Ian G. Sharpe

Capital Structure Dynamics with Interrelated Adjustment: Australian Evidence

The paper examines the dynamics of financial structure decisions through the specification and estimation of a dynamic model of capital structure choice. Using a multivariate adjustment model and pooled annual time series/crosssectional data for 164 publicly listed Australian firms over the 1967–1985 period, we find evidence of interrelated adjustment, interdependence in investment and financing decisions, and very slow adjustment to the desired capital structure. The model also sheds light on the long-run determinants of capital structure of Australian firms, including their debt maturity choice.

Long-run estimates of technological change and scale economies in a dynamic framework: Australian permanent building societies, 1974–1990

Abstract This paper formulates and estimates a dynamic model to investigate the characteristics of the cost function of Australian Permanent Building Societies. While the results suggest that the societies adjust costs quickly to long-run levels, the modelling of cost dynamics is shown to have a significant influence on estimates of scale economies, and on the identification of the timing of shifts in the cost frontier and changes in the growth of total factor productivity.

Financial Distress in Australian General Insurers

We develop and test a statistical model to identify Australian general insurers experiencing financial distress over the 1999-2001 period. Using a logit model and two measures of financial distress we are able to predict, with reasonable confidence, the insurers more likely to be distressed. They are generally small and have low return on assets and cession ratios. Relative to holdings of liquid assets they have high levels of property and reinsurance assets, and low levels of equity holdings. They also write more overseas business, and less motor insurance and long-tailed insurance lines, relative to fire and household insurance. Copyright The Journal of Risk and Insurance, 2007.

Hedging and Choice of Currency Denomination in International Syndicated Loan Markets

This paper examines the determinants of the currency denomination of debt decision of Australian and New Zealand firms and compares it with that of Asian firms around the 1997 Asian crisis. Unlike existing research, our model of currency choice controls for location choice, and includes firm and country specific determinants. The results show demand for hedging is the primary determinant of foreign currency borrowing by Australian and New Zealand firms. In Asian firms however, firm leverage, country political risk and interest rate differentials determine the currency denomination of debt. There is no support for the hedging hypothesis in Asian firms.

Monitoring costs and ownership concentration: Australian evidence

A structured theoretical analysis of the determinants of ownership concentration within the monitoring costs framework is provided, as suggested by Demsetz and Lehn. Within a utility maximizing mean-variance framework, optimal ownership concentration depends on firm size, investor wealth, market return and variance, firm risk, regulation, external market monitoring, free cash flow, the investment opportunity set and amenity potential. Tests of the model on Australian data produced disappointing results over the two sub-periods, 1976–1980 and 1981–1985 with only firm size, free cash flow and share turnover being statistically significant.

Risk-Based Capital Adequacy of Australian Banks

This paper analyses the capital adequacy provisions introduced by the Reserve Bank of Australia from September, 1988 and examines its initial application to three major Australian banks. This risk-adjusted capital adequacy ratio is partial in its coverage and thus a misleading measure of total bank risk. As well, it may distort the allocation of credit. An alternative approach based on option pricing theory is considered.

Are maturity and debt type decisions interrelated? Evidence from Australian firms in international capital markets

Abstract This paper models the interrelationship between maturity and debt type decisions that arise from agency and flotation cost hypotheses. Private debt and short-term debt are substitutes for resolving agency conflicts, whereas large public debt issues and lengthening maturity are alternative mechanisms for mitigating large fixed transaction costs. Using a sample of international bonds and syndicated loans of Australian firms, we find evidence that maturity has a strong direct effect on debt choice, but weak evidence that debt choice affects maturity. However, a direct simultaneous relationship is found when Eurobonds are excluded from the sample or treated as private debt.

Scale and scope economies of Australian permanent building societies in a dynamic framework

In this paper we examine the interrelationship between technological change, branching, and the multi-product cost structure of Australian Permanent Building Societies within a dynamic specification of the cost function. The results strongly support this dynamic formulation, though the speed of adjustment of costs to long-run levels is quite fast. We also find evidence of economies of scale for small societies, suggesting some potential for smaller societies to benefit from increased scale through mergers.

Implicit deposit insurance and deposit guarantees: Characteristics of Australian bank risk premia

This paper examines the hypothesis that CD issue yields of Australian banks incorporate a premium that reflects bank risk. Our empirical analysis of Australian banks’ CD premiums suggests the data is consistent with this hypothesis and hence supports the view that CD holders do not perceive their deposits as being risk-free. Nor do we find any statistically significant difference between the premiums paid by private banks with implicit deposit insurance vis-a-vis those paid by government-owned banks with explicit government guarantees.

Building society ownership structure and capital management

The issue of whether the nature of building society ownership influences capital management of societies is empirically examined. It is found that mutually-owned societies in Victoria, Australia, exhibit significantly different behaviour with respect to capital management than stock-holder-owned societies. The results have implications for prudential regulation and capital management of societies.