Sigitas Karpavičius

The Cost of Capital and Optimal Financing Policy in a Dynamic Setting

This paper revisits the Modigliani-Miller propositions on the optimal financing policy and cost of capital in a dynamic setting. In an environment without taxes and bankruptcy costs, the results are generally consistent with Modigliani and Miller Propositions 1 and 2. However, the first proposition should be presented and interpreted more carefully, as given firm characteristics, there is only one optimal capital structure. Thus, a firms capital structure is relevant. A relaxation of assumptions about either taxes or bankruptcy costs leads to conclusions that are generally different from those in Modigliani and Miller (1958). The model predicts that leverage and sales-to-capital ratios decrease but firm size and capital stock increase with the subjective discount factor of the firms manager if there are taxes and bankruptcy costs. The empirical analysis supports these predictions.

The Reaction of the Australian Stock Market to Monetary Policy Announcements from the Reserve Bank of Australia

The aim of this paper is to explore the impact of monetary policy decisions by the Reserve Bank of Australia on the Australian stock market. We find some evidence that equity prices are negatively impacted by unexpected changes in the target cash rate. The result is generally consistent with existing studies that use US data in the analysis. We show that the stock market does not react to raw changes in the target cash rate, the expected component of raw cash rate changes, and the release of the explanatory meeting minutes.

Are Employee Option Proceeds a Source of Finance for Investment

This paper investigates whether employee stock option proceeds, both executive and non-executive are employed by firms to finance investment by exploiting a quasi-natural experiment which mandated option expensing, SFAS 123R. We find that despite a fall in both executive and non-executive option grants and proceeds, investment has increased post-SFAS 123R. The investment’s sensitivity to option proceeds remains constant or even decreases for non-executive option proceeds post-SFAS 123R implying that option proceeds are not an integral source of finance. Our results are not driven by the recent financial crisis as well as the changes in corporate governance and financial constraints over the sample period.

Underwriter Switching in Shelf Offerings

Shelf offerings have risen in importance from 18% of all offerings in 1997 to 81% in 2007. Unlike in traditional offerings, shelf offerings are conducted like an auction in which underwriters tender to place the firm’s shares. This implies that cost-considerations have a more important role in shelf offerings, and that underwriter switching in shelf offerings might have different drivers from traditional offerings. We examine the drivers of switching in shelf offerings and traditional SEOs. The results suggest that switching in shelf offerings and traditional offerings have different drivers: cost-considerations (underwriter reputation) motivate switching in shelf offerings (traditional offerings).

Institutional Ownership and the Rise of Shelf Offerings in U.S. Equity Raisings

Shelf offerings have become the dominant method of issuing seasoned equity over the last decade. We find that the increased institutional ownership of U.S. public firms and in particular shelf issuers is the key determinant in the shift in SEO issue method over time. The increase in institutional ownership provides additional monitoring and mitigates the under-certification problem induced by shelf offerings and lowers issue costs. Firms with higher institutional ownership have a more elastic demand curve and there is less need for underwriters to build demand through marketing.

Conditional Security Choice and the Use of Shelf Offerings

We analyze three decisions in the shelf registration process. Firstly, we examine the determinants of shelf registration statement type, namely universal, common stock, or debt shelf. Secondly, we examine the drivers of the firm’s issue decision, that is, whether or not the firm issues securities under any shelf registration. Thirdly, we analyze the determinants of the debt-equity choice under a universal shelf registration statement. The results show that firms that register equity or debt shelves have characteristics that are common to equity or debt issuers. Firms that register universal shelves, have characteristics similar to dual issuers. Further, we find that larger firms are more likely to conduct offerings under all types of shelf registration statements implying that small firms have limited access to the capital market. The determinants of the debt-equity choice for firms that have an effective universal shelf registration statement are consistent with the prior literature on security issue decisions and the main theories of capital structure. This implies that a firm’s external financing behavior has not changed due to adoption of Rule 415. Firms use shelf offerings in a similar way to traditional security issues in the debt-equity choice decision.