- 12 May 2015
- Working Paper
This paper is the first to systematically study the extent to which industrial public firms in the US rely on the proceeds of security issues to fund payouts. By simultaneously raising and paying out capital, firms can accomplish a number of objectives, such as jointly managing their capital structure and cash holdings, monitoring managers' investment decisions, engaging in market timing, or increasing earnings-per-share. These results paint a very different picture from the commonly held view that payouts are first and foremost a vehicle to return free cash flow to investors.
- 29 Apr 2014
- Working Paper
Industrial firms listed on stock markets in the United States held $1.5 trillion in cash at the end of 2011. Many commentators and policymakers observed that this so-called "dead money" might be one reason behind the sluggish performance of the United States and other developed economies since the Great Recession. But evidence on such cash-hoarding behavior is limited to listed (or 'public') firms, which account for a relatively small part of the US economy. Do private firms also hold large cash balances? Using a rich panel of over 200,000 non-SEC-filing private US firms, the author finds that the average public firm holds twice as much cash as the average large private firm over the 2002-2011 period. Results are most consistent with the hypothesis that differences in the extent to which public and private firms engage in market timing are a key driver of public firms' higher demand for cash, as the risk of misvaluation induces public firms to raise capital and accumulate precautionary cash reserves when they perceive their equity to be overvalued. Consistent with this hypothesis, the author finds that the cash difference between public and private firms is larger in industries with a higher prevalence of misvaluation shocks. In addition, public firms in these industries tend to save a larger fraction of their equity issuance proceeds than private firms, particularly in times when they have reasons to believe that their equity is overvalued.
- 28 Apr 2014
- Working Paper
Payout policy is at the core of many key questions in corporate finance. In a world in which financial markets are not frictionless, how much firms pay out and which vehicle they choose to distribute cash to their shareholders may affect their valuation, has a potential impact on how much taxes investors pay, may affect management's investment decisions, and may inform the market about how good the firm is relative to its peers. In this paper the authors review the academic literature on payout policy, with a particular emphasis on developments in the past two decades. Scholarship on payout policy has made significant advancements in the last 20 years, and we now know much more about the importance of taxes, agency, and signaling motives for payout policy. Perhaps the most important change in corporate payout policy in the last two decades has been the secular increase of stock repurchases and the apparent triumph of buybacks over dividends as the dominant form of corporate payouts. Looking at the bigger picture, the authors observe that, until recently, most scholarship has analyzed payout policy in isolation. An important recent development in the payout literature has been to consider the interaction between payout and other corporate policies, such as compensation or investment. The fact that payouts are not simply residual free cash flows underlines the importance of taking seriously the interdependence of financing, investment, and payout decisions.
- 31 Oct 2013
- Working Paper
A core question in corporate finance is how financial constraints affect firm behavior. To answer this question we need a way to identify constrained firms with reasonable accuracy. Since the financial constraints that a firm faces are not directly observable, scholars have tended to rely on indirect proxies-such as having a credit rating or paying dividends-or on one of three popular indices based on linear combinations of observable firm characteristics such as size, age, or leverage (the Kaplan-Zingales, Whited-Wu, and Hadlock-Pierce indices). In this paper the authors ask: How well do these measures of financial constraints identify firms that are plausibly financially constrained? The short answer is: not well at all. The authors develop three different tests that show that public firms classified as constrained have no trouble raising debt when their demand for debt increases, are unaffected by changes in the supply of bank loans, and engage in paying out the proceeds of equity issues to their shareholders ("equity recycling"). Results imply that popular measures of financial constraints tend to identify as constrained subsets of firms that differ from the general firm population of public firms on a number of dimensions, but not in their ability to raise external funding. Importantly, the tests developed by the authors can be used to systematically test the extent to which any measure of financial constraints does capture constraints.
- 13 Sep 2012
- Research & Ideas
Private companies are much more focused on the long term when making deals than their publicly owned counterparts. Which side has the right idea? New research from Assistant Professor Joan Farre-Mensa and colleagues. Open for comment; 3 Comment(s) posted.