Capital Structure and Firm Value University of 资本结构与公司价值大学.ppt

Moeller-Finance Notes-Capital Structure Capital Structure and Firm Value Does Capital Structure affect value? Empirical patterns Across Industries Across Firms Across Years Who has lower debt? High intangible assets/specialized assets High growth firms High cash flow volatility High information asymmetry Industry leaders Is capital structure managed? If so much time is spent on capital structure then there must be some value to it (or managers/investors are irrational) Debt and Equity Only? Typically thought of and measured this way Much more complex Investment opportunities and strategy (needs) Financing (sources) Cash balance Distribution: Dividend and repurchases Debt capacity Equity capacity Existing debt and equity Other financial policies: Financial Hedging, Cash Flow Volatility, Forms of Compensation How does capital structure affect value? To prove this we start in the “perfect world” Based on the work of Miller and Modigliani Shows that capital structure is irrelevant Value is derived from market imperfections Example: What if a firm is considering issuing debt and retiring equal amounts of equity? Capital Structure is Irrelevant Miller and Modigliani assume perfect capital markets Proposition #1: The market value of any firm is independent of its capital structure. Market Imperfections: Taxes Taxes US Tax Code: Deductibility of interest leads to lower cost of debt (Rd(1-t)) Simple specification overvalues benefit Ignores personal taxes which Decreases investors debt return Increases investors preference for equity Capital gains: Defer and rate difference Dividend: Some portion is deductible Market Imperfections: Contracting Costs In imperfect markets, alternative ways to contract optimal behavior are necessary Costs of financial distress Underinvestment (rejecting NPV0 projects), direct, indirect costs, etc. Benefits of debt Monitoring function, manages free cash flow problem (Accepting NPV0 projects), etc. Contracting costs and taxes are