Keith M. Howe

PERPETUITY RATE OF RETURN ANALYSIS

ABSTRACT This paper introduces a new method of capital project analysis called the perpetuity rate of return (PRR). As implied by its name, the PRR is found by transforming a projects cash flow stream into a perpetuity and then relating this value to the required investment outlay. The PRR method is essentially a compromise between the NPV and IRR techniques. Like the NPV, the PRR correctly values a projects cashflows by using the market-determined cost of capital as the discount rate; like the IRR, the PRR is a rate of return that is appropriately compared to the cost of capital to determine a projects acceptability. The new yield-based method fares well in comparison with the IRR on a conceptual level and appears to have practical potential.

Stock Option Expensing: The Role of Corporate Governance

Analysis of the corporate stock option expensing decision (before the practice became mandatory in 2006) continues to be of interest because it provides insight into the underlying factors affecting not only expense recognition, but the overall corporate decision-making process. Using a sample of 207 companies that volunteered to expense options and more than 1,000 non-expensing firms, the authors found that companies that provide more disclosure and appeared to have a stronger alignment of managerial and shareholder interests were also more likely to expense stock options-a finding that the authors view as indirect evidence that voluntary expensing was more likely to occur in companies that practiced effective corporate governance. And consistent with the prediction of efficient market theorists, the study also found no significant market reaction to announcements of these decisions to expense options. Copyright (c) 2008 Morgan Stanley.

Informed Short Selling around SEO Announcements

While much of the prior research on short selling around announcements of seasoned equity offerings (SEOs) has focused on manipulation, it is unclear whether there is also informed short selling around these announcements. We test for informed short selling around SEO announcements by examining the relation between i) pre-announcement short selling and the announcement-period return and ii) changes in short interest around the SEO announcement and the long-term operating and stock price performance following the equity issue. We find that firms with large increases in short interest prior to the SEO announcement exhibit lower (i.e., more negative) announcement-period returns, and that firms with large increases in short interest around the SEO announcement experience inferior long-term operating and stock price performance following the equity issue. We also find that the negative relation between large increases in short interest and long-term operating and stock price performance is more pronounced among shelf offers. This result highlights the informational role of short sellers in identifying opportunistic market timers of equity issues among shelf filers. Our overall results indicate the presence of informed short selling around SEO announcements.

Do CEO Beliefs Affect Corporate Cash Holdings

We develop an expanded trade-off model of cash holdings that incorporates CEO beliefs. The optimistic CEO views external financing as excessively costly but expects this cost to decline over time, thus delaying external financing and maintaining a lower cash balance than rational CEOs. We find that, relative to rational CEOs, optimistic CEOs hold 24% less cash, exhibit a lower change in cash holdings over time, hold lower cash to fund the firms growth opportunities, and save less cash out of current cash flow. We confirm our findings with two different samples of firms and two alternative measures of optimism.

Issue costs and regulated returns: A general approach

This paper sets forth a general, unified procedure for the treatment of flotation costs for the regulated utility, a method which reduces to standard treatments as special cases. In this approach, the regulated return becomes a weighted average of the required rates on different portions of equity capital, portions that are distinguished by whether or not issue costs are incurred in their acquisition. In addition, the method provides solutions for a host of financial environments, including solutions where past flotation costs are to be recognized, and where merged utilities with different flotation-cost recovery patterns must be combined.