Amilcar Armando Menichini

A Dynamic Approach to the Dividend Discount Model

We derive a dynamic model of the firm with endogenous investment and leverage ratio within the framework of the dividend discount model (DDM). Our valuation model incorporates two relevant components, namely, managerial flexibility and long-run growth. We dispense with any utility specification capturing the preferences of shareholders and obtain closed-form solutions for the firm problem. A standard parameterization suggests that the value of the real options and long-run growth opportunities can easily represent more than 8% and 10% of share price, respectively. We also find that these two components of the stock price are both complements and countercyclical. We finally identify industries where valuation models that do not incorporate these features can lead to considerable underpricing of securities.

On the Value and Determinants of the Interest Tax Shields

We use a dynamic model of the firm to ascertain both the value and the determinants of the debt tax shields. For a representative U.S. firm, we find that the value of the interest tax shields represents less than 5 % of firm value, and it varies considerably across U.S. industries. Our results also show that this component of firm value behaves counter-cyclically over the business cycle. Finally, besides the interest rate on debt and the corporate income tax rate, we find that the curvature of the production function is one of the main determinants of the tax advantage of debt.

A Dynamic Model of the Firm: Structural Explanations of Key Empirical Findings

We derive a dynamic model of the firm in the spirit of the trade-off theory of capital structure that explains firm behavior in terms of firm characteristics. We show our model is consistent with many important findings about the cross-section of firms, including the negative relations between profitability and leverage, and between dividends and investment-cash flow sensitivities. The model also explains the existence of zero-debt firms and their observed characteristics. These results have been used to challenge the trade-off theory and the assumption of perfect capital markets. We revisit these critiques and provide structural explanations for the regularities we replicate.

On the determinants of firm leverage: evidence from a structural estimation

Purpose - – The purpose of this paper is to investigate the phenomena of convergence and stability of leverage reported by Lemmon Design/methodology/approach - – A dynamic trade-off model of the firm was used to simulate investment, leverage, and payout decisions for different types of firms. From an econometric standpoint, the Efficient Method of Moments was used to recover the structural parameters. Findings - – The structural model generates a leverage ratio that oscillates around a long-run, time-invariant level and consistently reproduces the convergence and stability of leverage reported by Lemmon Practical implications - – Determining the optimal capital structure of a firm is a complex problem that has challenged academics and practitioners for a long time. Understanding leverage decisions is of great importance not only for financial managers, but also for investors, such as banks, debt-holders, equity-holders, and other capital providers, who need to understand how firms make capital structure decisions in order to achieve an efficient allocation of funds. Originality/value - – The author shows that the firm-specific fixed effects in leverage regressions are not related to the usual determinants (e.g. profitability, market-to-book ratio), but to the primitive characteristics of the firm (e.g. elasticity of capital in the production function, the volatility of profits, the capital depreciation rate, the income tax rate, etc.)

Pensions and Intertemporal Choice: Evidence from the U.S. Military

We study a choice made by over 20,000 U.S. military personnel annually between the High-3 and Redux retirement plans. Compared to High-3, Redux offers a

Dynamic Model of Firm Valuation: A New Methodology and Its Empirical Validity

30,000 current lump sum payment in exchange for lower future annuity payments. Despite break-even discount rates between 10% and 25%, about 40% of individuals chose Redux. The likelihood of choosing Redux is decreasing with the break-even discount rate and is related to individual demographics. The implied personal discount rates from this choice are around 9.2%, much lower than found previously. Offering this choice has already saved the government over

The Retention Impacts of the Forthcoming U.S. Military Retirement Reform

2 billion in future retirement payments.

How Do Firm Characteristics Affect the Corporate Income Tax Revenue

We propose a dynamic version of the dividend discount model, solve it in closed-form, and assess its empirical validity. The valuation method is tractable and can be easily implemented. We find that our model produces equity value forecasts that are very close to market prices, and explains a large proportion (around 83%) of the observed variation in share prices. Moreover, we show that a simple portfolio strategy based on the difference between market and estimated values earns considerably positive returns. These returns are uncorrelated with the three risk factors in Fama and French (1993).

Hot Spot Policing: A Study of Place-Based Strategies to Crime Prevention

In 2018, the USA military will introduce a new retirement system that reduces the value of the traditional 20 years-of-service cliff-vesting pension and introduces a defined contribution for all service members. The personnel planning and budgetary consequences of this change depend crucially on how it will impact service member’s retention decisions. Survey results from USA military personnel suggest there will be a small increase in retention of enlisted service members in the early-career years, and a considerable decrease in retention of officers at midcareer.

Hot Spot Policing: A Study of Place-Based Strategies for Crime Prevention

We use a dynamic model of the firm to study the determinants of the maximal tax rate (i.e., the corporate income tax rate that maximizes tax proceeds). Under a standard parameterization of the model, we find that the curvature of the production function, the market cost of capital, and the operating costs are among the main determinants of that maximal rate. We also find that the maximal tax rate is around 68% for a representative firm and it varies across U.S. industries in the range 64%-74%. Finally, our results show that the maximal rate behaves procyclically over the business cycle.