V O L U M E 1 7 | N U M B E R 1 | W I N T E R 2005
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
Michael Barclay and Clifford Smith, University of Rochester
Do Managers Have Capital Structure Targets?
Evidence from Corporate Spinoffs
Vikas Mehrotra, University of Alberta, and Wayne Mikkelson
How To Choose a Capital Structure: Navigating the Debt-Equity Decision
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
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
William Wilhelm, University of Virginia and University of Oxford
Reforming the Bookbuilding Process for IPOs
Ravi Jagannathan, Northwestern University, and
Ann Sherman, University of Notre Dame
Assessing Growth Estimates in IPO Valuations—A Case Study
Roger Mills, Henley College (UK)
Incorporating Competition into the APV Technique for
Valuing Leveraged Transactions
Michael Ehrhardt, University of Tennessee
A Framework for Corporate Treasury Performance Measurement
Andrew Kalotay, Andrew Kalotay Associates
Morgan Stanley Panel Discussion on Seeking Growth in
Emerging Markets: Spotlight on China
Michael Richard, McDonald’s Corp., and Stephen Roach and
Jonathan Zhu, Morgan Stanley. Moderated by Frank English,
Trade, Jobs, and the Economic Outlook for 2005
Charles Plosser, University of Rochester
Merton Miller, University of Chicago
The Capital Structure Puzzle: The Evidence Revisited
by Michael J. Barclay and Clifford W. Smith, University of Rochester*
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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