Optimal Capital Structure: Reflections on Economic and Other Values

Despite a vast literature on the capital structure of the firm there still is a big gap between theory and practice. Starting with the seminal work by Modigliani & Miller, much attention has been paid to the optimality of capital structure from the shareholders’ point of view. Over the last few decades studies have been produced on the effect of other stakeholders’ interests on capital structure. Well-known examples are the interests of customers who receive product or service guarantees from the company. Another area that has received considerable attention is the relation between managerial incentives and capital structure. Furthermore, the issue of corporate control and, related, the issue of corporate governance, receive a lion’s part of the more recent academic attention for capital structure decisions. From all these studies, one thing is clear: The capital structure decision (or rather, the management of the capital structure over time) has to deal with more issues than the maximization of the firm’s market value alone. In this paper, we give an overview of the different objectives and considerations that have been proposed in the literature. We show that capital structure decisions can be framed as multiple criteria decision problems which can then benefit from multiple criteria decision support tools that are widely available.Capital structure;MCDA;Multi criteria decision analysis

Optimal Capital Structure: Reflections on Economic and Other Values

Despite a vast literature on the capital structure of the firm there still is a big gap between theory and practice. Starting with the seminal work by Modigliani & Miller, much attention has been paid to the optimality of capital structure from the shareholders’ point of view. Over the last few decades studies have been produced on the effect of other stakeholders’ interests on capital structure. Well-known examples are the interests of customers who receive product or service guarantees from the company. Another area that has received considerable attention is the relation between managerial incentives and capital structure. Furthermore, the issue of corporate control and, related, the issue of corporate governance, receive a lion’s part of the more recent academic attention for capital structure decisions. From all these studies, one thing is clear: The capital structure decision (or rather, the management of the capital structure over time) has to deal with more issues than the maximization of the firm’s market value alone. In this paper, we give an overview of the different objectives and considerations that have been proposed in the literature. We show that capital structure decisions can be framed as multiple criteria decision problems which can then benefit from multiple criteria decision support tools that are widely available

Valuation, Capital Structure Decisions and the Cost of Capital

This thesis consists of six essays in Corporate Finance. In Chapter 1 we examine the relation between the quality of corporate governance and the value of excess cash for large European firms. We use ratings for Shareholder rights, Takeover defenses, Disclosure and Board structure as proxies for the quality of corporate governance. We find that the value of excess cash is negatively related to anti-takeover provisions only. Chapter 2 discusses the relation between corporate governance and the cost of debt. We find a negative relation between Disclosure and the cost of debt and uncover that this relation depends on the quality of Shareholder rights. This novel interaction effect is explained by our share rights or disclose hypothesis. In Chapter 3 and 4 we formulate the capital structure decision within a multi-criteria framework. We conclude that the capital structure decision is unfit for consideration as an optimization problem. Rather, it makes sense to solicit a variety of solutions from finance specialists that can be compared on criteria considered to be important. In Chapter 4 we discuss a merger and acquisition case as illustration. We compare different solutions generated by mutually independent financial experts on criteria which are relevant for the shareholders and for the management. In Chapter 5 we derive a general formula for the cost of government’s claim. We show that the present value of tax shields is equal to the difference between the present value of the expected taxes paid by the unlevered firm and those paid by the levered firm. In Chapter 6 the required return of intangible assets is determined for a variety of business sectors. The required returns are subsequently compared to several proxies used in practice. For most sectors, the levered cost of equity seems to be the best proxy

Corporate Governance and the Value of Excess Cash Holdings of Large European Firms

We examine the relation between the quality of corporate governance and the value of excess cash for large European firms (FTSEurofirst 300 Index). We use Deminor ratings for Shareholder rights, Takeover defences, Disclosure and Board as proxies for the quality of corporate governance. We find that the value of excess cash is positively related to the Takeover defences score only. It seems that governance mechanisms—except the market for corporate control—are not strong enough to prevent managers from wasting excess cash. For non-UK firms we find that the value of €1 of excess cash in a poorly governed firm is valued at only €0.89 while the value is €1.45 for a good governed firm. We show that poorly governed firms dissipate excess cash relatively quickly with a negative impact on their operating performance as a result.corporate governance;excess cash;take-over defences

Maatschappelijk verantwoord ondernemen (MVO) en reputatie

In dit artikel introduceren wij een maatstaf waarmee de reputatie voor Maatschappelijk Verantwoord Ondernemen (MVO-R) kan worden gemeten. Met behulp van deze maatstaf wordt vervolgens voor 2.447 ondernemingen uit 29 landen de MVO-Reputatie bepaald. De data die gebruikt is om de MVO-R scores te berekenen bestaat uit MVO scores van internationale rating agencies, die per onderneming betrekking hebben op circa 177 aspecten van MVO. Uit het empirisch onderzoek blijkt dat: i) ondernemingen gemiddeld genomen meer dan voldoen aan de MVO verwachtingen die geschapen zijn door de ondernemingen zelf; ii) er in Europa het hoogst wordt gescoord op MVO Reputatie, met Groot Brittannië en Finland als leiders; iii) dat de utility sector het best scoort en dat ‘gezondheidszorg’ en ‘financiële instellingen’ het slechtst scoren op MVO-Reputatie

Corporate Governance and the Value of Excess Cash Holdings of Large European Firms

We examine the relation between the quality of corporate governance and the value of excess cash for large European firms (FTSEurofirst 300 Index). We use Deminor ratings for Shareholder rights, Takeover defences, Disclosure and Board as proxies for the quality of corporate governance. We find that the value of excess cash is positively related to the Takeover defences score only. It seems that governance mechanisms—except the market for corporate control—are not strong enough to prevent managers from wasting excess cash. For non-UK firms we find that the value of €1 of excess cash in a poorly governed firm is valued at only €0.89 while the value is €1.45 for a good governed firm. We show that poorly governed firms dissipate excess cash relatively quickly with a negative impact on their operating performance as a result