Capital Structure and Corporate Financing Decisions

Given the dramatic changes that have recently occurred in the economy, the topic of capital structure and corporate financing decisions is critically important. The fact is that firms need to constantly revisit their portfolio of debt, equity, and hybrid securities to finance assets, operations, and future growth.

Capital Structure and Corporate Financing Decisions provides an in-depth examination of critical capital structure topics, including discussions of basic capital structure components, key theories and practices, and practical application in an increasingly complex corporate world. Throughout, the book emphasizes how a sound capital structure simultaneously minimizes the firm's cost of capital and maximizes the value to shareholders.

• Offers a strategic focus that allows you to understand how financing decisions relates to a firm's overall corporate policy
• Consists of contributed chapters from both academics and experienced professionals, offering a variety of perspectives and a rich interplay of ideas
• Contains information from survey research describing actual financial practices of firms

This valuable resource takes a practical approach to capital structure by discussing why various theories make sense and how firms use them to solve problems and create wealth. In the wake of the recent financial crisis, the insights found here are essential to excelling in today's volatile business environment.

Acknowledgments ix

1 Capital Structure: An Overview 1
H. Kent Baker and Gerald S. Martin

Part I The Elements of Capital Structure 15

2 Factors Affecting Capital Structure Decisions 17
Wolfgang Bessler, Wolfgang Drobetz, and Robin Kazemieh

3 Capital Structure and Corporate Strategy 41
Maurizio La Rocca

4 Capital Structure and Firm Risk 59
Valentin Dimitrov

5 Capital Structure and Returns 75
Yaz Gulnur Muradoglu and Sheeja Sivaprasad

6 Capital Structure and Compensation 93
Alan Victor Scott Douglas

7 Worldwide Patterns in Capital Structure 111
Carmen Cotei and Joseph Farhat

Part II Capital Structure Choice 127

8 Capital Structure Theories and Empirical Tests: An Overview 129
Stein Frydenberg

9 Capital Structure Irrelevance: TheModigliani-Miller Model 151
Sergei V. Cheremushkin

10 Trade-Off, Pecking Order, Signaling, and Market Timing Models 171
Anton Miglo

11 Estimating Capital Costs: Practical Implementation of Theory’s Insights 191
Robert M. Conroy and Robert S. Harris

12 Economic, Regulatory, and Industry Effects on Capital Structure 211
Paroma Sanyal

13 Survey Evidence on Financing Decisions and Cost of Capital 229
Franck Bancel and Usha R. Mittoo

14 Survey Evidence on Capital Structure: Non-U.S. Evidence 249
Abe de Jong and Patrick Verwijmeren

Part III Raising Capital 261

15 The Roles of Financial Intermediaries in Raising Capital 263
Neal Galpin and Heungju Park

16 Bank Relationships and Collateralization 281
Aron A. Gottesman and Gordon S. Roberts

17 Rating Agencies and Credit Insurance 299
John Patrick Hunt

18 Secured Financing 319
Hugh Marble III

19 Sale and Leasebacks 335
Kyle S. Wells

Part IV Special Topics 351

20 Financial Distress and Bankruptcy 353
Kimberly J. Cornaggia

21 Fiduciary Responsibility and Financial Distress 371
Remus D. Valsan and Moin A. Yahya

22 The Lease versus Buy Decision 387
Sris Chatterjee and An Yan

23 Private Investment in Public Equity 401
William K. Sjostrom Jr.

24 Financing CorporateMergers and Acquisitions 419
Wolfgang Bessler, Wolfgang Drobetz, and Jan Zimmermann

Answers to Chapter Discussion Questions 445

Index 475

H. KENT BAKER, PHD, CFA, CMA, is University Professor of Finance and Kogod Research Professor at the Kogod School of Business at American University, Washington, D.C. He has published extensively in leading academic and professional finance journals including the Journal of Finance, Journal of Financial and Quantitative Analysis, Financial Management, Financial Analysts Journal, and Journal of Portfolio Management. Recognized as one of the most prolific authors in finance during the past fifty years, Professor Baker has consulting and training experience with more than 100 organizations and has been listed in fifteen biographies.

GERALD S. MARTIN, PHD, is an Associate Professor of Finance at the Kogod School of Business at American University, Washington, D.C. He has published in top scholarly journals, including the Journal of Financial Economics and Journal of Financial and Quantitative Analysis. Before embarking on his academic career, Professor Martin spent seventeen years in the private sector as president and CEO of TMI Aircraft Finance/TMI Leasing, LLC, financing aircraft and aviation products worldwide for Textron Financial Corporation, as well as in marketing and research at Bell Helicopter Textron Inc.

Given the dramatic changes that have recently occurred in the economy, including the global financial crisis, the topic of capital structure and corporate financing decisions is critically important. But despite being one of the most highly researched topics in finance, many questions within this area still exist.

That is why Capital Structure and Corporate Financing Decisions, part of the Robert W. Kolb Series in Finance, has been created. Filled with in-depth insights and practical advice, this book contains detailed discussions of essential capital structure components; key financial theories as well as empirical support for them; and practices involving corporate financial policies, strategies, and choices. Along the way, the book emphasizes how a sound capital structure can simultaneously reduce a firm's cost of capital and increase value to shareholders.

With chapters from leading academics and researchers from around the world, this reliable resource provides a synthesis of the current state of capital structure and puts a firm's financing decisions in perspective. Divided into four comprehensive parts, it skillfully:

• Examines the factors influencing capital structure decisions as well as the interactions among capital structure, strategy, firm risk, returns, and compensation

• Highlights the key issues involved in capital structure choice

• Explores the various aspects of raising capital, including bank relationships and collateralization, rating agencies and credit insurances, secured finance, and sale and leasebacks

• Discusses special topics involving financial distress, the lease-versus-buy decision, private investment in public equity, and financing mergers and acquisitions

While questions still remain on how firms should determine their financing mix, extensive empirical and theoretical evidence is available to help you unravel the capital structure puzzle. This timely guide contains a wealth of information that will allow you to understand the factors that influence capital structure and financing decisions, and put you in a better position to effectively use these insights in real-world situations.

Given the dramatic changes that have recently occurred in the economy, including the global financial crisis, the topic of capital structure and corporate financing decisions is critically important. But despite being one of the most highly researched topics in finance, many questions within this area still exist.

That is why Capital Structure and Corporate Financing Decisions, part of the Robert W. Kolb Series in Finance, has been created. Filled with in-depth insights and practical advice, this book contains detailed discussions of essential capital structure components; key financial theories as well as empirical support for them; and practices involving corporate financial policies, strategies, and choices. Along the way, the book emphasizes how a sound capital structure can simultaneously reduce a firm's cost of capital and increase value to shareholders.

With chapters from leading academics and researchers from around the world, this reliable resource provides a synthesis of the current state of capital structure and puts a firm's financing decisions in perspective. Divided into four comprehensive parts, it skillfully:

• Examines the factors influencing capital structure decisions as well as the interactions among capital structure, strategy, firm risk, returns, and compensation
• Highlights the key issues involved in capital structure choice
• Explores the various aspects of raising capital, including bank relationships and collateralization, rating agencies and credit insurances, secured finance, and sale and leasebacks
• Discusses special topics involving financial distress, the lease-versus-buy decision, private investment in public equity, and financing mergers and acquisitions

While questions still remain on how firms should determine their financing mix, extensive empirical and theoretical evidence is available to help you unravel the capital structure puzzle. This timely guide contains a wealth of information that will allow you to understand the factors that influence capital structure and financing decisions, and put you in a better position to effectively use these insights in real-world situations.