Optimal Corporate Financing Policies
Speakers: Vojislav Maksimovic, Bank of America Professor of Finance, University of Maryland - Robert H. Smith School of Business, United States and Kees Koedijk, Hoogleraar Ondernemingsfinanciering, Faculteit Bedrijfskunde, Erasmus Universiteit Rotterdam
Location: Radisson SAS, Ruslang 17, Amsterdam
Maksimovic will present his paper "The Financial Structure of Corporations". The paper will focus on the question of determining the firm’s optimal capital structure of central importance is for corporate managers. Initially the models focused on the trade-offs between tax advantages of debts and the costs of financial distress. As our understanding of the importance of incentives within the corporation increased, a great deal of attention is on the analysis of the implications of firm’s financial structure choices on their incentives to produce and invest.
The focus will be on the reorganization of the interdependence between asset and liability structure. This focus also raises the possibility that a firm’s financial structure decision depends on the choices of its competitors.
If all competitors choose relatively modest levels of financial leverage, do you have the option to deviate? This question is not limited to just leverage. It is also relevant for the maturity structure of debt (e.g. if competitors choose not to be exposed to short term interest movements, can you?). In many circumstances you may feel compelled to follow industry practice.
Maksimovic’s draft report had been presented on March 25th this year. Its final version will be discussed during this lunch seminar. It focuses on four mechanisms that have been identified in the literature as determining how financial structure affects value in product markets. These mechanisms are (i) the effect of investment choices of other firms in the industry on the interaction between the firm’s financial structure and its investment incentives; (ii) the effect of debt on a firm’s ability to enter into advantageous contracts with competitors or customers; (iii) the effects of changes in leverage on a firm’s incentives in industries with few competitors and (iv) the exploitation by competitors of conflicts of interest caused by a firm’s need to finance its investments externally.
In the paper "Corporate Finance in Europe: Confronting Theory with Practise" Koedijk et.al presents the results of an international survey among 313 CFOs on capital budgeting, cost of capital, capital structure, and corporate governance. We document interesting insights on how theoretical concepts are applied by professionals in the U.K., the Netherlands, Germany and France and compare these results with the U.S.
We discover compelling variations between large and small firms across all markets. While large firms frequently use present value techniques and the capital asset pricing model when assessing the financial feasibility of an investment opportunity, CFOs of small firms still rely on the payback criterion. Regarding debt policy we document more subtle disparities across frims and national samples.
We also find substantial variation in corporate governance structures, which turn out to be more oriented at shareholder wealth in the Anglo-Saxon countries. Corporate finance practice appears to be influenced mostly by firm size, to a lesser extent by shareholder orientation, while national differences are weak at best.
If you wish to attend, please send an e-mail to firstname.lastname@example.org before March 10.
* Opening by Dolf van den Brink, Chairman ACCF
* Talk by professor Vojislav Maksimovic
* Talk by Professor Kees Koedijk
* Panel discussion