang, H.P., and R.E. Stulz, 1994, "Tobin's Q, Corporate Diversification and Firm Performance," Journal of Political Economics 102,1248-1280
E5. Berger, Philip G. and Eli Ofek, "Diversification's Effect on Firm Value," Journal of Financial Economics, (1995) vol. 37, 39-65.
E6. Denis, David J. Diane K. Denis and Atulya Sarin, "Agency Problems, Equity Ownership, and Corporate Diversification," Journal of Finance, March 1997, 52, 135-160.
E7. Sheridan Titman and Roberto Wessels, 1988, "The Determinants of Capital Structure Choice," Journal of Finance, 43,1-19.
E8. Raghuram G. Rajan and Luigi Zingales, "What Do We Know About Capital Structure? Some Evidence From International Data," Journal of Finance, December 1995, 1421-1460.
E9. Berger and Ofek, “Causes and Effects of Corporate Refocusing,” The Review of Financial Studies, Summer 1999, 311-346.
E10. Harvey, C. and J. Graham, “The Theory and Practice of Corporate Finance: Evidence from the Field," with John Graham, Journal of Financial Economics 2001, 60, 187-243

H. Incomplete Information Games/Signalling
1. Spence, M., "Job Market Signaling," Quraterly Journal of Economics, August 1973,355-379.
2. Riley, J.G., "Information Equilibrium," Econometrica 47, March 1979,

3. Ross, S.A., "The Determination of Financial Structure: The Incentive Signaling Approach," Bell Journal of Economics, Spring 1977, 23-40.

4. Leland and Pyle, "Informational Asymmetries, Financial Structure and

Financial Intermediation," Journal of Finance, May 1977, 371-387.

5. Myers, Stewart C. and Nicholas S. Majluf (1984). "Corporate Financing and Investment Decisions When Firms Have Information That Investors Do Not Have," Journal of Financial Economics 13, 187-221.
6. John and Williams, "Dividends, Dilution and Taxes: A Signaling

Equilibrium," Journal of Finance, September 1985.

7. Miller, M. and K. Rock, "Dividend Policy Under Asymmetric Information," Journal of Finance, September 1985.
8. Brennan, Michael and Alan Kraus (1987). "Efficient Financing Under

Asymmetric Information," Journal of Finance 42, 1225-1243.

9. Ambarish, John and Williams, "Efficient Signaling with Dividends and Investment," Journal of Finance, June 1987, 321-343.
Background: Mas-Colell, Whinston and Green, Chapter 13.
Survey: Riley, J. G. “Silver Signals: Twenty-Five Years of Screening and Signaling,” Journal of Economic Literature, Vol 39,June 2001, 432-478.
Survey: Smith, C., Jr. "Investment Banking and the Capital Acquisition

Process," Journal of Financial Economics, January-February 1986, 3-30.

E1. Pyung Sig Yoon and Laura T. Starks, "Signaling Investment Opportunities, and Dividend Announcements," The Review of Financial Studies, Winter 1995,


E2. Masulis, R., "The Effects of Capital Structure Change on Security

Prices: A Study of Exchange Offers," Journal of Financial Economics,

June 1980, 139-178.
E3. Masulis, R., and A. Korwar, "Seasoned Equity Offerings: An Empirical

Investigation," Journal of Financial Economics, January-February

1986, 91-118.

E4. Asquith, P., and D. Mullins, Jr., "The Impact of Initiating Dividend

Payments on Shareholders' Wealth," Journal of Business, January 1983,


E5. Vermaelen T., "Common Stock Repurchases and Market Signa ling: An

Empirical Study," Journal of Financial Economics, June 1981, 139-183

I. Reputation in Financial Markets

1. John and Nachman, "Risky Debt, Investment Incentives and Reputation

in a Sequential Equilibrium," Journal of Finance, July 1985.
2. Diamond D., "Reputation Acquisition in Debt Markets," Journal of Political Economy, 1989, 828-862.
3. Thomas J. Chemmanur and Paolo Fulghieri, "Investment Bank Reputation, Information Production, and Financial Intermediation," Journal of Finance, March 1994, 57-79.

Morris, J. "A Model for Corporate Debt Maturity Decisions" Journal of Financial and Quantitative Analysis , September 1976(b), 339-355.
Morris, J. " Factors Affecting the Maturity Structure of Corporate Debt"

Working paper, University of Colorado at Denver, January 1992.

Ravid, S.A. "On Debt Maturity and Other Contractual Provisions" - October 1996, Financial Markets Institutions and Instruments (an entire monograph issue).
Rauh, J. and A. Sufi, 2010, “Capital Structure and Debt Structure" Review of Financial Studies, December, pp. 4241-4280.
Stohs, M. and D. Mauer (1995) "The Determinants of Corporate Debt Maturity Structure" forthcoming, Journal of Business.
Welch, Ivo, 1997, “Why is Bank Debt Senior? A Theory of Asymmetry and Claim Priority Based on Influence Costs," Review of Financial Studies, 10, 1203-1236.

G: Debt Policy Without Signalling in Models With Asymmetric Information.

Myers, S. and N. Majluf, "Corporate Financing and Investment Decisions When Firms Have Information that Investors Do Not Have," Journal of Financial Economics, June 1984,187-221.
Heinkel, R. and J. Zechner, "The Role of Debt and Preferred Stock as a Solution to Adverse Investment Incentives," Journal of Financial and Quantitative Analysis, 1990, 25, 1-24.
H. Dividends.
Modigliani, F. and M. Miller " Dividend Policy, Growth and the Valuation of Shares" Journal of Business, October 1961, 411-433.
Benartzi, S. Micahely, R. and Thaler, R.H. ADo Changes in Dividends Signal the Future or the Past@ Journal of Finance, 52, July 1997, pp.1007-1034.
Bhattacharya, S., "Imperfect Information, Dividend Policy, and the 'Bird in the Hand' Fallacy," Bell Journal of Economics, Spring 1979, 259-270.
Grullon, G. R. Mihcaely and B. Swaminathan : AAre Dividend Changes a Sign of Firm Maturity? A Journal of Business, Vol. 75 #3 July, 2002, p.387-424.
John, K. and J. Williams, "Dividends, Dilution, and Taxes: A Signalling Equilibrium," Journal of Finance, September 1985, 40, 1053-1070.
Masulis, R. and B. Trueman, 1988, Corporate Investment and Dividend Decisions under

Differential Personal Taxation, Journal of Financial and Quantitative Analysis 23:4, 369-

Miller, M. and K. Rock, "Dividend Policy Under Asymmetric Information," Journal of Finance, September 1985, 40, 1031-1051.
Easterbrook, F., "Two Agency-Cost Explanations of Dividends," American Economic Review, September 1984, 74, 650-659.
Hedging and Risk Management:
Adam, T., S. Dasgupta and S. Titman, 2007, Financial Constraints, Competition and Hedging in Industry Equilibrium, Journal of Finance 62: 2445-2473
Adam. T., C. S. Fernando and J.S. Salas, 2010, Why Do Firms Hedge Selectively? Evidence from the Gold Mining Industry, Working Paper, University of Berlin, University of Oklahoma, and Lehigh University
Adam, Tim R. and Chitru S. Fernando, 2006, Hedging, Speculation, and Shareholder Value, Journal of Financial Economics 81, 283-309.
Allayannis, G. and J.P. Weston, 2001, The Use of Foreign Currency Derivatives and Firm Market Value, Review of Financial Studies 14: 243-276
Amihud, Y., and B. Lev, 1981, Risk reduction as a managerial motive for conglomerate mergers, The Bell Journal of Economics 12: 605-617
Brown, Gregory W., Peter R. Crabb, and David Haushalter, 2006, Are Firms Successful at Selective Hedging? Journal of Business 79, 2925–2949.
Chevalier, J., and G. Ellison, 1997, Risk Taking by Mutual Funds as a Response to Incentives, The Journal of Political Economy 105: 1167-1200
De Angelis, D. and R. Garcia, 2008, A Multirisk Approach to Measuring Corporate Hedging and its Determinants, Working Paper, Cornell University, EDHEC Nice
De Angelis, D. and S. Abraham Ravid, 2010, Hedging Policies, Incentives and Market Power, Working paper, Cornell University.
DeMarzo, P.M. and D. Duffie, 1995, Corporate incentives for hedging and hedge accounting, Review of Financial Studies 8: 743-771
Froot, K.A., D.S. Scharfstein and J.C. Stein, 1993, Risk Management: Coordinating Corporate Investment and Financing Policies, Journal of Finance 48: 1629-1658

Géczy, C., B.A. Minton and C. Schrand, 1997, Why Firms Use Currency Derivatives, Journal of Finance 52: 1323-1354

Géczy, C., B.A. Minton and C. Schrand, 2007, Taking a View: Corporate Speculation, Governance, and Compensation, Journal of Finance 62: 2405-2443
Graham, J.R. and C.W. Smith, 1999, Tax Incentives to Hedge, Journal of Finance 54: 2241-2261
Graham, J.R. and D.A. Rogers, 2002, Do Firms Hedge in Response to Tax Incentives?, Journal of Finance 57: 815-839
Haushalter, G.D., 2000, Financing Policy, Basis Risk, and Corporate Hedging: Evidence from Oil and Gas Producers, Journal of Finance 55: 107-152
Jin, Li, 2002, CEO compensation, diversification, and incentives, Journal of Financial Economics 66: 29-63
Mian, S.L., 1996, Evidence on Corporate Hedging Policy, Journal of Financial and Quantitative Analysis 31: 419-439
Nance, D.R., C.W. Smith and C.W. Smithson, 1993, On the Determinants of Corporate Hedging, Journal of Finance 48: 267-284
Ravid, S.A., and S. Basuroy, 2004, Managerial Objectives, the R-Rating Puzzle, and the Production of Violent Films, Journal of Business 77: 155-192
Raman, V. and C. Fernando, 2010, Is Hedging bad News? Evidence from Corporate Hedging Announcements, Working paper, University of Oklahoma
Smith, C.W. and R. Stulz, 1985, The Determinants of Firms' Hedging Policies, Journal of Financial and Quantitative Analysis 20: 391-405
Tufano, P., 1996, Who Manages Risk? An Empirical Examination of Risk Management Practices in the Gold Mining Industry, Journal of Finance 51: 1097-1137
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