Abe de Jong

Capital structure policies in Europe: Survey evidence

textabstractIn this paper we present the results of an international survey among 313 CFOs on capital structure choice. We document several interesting insights on how theoretical concepts are being applied by professionals in the U.K., the Netherlands, Germany, and France and we directly compare our results with previous findings from the U.S. Our results emphasize the presence of pecking-order behavior. At the same time this behavior is not driven by asymmetric information considerations. The static trade-off theory is confirmed by the importance of a target debt ratio in general, but also specifically by tax effects and bankruptcy costs. Overall, we find remarkably low disparities across countries, despite the presence of significant institutional differences. We find that private firms differ in many respects from publicly listed firms, e.g. listed firms use their stock price for the timing of new issues. Finally, we do not find substantial evidence that agency problems are important in capital structure choice.

An empirical analysis of incremental capital structure decisions under managerial entrenchment

Abstract We study incremental capital structure decisions of Dutch companies. From 1977 to 1996 these companies have made 110 issues of public and private seasoned equity and 137 public issues of straight debt. Managers of Dutch companies are entrenched. For this reason a discrepancy exists between managerial decisions and shareholder reactions. Confirming Zwiebel [American Economic Review (1996) 1197–1215] we find that Dutch managers avoid the disciplining role of debt allowing them to overinvest. However, the market reactions show that this overinvestment behavior is recognized. We do not find a confirmation of the adverse selection model of Myers and Majluf [Journal of Financial Economics (1984) 187–221]. This is probably due to the entrenchment of managers and the prevalence of rights issues.

The Disciplining Role of Leverage in Dutch Firms

In this study we investigate the role of leverage in disciplining overinvestment problems. We measure the relationships between leverage, Tobins q and corporate governance characteristics for Dutch listed firms. Besides, our empirical analysis tests for determinants of leverage from tax and bankruptcy theories. Representing growth opportunities, q is expected to be an agency-based determinant of leverage. Simultaneously,q represents firm value, which is determined by leverage and governance structures. We tes a structural equations model in which we deal with this simultaneous nature of the relation between leverage and q. Our results indicate that Dutch managers avoid the disciplining role of debt, when they are most likely to overinvest. Leverage is mainly determined by tax advantages and bankruptcy costs. In addition, we test the impact of leverage on excess investment.We do not find a difference in the influence of leverage on investment between potential overinvestors and other firms. This confirms that the disciplinary role of leverage in Dutch firms is absent. JEL classification code: G32

Determinants of Leverage and Agency Problems: A Regression Approach with Survey Data

This paper reports on empirical investigations of the determinants of leverage and agency problems. Use is made of private data obtained through questionnaires, and a regression model is estimated in which leverage and four agency problems are explained, i.e. direct wealth transfer, asset substitution, underinvestment and overinvestment. The application of regression analysis on survey data is novel in finance. Therefore, this paper contains an in-depth description of the research methods. Results for a sample of Dutch firms confirm that the trade-off between tax advantages and bankruptcy costs determines leverage. Free cash flow and corporate governance characteristics appear to be determinants of overinvestment. Despite finding that agency problems are present, no evidence is found for direct relations between leverage and the agency problems.Abstract This paper reports on empirical investigations of the determinants of leverage and agency problems. Use is made of private data obtained through questionnaires, and a regression model is estimated in which leverage and four agency problems are explained, i.e. direct wealth transfer, asset substitution, underinvestment and overinvestment. The application of regression analysis on survey data is novel in finance. Therefore, this paper contains an in-depth description of the research methods. Results for a sample of Dutch firms confirm that the trade-off between tax advantages and bankruptcy costs determines leverage. Free cash flow and corporate governance characteristics appear to be determinants of overinvestment. Despite finding that agency problems are present, no evidence is found for direct relations between leverage and the agency problems.

The dividend and share repurchase policies of Canadian firms: Empirical evidence based on an alternative research design

We empirically investigate dividend and share repurchase policies of Canadian firms. Our analysis contains two features that are uncommon in finance, while they are encountered in other fields of science. First, we use standard, simultaneous, and nested logit models. By examining different model specifications, we test alternative descriptions of the behavior of decision makers. Second, we use questionnaire data on firm characteristics. We have sent a questionnaire to the 500 largest nonfinancial Canadian companies listed on the Toronto Stock Exchange, of which 191 usable responses were returned. Our results are consistent with a structure in which the company first decides whether it wants to pay out cash to its shareholders or not. In the second stage, the firm decides on the form of the payout: dividends, share repurchases, or both. Payout is determined by free cash flow. The choice for dividends and repurchases depends on behavioral and tax preferences. Furthermore, the payout is less likely to be dividends if the company has executive stock option plans. Finally, we find evidence for the Brennan and Thakor [J. Finance (1990)] model. According to this model, the existence of asymmetric information amongst outsiders is associated with a preference for dividend payments over share repurchases.

Towards a new business history

This article calls for a discussion about business history research. We advocate that the current typical approach in business history – dominantly case study analysis – maintains its prominent position, but the purpose and relevance of this type of research in the scientific method for business history is made more explicit. Moreover, the article proposes the application of additional approaches in business history, which specifically aim to develop theory and test hypotheses. These approaches are well established in the social sciences, but require adaptation to the particular needs of business history. The purpose of this article is to argue that opportunities for scientific explanations in business history are enhanced by engagement with the circle of knowledge creation where theory is confronted with empirical evidence and empirical observations feed back into theory formation.

The Formative Years of the Modern Corporation: The Dutch East India Company VOC, 1602-1623

With their legal personhood, permanent capital with transferable shares, separation of ownership and management, and limited liability for both shareholders and managers, the Dutch East India Company (VOC) and subsequently the English East India Company (EIC) are generally considered a major institutional breakthrough. Our analysis of the business operations and notably the financial policy of the VOC during the company’s first two decades in existence shows that its corporate form owed less to foresight than to constant piecemeal engineering to remedy original design flaws brought to light by prolonged exposure to the strains of the Asian trade. Moreover, the crucial feature of limited liability for managers was not, as previously thought, part and parcel of that design, but emerged only after a long period of experimenting with various, sometimes very ingenious, solutions to the company’s financial bottlenecks.

Changing national business systems:Corporate governance and financing in the Netherlands, 1945-2005

This study traces the evolution of corporate governance and financing structures in the Netherlands during the second half of the twentieth century. A description of Dutch shareholder rights, fi nancing structures, and networks of directors reveals the changes that have occurred in many aspects of the Dutch corporate system over the course of six decades. The case of Royal Ahold illustrates some of the developments that have taken place. Most indicate a transition from a coordinated market economy to a more liberal system. The internationalization of the Dutch economy, which has played an important role in the transition of the system, is reflected in the expansion of Dutch firms beyond the national borders and in the growing number of foreign investors in Dutch fi rms.

Strategic Debt: Evidence from Bertrand and Cournot Competition

We investigate how competitive behavior affects the capital structure of a firm. Theory predicts that the impact of different types of output market uncertainty (in particular, unanticipated shocks in demand and costs) on a firm’s leverage depends on the type of competition in an industry. We test these predictions in a sample of U.S. manufacturing firms by classifying firms into Cournot competition (strategic substitutes), and Bertrand competition (strategic complements). We show that demand uncertainty is positively related to leverage for firms in both the Cournot and the Bertrand sample. Cost uncertainty has a significantly positive impact on the leverage of Cournot firms, but plays a negligible role for Bertrand firms. Our results support the strategic use of debt and highlight the role of firms’ competitive behavior in the product market in their capital structure decisions.

Convertible Arbitrage Price Pressure and Short-Sale Constraints

Using a sample of 4,148 convertibles issued over 1990–2009 by companies listed in 35 countries, the authors exploited worldwide differences in short-sale constraints to examine whether short selling by convertible arbitrageurs creates downward pressure on convertible issuers’ stock prices. They found that short-sale constraints have a positive effect on issue-date abnormal stock returns, which suggests that a substantial part of the stock price effect of convertible issues is attributable to convertible arbitrageurs. Convertible bonds are securities that can be converted, at the option of the holder, into a fixed number of the issuer’s ordinary shares. Convertible arbitrage hedge funds have played an important role in the convertible bond market, especially since the beginning of the 21st century. These hedge funds combine long positions in convertibles with short positions in the underlying stock. We exploited worldwide differences in short-sale constraints to examine whether convertible arbitrage short selling creates downward pressure on convertible issuers’ stock prices. Because arbitrage hedge funds are unable to execute their hedging strategy in markets that are short-sale constrained, we used the existence of short-sale constraints as a proxy for the presence of convertible arbitrage hedge funds in a market. We hypothesized that convertibles issued by companies listed in countries where short selling is legally restricted are associated with more favorable issue-date stock price effects than are convertibles issued in countries where short selling is allowed and practiced. We tested this hypothesis with a sample of 4,148 convertible bonds issued over 1990–2009 by companies listed in 35 countries. In line with our hypothesis, we found that short-sale constraints have a positive effect on issue-date abnormal stock returns. We further found that this effect is stronger in years with higher hedge fund involvement and for offerings expected to induce more arbitrage short selling. In addition, our study maps the global convertible bond market as completely as permitted by publicly available data sources and offers new insights into the determinants of the negative stock price reaction associated with convertible bond offerings. Previous papers have attributed this negative reaction to the signaling content of convertible bond issues. Our approach allowed us to estimate the magnitude of downward price pressure around convertible bond offerings that is attributable to the actions of convertible arbitrageurs rather than to the negative signal inferred from the convertible bond announcement. Our findings suggest that both academics and practitioners who analyze post-2000 convertible bond announcement effects are likely to overstate the negative announcement effects when they fail to control for the short-sale pressure of convertible bond arbitrageurs. On a more general level, our study suggests that stock price behavior around corporate financing events can be substantially affected by short-selling regulations.