Barclay Smith

Topics: Finance, Corporate finance, Debt Pages: 40 (10154 words) Published: July 24, 2014
V O L U M E 1 7 | N U M B E R 1 | W I N T E R 2005

Journal of

APPLIED CORPORATE FINANCE
A MO RG A N S TA N L E Y P U B L I C AT I O N

In This Issue: Capital Structure, Payout Policy, and the IPO Process The Capital Structure Puzzle: The Evidence Revisited

8

Michael Barclay and Clifford Smith, University of Rochester

Do Managers Have Capital Structure Targets?
Evidence from Corporate Spinoffs

18

Vikas Mehrotra, University of Alberta, and Wayne Mikkelson

How To Choose a Capital Structure: Navigating the Debt-Equity Decision

26

and Megan Partch, University of Oregon
Anil Shivdasani, University of North Carolina, and
Marc Zenner, Citigroup Global Markets

Morgan Stanley Roundtable on Capital Structure and Payout Policy

36

Clifford Smith, University of Rochester; David Ikenberry,
University of Illinois; Arun Nayar, PepsiCo; and Jon Anda
and Henry McVey, Morgan Stanley. Moderated by Bennett
Stewart, Stern Stewart & Co.

Bookbuilding, Auctions, and the Future of the IPO Process

55

William Wilhelm, University of Virginia and University of Oxford

Reforming the Bookbuilding Process for IPOs

67

Ravi Jagannathan, Northwestern University, and
Ann Sherman, University of Notre Dame

Assessing Growth Estimates in IPO Valuations—A Case Study

73

Roger Mills, Henley College (UK)

Incorporating Competition into the APV Technique for
Valuing Leveraged Transactions

79

Michael Ehrhardt, University of Tennessee

A Framework for Corporate Treasury Performance Measurement

88

Andrew Kalotay, Andrew Kalotay Associates

Morgan Stanley Panel Discussion on Seeking Growth in
Emerging Markets: Spotlight on China

94

Michael Richard, McDonald’s Corp., and Stephen Roach and
Jonathan Zhu, Morgan Stanley. Moderated by Frank English,
Morgan Stanley.

Trade, Jobs, and the Economic Outlook for 2005

100

Charles Plosser, University of Rochester

Leverage

106

Merton Miller, University of Chicago

The Capital Structure Puzzle: The Evidence Revisited
by Michael J. Barclay and Clifford W. Smith, University of Rochester*

I

s there a way of dividing a company’s capital base
between debt and equity that can be expected to
maximize firm value? And, if so, what are the critical factors in determining the target leverage ratio for a given company?
Although corporate finance has been taught in business
schools for more than a century, the academic finance profession has found it difficult to come up with definitive answers to these questions. Part of the difficulty stems from how the discipline has evolved. For much of the last century, finance education was a glorified apprenticeship system designed to pass on to students the accepted wisdom—often codified

in the form of rules of thumb—of successful practitioners. However effective in certain circumstances, such rules tend to harden into dogma and lose their relevance when
circumstances change. A good example is Eastman Kodak’s
complete avoidance of debt financing until the 1980s, a
policy that can be traced back to George Eastman’s brush
with insolvency at the turn of the 20th century.
Over the past several decades, financial economists have
worked to transform corporate finance into a more scientific undertaking, with a body of formal theories that can be tested by empirical studies of corporate and stock market behavior. But this brings us to the most important obstacle

to developing a definitive theory of capital structure: designing empirical tests that are powerful enough to provide a basis for choosing among the various theories.
What makes the capital structure debate especially
intriguing is that the theories lead to such different, and in some ways diametrically opposed, decisions and outcomes.
For example, some finance scholars have followed Miller
and Modigliani in arguing that both capital structure and
dividend policy are largely “irrelevant” in the sense that they have no predictable...
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