Anton Miglo

Capital Structure and Earnings Manipulation

We consider an optimal contract between an entrepreneur and an investor, where the entrepreneur is subject to a double-moral hazard problem (one being the choice of production effort and the other being earnings manipulation). Since the entrepreneur cannot entirely capture the results of his effort, investment is below the optimal level and production effort is socially inefficient. The opportunity to manipulate earnings protects the entrepreneur against the risk of a low payoff when production is unsuccessful. Ex ante, this provides an incentive for the entrepreneur to increase investment and improve effort.

Capital Structure in the Modern World

This book focuses on microeconomic foundations of capital structure theory. It combines theoretical results with a large number of examples, exercises and applications. The book examines fundamental ideas in capital structure management, some of which are still not very well understood in the business community, such as Modigliani and Miller’s irrelevance result, trade-off theory, pecking-order theory, asset substitution, credit rationing and debt overhang. Chapters also cover capital structure issues that have become very important following the recent financial crisis. Miglo discusses the ways in which financial economists were forced to look critically at capital structure, as the problems faced by many companies stemmed from their financing policies following the crisis. The book also discusses links between capital structure and firm’s performance, corporate governance, firm’s strategy and flexibility, and covers such topics as life cycle approach to capital structure management, capital structure of small and start-up companies, corporate financing versus project financing and examples of optimal capital structure analyses for different companies. This comprehensive guide to capital structure theory will be of interest to all students, academics and practitioners seeking to understand this fast-developing and critical area of business management.

Project Financing Versus Corporate Financing Under Asymmetric Information

In recent years financing through the creation of an independent project company or financing by non-recourse debt has become an important part of corporate decisions. Shah and Thakor (JET, 1987) argue that project financing can be optimal when asymmetric information exists between firms insiders and market participants. In contrast to that paper, we provide an asymmetric information argument for project financing without relying on corporate taxes, costly information production or an assumption that firms have the same mean of return. In addition, the model generates new predictions regarding asset securitization.

Financing of Entrepreneurial Firms in Canada: An Overview

Flexibility theory of capital structure, asymmetric information, credit rationing, life cycle theory and market timing are consistent with many patterns of financing of entrepreneurial or small/medium size enterprises (SME) in Canada. Tax theory of capital structure does not seem to play a significant role for SMEs as opposite to large companies while it may affect the choice of securities by firms that use venture capital. More research is required to explain why the amount of loans to SMEs is growing although it increases slower than other loans and why the ratio of SME loans to all business loans is smaller relative to average ratio in other OCDE countries. Despite the wide variety of government support, Canadian entrepreneurs feel that governmental programs need improvement. The volume of equity financing and government financing for entrepreneurs is not significant although it was a substantial increase in venture capital financing in 2014-2015. New forms of financing such as crowdfunding are on the rise. This article provides an overview of entrepreneurial financing in Canada, discusses its major challenges and makes some suggestions.

Capital Structure of Start-Up Firms and Small Firms

An interesting idea is to look at the importance of different factors affecting the capital structure choice at different stages of a firm’s development (so called “life cycle theory” of capital structure). For example, start-up firms usually do not have much profit, so the tax advantage of debt is not as important as it is for a mature firm. Likewise, start-up firms do not usually need to provide strong incentives for managers since there is no large separation between ownership and management as there is in big public corporations. This leads to the idea that mature firms value debt more than start-up firms do.

Capital Structure of Internet Companies: Case Study

The financing decisions and capital structure of Internet companies are analyzed, and observed findings are related to the common capital structure theories. Large Internet companies usually have low debt, and small Internet companies have high debt. It was found that the trade-off theory of capital structure, pecking order theory, market timing theory, and other theories cannot individually explain a firms capital structure. However, they can complement each other in describing some patterns of observed behavior. A number of recommendations for capital structure theory and practice are suggested.

Managers Versus Students: New Approach in Improving Capital Structure Education

According to Graham and Harvey (2001), an immense gap exists between capital structure theories and practice. By analyzing students’ perception of capital structure theories and the differences between their opinion and that of the current CEO’s and managers this paper argues that this can be partially explained by current educational practices. Educators mostly focus on one or maybe two most popular theories and students have much smaller knowledge about other theories. Secondly educational practices favor trade-off theory to asymmetric information based theories. The paper provides some suggestions regarding capital structure education and future research.

Property Rights and Earnings Manipulations

This paper analyzes the links between cash flow rights, control rights and property rights in situations where a firms security holders can manipulate earnings (intertemporal substitution). It is shown that the allocation of these rights a¤ects the incentives of claimholders when intertemporal substitution activities are numerous and cannot be contracted ex-ante. The main results we obtain are: 1) current cash flow rights and residual property rights are connected through the rule of marginal revenues; 2) the allocation of control rights does not necessarily coincide with the allocation of residual property rights; 3) when current cash flow rights are two-part linear, and in some cases when they are three-part linear, the problem of earnings manipulation can be eliminated through the appropriate design of property rights. However, for some contracts earnings manipulation is unavoidable. This theory provides new insights into the link between different rights of the holders of securities.

Corporate Capital Structure vs. Project Financing

This chapter discusses project finance. From my experience, when speaking about project finance people think about different things. Often they are confused because they do not understand why project finance should be discussed as a separate topic since it is, seemingly, a part of almost every other topic including general topics like investments, net present value, etc. We will learn in this chapter that project financing has a very special meaning in finance and is often related to terms like non-recourse debt, limited recourse debt, asset-backed securities, and many others. To begin, let us note that project financing has been used in many important projects around the globe including many historical projects. Below we will review some of them.

Modigliani-Miller Proposition and Trade-off Theory

This chapter considers the three basic ideas of capital structure. The capital structure irrelevance idea, the debt tax shield, and the link between expected bankruptcy costs and optimal capital structure. All of these ideas attempt to provide an answer to the following question: can the firm increase its value by changing its capital structure? Each idea provides a different answer, which makes capital structure a complicated yet exciting topic at the same time.