Dilip K. Shome

The monitoring rationale for dividends and the interaction of capital structure and dividend decisions

Abstract This paper develops an agency-cost framework for the simultaneous determination of a firms capital structure and dividend decisions. In the model, simultaneity is contingent on the applicability of Easterbrooks (1984) monitoring rationale for paying dividends, which, in turn, is hypothesized to depend on the existence of alternative sources of monitoring. Estimations of the Rozeff (1982) specification for dividend payout for subsamples stratified according to the prevalence of non-dividend monitoring mechanisms and growth-induced capital market monitoring, confirm the sample-specific validity of the monitoring rationale. A simultaneous system of equations is then estimated and, consistent with our hypothesis, simultaneity between capital structure and dividend decisions is observed only for the subsample in which the monitoring rationale for dividends is found applicable.

Firm Value and External Blockholdings

This paper examines the valuation consequences of external blockholdings. The stock market responses to announcement of block formations are positive, on average. Potential sources of gains to blockholders are identified, and the stock market responses are related cross-sectionally to firm-specific variables proxying for these sources and to blockholder-specific characteristics. The announcement period abnormal returns are explained by the potential for wealth transfer from bondholders, block size, and the identity of the blockholder. Changes in operating and performance variables following block formations provide weak evidence of hands-on monitoring by blockholders on an ongoing basis, suggesting that the observed value increases arise from expectations of future takeover gains and/or from limits on future opportunistic managerial behavior.

Dividend Policy and Corporate Monitoring: Evidence from the Regulated Electric Utility Industry

The payment of dividends imposes costs on the firms shareholders in the form of higher taxes (relative to capital gains) and issuance costs arising from the dividend-induced need to acquire external equity, given the firms investment and capital structure policies. Why, then, do firms pay dividends? In particular, why do the more capital intensive electric utilities have a dividend payout rate more than twice that of industrial firms? In simpler terms, why are utilities among the largest suppliers of dividends and simultaneously among the largest sellers of common stock? In this study, we provide some possible insights into the larger dividend puzzle through an empirical investigation of the seemingly extraordinary dividend payout policies of regulated electric utilities.

Exchange Rates and Stock Prices: Are they Related?

Changes in exchange rates are expected to affect the competitiveness of companies: a strong dollar is bad for American exporters and a weak dollar is good. Yet empirical research has not found much evidence of the expected contemporaneous correlation between exchange rate changes and stock returns even for a carefully selected set of exporting firms. Authors have attributed this apparent anomaly to market inefficiency, investor naivete, sample selection, etc. In this paper, we propose a simple extension by looking at a different implication of currency valuation. If a stronger currency signals a stronger economy then the weakness that exporting firms experience in the foreign markets is partially or fully offset by the strength in the domestic economy. We find that positive surprises in GDP announcements are typically associated with a stronger dollar supporting the dual effect of currency changes. The above result implies that a better sample to capture the impact of currency changes would likely be importing firms because an importer is helped by a stronger currency on both dimensions: lower import prices and a stronger domestic economy. Our results are consistent with this explanation. Alternate explanations for the results such as pass-through and hedging are considered.

A Business Model Framework for Dynamic Spectrum Access in Cognitive Networks

We have outlined a comprehensive business framework to evaluate the business impact of dynamic spectrum access technology in cognitive networks. Our model seeks to address the technical feasibility and practicality of this new technology. We attempt to obtain upper bounds on the allowable capital expenditure below which the technology might be worth pursuing for the primary providers. Cognitive radios & networks are bound to open new frontiers in the field of wireless networks and spectrum management and have the potential of becoming success stories in the near future.