Capital Structure, Payout Policy and the IPO Process
Winter 2005, Volume 17.1
A Framework for Corporate Treasury Performance Measurement
A properly designed performance measurement framework for liability management could help guide corporate treasurers in choosing among financing alternatives. This article calculates a benchmark-adjusted liability return that is designed to reflect the success (or lack thereof, and so perhaps discourage) a corporate treasury’s efforts to “time” interest rates.
Assessing Growth Estimates in IPO Valuations — A Case Study
Perpetuity growth rate assumptions can have a significant impact on the overall valuation of a company. The framework outlined in this article incorporates Market Implied Competitive Advantage Period (MICAP) analysis to evaluate perpetuity-with-growth assumptions in IPO valuations using market-derived information about growth estimates for comparable businesses.
Bookbuilding, Auctions, and the Future of the IPO Process
Despite severe criticism related to new dot-com issues and first-day price run-ups, bookbuilding has flourished both here and abroad. Although recent advances in communications technology and auction theory will undoubtedly reshape current securities underwriting practices, there will continue to be an important role for bookbuilding and the information exchange provided by investment banks.
Do Managers Have Capital Structure Targets? Evidence from Corporate Spinoffs
In corporate spinoffs, managers assign debt loads to the spun-off units on the basis of their different business strategies. Higher debt loads are assigned to units with more tangible assets and with higher and more predictable cash operating earnings, suggesting that managers set—and work to achieve—capital structure targets on the basis of profitability and asset characteristics.
How To Choose a Capital Structure: Navigating the Debt-Equity Decision
Companies are reassessing their rating agency relationships and target credit ratings, especially in light of the emergence of new rating agencies, the growth of the credit default swap market, and positive market reactions to financial releveragings tied to special dividends or repurchases. What management views as value-preserving flexibility may in fact be value-reducing financial “slack.”
Incorporating Competition into the APV Technique for Valuing Leveraged Transactions
Since the DCF approach is not appropriate for evaluating acquisition targets when the capital structure is changing during the forecast period, many analysts turn to the APV approach. But the APV technique does not capture the effect of competition on horizon values. This article provides two ways to calculate horizon values for companies with changing leverage that expect to face competition.
Leverage
In his 1990 Nobel Prize Lecture, reprinted here, Merton Miller argued that capital markets have self-correcting mechanisms that prevent corporate “overleveraging.” Corporate leveraging is not likely to increase overall economic risk; financial distress involves “mainly private, not social, costs;” and additional regulation is generally not only unnecessary but positively harmful to the economy.
Morgan Stanley Panel Discussion on Seeking Growth in Emerging Markets: Spotlight on China
China has established itself as a global manufacturing center, a strong location for R&D, and a significant consumer market. Its accession to the WTO has opened sectors that were restricted to foreign investors, including financial services. Even as Chinese firms acquire companies beyond their borders, direct foreign investment in China will increasingly take the form of M&A and joint ventures.
Morgan Stanley Roundtable on Capital Structure and Payout Policy
As panelist Jon Anda puts it, most companies are seeking the “right mix of debt, dividends, and buybacks”—the mix that encourages managers to achieve the optimal balance between growth and profitability, while preserving only enough flexibility to respond to change. Financing decisions should support the company’s business strategy and investment needs.
Reforming the Bookbuilding Process for IPOs
Auctions of equity IPOs have been tried in at least 20 countries and abandoned in almost as many. Therefore, rather than recommending a move to auctions, the authors propose a modified version of bookbuilding that increases transparency and participation by retail investors.
The Capital Structure Puzzle: The Evidence Revisited
Although not as important as corporate investment policy, financing and dividend policy can play a key supporting role. Companies on a growth trajectory should be funded mainly with equity while payouts are probably unnecessary. But as companies come of age, they should begin to use more debt and return more capital to investors through stock repurchases or dividends.
Trade, Jobs, and the Economic Outlook for 2005
From media reports, the U.S. economy seems on the verge of collapse—despite robust performance during 2004 that should continue in 2005. The trade deficit in particular has given rise to age-old calls for protectionism. But job losses from “offshoring” are just 1% of annual job losses—and the trade deficit, driven mainly by foreign investment, is not a sign of economic failure or mismanagement.
The views and opinions expressed in the Journal do not necessarily represent those of Morgan Stanley or its affiliates.
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For close to 20 years, the Journal of Applied Corporate Finance has distinguished itself as a unique forum for addressing the topics that drive corporate value. Featuring articles by top academic thinkers and financial practitioners, this quarterly publication presents the practical application of the best current research in finance.
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