R. Charles Moyer

Security Analyst Monitoring Activity: Agency Costs and Information Demands

This paper explores the determinants of monitoring activity provided by security analysts. Jensen and Meckling have argued that analysts play the role of monitors of managerial performance as a means of reducing agency costs of debt and equity. The other major role analysts play is that of making security markets more informationally efficient. The empirical results reported in this paper support the role of analyst monitoring as an efficient device for controlling agency-related costs of debt and equity and as a response to the information demands of investors.

Bankruptcy Costs and the Financial Leasing Decision

The theory of financial leasing views financial leases as substitutes for secured debt. Empirical studies have reported a high positive correlation between lease ratios and debt ratios and that lessors earn higher rates of return than lenders. These results contradict traditional leasing theory. They are explained in this paper by recognizing the role bankruptcy costs play in the lease/borrow decision and the nature of the assets to be acquired by a firm. Leasing is shown to involve lower bankruptcy costs than borrowing. Our empirical analysis shows that lessee firms have lower retained earnings relative to total assets, higher growth rates, lower coverage ratios, higher debt ratios, and higher operating risk than non-lessee firms. Lessee firms also have significantly lower Altman Z-scores, a measure of bankruptcy potential. Overall, our results indicate that as bankruptcy potential increases, lease financing becomes an increasingly attractive financing option. We also find evidence to support an industry clientele effect in financial leasing.

Performance, capital structure and home country: An analysis of Asian corporations

Abstract This paper offers an empirical look at the corporate performance and capital structure of large enterprises from four emerging market economies of Asia. The paper combines two strands of business research: one from the international business field on corporate performance and country of origin; and the other from corporate finance research on capital structure. We study 81 corporations from Hong Kong, Malaysia, Singapore and Korea and find that both financial performance and capital structure are influenced by the country of origin. Specifically, we find that Hong Kong corporations have significantly higher returns on equity and invested capital than corporations from the other countries, possibly reflecting the concentrated conglomerate business structure typical of Hong Kong. The performance differences among firms from other countries are not statistically significant. Firms from Korea have significantly higher leverage than firms from the other countries. Leverage itself does not seem to affect corporate performance. The evidence lends only limited support to the extant capital structure theories in these emerging market economies.

Market power and systematic risk

Abstract This paper examines the relationship between market power variables and the systematic risk, beta, of a firm. The study controls for the effects of dividend policy, liquidity, and earnings growth. Market power is measured by firm size (both sales and assets), proportion of industry sales, and the industrys four-firm concentration ratio. The study finds only a weak relationship between individual firm market power and firm risk, but there is evidence of a strong negative relationship between industry concentration and the market risk of the firms in an industry. This indicates that firms in concentrated industries experience lower capital costs than firms in less-concentrated industries. The existence of limit pricing is suggested as an explanation for this finding.

Substitutes for Voting Rights: Evidence From Dual Class Recapitalizations

We offer additional insights regarding the motivation for dual class recapitalizations and their potential impact on managerial entrenchment. We test the general hypothesis that the loss of shareholder monitoring associated with dual class recapitalizations is replaced by alternative monitoring mechanisms. Evidence is found supporting an increase in the use of outside directors and an increase in the use of debt leverage in response to these recapitalizations. Evidence of increased monitoring by financial analysts and institutional investors also is reported, although the casual link to dual class recapitalization transactions is less clear.

A note on the stock market's reaction to the accident at three mile island

This note provides new information regarding the market reaction toward electric utility stocks that resulted both from the accident at Three Mile Island, and the events predating and postdating the accident. The results suggest that some of the market reaction heretofore ascribed to the accident resulted instead from regulatory activity occurring before the accident. We also provide results suggesting that regulatory activity by the Pennsylvania Public Utilities Commission in the wake of the accident served to offset a majority of the increased systematic risk resulting from the accident. Our results imply that previously reported lingering effects of the accident at Three Mile Island may be regulatory effects from events predating the accident.

Dividend policy and regulatory risk: A test of the Smith hypothesis

Abstract This article explores reasons for high observed dividend payout ratios and dividend yields in regulated electric utilities. We argue that monitoring of the capital markets, forced by high dividend payout rates, substitute for the agency control mechanisms that are largely absent for utility firms. We have tested the Smith hypothesis that utility firms use dividend policy as a mechanism for controlling or responding to regulatory risk. Our results are consistent with the Smith hypothesis and suggest that the dividend policies of regulated utilities are influenced significantly by policies adopted by various regulatory commissions.

The accuracy of long-term earnings forecasts in the electric utility industry

This paper examines the accuracy of various methods of forecasting long-term earnings growth for firms in the electric utility industry. In addition to a number of extrapolative techniques, Value Line analyst forecasts are also evaluated. Value Line analyst forecasts for a five-year time horizon are found to be superior to many of the extrapolative models. Among the extrapolative models examined, implied growth and historical book value per share growth rate models performed best. These results provide strong support for using Value Line growth forecasts in cost of capital estimates for electric utilities in the context of utility rate cases. Value Line forecast errors could be explained by changes in dividend payout ratios, the firms regulatory environment and bond rating changes.

An examination of factors influencing aggregate electric utility equity return shortfalls

From 1976 to the present, electric utilities have earned returns that were either appreciably less or greater than their allowed equity return. The evidence suggests that equity earnings shortfalls can be explained in large part by inflation levels and changes in demand for electric power, as well as distortions in the regulatory process.

Nonconvertible preferred stock financing and financial distress: A note

Abstract Nonconvertible preferred stock does not play a major role in the financing of most corporations, with the exception of public utilities. Donaldson (1962) hypothesized that nonconvertible preferred stock will be issued primarily by industrial (non-utility) firms facing financial difficulties. This article investigates this hypothesis. Our results support the financial-distress hypothesis and indicate that industrial issuers of nonconvertible preferred stock have a lower relative market value, a lower interest coverage ratio, a lower level of retained earnings, and a lower equity ratio than do non-issuers.