Varouj A. Aivazian

Capital Structures in Developing Countries

This study uses a new data set to assess whether capital structure theory is portable across countries with different institutional structures. We analyze capital structure choices of firms in 10 developing countries, and provide evidence that these decisions are affected by the same variables as in developed countries. However, there are persistent differences across countries, indicating that specific country factors are at work. Our findings suggest that although some of the insights from modern finance theory are portable across countries, much remains to be done to understand the impact of different institutional features on capital structure choices.

Do Emerging Market Firms Follow Different Dividend Policies From U.S. Firms

We find that emerging market firms exhibit dividend behavior similar to U.S. firms, in the sense that dividends are explained by profitability, debt, and the market-to-book ratio. However, empirical dividend policy equations are structurally different, indicating different sensitivities to these variables. Additionally, emerging market firms seem to be more affected by asset mix, which seems to be due to their greater reliance on bank debt. Overall, country factors are as important in dividend policies as previous studies find them to be in capital structure decisions. 2003 The Southern Finance Association and the Southwestern Finance Association.

Dividend policy and the organization of capital markets

The hypothesis that dividend policy serves as a signaling mechanism and also serves to control managerial opportunism is usually supported by empirical studies showing that firms in developed countries (e.g. the USA) smooth their dividends as noted by Lintner (Am. Econ. Rev. 46 (1956) 97). However, the theoretical justification for these results largely stems from models based on arms length contracting in capital markets. In contrast, most emerging markets have a bank centered financial system, where contracting is not normally at arms length. Consequently, this paper compares the dividend policy of companies from eight emerging markets to the policies adopted by 100 US firms over the same period. Firms in these emerging markets have more unstable dividend payments than their US counterparts. Regression results indicate that dividends are much less sensitive to past dividends. These results support the substitute view of dividend policy on the premise that the institutional structures of these developing countries make dividends a less viable mechanism for signaling and for reducing agency costs than for their US counterparts operating in more highly developed arms length capital markets.

Dividend Smoothing and Debt Ratings

We find that firms that regularly access public debt (bond) markets are more likely to pay a dividend and subsequently follow a dividend smoothing policy than firms that rely exclusively on private (bank) debt. In particular, firms with bond ratings follow a traditional Lintner (1956) style dividend smoothing policy, where the influence of the prior dividend payment is very strong and the current dividend is relatively insensitive to current earnings. In contrast, firms without bond ratings flow through more of their earnings as dividends and display very little dividend smoothing behavior. In effect, they seem to follow a residual dividend policy.

Corporate leverage and growth the game-theoretic issues

Abstract The equilibrium value of a levered firm facing growth opportunities is shown to involve the valuation of a lottery over (cooperative) games rather than a lottery over specific monetary outcomes. In the absence of assumptions about negotiating risk, the value of the firms claims is seen to be ambiguous even with zero transactions costs. This ambiguity is compounded if the core of the game is empty. This paper rationalizes specific financial instruments and institutions as means for attenuating negotiation costs and core existence problems. Furthermore, the valuation of these instruments requires determining the certainty-equivalent of a lottery over games.

The Coase Theorem and Coalitional Stability

It is the contention of this paper that the Coase theorem has yet to be formulated and proved in a rigorou s manner. The paper addresses the problem of strategic coalitional be havior when more than two agents are involved in the externality. It is shown that there are examples for which nonefficient allocations a re stable in the sense of Aumann-Maschler bargaining sets, thereby vi tiating the Coase theorem. Hence a proper formulation of the Coase th eorem must exclude bargaining-set stability. Copyright 1987 by The Review of Economic Studies Limited.

Reorganization in bankruptcy and the issue of strategic risk

Abstract The decision by creditors to force the firm into bankruptcy, where bankruptcy includes reorganization, is shown to involve the valuation of a lottery over (cooperative) games rather than a lottery over specific monetary outcomes. In the absence of assumptions about strategic (negotiating) risk, the value of creditor claims is seen to be ambiguous. This paper extends Van Hornes model of the optimal initiation of bankruptcy proceedings to include the reorganization option and strategic risk. A modified decision rule is obtained to determine the optimal solution.

Financial constraints and investment: assessing the impact of a World Bank credit program on small and medium enterprises in Sri Lanka

This paper examines the investment behaviour of a sample of small, credit-constrained firms in Sri Lanka. Using a unique panel data set, we analyze and compare the activities of two groups of small firms distinguished by their differential access to financing; one group consists of firms with subsidized loans from the World Bank, while the other group consists of firms without such subsidies. The paper shows that the program led to higher levels of investment for financially constrained firms. However, the evidence is inconclusive on whether the program improved economic efficiency.

Bank Loan Contracting and Corporate Diversification: Does Organizational Structure Matter to Lenders?

This paper investigates the effect of corporate diversification on the pricing of bank-loan contracts. We find that diversified firms have significantly lower loan rates than comparable focused firms, and we find no evidence that diversified firms are subject to more restrictive non-price contract terms pertaining to maturity, collateral requirements, and covenant restrictions. We show that the effect of diversification on the cost of a bank loan is channeled primarily through coinsurance in investment opportunities and cash flows and that the effect is nonlinear: as the extent of corporate diversification grows, the cost-reduction benefit of diversification decreases. Our results indicate that the organizational structure of the firm can alleviate its external financing constraints and that it has an important bearing on the firm’s financing capacity.

Mean-Variance Utility Functions and the Demand for Risky Assets: An Empirical Analysis Using Flexible Functional Forms

In a recent study, Levy and Markowitz [15] demonstrate that, at least for some utility functions, expected utility can be approximated by a judiciously chosen function defined over mean and variance. In addition to resurrecting mean-variance analysis from the limbo into which it was placed by the criticisms of Borch [10] and others, the analysis by Levy and Markowitz yields a more direct approach to portfolio analysis than that provided by the current empirical literature. The current portfolio literature is concerned with notions of efficient sets and systematic risk rather than with utility functions and mean-variance. While much has been gained from a utility-free methodology, it is ultimately predicated upon a separation theorem and, hence, an environment with zero transactions costs. But security markets are not costless and the separation theorem may not hold. In that event, a utility-dependent approach to portfolio analysis could potentially lead to more powerful results especially if such an approach could be empirically implemented.