Profitable Investment Projects Research Articles

An Empirical Examination of Ownership Structure, Earnings Management and Growth Opportunities in Mexican Market

This paper analyses the influence of ownership structure, board and leverage on the earnings management when companies either face, or do not face, profitable growth opportunities for a sample of 90 listed Mexican firms during the period 2005-2009. The results confirm the relevance of debt and board of directors in terms of earnings management by showing a positive relationship between earnings management and both board of directors and leverage in the presence of growth opportunities. In contrast, this relationship becomes negative when firms have no profitable investment projects. The results also demonstrate the relevance of controlling shareholders on earnings management under a growth opportunity setting. Therefore, our results show that ownership structure, composition and size of board and leverage play a dual role: reduce the earnings management when there are no investments projects, but impact positively in presence of growth opportunities.

Capital Rationing and Managerial Retention: The Role of External Capital

ABSTRACT In modern businesses, firms face new challenges of managerial retention in a capital budgeting process. We consider a model in which a manager privately observes the capital productivity of a project and has access to multiple outside financing options. We show that if the manager can obtain funding from either internal or external capital (but not both), the firm may exclude highly profitable investment projects but fund those projects that have moderate capital productivity, even when there is no limit on capital allocation. Furthermore, the firm may voluntarily impose capital rationing in order to keep the projects within the firm, even though it has sufficient capital to fund such profitable projects. However, if the firm can utilize both the internal and external capital, highly profitable projects are always retained and the voluntary capital rationing is not optimal. Our analysis identifies testable empirical predictions on the association between capital budgeting and external capital.

Why Pay Dividends and Issue Equity Simultaneously? The Controlling Corporate Shareholders' View

This paper proposes an explanation, according to a given investment policy and capital structure, for why some firms pay dividends and issue equity simultaneously. For individual investors, this combination invites additional taxes, wasteful flotation costs, and adverse selection. Within the framework presented herein, dividend policy is tailored for the median shareholder's personal consumption-optimum if the shareholder is dividend-seeking. As long as private benefits from saving taxes and transaction costs outweigh pro-rata costs of equity issue, controlling shareholders find it reasonable to receive positive dividends. They compel the firm to issue equity to finance profitable investment projects.

Resource Allocation and Firm Scope

We develop a theory of firm scope in which integrating two firms into one facilitates the allocation of resources, but leads to weaker incentives for effort, compared with nonintegration. Our theory makes minimal assumptions about the underlying agency problem. Moreover, the benefits and costs of integration originate from the same problem - to allocate resources efficiently, the integrated firm's top management must obtain information about the possible use of resources from division managers. The division managers' job is to create profitable investment projects. Giving the managers incentives to do so biases them endogenously towards their own divisions, and gives them a motive to overstate the quality of their projects in order to receive more resources. We show that paying managers based on firm performance in addition to individual performance can establish truthful upward communication, but creates a free-rider problem and raises the cost of inducing effort. This effect exists even though with perfect information, centralized resource allocation would improve the managers' incentives. The resulting tradeoff between a better use of resources and diminished incentives for effort determines whether integration or non-integration is optimal. Our theory thus provides a simple answer to Williamson's selective-intervention puzzle concerning the limits of firm size and scope. In addition, we provide an incentivebased argument for the prevalence of hierarchically structured firms in which higher-level managers coordinate the actions of lower-level managers.

Financial decisions and growth opportunities: a Spanish firm's panel data analysis

This paper analyses the influence of financial leverage decisions, dividend payout policies and the ownership structure on the firm market value when companies either face, or do not face, profitable growth opportunities. A sample of 101 large non-financial publicly-traded Spanish companies is used. The results confirm the relevance of debt and dividends in terms of firm value creation by showing a negative relationship between firm value and both leverage and dividend payments in the presence of growth opportunities. On the contrary, this relationship turns out to be positive when firms have no profitable investment projects. The results also demonstrate the relevance of ownership structure in the allocation of firm resources.

Estimating the value of the Premier League or the worlds most profitable investment project

This paper shows that market values for UK football (soccer) teams may be described by a remarkably simple regression model. This model is used to estimate the value of the Premier league. A tentative estimate of the Norwegian club Rosenborg Ballklubb is also established. As Rosenborg Ballklub is a ‘membership club’ - meaning that a small entrance fee (independent of the clubs performance) is the real price of ‘a share’ in the club - the return of an investment in the club is shown to be ‘unbelievable’.

Financial Decisions and Growth Opportunities: A Spanish Firms Panel Data Analysis

This paper analyzes the influence of financial leverage decisions, dividend payout policies and the ownership structure on the firm market value when companies either face, or do not face, profitable growth opportunities. We use a sample of 101 large non-financial publicly traded Spanish companies. Our results confirm the relevance of debt and dividends in terms of firm value creation by showing a negative relationship between firm value and leverage in the presence of growth opportunities. On the contrary, this relationship turns out to be positive when firms have no profitable investment projects and dividends show an outstanding role in improving value creation. Our results also demonstrate the relevance of ownership structure in the allocation of firm resources.

Economic influence on rights issue announcement behavior in Malaysia

The negative announcement period return for seasoned equity issues in several developed share markets has been explained as an adverse selection effect to information asymmetry between managers and investors during the expansionary phases of share market cycles. This paper reports a significant positive announcement period return in an emerging share market. The average return during periods of favourable economic conditions is higher than return during unfavourable periods. The term premiums, which decline (rise) during favourable (unfavourable) economic conditions, are correlated with announcement period returns. These findings support the good news hypothesis that the return is positive because investors expect the funds from issues to be used in profitable investment projects in a high growth emerging economy.

Why do Profitable Energy-Saving Investment Projects Languish?

Why do Profitable Energy-Saving Investment Projects Languish?

Partially anticipated events: A model of stock price reactions with an application to corporate acquisitions

This paper presents a model of stock price reactions to partially anticipated events. The model formalizes the intuition that stock price reactions reflect both the economic importance of events and the extent to which events are surprises. Unbiased estimates of the economic importance of partially anticipated events must combine stock price reactions to events with stock price movements in periods when no event occurs. The model is used to estimate the value of acquisition attempts made by frequently acquiring firms. For a sample of thirty active acquirers, the evidence indicates that acquisition attempts were profitable investment projects.

Costly Contracting and Optimal Payout Constraints

groups whose interests can conflict. This paper concentrates on the conflict between the two major groups-the stockholders and the bondholders-and derives an optimal set of contractual arrangements which minimize the costs of this conflict. In our model, these contracts will determine endogenously the optimal investment levels and the dividend policy of a levered firm. Myers [12] has argued that stockholders, who control the firm, could attempt to transfer wealth from the bondholders even by rejecting profitable investment projects. In other words they can choose policies which reduce the market value of the firm. He has indicated that constraints on dividend payouts', self-imposed by stockholders, are a possible solution to the problem of underinvestment. The details of such constraints are documented and anlayzed by Kalay [8, 9], who examines a large random sample of bond indentures. Kalay models the choice of the tightness of the effective dividend constraint and finds it to depend on the investment opportunities facing the firm and its leverage ratio. His analysis provides a possible explanation for dividend payments even when they involve transaction and tax related costs. This paper presents a rigorous theoretical analysis of the form and optimality2 of constraints on dividend payouts to be self-imposed by the shareholders of a levered firm in debt contracts. These optimal contracts are derived endogenously