股权和债权

3 stocks and debt 徐建国 北京大学 2014.02.20 Equity as the risk absorber Debt Equity Fixed payment Yes No Maturity Usually Fixed Presumably long? Tax deductible? Yes No Default probability Yes No 2 Equity: Residual claimer and ultimate risk absorber. Debt: Explicitly “cheaper”, but with implied costs. Implied Cost of Debt  Financial Distress  Bankruptcy costs  Managerial Incentives  Agency cost  Agency benefit  Information  Pecking order 3 Financial Distress, Default, and Bankruptcy  Financial Distress  Difficult meet debt obligations  Default: When a firm fails to meet debt obligations  Bankruptcy  Liquidation (Chapter 7 )  Reorganization (Chapter 11)  Purpose:  Treat creditors fairly  Value of assets not unnecessarily destroyed.  Direct and indirect costs of bankruptcy 4 Tradeoff Theory of Capital Structure  MM theorem  Irrelevance of debt or equity  Tax shield  Debt interest tax deductible but equity dividend are not  Tradeoff  Tax shield vs. Financial distress (Interest Tax Shield) (Financial Distress Costs)L UV V PV PV   5 Key Determinants of Financial Distress Costs  Probability of financial distress  Increases with firm liabilities  Increases with the volatility of cash flows and asset values  Magnitude of the costs after distress  Vary by industry  Technology firms: high  Real estate firms: low  Appropriate discount rate  Depends on market risk: increases with beta 6 Tradeoff theory: summary  Optimal leverage  Firms increase leverage until firm value is maximized.  Tradeoff theory help explain  The low leverage puzzle  Cross industry variation in leverage 7 Implied Cost of Debt  Financial Distress  Bankruptcy costs  Managerial Incentives  Agency cost  Agency benefit  Information  Pecking order 8 Agency Costs of Leverage  Agency Costs  Conflicts between stakeholders: shareholders vs creditors  Management on behalf of shareholders  Excessive risk taking and Over-investment  Facing financial distress, shareholders can gain at the expense of debt holders by taking risky negative-NPV projects.  Effectively, equity holders gambling with debt holders’ money. 9 Debt Overhang  Under-investment  When equity holders choose not to invest in a positive NPV project  Because in financial distress the value of the investment accrues to bondholders rather than themselves.  Cash Out  Facing financial distress, shareholders may withdraw money from the firm.  For example, the firm may sell assets below market value and pay an immediate cash dividend.  Another form of under-investment 10 Agency Costs and the Value of Leverage  Shareholders benefit at the cost of debt holders?  When a firm raises leverage, two effects on share price:  Share price benefits from the possibility of exploiting debt holders  Debt holders pay less for the debt  Debt holders lose more than shareholders gain  Net effect is a reduction in the initial share price of the firm  Ultimately, shareholders bear the agency costs. 11 Debt Maturity and Covenants  Agency costs depends on debt maturity  Higher for long-term debt and smallest for short-term debt.  Debt Covenants  Debt conditions to restrict firm’s action  May help reduce agency costs  Also hinder management flexibility and have costs of their own 12 Agency Benefits of Leverage: Motivating Managers  Agency costs: shareholders vs creditors  Agency benefits: shareholders vs managers  Management Entrenchment  Separation of ownership and control  why managers should “loyally” serve shareholders?  Work effort  Perks  Empire building  Large vs small firms: salary, prestige, publicity  Size vs profitability  Managerial overconfidence 13 Free Cash Flow Hypothesis  Wasteful spending more likely with more free cash  Tight cash as motivation/discipline of efficiency  Leverage reduce managerial entrenchment  Entrenched managers: fired in distress  Managers less entrenched: concerned about performance  Creditors may monitor managers  Especially in highly levered firms  Major creditors  Banks versus debt 14 Tradeoff Theory with Agency Costs and Benefits  The value of the levered firm can now be shown to be (Interest Tax Shield) (Financial Distress Costs) (Agency Costs of Debt)+ (Agency Benefits of Debt) L UV V PV PV PV PV     15 Capital Structure with Asymmetric Information  Asymmetric Information  Managers have superior information to investors  Signaling  Adverse selection 16 Leverage as a Credible Signal  Consider a profitable project  Cannot discuss due to competitive reasons  To credibly communicate this positive information, commit the firm to large future debt payments  True: no trouble paying back  False: financial distress, costly  Credibility Principle  Claims are credible only if in self-interest  “Actions speak louder than words.” 17 Adverse Selection in Issuing Equity  Adverse Selection  Buyers and sellers have different information  Equity or Debt  Good or bad project?  Lemons Principle  Pecking order hypothesis  IPO (SEO) timing  After price gains  After earnings announcements  When considered overpriced 18 Aggregate Sources of Funding for Capital Expenditures, U.S. Corporations Source: Federal Reserve Flow of Funds. 19 Stock Returns Before and After an Equity Issue 20 Optimal Capital Structure: A Summary  The importance of market imperfections  Taxes  Financial distress  Agency costs  Agency benefit  Asymmetric information.  Which gives us  Tradeoff theory  Pecking order theory 21 Suggested Readings  Berk and Demarzo, Chapters 14-16 22