Degree Of Leverage Research Articles

Testing the information quality of the degree of operating leverage disclosed in financial reports

Taiwan is the only country requiring public firms to disclose the degree of leverage (DOL). Mandatory disclosure of DOL could help amateur investors to get a clear picture of a firm's financial position. This paper tests the relationship between the DOL and the operating risk of companies in Taiwan. The consistency quality of DOL disclosed in financial reports is also examined. DOLs transformed by Model 1 (regulated by the Securities and Futures Commission, Taiwan) and Model 2 (Mandelker and Rhee, 1984) have a more significant relationship with risk. This finding is an important contribution of this paper. We also find that DOL information presented in financial statements is not consistent by time-series comparisons. This paper concludes that the degree of operating leverage presented in financial statements from Taiwanese public companies might lack reliability and relevance.

Leveraged Buyouts in the U.K. and Continental Europe: Retrospect and Prospect

Management buy-outs have become a global phenomenon. This paper examines the key market trends in the UK and Continental Europe and identifies challenges for the future development of the market. Key recent trends include: buy-out funds raised have exceeded funds invested; evidence from Continental Europe indicates an intention by institutional investors to increase their commitment; private equity firms from the United States have become more prominent investors in European buy-outs; increased competition has come from hedge funds and new entrants such as government-sponsored operators, family offices and wealthy entrepreneurs; major changes in deals have been the growth of secondary buy-outs and public-to-private buy-outs; recent lower interest rates have been associated with a rise in debt; size of deal syndicates is increasing in very large deals; average share price reaction to the PTP announcement in the UK during 1997-2003 was 30%; secondary buy-outs have become an important exit route, and there is an increasing number of tertiary or quaternary buy-outs. Future challenges include: realizing the scope for attractive deals from restructuring larger corporations in Continental Europe; encouraging succession planning that will result in buy-outs involving family-owned firms; further differentiation between private equity firms in order to generate upside gains; addressing the competitive challenge to existing financiers from hedge funds; reconciling concerns about the medium term economic performance of European economies and the degree of leverage in buy-out deals; and secondary buy-outs raise major challenges relating to whether managers are buyers or sellers, and the attitudes of limited partners.

Index Futures Trading and Spot Price Volatility

This article contributes to the debate whether the introduction of derivative instruments stabilises or destabilises markets for underlying assets. It has often been argued that due to the higher degree of leverage, futures markets tend to attract uninformed speculative investors and thus destabilise cash markets by increasing volatility. On the other hand, it has been pointed out that futures markets increase the overall market depth and informativeness, are important for price discovery, allow the transfer of risk, and may actually reduce spot volatility. The empirical evidence is controversial and has been concentrated on large capitalisation markets. This paper investigates the issue for a dynamic emerging market, the Athens Stock Exchange, employing a methodology that allows the examination of changes in the nature of volatility rather than changes in volatility per se, and allowing for asymmetric responses to news. To anticipate the results, spot volatility appears unaffected with some evidence to suggest that uncertainty is actually reduced following the introduction of futures trading.

Determinants of corporate debt structure in a privately dominated debt market: a study of the Spanish capital market

To date, corporate debt structure research has focused largely on national debt markets characterized by both public and private debts supplies. However, given that most national debt markets are characterized by the absence of public debt supply, the representative debt market of Spain is used to extend the research on corporate debt structure. A double-hurdle test approach reveals that the likelihood of using bank debt is positively related to firm size and information availability but negatively related to firm credit worthiness, while the likelihood of using non-bank private debt is positively related to firm size, growth potential, relative firm size and degree of leverage. Further, it is found that the amount of bank debt firms hold is positively related to firm size, growth potential, information asymmetry, and age but negatively related to information availability. The amount of non-bank private debt is positively related to firm size but negatively to growth potential and age. Moreover, it is fou...

A process‐driven IT training model for construction: core development issues

Information technology (IT) has often been cited as being able to create competitive advantage. However, the degree of leverage is often dependent upon several factors, not least the type and level of IT training provided, resources available, management commitment, and prevailing level of corporate culture. This paper introduces the generic processes involved in developing an IT training framework in order to support and deliver the business strategy, and presents findings in the form of a generic IT training model. This model identifies the sequential stages needed to commission and deploy IT training in a construction environment in the form of an implementation roadmap. This model was developped with two leading UK construction organizations. Findings have identified that seven core process phases should be considered before committing resources to training. Recommendations include identifying the core business benefits and matching these to the training outcomes, albeit cognisant of barriers such as lack of empowerment, organizational culture, resource limitations, and so on.

Capital structure in South Korea: a quantile regression approach

Knowledge of how South Korean firms choose their capital structures has particular value due to the country's specific corporate structure and the role of leverage in the evolution of its financial crisis of 1997 and recovery. Using a large panel for the years 1992–2001, we investigate the evolution and determinants of Korean firms' capital structure and focus on differences between firms in different quantiles of the debt–capital distribution. Conditional quantile regressions show that while variables associated with standard models of asymmetric information costs are significant throughout the distribution, there are considerable differences, including differences in sign, in their impact on firms with different degrees of leverage. Those observed nonlinearities in the determinants of capital structure are consistent with a model of capital structure that includes both costs resulting from asymmetric information and an upper bound on the debt–capital ratio.

Debt, demographics, and dishonesty

The costs of supporting an aging society, in an era that will experience increased longevity, escalating health care costs, and low birth rates, will become untenable. The adjustments that must ultimately be made will inflict significant economic pain across all sections of society. Many people who regard themselves as being middle class will live out their lives in near-poverty. There are major implications for investment strategies. Long-term returns for most asset classes will be far lower than recent bull markets have led people to expect. Consumers, companies, and local and national governments all acquire debt. The impact of this debt depends on many factors. These include: its real (inflation-adjusted) cost, the degree of leverage and the debt-servicing capability, the uses that are made of the debt, and the identity of the creditors. The aging of western societies is not happening in isolation from demographic trends that are occurring elsewhere in the world. They are reforming totalitarian or corrupt political, legal, and class systems that kept the majority of their populations in poverty. The net result is a dramatic increase in global production capacity.

Corporate Walkout Decisions and the Value of Default

We present a continuous-time asset pricing model of the levered firm where shareholders select not only the timing but also the form of abandonment. Shareholders can walk out of the firm either by (i) defaulting on their debt obligations or (ii) selling their shares to alternative operators of the technologies, as in a corporation sale. The structural model relates shareholders' ex-post choice to both technological and financial factors. Considering that operators' technological supremacy is not universal, we obtain that whereas default necessarily involves an inefficient timing of ownership transfer, corporation sales do not. Then, the likelihood of default being chosen instead of a corporation sale increases with (i) the degree of leverage displayed by the firm and (ii) its technological supremacy. By ignoring corporation sales, existing defaultable bond pricing models have thus a tendency to exaggerate risk premia and underestimate the borrowing ability (debt capacity) of firms.

Quality of Information and Volatility Around Earnings Announcements

On the basis of theoretical work of Kim and Verrecchia (1991a, 1997), this paper investigates the association between volatility around earnings and dividend announcements and the amount of pre-announcement information and the precision of the announced news for a sample of 212 firms drawn from the London Stock Exchange for the period January 1990 to December 1998. The aforementioned theory suggest that the variance of price change around announcement periods is decreasing in the amount of pre-announcement information but increasing in the precision of the disclosed news. The volatility of stock returns in the event window, natural logarithm of the average market value of a firm over the sample period, and the surrogate of precision derived from analytical work of KV (1991a) are assumed to be the operational measures for the variance of price change around announcement periods, the amount of pre-announcement information, and the precision of the announced news respectively. Tests are conducted using both GJR-GARCH (1,1) and the absolute return measure of volatility. After controlling for the magnitude of the average change of earnings per share, the net change in the degree of leverage, and the level of stock market volatility around firm specific news, the following conclusions emerge. First, it is documented that the volatility of stock returns around announcement periods is negatively related to the amount of pre-announcement information. Consistent with Grant (1980), this finding suggests that (small) firms with relatively less pre-announcement information experience high levels of uncertainty before announcement. This high pre-release uncertainty causes analysts and market participants to disagree about the implications of the forthcoming earnings and dividends announcements. When the announcement becomes imminent it tends to contain a lot of surprises that are translated into higher announcement period volatility. Second, it is found that the precision of the disclosed news plays a significant and important role in explaining shifts in volatility around event windows. In more specific terms, the volatility of stock returns around announcement periods is found to be directly proportional to the precision of the information released. Thus, the precision of an announcement is likely to influence investors' trading decisions around future earnings and dividends announcement dates. The primary conclusions of this paper are robust to the announcement of good or bad news, and remain qualitatively unchanged under a number of alternative assumptions about the way we estimate announcement period volatility. To the extent that the surrogates used for the quality of the predisclosure information and the precision of the news disclosed are appropriate operational measures of the unobservable theoretical constructs of precision implied by Kim and Verrecchia (1991a, 1997) analytical work, the evidence presented here is consistent with their theoretical predictions.

Predictability of UK Stock Returns by Using Debt Ratios

The purpose of this study is to examine the ability of debt ratios in predicting company performance and stock returns in the long run. The U.K. companies included in the FTSE-350 index for the past ten years constitute our sample. We rank the companies according to the degree of leverage that they have. Then we examine the predictive ability of the debt burden for shareholder wealth by investigating the cumulative abnormal returns and buy and hold returns in the long-run for a holding period of three years. The results show that companies with moderately low leverage yield buy and hold abnormal returns of up to 20% in three years.

Who Owns Your Sickness in the New Corporate Wellness?

Who Owns Your Sickness in the New Corporate Wellness?

Is the 'Leverage Effect' a Leverage Effect?

The refers to the well-established relationship between stock returns and both implied and realized volatility: volatility increases when the stock price falls. A standard explanation ties the phenomenon to the effect a change in market valuation of a firm's equity has on the degree of leverage in its capital structure, with an increase in leverage producing an increase in stock volatility. We use both returns and directly measured leverage to examine this hypothetical explanation for the as it applies to the individual stocks in the SP it is too small with measured leverage for individual firms, but much too large for OEX implied volatilities; the volatility change associated with a given change in leverage seems to die out over a few months; and there is no apparent effect on volatility when leverage changes because of a change in outstanding debt or shares, only when stock prices change. In short, our evidence suggests that the is really a down market that may have little direct connection to firm leverage.

Share Price Reactions to Ceo Resignations and Large Shareholder Monitoring in Listed French Companies

This study has analysed the share price reactions to changes in top management. A distinction was made among different types of CEO turnover: forced resignation, voluntary departures and age-related retirements. The announcement of a forced CEO resignation is hailed favourably by the market with a small but significantly positive abnormal return of 0.5%. The market may have anticipated the forced turnover since the abnormal return over a one-month period prior to the turnover amounts to 6%. Whereas voluntary resignations do not cause a price reactions, age-related turnover triggers a small negative price reaction. Subsequently, a more detailed classification of the change of top management was made based on the background of the successor (an internal versus external candidate), on the size of the corporation and the degree of corporate diversification. Expectedly, the nomination of an external manager following the performance-related forced resignation of a CEO causes a strong increase in abnormal returns of more than 2%. The cumulative abnormal return of an internal CEO promotion in a poorly performing firms drops by almost 1% on the day of the announcement. Presumably, this is because the internal manager is held (partially) responsible for past poor performance. In companies with good past performance and with internal succession, there is a price decline, but this is not statistically significant. The paper also analysed which corporate governance mechanisms are responsible for forced CEO turnover. A logit regression which accounted for time and industry specific fixed effects did not reveal a relation between performance and turnover. Furthermore, institutional investors, banks and the government do not seem to provoke CEO departures even if they own large blocks of equity. We did not find evidence that the government exerts control in the companies in which it holds majority shareholdings. In contrast, when industrial companies are major owners, there is evidence that forced turnover is facilitated. It also seems that it is easier to remove management in smaller companies than in larger ones. On the part of holding companies, there is only some evidence that they take a monitoring role in the case of other listed holding companies. No correlation was discovered between the degree of leverage and forced CEOs departures, although CEO turnover is facilitated if creditors have their own representatives on the board. Likewise, a high proportion of shareholder representatives on the board leads to a higher probability of forced CEO resignations. However, this probability decreases when the founding family is represented by one or more (executive) directors.

Restoring Global Financial Stability

Recent crises reflect fundamental weaknesses in the operation of the present global financial system and the need for wide-ranging reform. Public debate has been mainly limited to the issues of prudential regulation with little discussion of the basic problems of volatile capital movements, and asset price and exchange rate instability. The degree of leverage now available to financial institutions through the development of derivatives is excessive and should be reduced. The pressure to abolish control over capital movements in developing countries needs to be reconsidered. A central feature of any “new financial architecture” must be a more stable exchange rate system. There are major drawbacks with both “fixed” and free floating rates. We need to devise workable systems of managed rates with stated parities and bands. Changes in parities should be relatively small and frequent to minimise the potential gains for speculators. Such systems are only workable by mutual agreement between limited numbers of countries and currencies. This suggests the need for a two-tier approach with both regional and global arrangements.

Toward An Ex Ante Cost-of-Capital

We use a discounted residual-income valuation model to compute an ex-ante cost-of-capital for a large sample of U.S. stocks that are covered by I/B/E/S analysts. We show that the ex ante cost-of-capital computed in this manner is correlated with a firm's degree of leverage, market liquidity, information environment, and earnings variability. Specifically, the market demands a higher risk premia for stocks with high book leverage and market leverage, low dollar trading volume or market capitalization, low analyst coverage, and more volatile (less predictable) earnings. The market also demands a higher risk premia for stocks with high book-to-market ratios and low price momentum. Traditional market risk proxies such as beta and return volatility are not significantly correlated with the ex ante cost-of-capital.

An Analysis of the Underreported Magnitude of the Total Indirect Costs of Financial Distress

In this paper we examine 1,041 ongoing firms over the time period 1982–92. Using quarterly data for the detection and measurement of the magnitude of the indirect costs of financial distress, we find three important explanatory factors: (a) the distinctiveness of the pattern of increasing financial distress over time, (b) the degree of leverage in the capital structure and (c) the size of the firm. For those firms with a distinctive pattern of increasing financial distress over time, the average annual losses as a percentage of market value is −10.3%. The maximum loss is −76%. Even if the firm never fails, its market value can be severely impacted by the presence of the indirect costs of bankruptcy over time. This study finds a significantly positive relationship between Altman's Z-score and the firm capital investment growth rate. This relation holds after controlling for other variables such as leverage, firm size and market/book ratio. This implies that lost investment opportunities may be also an important part of the total indirect costs of financial distress, which appear now to be much larger than previously recorded.

Money in a globalized world: From monopoly to oligopoly

When addressing issues of global finance, we are accustomed to thinking of money as effectively insular: each currency sovereign within the territorial frontiers of a single state or monetary union. In fact, cross‐border currency competition has become increasingly prevalent. Money today is effectively deterritorialized. What does this mean for national monetary sovereignty? A strictly territorial currency privileges government in relation to societal actors. Conversely, the benefits of monetary sovereignty are noticeably compromised by currency deterritorialization, which gives the private sector a critical degree of leverage over public policy. So long as governments remain the main source of money, however, the state still retains a significant role. Monetary sovereignty has been not so much lost as transformed. Where once existed monopoly, we now find oligopoly—a finite number of autonomous suppliers, national governments, all vying ceaselessly to shape and manage demand. Globalized money, at its most basic, is a political contest for market loyalty.

The Effect of Limited Liability on the Market Response to Disclosure*

Abstract. We formalize the effects of an earnings disclosure on security prices under an assumption of limited liability. We derive various nonlinear relations between equity prices and earnings under a variety of capital structure assumptions and. if possible, we tie the relations attained to results from the existing empirical literature. We also characterize how debt prices respond to earnings when holders of debt have limited liability. Finally, we analyze how changes in the degree of leverage and conversion features of debt affect the relation between price and earnings.

Economies-of-Scale for Real Estate Investment Trusts

Using the translog cost function to estimate economies-of-scale for a sample of Real Estate Investment Trusts for the years 1992-1994, we find significant evidence that economies-of-scale exist for REITs for all years examined. The results show that measurement of scale economies is sensitive to the model used for the measurement. Individual characteristics of the REIT, such as type of management and degree of leverage, affect the magnitude of the scale economy. Additional variables accounting for propertytype diversification and geographic influences have little additional impact on the measured scale economies. Finally, the measured economies-of-scale for REITs vary considerably over time.

Modeling returns to owner-occupied single-family residences

This paper expands previous models of the returns to owner-occupied single-family residences by modelling returns to a specific property of an individual homeowner instead of determining an average market return based on appraised values. Included in the model are transaction costs, degree of leverage, level of price appreciation, the implied rental cost in ownership, tax bracket, and duration of home ownership. Simulation results suggests that the level and timing of transaction costs are important to homeowners and rates of return to owner-occupied single-family residences increase to a point in time and thereafter decline.