Charles E. Edwards

Financial Objectives of Small Firms

Goals perceived by business managers in practice may differ from those postulated in finance theory. Such a divergence between practice and theory is found in a perceptual survey of small-business managers. This paper reports on the financial goals perceived as important by small-business managers and discusses the implications of the findings. 1 1 The authors gratefully acknowledge the financial and administrative support provided by the Petroleum Marketing Education Foundation. Only the authors’ views are reported here, however,

Marginal Stockholders and Implied Tax Rates

In this REVIEW some years ago, Edwin Elton and Martin Gruber (1970) used the concepts of market equilibrium and differential tax rates between capital gains and dividend income to structure a theoretical model which they then used empirically to estimate marginal stockholder tax rates. Their specification of an equilibrium condition is appropriate for a security seller who qualifies for preferential tax treatment of capital gains. However, their assumption that such a stockholder is the marginal stockholder in a market equilibrium is questionable. This assumption, along with disregard of transactions and other costs, is essential to their empirical derivation of stockholder tax rates. This note presents an alternative explanation of their empirical results.

Pricing New-issue and Seasoned Preferred Stocks: A Comparison of Valuation Models

We compare three alternative models for valuing fixed-rate preferred stocks: the perpetuity model and two models derived from option pricing theory. The parameters necessary to use these models were first approximated using estimation samples of new-issue and seasoned preferred stocks, and subsequently used to price validation samples of preferred stocks. We then compared each models predicted prices with actual market prices. The results provide strong evidence that the simple perpetuity model more accurately predicts the prices of new issues of preferred stocks. The option models, however, appear to price the seasoned issues better, although the evidence is less conclusive. Overall, the perpetuity model appears to be less sensitive to violations of key assumptions than the OPT-derived models.

Age Effects on Managerial Compensation in Small Firms

A number of factors exert significant influences on levels of executive pay In small firms. For example, CEOs of larger firms generally earn larger compensation than do CEOs of smaller firms. Similarly, more profitable firms tend to pay their CEOs more than do less profitable firms. Where survey data are used to prescribe compensation levels In small firms, the analyst must ascertain that comparability of circumstances exists. Otherwise, the compensation prescribed may fall short of the competitive level required to attract and retain competent managers. The present study suggests the addition of an “age effect” to be considered along with other factors In evaluating salary data.

Risk-return characteristics of convertible preferred stock: Comment

Soldofsky’s findings are provocative. For example, differences in contractual features of convertible preferred, straight preferred, and common stocks would lead one to expect that convertible preferred stocks have risk and return levels falling between those of straight preferred and common stocks. Convertible preferred stocks, like straight preferreds, typically have prior claims on corporate income ahead of common stock, but, unlike straight preferreds, they also provide an opportunity for price appreciation from the conversion privilege. Since the advantageous combination of ”safety” and “growth” in the convertible security is intended to appeal to investors seeking intermediate levels of risk and return, Soldofsky’s findings are surprising. The empirical findings of the present study conflict with those of Soldofsky; we find risk and return to be positively associated.

Financial Leverage Analysis for Small Business

The effects of financial leverage on equity returns may be analyzed in either of two frameworks. When using the net-operating-income model to evaluate leverage, the small-business analyst, unwittingly and by default, makes several implicit assumptions. Most of these implicit assumptions are unrealistic and too restrictive for small businesses. Unencumbered by such restrictive conditions, the cash-flow model can be tailored to meet the distinctive characteristics of small businesses.