Garry J. Twite

An International Comparison of Capital Structure and Debt Maturity Choices

This study examines the influence of institutional environment on capital structure and debt maturity choices by examining a cross-section of firms in 39 developed and developing countries. We find that a countrys legal and tax system, the level of corruption and the preferences of capital suppliers explain a significant portion of the variation in leverage and debt maturity ratios. Our evidence indicate that firms in countries that are viewed as more corrupt tend to use less equity and more debt, especially short-term debt, while firms operating within legal systems that provide better protection for financial claimants tend to have capital structures with more equity, and relatively more long-term debt. In addition, the existence of an explicit bankruptcy code and/or deposit insurance is associated with higher leverage and more long-term debt. We also find that firms tend to use more debt in countries where there is a greater tax gain from leverage, while firms in countries with larger government bond markets have lower leverage, suggesting that government bonds tend to crowd out corporate debt. Countries with more extensive defined benefit pension funds have higher debt ratios and longer debt maturities, whereas those with more extensive defined contribution fund activities have lower debt ratios. In addition, debt ratios are lower in countries that limit the bond holdings of pension funds. Finally, we do not find a significant association between financing choices and the size of the insurance industry.

Capital Structure Choices and Taxes: Evidence from the Australian Dividend Imputation Tax System

The introduction in 1987 of a dividend imputation tax system in Australia represented a significant change to the tax framework. To the extent that tax incentives influence the use of debt financing, changes in tax laws that alter these incentives will lead to changes in corporate capital structures. This paper examines the changes in corporate capital structure around the introduction of a dividend imputation tax system. The introduction of dividend imputation provides an incentive for firms to (a) reduce the level of debt financing utilized where this incentive varies across firms depending on the firm’s effective corporate tax rate, and (b) increase the level of external equity financing. The results present evidence consistent with these incentives.

Gold Prices, Exchange Rates, Gold Stocks and the Gold Premium

This paper studies the exposure of the stock prices of Australian gold-mining firms to changes in gold prices and the valuation effects of gold price exposure. Gold-mining firms have significant gold price exposure; the price of the average gold-mining stock moves 0.76% for each 1.00% change in Australian-dollar-denominated gold prices. Evidence from the behaviour of stock price sensitivities suggests that gold-mining firms can be represented as a portfolio of gold assets and embedded real options. Simple discounted cash flow models systematically underestimate the price of gold stocks. The evidence suggests that the valuation error is due to both the failure of discounted cash flow models to reflect managerial flexibility that is embedded in the operation of gold mines and the misuse of discounted cash flow techniques.

Corporate Governance and the CEO Pay-Performance Link: Australian Evidence

We examine the influence of corporate governance mechanisms, namely blockholdings and board structure, on CEO pay-performance sensitivity in listed Australian firms. Results highlight blockholders’ role in shaping observed pay-performance associations and their impact varying with their independence and relative magnitude of ownership. Monitoring blockholders increase the sensitivity of long-term at-risk pay to performance, better aligning manager and shareholder interests. However, consistent with a shorter investment horizon, insider blockholders increase (decrease) the responsiveness of cash bonuses (long-term at-risk pay). Finally, consistent with them affording less effective monitoring, larger boards raise (lower) the sensitivity of known pay (long-term at-risk pay) to performance.

Arbitrage Opportunities in The Australian Share Price Index Futures Contract

This study examines the pricing behaviour of share price index futures contracts traded on the Australian market. Particularly, we investigate the relationship between futures prices and the no-arbitrage price predicted by the current spot prices. Consistent with similar studies of U.S. markets, we find that the observed share price index futures prices differ from those predicted by the no-arbitrage prices, but that the size and sign of this difference is not constant across the contracts or across the time period included in our sample. The explanations suggested in the literature for the existence of these price differences are predominantly institutional in nature. These include differential tax treatment, short selling constraints, thin trading and transaction costs. We find that these explanations do not appear to be capable of explaining the size or sign of the pricing differences we observe.

The Pricing of SPI Futures Options with Daily Futures Style Margin Payments

Empirical evidence on the pricing behaviour of options on index futures contracts traded on USA and UK futures markets reveals that pricing errors and implied volatility estimates differ systematically across exercise price and time to maturity. The introduction on 17 June 1985 of options on share price index futures contracts on the Sydney Futures Exchange, presents the opportunity to examine the pricing of pure futures options, that is, options with daily futures style margin payments. This paper examines the pricing of SPI futures options The results reveal that the pricing of SPI futures options is not well described by a pure futures option pricing model derived under the assumptions of frictionless markets and non-stochastic interest rates. The model underprices both call and put options. Further, implied volatility increases as the option becomes more in/out-of-the-money.

The Pricing of Australian Index Futures Contracts with Taxes and Transaction Costs

This paper examines the pricing behaviour of the Australian share price index futures contracts, incorporating taxes and transaction costs. The Australian SPI futures contract provides an interesting research setting to investigate futures pricing because of the combination of a relatively liquid futures market and a broadly based index portfolio with significant transaction costs, together with a tax system which differentiates between trades in the spot and the futures markets for at least one class of investors. The results presented are consistent with the existence of transaction costs as an explanation for the divergence between observed futures prices and predicted prices. The observed futures prices generally lay within the estimated transaction cost bounds.

Urban Density, Law and the Duration of Real Estate Leases

This study explores the relationship between a country’s legal system and how its cities develop by examining the considerable variations in commercial real estate lease duration (or term) across both countries and cities. We find that the cross-country variation in lease duration and building construction is related to the content (common versus civil law) and efficiency (integrity and enforceability) of the legal system in the respective countries. First, we find that countries with a common law system and lower levels of corruption tend to have longer leases. Second, we find that in the United States, high-rise Class A office buildings tend to have tenants with longer term leases, suggesting that the advantages associated with being able to write and enforce a long term lease is particularly important for the development of high-rise office buildings. Finally, we find that there are in fact more high-rise office buildings in countries with more efficient legal systems. 2012 Elsevier Inc. All rights reserved.

Determinants of Dividend Policy in Chinese Firms: Cash Versus Stock Dividends

The Chinese market is characterized by state-controlled and closely held firms as well as significant differences in economic development and legal structures at the provincial level and corporate regulations that require firms seeking external financing to show a history of dividend payment. Using a sample of listed Chinese firms, we investigate the likelihood of paying dividends, different forms of dividends and market reactions to various dividend announcements. We find that profitable, low leverage, high cash holding, stronger shareholder protection firms, and those firms with state ownership prior to listing and undertaking subsequent equity offerings are more likely to pay dividends and cash dividends, in particular. Firms appear to cater to investor demands in setting dividend policy; hence firms with a large proportion of non-tradable shares are more likely to pay cash dividends. Consistent with the use of stock dividends to attract the attention of analysts, we also find that growing firms with high levels of retained earnings and greater investment in fixed assets pay stock dividends and these firms’ dividend announcements are associated with significant positive market reactions and increased analyst following.

Effect of Stochastic Interest Rates on the Pricing of SPI Futures Contracts

The model most often used in empirically testing the pricing of share price index futures contracts is the no-arbitrage model. But this model is actually a forward, not a futures, pricing model. To apply the model to SPI futures, we must assume the equality of forward and futures prices. But the forward price and futures price need not be equal if interest rates are stochastic. This paper examines the appropriateness of assuming the equality of forward and futures prices. Cox, Ingersoll and Ross (1981) demonstrate that forward-futures price differential is given by the local covariance between the rate of return on the futures contract and the rate of return on a risk-free pure discount bond. The results presented in this paper question the appropriateness of assuming the equality of forward and futures prices, providing limited support for non-zero local covariance.