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Conferences

Session II-1 Corporate Finance 1 (17/12/2009 à 11h30)

F. Derrien

Leverage in Pyramids: When Debt Leads To Higher Dividends

Auteurs : Abe de Jong (Rotterdam School of Management, Erasmus University); Douglas V. de Jong (Tippie College of Business, University of Iowa); Ulrich Hege (Department of Finance, HEC Paris); Gerard Mertens (Rotterdam School of Management, Erasmus University)

!!Email!! : hege@hec.fr

Intervenants : Ulrich Hege (Department of Finance, HEC Paris)

Rapporteurs : Gilles Sanfilippo

Analyzing pyramids in France, this paper explores the use of leverage in the pyramidal control chain as a control-enhancing mechanism and its relationship to payout policy. In contrast to previous work, we consider not only the control-enhancing effect of equity but explicitly include debt contracted along the control chain. We document that debt in holding companies constitutes a dominant part of the overall discrepancy between control rights and cash flow rights (the control wedge). We closely scrutinize the interaction between leveraged pyramids and payout policy. We find that the dividend payout decreases in the equity portion of the control wedge. At the same time, our evidence shows that the debt portion of the control wedge leads to larger dividend payouts. We suggest that the use of leverage in holding companies commits the dominant owner to more generous payouts since the dividends are needed to service debt in the pyramidal structure. We argue that this debt service hypothesis helps resolve contradictory results among earlier empirical studies. Only a fraction of the cash made available to controlling owners is actually paid out to them, consistent with the view that in leveraged pyramids, servicing debt along the control chain is a primary motive for dividend payouts.

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Dividend Signaling and Pecking Order When “Style” Is All That Matters

Auteurs : Alberto Manconi (Insead Finance Department)

!!Email!! : alberto.manconi@insead.edu

Intervenants : Alberto Manconi (Insead Finance Department)

Rapporteurs : Jens Martin

Two classic adverse selection theories, dividend signaling and the pecking order of capital structure, face significant empirical difficulties: the market underreacts to dividend increases, and firms issue large amounts of equity, contradicting the pecking order theory. This paper argues that “style investing” can explain these apparent anomalies. When investors allocate their portfolios purely on the basis of broad “styles” (e.g. value/growth), they make the stock price less sensitive to information about the individual firm. Thus the firm gains less from signaling, and bears a smaller dilution cost when issuing equity — and signaling and the pecking order break down. Using mutual fund flows to proxy for style investing and identify “hot” styles, this paper provides evidence supporting this argument. In a “hot” style, the firm is less likely to increase dividends, and the market reaction to the dividend increase is smaller. When in the long run style investing fades, the stock price gradually incorporates the full information contained in the dividend increase announcement: dividend–increasing stocks that at the announcement date belong to a “hot” style earn a significantly positive long–run abnormal return. On the other hand, in a “hot” investment style the firm issues more equity and less debt, and as style investing induces “good” firms to pool with the “bad” ones and issue equity, issuers driven by style investing are more profitable. A number of robustness checks distinguish these results from alternative explanations based on market timing or growth opportunities.

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Agency Risk and Firm Valuation: An Empirical Analysis of Venture Capitalists’ Private Expectations

Auteurs : Thomas Hartmann-Wendels (Department of Banking, University of Cologne); Georg Keienburg (Department of Banking & Graduate School of Risk Management, University of Cologne); Soenke Sievers (Kenan-Flagler Business School, University of North Carolina)

!!Email!! : hartmann-wendels@wiso.uni-koeln.de

Intervenants : Thomas Hartmann-Wendels (Department of Banking, University of Cologne)

Rapporteurs : Aurélie Sannajust

This study empirically evaluates the price impact of agency risk in firm valuation. Using a unique data set comprised of internal valuation documents, we find that venture capitalists use risk discounts to cope with expected agency risks. These effects are economically large: e.g., whenever investors deem the management team inexperienced or recent performance inadequate, a firm’s equity value drops by 17-25%. This effect is robust to i) controlling for private business risk expectations, ii) controlling for financial statement data, firm and market characteristics, and iii) examining the effect of financial contracting mechanisms to reduce agency risks.

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