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"Fosberg, Richard H"
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Agency problems and debt financing: leadership structure effects
In previous research, Friend and Hasbrouck theorized that managerial insiders (officers and directors) have a personal incentive to cause the firm to use less than the optimal amount of debt in its capital structure. They suggested this occurs because officers and directors have a large proportion of their personal wealth invested in the firm in the form of common stock holdings and firm-specific human capital. This makes managerial insiders reluctant to use the optimal amount of debt financing for the firm because of the additional bankruptcy risk higher levels of debt engender. I test FH's theory and find evidence that supports it. Specifically, the amount of debt in our sample firms' capital structures declines as the percentage of the firm's common stock held by the CEO and other officers and directors increases. A direct relationship is found between blockholder share ownership and our sample firms' debt equity ratio. This suggests that monitoring by blockholders is effective in controlling the suboptimal debt usage agency problem. Further, for any given level of blockholder share ownership, the greater the number of blockholders a firm has the less effective blockholders are in raising the amount of debt in the firm's capital structure. Lastly, some weak evidence was found suggesting that a dual leadership structure was effective in increasing the amount of debt in a firm's capital structure.
Journal Article
A Test Of The M&M Capital Structure Theories
Modigliani and Miller (1958, 1963) predict two very specific relationships between firm value and the amount of debt in the firm's capital structure, depending on whether or not the firm pays corporate income taxes. Although there has been some testing of the implications of these equations, I have been unable to find anyone who has tested them in the exact forms specified by MM. In this paper, the MM equations are tested exactly as specified. The results of these tests indicate that neither the MM tax nor the no-tax valuation equations are accurate predictors of firm value. Specifically, the value of the unlevered firm accounts for much less of firm value than predicted and the sign of the coefficient of the interest tax shield variable is negative, instead of positive as MM predict. These results are robust to the inclusion of control variables for firm growth, earnings variability, and the existence of other tax shields.
Journal Article
Timing Trades And Mutual Fund Investors
Recently, a number of well known mutual funds advisors, including Strong, Putnam, and Bank of America, have been accused of or admitted to allowing selected institutional investors to engage in timing trades with the shares of some of the mutual funds they manage. The news media has generally taken the position that timing trades reduce the wealth of other fund investors. In this study, I show that timing trades can either increase, decrease, or leave unchanged fund shareholder wealth. Which outcome results will depend on specific timing trader and fund characteristics such as the frequency and accuracy of timing trader speculation, the trading of other fund shareholders, the return on the fund's security portfolio, and how much a mutual fund must increase its cash holdings to cover the transactions of timing traders. Consequently, whether timing traders harm other fund shareholders is an empirical question.
Journal Article
Should The CEO Also Be Chairman Of The Board?
For some time, practitioners and academics have been trying to determine whether it is better for a company's shareholders to allow the CEO of the company to also be Chairman of the Board (a unitary leadership structure) or whether another person (an independent director) should hold the board Chair position (a dual leadership structure) Not surprisingly, most executives believe one person should hold both positions while academics hold mixed views on the subject. The empirical results presented in this study suggest that a dual leadership structure is superior for most firms because it allows the board to better control the opportunistic behavior of the firm's managers. Specifically, as agency theory predicts, dual leadership firms pay lower compensation to their CEOs, have lower selling, general, and administrative expenses, use more debt in their capital structures, pay out more of their free cash flows to investors, and are more profitable than unitary leadership firms. Each of these results indicates less opportunistic behavior by the managers of dual leadership firms.
Journal Article
The Short-Term Reaction To The Dividend Tax Reduction
With the passage of the Jobs and Growth Reconciliation Act of 2003, the maximum tax rate on dividend income was lowered from 38.6% to 15%. This eliminated the traditional tax disadvantage that dividend income had relative to capital gains income. Theoretically, this should have led a significant number of firms to increase their dividend payments. In an empirical analysis of firm dividend payments after the dividend tax reduction took effect, it was found that there was a statistically significant increase in the number of firms raising their dividends. For example, in the third quarter of 2003, 4.6% more firms increased their dividends than did so in the third quarter in 2002. Similarly, 4.9% more firms increased their dividend payments in the fourth quarter of 2003 than did so in the fourth quarter of 2002. A logit regression analysis of dividend changes showed that most of the change in the number of dividend increases was caused by the dividend tax reduction and not other factors such as earnings, earnings stability, investment opportunities or firm size. The logit regression analysis also indicated that the dividend tax reduction increased by 3.7% (4.2%) the probability that the average sample firm would increase its dividend payment in the third (fourth) quarter of 2003. It was also found that the greater a firm's blockholder share ownership the less likely the firm was to increase its dividend payment following the dividend tax reduction. CEO and other officer and director share ownership were found to be unrelated to the probability that a firm would increase its dividend payment.
Journal Article
Debt Capacity And Debt Financing
The pecking order theory of capital structure predicts that firms will finance a significant proportion of their financial deficit (investments + dividends – operating cash flows) with debt capital. I also hypothesize that the amount of debt financing a firm actually uses is also related to its unused debt capacity. The empirical analysis in this study confirms that firms follow the pecking order theory in financing their financial deficits. Further, it is shown that firms with more unused debt capacity finance more of their financial deficits with debt than other firms. Specifically, the data indicates that firms with the most unused debt capacity finance approximately 50% of their financial deficits with debt while firms with less unused debt capacity finance approximately 25% of their financial deficits with debt. The data also indicate that a failure to adjust for credit availability in an empirical analysis of financial deficit financing will significantly under estimate the degree to which firms follow the pecking order theory. It is also confirmed that most firms seem to have a target capital structure but the actual firm debt ratio only reverts to the target at a rate of 5-10% per year. Additionally, the data also shows that a combination of an investment grade credit rating and relatively low debt outstanding is a better proxy for credit availability than the more commonly used total assets.
Journal Article
Determinants Of Firm Leadership Structure
In this study, we seek to ascertain some of the factors that determine the leadership structure that a firm chooses to adopt. Our main empirical finding is that both share ownership by officers and directors and by blockholders is inversely related to the probability that a firm will have a unitary leadership structure. These results imply that officers, directors, and blockholders believe that a dual leadership structure is the optimal leadership structure for most firms and that greater share ownership by these groups motivates them to see that the firm adopts that optimal leadership structure. We are also able to confirm Brickley, Coles, and Jarrell’s (1997) finding that CEO tenure in office is directly related to the probability that a firm will have a unitary leadership struc- ture. This finding is consistent with the pass-the-baton theory of CEO/Chair succession proposed Vancil (1987).
Journal Article
Profitability And Capital Structure Of Amex And Nyse Firms
In this study, we found that NYSE and AMEX firms have somewhat different capital structures. NYSE firms generally use 5% to 8% more debt financing in their capital structures than AMEX firms. It was also found that the amount of debt in the capital structures of AMEX firms declined somewhat between 1985 and 2003 but remained relatively stable for NYSE firms. Also, NYSE firms were found to exhibit a strong inverse relationship between firm profitability and the amount on debt in the firm's capital structure. This result is generally consistent with Myers and Majluf's \"asymmetric information theory\" of capital structure. No relationship was found between profitability and capital structure for AMEX firms. Comparison of these results to similar calculations found in Fosberg and Ghosh (2005) for NASDAQ firms shows that, like AMEX firms, NASDAQ firms use less debt in their capital structures than NYSE firms and exhibit no relationship between profitability and capital structure. Consequently, because these anomalies exist for both AMEX and NASDAQ firms, these two anomalies can not be an exchange listing effect.
Journal Article
