The Theory and Practice of Corporate Finance: Evidence from the Field

357

110

This paper provides evidence that top managers have contrarian views on firm value. Managers' perceptions of fundamental value diverge systematically from market valuations, and perceived mispricing seems an important determinant of managers' decision making. Insider trading patterns shows that low valuation firms are regarded as undervalued by their own managers relative to high valuation firms. This finding is robust to controlling for noninformation motivated trading. Further evidence links managers' private portfolio decisions to changes in corporate capital structures, suggesting that managers try to actively time the market both in their private trades and in firm-level decisions. Copyright 2005 by The American Finance Association.

Section: Subsequent Returnsmentioning

confidence: 99%

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confidence: 99%

Market Timing and Managerial Portfolio Decisions

Jenter

2005

357

110

“…Graham and Harvey () report that about 60% of CFOs condition on financial flexibility, over 20% of CFOs condition on bankruptcy and distress costs, and almost 50% of CFOs condition on their firm's level of internal funds when deciding whether or not to issue debt. See the paper for comprehensive survey evidence about CFO objectives.…”

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confidence: 99%

Personal Lending Relationships

Karolyi

2017

112

I identify the effects of personal relationships on loan contracting using executive deaths and retirements at other firms as a source of exogenous variation in executive turnover. After plausibly exogenous turnover, borrowers choose lenders with which their new executives have personal relationships 4.1 times as frequently, and loans from these lenders have 20 basis points lower spreads and 12.5% larger amounts. Personal relationships benefit firms across loan terms, especially during macroeconomic downturns. Increased financial flexibility from personal relationships insulated firms from financial shocks during the recent financial crisis: they exhibited less constrained investment and were less likely to layoff employees.

“…1 1 See Graham (2000) on conservatism in financing decisions; Titman and Wessels (1988), Rajan and Zingales (1995), Fama and French (2002), among others, on cross‐sectional determinants; Fama and French (2002), Hovakimian, Opler, and Titman (2001), and Graham and Harvey (2001) on slow mean‐reversion of debt ratios; Baker and Wurgler (2002) on the influence of past book‐to‐market ratios; Welch (2004) on the influence of changes in the market value of equity; Opler and Titman (1994) on the reaction of highly leveraged companies to industry shocks; Korajczyk and Levy (2003) on their reaction to macro shocks; and Leary and Roberts (2005) and Kisgen (2006) on the frequency of refinancing. …”

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confidence: 99%

Do Tests of Capital Structure Theory Mean What They Say?

Strebulaev

2007

725

In the presence of frictions, firms adjust their capital structure infrequently. As a consequence, in a dynamic economy the leverage of most firms is likely to differ from the "optimum" leverage at the time of readjustment. This paper explores the empirical implications of this observation. I use a calibrated dynamic trade-off model to simulate firms' capital structure paths. The results of standard cross-sectional tests on these data are consistent with those reported in the empirical literature. In particular, the standard interpretation of some test results leads to the rejection of the underlying model. Taken together, the results suggest a rethinking of the way capital structure tests are conducted.