1、Empirical Corporate Finance,Prepared by Xue Shuang （薛爽） Zhu Kai（朱凯）,Grade,Class participation (20%) Proposal (30%) Final Examination (50%),Requirement for Participation,Ordinary participation Presentation for the selected papers Capital Structure (3 topics) IPO (1 topics) SEO (1 topics) Dividends (1
2、 topics) Takeover (1 topics),Sheridan Titman; Roberto Wessels, The Determinants of Capital Structure Choice, The Journal of Finance Vol. 43, No. 1 (Mar., 1988), pp. 1-19 Owen Lamont, Cash Flow and Investment: Evidence from Internal Capital Markets, The Journal of Finance ,Vol. 52, No. 1 (Mar., 1997)
3、, pp. 83-109 Tim Loughran; Jay R. Ritter, The New Issues Puzzle, The Journal of Finance, Vol. 50, No. 1 (Mar., 1995), pp. 23-51. Roni Michaely; Wayne H. Shaw, The Pricing of Initial Public Offerings: Tests of Adverse-Selection and Signaling Theories, The Review of Financial Studies, Vol. 7, No. 2 (S
4、ummer, 1994), pp. 279-319 Shlomo Benartzi. et., 1997 Do changes in dividends signal the future or the past. The Journal of Finance,vol52. Healy, Paul,1992,Does corporate performance improve after mergers? JFE 31,135-175.,Requirement for Proposal,Database Main findingsProcedure of programming (SAS is
5、 prefered),References,Main:Advanced Corporate Finance Other: Empirical Corporate Finance(Vol I-IV) Handbook of Economics of Finance, 1(A+B) Copeland,Weston, Shastri, Financial Theory and Corporate Policy,Journals in Finance,Tops Journal of Finance (Jstor) Journal of Financial Economics Review of Fin
6、ancial Studies (Jstor) B Journals Journal of Corporate Finance Journal of Financial Research Financial Management Journal of Quantitative and Financial Analysis (Jstor) Journal of Banking and Finance,Related Journals,American Economic Review (Jstor) Quarterly Journal of Economics (Jstor) Journal of
7、Law and Economics Journal of Business (Jstor),Working Papers on NET, www.nber.org,Journals in Chinese,经济研究 经济学季刊 金融研究 会计研究 中国会计与财务研究（CAFR） 中国会计评论 上证研究 深圳交易所研究报告（ ）,There is no fact,But interpretation,An Example,抗日战争期间国民党军队弹药消耗统计（歼灭日军100万）,百团大战期间八路军弹药消耗与歼灭敌军统计,共毙伤日伪军25799人（其中日军20636人）。 共消耗子弹401370发，各
8、种炮弹19130发，手榴弹126602发。 平均每27.19发子弹毙伤一个日伪军,车桥战役期间新四军弹药消耗与歼灭敌军统计,毙伤俘日军465人，伪军483人，总计为948人。 消耗子弹共9993发，手榴弹2144发。 平均每13.2发子弹毙伤一个敌人，每21.5发子弹消灭一个日军。,晋察冀边区抗战七周年统计,作战次数达22554次，毙伤敌伪军214027名，俘虏敌军560名，俘虏伪军40147名，反正的伪军18294名。 消耗的炮弹6549发，掷弹21265发，手榴弹322691发，子弹7501750发。 晋察冀根据地军民七年来每毙伤一名敌伪军耗弹35发，每毙伤俘一名日伪军耗弹27.48发。,
9、结论,共军每2050发子弹毙伤一个敌人的结论是可信的。有较大的可信度的，符合战场上的实际情况。 国民党部队的作战效率远低于共产党部队，如果国民党更慷慨地提供共产党弹药的话，抗日战争的胜利会来得更大。,Financial Decisions in Different Institutions,USA and China,Number of US Nonfinancial Firms 1980-2000,The Evolution of US Firms,Publicly traded firms increased from 3,561 in 1980 to 6,146 in 2000 Only
10、 about one-third of the 3,561 firms remained alive in 2000 A total of 7,355 firms IPOed during this period What happened to the other firms? M & A (3,796 firms) Bankruptcy (639) Buyouts, privatized (335),The Evolution of Chinese Firms,Although I dont have the data at hand, the following is probably
11、true: No effective and timely exit for Chinese firms No corporate control market As a result, many poorly managed firms in China More evidence later,Ownership Structure, 1999,Ownership in China,Ownership Comparison,Ownership structure in the US is not as disperse as it is widely believed On average,
12、 insiders of non-S&P firms owned 48.2% of equity! Even for S&P 500 firms, average insider ownership is 21%! Although ownership in China is more concentrated, the more important distinction probably lies in the nature of ownership! (Private vs. State),CFOs Views on Capital Structure,Percentage Asset
13、Components,Percentage Asset Components,Differences in Asset Structure,Chinese firms have Much lower intangibles Higher cash, inventory, and fixed assets Similar A/Rs! Why? Accounting standards? Lack of property rights protection? Mis-management? Internal capital markets more important? Misclassifica
14、tions?,Percentage Liabilities and Equity Components,Percentage Liabilities & Equity Components,Differences in Capital Structure,Chinese firms have Higher equity Much lower “Other noncurrent liabilities” Similar debt and current liabilities Why? State ownership is high. But are they equity or debt? E
15、quity is cheaper in China? No pension liabilities!,Sources of Funds,Sources of Funds,Differences in Fund Sources,US Net cash flows from operations Sales of investments (both equity and debt) Proceeds from long-term debt issuance Increases in other long-term debt and current debt Stock issuance Sales
16、 of PP&E,China Increases in long-term and current debt (bank borrowings) Net cash flows from operations Sales of investments Stock issuance Sales of PP&E,CFOs View on Investment Decisions (US),Investment and Performance,Uses of Funds,Uses of Funds,Differences in Fund Uses,US Increases in investments
17、 Capital Expenditure Reductions in long-term debt Cash dividends and stock repurchases Acquisitions,China Reductions in debt Capital expenditure Increases in investments Cash dividends Acquisitions,US Composite Market-to-book Ratios,Chinese Composite Market-to-book Ratios,Appropriate Prices of Non-t
18、radable State Shares?,US market-to-book is around 3 Surprisingly, if we price the non-tradable shares at the market level, the M/B ratio is also close to 3 in China! M/B is around 1.5 if we price the non-tradable shares at their book value Questions Are the book values equally accurate? Comparable a
19、ges of the firms? Industry differences?,ROE and P/E Ratios,ROE,P/E Ratios,Dividend Payout and Dividend Yields,Dividend Payout Ratios,Dividend Yield in China,Chapter 2,Valuation and Financing Decisions in an Ideal Capital Market,Learning Objective,Valuation Models in Ideal Capital Market. MM Theorem(
20、1958)-Capital Structure Irrelevance and Determinants of Cost of Equity Portfolio Theory and CAPM Option Pricing Models,Noble Prize Winners,Portfolio theory, Markowitz,(1953; 1990 Noble Prize winner) MM on capital structure, (1958,1961; 1985 1996 Noble Prize winner),ASSUMPTIONS,Capital market are fri
21、ctionless All participants share same expectations All participants are atomistic The firms investment program is fixed and know The firms financing is fixed,Why do we care the unrealistic (ideal) capital market?,Of course, it is never claimed that the real world follows these assumptions. What is h
22、oped is that by modeling the universe of the firms in such a way, and by relaxing the assumptions one by one, it is possible to identify and discuss the weight or relevance of each of the different factors in the search for the optimal financial decisions.,Why We Care about Capital Structure?,The va
23、lue of project is determined by the cash flow and the intertemporal cost of money available for the project. Cost of money is an opportunity cost. Different type of money maybe have different opportunity cost. Does mixture of different source of money have additional value for optimization of invest
24、ment?,Source of Money,Internal vs. External Debt vs. Equity,Classical Capital Structure Perspectives,Durant(1952) summarized current perspectives on capital structure: Net Profit Approach Operating Profit Approach Trade-off Approach,Net Profit Approach,Net profit belongs to shareholders, and the mor
25、e net profit, the more wealth of shareholders. So optimal structure is to maximize the net profit.,B/S,100,Ke,Kb,Kw,Operating Profit Approach,Firm value is determined by the ability of value creation of asset and capital structure is only to distribute the operating profit. So there is irrelevance b
26、etween capital structure and firm value,Kb,Ke,Kw,B/S,Trade-off Approach,As the increasing of debt, the cost of equity increase, but the marginal effect of debt matter more and cost of capital decrease. Above the optimal point, the marginal effect of cost of equity matter more and cost of capital inc
27、rease.,Kw,Kb,Ke,B/S,B/S*,Preliminary Remarks,There are ideas, no formal analysis and not tested.,Development of Capital Structure Theory,MM(1958): Irrelevance Model MM(1963): Relevance Model Miller(1977): Personal vs. Corporate Tax,MM Theorem (1958),MM Proposition I: The market value of a firm is co
28、nstant regardless of the amount of leverage (i.e., debt relative to equity)that the firm uses to finance its assets,Irrelevance Statement,ASSUMPTION Same class of risk; Complete and Perfect Market;No tax; Absence of Arbitrage;,Firm Value,For unleveraged firm:For leveraged firm:,Arbitrage Analysis,If
29、 If you are investors on leverage firm and hold a fraction of its existing shares, and its value is . How will you do?,Arbitrage Analysis (cond),Borrow at the risk-free interest rate Buy of the existing equity at cost of Sell Is there any arbitrage profit?,EXAMPLE,套利过程,作为一位理性的投资者，目前持有L公司1%的股票，市场价值为4
30、00元。将会怎样进行套利呢？ 出售L公司股票，获得400元现金； 按照12%的利率借款300元； 购买NL公司股票，支付666.67元，其余33.33元用于其他投资(或者消费以增加效用)；,套利前后的收益,4. 套利之前，持有L公司股票的收益为400*16%=64元 5. 套利之后，从NL公司获得的收益为666.67*15%=100元，扣除借款所需要支付的利息费用36元，净收益为64元。 套利的结果：NL公司股票价格上升；而L公司股票价格下降，两公司的价值相同。,Cost of Capital,Cost of firm or project(WACC),MM Theorem (1958),MM
31、 Proposition II: The expected return on a firms equity is an increasing function of the firms leverage.,Analysis of MM Proposition II,Is it true? If WACC is constant and WACC is great than cost of debt, MM Proposition II is correct.,Formal Analysis,Risk-neutral Investors,If investors are risk neutra
32、l, that is, they do not demand a premium for risk of the firms assets, then The risk of both debt and equity are function of risk of firms assets, It is inconsistent with MM Proposition II,Risk Premium and risk-free debt,Expected return on assets( ) contains a risk premium, and expected return on eq
33、uity also has a risk premium Debt is risk free Consistent with MM proposition II,Risk Premium and risk-free debt,Assumption 1 Investors demand a premium for firms riskis increased function of firms leverage MM proposition II may be not hold,Conclusions,The present model structure is insufficient to
34、prove that MM Proposition II is true. However, we need to know the nature of firms risk and that of its debt and equity, as well as the markets required return for risk in form of a premium. Change in leverage simply involve redistribution of the firms total risk among the claimants.,MM under Income
35、 Tax(1963),Assumption,Definition of risk class,Effect of Income Tax,Effect of Income Tax on value of Securities,Without Leverage,Effect of Income Tax on value of Securities,BondFirm with Leverage,Equilibrium with Arbitrage,If Yield on portfolio 1(without leverage)Alternative Portfolio(P2),Equilibriu
36、m with Arbitrage,Alternative Portfolio(P2)Yield on P2,Equilibrium with Arbitrage,ArbitrageIf and only if,Portfolio Theory and CAPM,MM theorem is partial equilibrium model (Stiglitz,1969) CAPM is a general equilibrium model on risk-return for all securities.,Constructions of Portfolio Theory,Statisti
37、cal effects of diversification on the expected return and risk of a portfolio; Attitude of investors towards the risk, i.e., risk averse.,Statistics for a portfolio of Two Securities,Expected returnThe standard deviation of the portfolio,Subject to:,Statistics for a portfolio of N- Securities,Expect
38、ed returnStandard deviation,Statistics for a equally weighted portfolio of N-Securities,Expected returnStandard deviationis average variance,Risk Aversion and optimal portfolio in the absence of risk-free securities,Optimal portfolio for less averse investors,Optimal portfolio for more averse invest
39、ors,Indifference curve,Efficient Frontier,Inefficient area,Portfolio Separation Theorem: Optimal Portfolio with Risky and Risk-free Securities,Expected returnStandard deviation,Portfolio Separation Theorem,Old optimal portfolio for less averse investors,Old optimal portfolio for more averse investor
40、s,Indifference curve,Old efficient frontier,Inefficient area,T,New efficient frontier,New optimal portfolio for less averse investors,New optimal portfolio for more averse investors,Capital Market Equilibrium,Capital Market LineSecurity Market Line,Option Pricing -Binomial approach,Expected return i
41、s binominal distribution If nature is good, If nature is bad,Valuation with Binomial Pricing Model,Case 1: risk-free debtIf,Valuation with Binomial Pricing Model,Case 2: Default-risky debt If it is good, debtor get X, shareholders get If it is bad, Debtor get shareholders get 0.,Valuation with Binom
42、ial Pricing Model,Hedge portfolio: long position in firms asset and short position in equity.,Valuation with Binominal Pricing Model,Valuation of equity and risky debt,A Proof of MM Proposition I Based on Binomial Pricing Model,For an unlevered firmFor an levered firm with risk-free debt,A Proof of
43、MM Proposition I Based on Binomial Pricing Model,If Buy a of both the firms equity and debt, and his cost is Payoff at T will beArbitrage profit is,How about default-risky debt? It is your task to give proof,Valuation of Option and Pricing of securities,What is Option? Choice Basic Options Call Opti
44、on Put Option,Payoff Structure of Option,Call optionPut option,Put-Call Parity Theorem,Hans Stoll(1969)V is current value of underlying asset.,Applying the P-C Parity Equation to Valuation of Securities,Limited Liability Equity is an call option on asset and buy a put option from debtor.,Black-Schol
45、es Option Pricing Model (BSOPM),Additional assumptions The risk-free interest rate is constant The future value of underlying asset is log-normally distributed, or instantaneous returns on the underlying asset are normally distributed with a constant mean ( ) and variance ( ),Black-Scholes Option Pricing Model (BSOPM),For the price, C, of a European call option,Valuation of Securities on BSOPM,Risk of Securities on BSOPM,Galai and Masulis(1976),Expected Return on BSOPM,MM, CAPM, BSOPM together,
