- Email: [email protected]
Contents of volume 1A
CONTENTS OF VOLUME 1A
Introduction to the Series
v
Contents of the Handbook
vii
Preface
ix
CORPORATE FINANCE Chapter 1 Corporate Governance and Control ¨ MARCO BECHT, PATRICK BOLTON and AILSA ROELL Abstract Keywords 1. Introduction 2. Historical origins: a brief sketch 2.1. How representative is corporate government? 2.2. Whom should corporate government represent?
3. Why corporate governance is currently such a prominent issue 3.1. 3.2. 3.3. 3.4. 3.5. 3.6.
The world-wide privatization wave Pension funds and active investors Mergers and takeovers Deregulation and capital market integration The 1998 Russia/East Asia/Brazil crisis Scandals and failures at major USA corporations
4. Conceptual framework 4.1. 4.2. 4.3. 4.4. 4.5. 4.6. 4.7.
Agency and contracting Ex-ante and ex-post efficiency Shareholder value Incomplete contracts and multiple constituencies Why do we need regulation? Dispersed ownership Summary and conclusion
5. Models 5.1. Takeover models 5.2. Blockholder models 5.3. Delegated monitoring and large creditors
1 3 3 4 5 5 7 7 8 9 12 12 12 13 13 13 13 14 14 16 17 17 19 19 24 29
xviii
Contents of Volume 1A
5.4. Board models 5.5. Executive compensation models 5.6. Multi-constituency models
6. Comparative perspectives and debates 6.1. Comparative systems 6.2. Views expressed in corporate governance principles and codes 6.3. Other views
7. Empirical evidence and practice 7.1. 7.2. 7.3. 7.4. 7.5. 7.6.
Takeovers Large investors Minority shareholder action Boards Executive compensation and careers Multiple constituencies
8. Conclusion References Chapter 2 Agency, Information and Corporate Investment JEREMY C. STEIN Abstract Keywords 1. Introduction 1.1. Scope of the essay: what’s covered and what’s left out 1.2. Organization
Part A. Investment at the firm level 2. Theoretical building blocks: investment at the firm level 2.1. Models of costly external finance 2.2. The agency conflict between managers and outside stockholders 2.3. Investment decisions when stock prices deviate from fundamentals
3. Evidence on investment at the firm level 3.1. Financial slack and investment 3.2. Direct evidence of agency-related overinvestment 3.3. Evidence on reputational models of investment
4. Macroeconomic implications 4.1. The financial accelerator 4.2. When banks face financing frictions 4.3. Cross-country differences in financial development, investment and growth
Part B. Investment inside firms 5. Theoretical work on internal capital allocation 5.1. Fundamental differences between internal and external capital markets 5.2. Implications for the efficiency of capital allocation 5.3. How information and agency problems shape firms’ capital budgeting practices
31 33 35 41 42 47 49 49 50 59 67 71 73 80 82 86
111 113 113 114 115 116 116 116 116 120 126 127 127 130 131 133 133 134 135 136 136 137 140 145
Contents of Volume 1A
6. Empirical work on internal capital allocation 6.1. The value consequences of diversification 6.2. Evidence on investment at the divisional and plant level
7. Conclusions: implications for the boundaries of the firm References Chapter 3 Corporate Investment Policy MICHAEL J. BRENNAN Abstract Keywords 1. Introduction 2. The objective of the firm and the net-present-value rule 3. Valuation by discounting 3.1. Multi-factor asset pricing models 3.2. The capital asset pricing model
4. Practical approaches to estimating discount rates 4.1. 4.2. 4.3. 4.4.
Estimating equity discount rates in practice From firm cost of equity to firm cost of capital Performance of CAPM-based valuations From firm cost of capital to project cost of capital
5. The certainty equivalent approach to valuation 5.1. The basic theory of martingale pricing 5.2. Estimating risk-adjusted drifts 5.3. Some real options
6. Summary References Chapter 4 Financing of Corporations STEWART C. MYERS Abstract Keywords 1. Introduction 1.1. Theories of optimal financing
2. The Modigliani–Miller value-irrelevance propositions 3. The trade-off theory 3.1. 3.2. 3.3. 3.4. 3.5. 3.6. 3.7.
Taxes Direct costs of financial distress Indirect costs of financial distress – conflicts between creditors and stockholders Other indirect costs of financial distress Evidence on costs of financial distress Leverage and product markets Evidence for the trade-off theory
xix
145 145 147 152 155
167 168 168 169 171 175 178 179 180 180 188 191 192 194 196 197 203 208 209
215 216 216 217 217 218 221 222 226 226 228 229 229 230
xx
Contents of Volume 1A 3.8. Target-adjustment models 3.9. Computational models
4. The pecking-order theory 4.1. 4.2. 4.3. 4.4.
Debt vs. equity in the pecking order What’s wrong with the pecking order as theory? Pecking order vs. the trade-off theory – time-series tests Further tests of the trade-off and pecking-order theories
5. Agency theories of capital structure 5.1. Jensen and Meckling’s pecking order 5.2. Free cash flow, leveraged buyouts and restructurings 5.3. Is there a general free-cash-flow theory of capital structure?
6. What next? 6.1. Compensation and incentives 6.2. Human capital and financing 6.3. Exporting capital-structure theory
References Chapter 5 Investment Banking and Securities Issuance JAY R. RITTER Abstract Keywords 1. Introduction 1.1. Overview 1.2. A brief history of investment banking and securities regulation 1.3. The information conveyed by investment and financing activities
2. Seasoned equity offerings (SEOs) 2.1. Announcement effects 2.2. Evidence on long-run performance 2.3. Reasons for underperformance
3. Short-run and long-run reactions to corporate financing activities 4. Initial public offerings (IPOs) 4.1. 4.2. 4.3. 4.4. 4.5. 4.6. 4.7. 4.8. 4.9.
Overview Short-run underpricing of IPOs Alternative mechanisms for pricing and allocating securities Explanations of underpricing Underwriter compensation Stabilization activities Hot-issue markets Market activity across countries Long-run performance
5. Summary References
231 232 233 234 236 237 238 239 240 242 243 243 244 245 246 247
255 256 256 257 257 259 261 263 263 265 271 274 279 279 281 281 286 291 292 293 294 295 299 300
Contents of Volume 1A
Chapter 6 Financial Innovation PETER TUFANO Abstract Keywords 1. Introduction 2. What is financial innovation? 3. Why do financial innovations arise? What functions do they serve? 3.1. 3.2. 3.3. 3.4. 3.5. 3.6.
Inherently incomplete markets stimulate innovation Inherent agency concerns and information asymmetries stimulate innovation Transaction, search or marketing costs stimulate innovation Taxes and regulation stimulate innovation Increasing globalization and perceptions of risk stimulate innovation Technological shocks stimulate innovation
4. Who innovates? The identities of and private returns to innovators 5. The impact of financial innovation on society 6. Issues on the horizon: patenting and intellectual property 7. Summary References Chapter 7 Payout Policy FRANKLIN ALLEN and RONI MICHAELY Abstract Keywords 1. Introduction 2. Some empirical observations on payout policies 3. The Miller–Modigliani dividend irrelevance proposition 4. How should we measure payout? 5. Taxes 5.1. Static models 5.2. Dynamic models 5.3. Dividends and taxes – conclusions
6. Asymmetric information and incomplete contracts – theory 6.1. Signaling and adverse selection models 6.2. Incomplete contracts – agency models
7. Empirical evidence 7.1. Asymmetric information and signaling models 7.2. Agency models
8. Transaction costs and other explanations 9. Repurchases 9.1. The mechanics and some stylized facts 9.2. Theories of repurchases
xxi
307 308 308 309 310 313 314 315 317 318 320 321 324 327 329 331 331
337 339 339 340 342 351 354 358 359 368 376 377 377 383 386 386 396 399 404 404 407
xxii
Contents of Volume 1A
9.3. Repurchases compared to dividends 9.4. Empirical evidence 9.5. Summary
10. Concluding remarks References Chapter 8 Financial Intermediation GARY GORTON and ANDREW WINTON Abstract Keywords 1. Introduction 2. The existence of financial intermediaries 2.1. 2.2. 2.3. 2.4. 2.5. 2.6. 2.7. 2.8. 2.9.
Empirical evidence on bank uniqueness Banks as delegated monitors Banks as information producers Banks as consumption smoothers Banks as liquidity providers Banks as commitment mechanisms Empirical tests of bank-existence theories Bonds versus loans Banks versus stock markets
3. Interactions between banks and borrowers 3.1. 3.2. 3.3. 3.4. 3.5.
Dynamic relationships and the pros and cons of bank monitoring Monitoring and loan structure Beyond lending: equity stakes, board seats, and monitoring Banking sector structure and lending Credit cycles and the effect of bank funding on lending
4. Banking panics and the stability of banking systems 4.1. 4.2. 4.3. 4.4. 4.5. 4.6. 4.7. 4.8. 4.9.
Definitions of banking panics and the relation of panics to the business cycle Panics and the industrial organization of the banking industry Private bank coalitions Are banks inherently flawed institutions? Information-based theories of panics Other panic theories Tests of panic theories The banking crises during the Great Depression Contagion
5. Bank regulation, deposit insurance, capital requirements 5.1. 5.2. 5.3. 5.4.
The origins of government bank regulation and government deposit insurance Deposit insurance and moral hazard Corporate governance in banks and the moral hazard argument Bank capital requirements
408 410 419 420 422
431 432 432 433 437 437 440 444 448 453 456 458 459 461 462 463 469 474 479 490 494 495 499 501 503 505 507 508 511 516 518 519 520 526 529
Contents of Volume 1A 5.5. Other issues
6. Conclusion References Chapter 9 Market Microstructure HANS R. STOLL Abstract Keywords 1. Introduction 2. Markets, traders and the trading process 2.1. 2.2. 2.3. 2.4. 2.5.
Types of markets Types of orders Types of traders Rules of precedence The trading process
3. Microstructure theory – determinants of the bid–ask spread 3.1. Inventory risk 3.2. Free-trading option 3.3. Adverse selection
4. Short-run price behavior and market microstructure 4.1. A model of short-term price behavior 4.2. The realized spread 4.3. Serial covariance of price changes
5. Evidence on the bid–ask spread and its sources 5.1. The spread and its components 5.2. Cross-section evidence
6. Price effects of trading 6.1. Block trading 6.2. Herding 6.3. Other studies of the effects of trading
7. Market design 7.1. Call-auction markets 7.2. Dealer versus auction markets: the Nasdaq controversy 7.3. Other issues in market design
8. The market for markets: centralization versus fragmentation of trading 8.1. 8.2. 8.3. 8.4.
Evolution of equities markets in the USA Global markets Economic forces of centralization and fragmentation The future structure of markets
9. Other markets 9.1. Bond market 9.2. Currency market
xxiii
532 532 534
553 555 555 556 557 557 558 559 560 561 562 563 566 566 567 568 569 570 572 572 575 577 577 578 579 579 580 583 586 589 589 592 593 595 595 596 596
xxiv 9.3. Futures markets 9.4. Options markets
10. Asset pricing and market microstructure 11. Conclusions References Subject Index
Contents of Volume 1A
597 597 598 598 600 I-1
Introduction to the Series
v
Contents of the Handbook
vii
Preface
ix
CORPORATE FINANCE Chapter 1 Corporate Governance and Control ¨ MARCO BECHT, PATRICK BOLTON and AILSA ROELL Abstract Keywords 1. Introduction 2. Historical origins: a brief sketch 2.1. How representative is corporate government? 2.2. Whom should corporate government represent?
3. Why corporate governance is currently such a prominent issue 3.1. 3.2. 3.3. 3.4. 3.5. 3.6.
The world-wide privatization wave Pension funds and active investors Mergers and takeovers Deregulation and capital market integration The 1998 Russia/East Asia/Brazil crisis Scandals and failures at major USA corporations
4. Conceptual framework 4.1. 4.2. 4.3. 4.4. 4.5. 4.6. 4.7.
Agency and contracting Ex-ante and ex-post efficiency Shareholder value Incomplete contracts and multiple constituencies Why do we need regulation? Dispersed ownership Summary and conclusion
5. Models 5.1. Takeover models 5.2. Blockholder models 5.3. Delegated monitoring and large creditors
1 3 3 4 5 5 7 7 8 9 12 12 12 13 13 13 13 14 14 16 17 17 19 19 24 29
xviii
Contents of Volume 1A
5.4. Board models 5.5. Executive compensation models 5.6. Multi-constituency models
6. Comparative perspectives and debates 6.1. Comparative systems 6.2. Views expressed in corporate governance principles and codes 6.3. Other views
7. Empirical evidence and practice 7.1. 7.2. 7.3. 7.4. 7.5. 7.6.
Takeovers Large investors Minority shareholder action Boards Executive compensation and careers Multiple constituencies
8. Conclusion References Chapter 2 Agency, Information and Corporate Investment JEREMY C. STEIN Abstract Keywords 1. Introduction 1.1. Scope of the essay: what’s covered and what’s left out 1.2. Organization
Part A. Investment at the firm level 2. Theoretical building blocks: investment at the firm level 2.1. Models of costly external finance 2.2. The agency conflict between managers and outside stockholders 2.3. Investment decisions when stock prices deviate from fundamentals
3. Evidence on investment at the firm level 3.1. Financial slack and investment 3.2. Direct evidence of agency-related overinvestment 3.3. Evidence on reputational models of investment
4. Macroeconomic implications 4.1. The financial accelerator 4.2. When banks face financing frictions 4.3. Cross-country differences in financial development, investment and growth
Part B. Investment inside firms 5. Theoretical work on internal capital allocation 5.1. Fundamental differences between internal and external capital markets 5.2. Implications for the efficiency of capital allocation 5.3. How information and agency problems shape firms’ capital budgeting practices
31 33 35 41 42 47 49 49 50 59 67 71 73 80 82 86
111 113 113 114 115 116 116 116 116 120 126 127 127 130 131 133 133 134 135 136 136 137 140 145
Contents of Volume 1A
6. Empirical work on internal capital allocation 6.1. The value consequences of diversification 6.2. Evidence on investment at the divisional and plant level
7. Conclusions: implications for the boundaries of the firm References Chapter 3 Corporate Investment Policy MICHAEL J. BRENNAN Abstract Keywords 1. Introduction 2. The objective of the firm and the net-present-value rule 3. Valuation by discounting 3.1. Multi-factor asset pricing models 3.2. The capital asset pricing model
4. Practical approaches to estimating discount rates 4.1. 4.2. 4.3. 4.4.
Estimating equity discount rates in practice From firm cost of equity to firm cost of capital Performance of CAPM-based valuations From firm cost of capital to project cost of capital
5. The certainty equivalent approach to valuation 5.1. The basic theory of martingale pricing 5.2. Estimating risk-adjusted drifts 5.3. Some real options
6. Summary References Chapter 4 Financing of Corporations STEWART C. MYERS Abstract Keywords 1. Introduction 1.1. Theories of optimal financing
2. The Modigliani–Miller value-irrelevance propositions 3. The trade-off theory 3.1. 3.2. 3.3. 3.4. 3.5. 3.6. 3.7.
Taxes Direct costs of financial distress Indirect costs of financial distress – conflicts between creditors and stockholders Other indirect costs of financial distress Evidence on costs of financial distress Leverage and product markets Evidence for the trade-off theory
xix
145 145 147 152 155
167 168 168 169 171 175 178 179 180 180 188 191 192 194 196 197 203 208 209
215 216 216 217 217 218 221 222 226 226 228 229 229 230
xx
Contents of Volume 1A 3.8. Target-adjustment models 3.9. Computational models
4. The pecking-order theory 4.1. 4.2. 4.3. 4.4.
Debt vs. equity in the pecking order What’s wrong with the pecking order as theory? Pecking order vs. the trade-off theory – time-series tests Further tests of the trade-off and pecking-order theories
5. Agency theories of capital structure 5.1. Jensen and Meckling’s pecking order 5.2. Free cash flow, leveraged buyouts and restructurings 5.3. Is there a general free-cash-flow theory of capital structure?
6. What next? 6.1. Compensation and incentives 6.2. Human capital and financing 6.3. Exporting capital-structure theory
References Chapter 5 Investment Banking and Securities Issuance JAY R. RITTER Abstract Keywords 1. Introduction 1.1. Overview 1.2. A brief history of investment banking and securities regulation 1.3. The information conveyed by investment and financing activities
2. Seasoned equity offerings (SEOs) 2.1. Announcement effects 2.2. Evidence on long-run performance 2.3. Reasons for underperformance
3. Short-run and long-run reactions to corporate financing activities 4. Initial public offerings (IPOs) 4.1. 4.2. 4.3. 4.4. 4.5. 4.6. 4.7. 4.8. 4.9.
Overview Short-run underpricing of IPOs Alternative mechanisms for pricing and allocating securities Explanations of underpricing Underwriter compensation Stabilization activities Hot-issue markets Market activity across countries Long-run performance
5. Summary References
231 232 233 234 236 237 238 239 240 242 243 243 244 245 246 247
255 256 256 257 257 259 261 263 263 265 271 274 279 279 281 281 286 291 292 293 294 295 299 300
Contents of Volume 1A
Chapter 6 Financial Innovation PETER TUFANO Abstract Keywords 1. Introduction 2. What is financial innovation? 3. Why do financial innovations arise? What functions do they serve? 3.1. 3.2. 3.3. 3.4. 3.5. 3.6.
Inherently incomplete markets stimulate innovation Inherent agency concerns and information asymmetries stimulate innovation Transaction, search or marketing costs stimulate innovation Taxes and regulation stimulate innovation Increasing globalization and perceptions of risk stimulate innovation Technological shocks stimulate innovation
4. Who innovates? The identities of and private returns to innovators 5. The impact of financial innovation on society 6. Issues on the horizon: patenting and intellectual property 7. Summary References Chapter 7 Payout Policy FRANKLIN ALLEN and RONI MICHAELY Abstract Keywords 1. Introduction 2. Some empirical observations on payout policies 3. The Miller–Modigliani dividend irrelevance proposition 4. How should we measure payout? 5. Taxes 5.1. Static models 5.2. Dynamic models 5.3. Dividends and taxes – conclusions
6. Asymmetric information and incomplete contracts – theory 6.1. Signaling and adverse selection models 6.2. Incomplete contracts – agency models
7. Empirical evidence 7.1. Asymmetric information and signaling models 7.2. Agency models
8. Transaction costs and other explanations 9. Repurchases 9.1. The mechanics and some stylized facts 9.2. Theories of repurchases
xxi
307 308 308 309 310 313 314 315 317 318 320 321 324 327 329 331 331
337 339 339 340 342 351 354 358 359 368 376 377 377 383 386 386 396 399 404 404 407
xxii
Contents of Volume 1A
9.3. Repurchases compared to dividends 9.4. Empirical evidence 9.5. Summary
10. Concluding remarks References Chapter 8 Financial Intermediation GARY GORTON and ANDREW WINTON Abstract Keywords 1. Introduction 2. The existence of financial intermediaries 2.1. 2.2. 2.3. 2.4. 2.5. 2.6. 2.7. 2.8. 2.9.
Empirical evidence on bank uniqueness Banks as delegated monitors Banks as information producers Banks as consumption smoothers Banks as liquidity providers Banks as commitment mechanisms Empirical tests of bank-existence theories Bonds versus loans Banks versus stock markets
3. Interactions between banks and borrowers 3.1. 3.2. 3.3. 3.4. 3.5.
Dynamic relationships and the pros and cons of bank monitoring Monitoring and loan structure Beyond lending: equity stakes, board seats, and monitoring Banking sector structure and lending Credit cycles and the effect of bank funding on lending
4. Banking panics and the stability of banking systems 4.1. 4.2. 4.3. 4.4. 4.5. 4.6. 4.7. 4.8. 4.9.
Definitions of banking panics and the relation of panics to the business cycle Panics and the industrial organization of the banking industry Private bank coalitions Are banks inherently flawed institutions? Information-based theories of panics Other panic theories Tests of panic theories The banking crises during the Great Depression Contagion
5. Bank regulation, deposit insurance, capital requirements 5.1. 5.2. 5.3. 5.4.
The origins of government bank regulation and government deposit insurance Deposit insurance and moral hazard Corporate governance in banks and the moral hazard argument Bank capital requirements
408 410 419 420 422
431 432 432 433 437 437 440 444 448 453 456 458 459 461 462 463 469 474 479 490 494 495 499 501 503 505 507 508 511 516 518 519 520 526 529
Contents of Volume 1A 5.5. Other issues
6. Conclusion References Chapter 9 Market Microstructure HANS R. STOLL Abstract Keywords 1. Introduction 2. Markets, traders and the trading process 2.1. 2.2. 2.3. 2.4. 2.5.
Types of markets Types of orders Types of traders Rules of precedence The trading process
3. Microstructure theory – determinants of the bid–ask spread 3.1. Inventory risk 3.2. Free-trading option 3.3. Adverse selection
4. Short-run price behavior and market microstructure 4.1. A model of short-term price behavior 4.2. The realized spread 4.3. Serial covariance of price changes
5. Evidence on the bid–ask spread and its sources 5.1. The spread and its components 5.2. Cross-section evidence
6. Price effects of trading 6.1. Block trading 6.2. Herding 6.3. Other studies of the effects of trading
7. Market design 7.1. Call-auction markets 7.2. Dealer versus auction markets: the Nasdaq controversy 7.3. Other issues in market design
8. The market for markets: centralization versus fragmentation of trading 8.1. 8.2. 8.3. 8.4.
Evolution of equities markets in the USA Global markets Economic forces of centralization and fragmentation The future structure of markets
9. Other markets 9.1. Bond market 9.2. Currency market
xxiii
532 532 534
553 555 555 556 557 557 558 559 560 561 562 563 566 566 567 568 569 570 572 572 575 577 577 578 579 579 580 583 586 589 589 592 593 595 595 596 596
xxiv 9.3. Futures markets 9.4. Options markets
10. Asset pricing and market microstructure 11. Conclusions References Subject Index
Contents of Volume 1A
597 597 598 598 600 I-1