Capital structure in the modern world

Capital Structure in the Modern World Anton Miglo Capital Structure in the Modern World Anton Miglo Capital Structure in the Modern World Anton Miglo Nipissing University, Ontario, Canada ISBN 978-3-319-30712-1 ISBN 978-3-319-30713-8 DOI 10.1007/978-3-319-30713-8 (eBook) Library of Congress Control Number: 2016940577 © The Editor(s) (if applicable) and The Author(s) 2016 This work is subject to copyright All rights are solely and exclusively licensed by the Publisher, whether the whole or part of the material is concerned, specifically the rights of translation, reprinting, reuse of illustrations, recitation, broadcasting, reproduction on microfilms or in any other physical way, and transmission or information storage and retrieval, electronic adaptation, computer software, or by similar or dissimilar methodology now known or hereafter developed The use of general descriptive names, registered names, trademarks, service marks, etc in this publication does not imply, even in the absence of a specific statement, that such names are exempt from the relevant protective laws and regulations and therefore free for general use The publisher, the authors and the editors are safe to assume that the advice and information in this book are believed to be true and accurate at the date of publication Neither the publisher nor the authors or the editors give a warranty, express or implied, with respect to the material contained herein or for any errors or omissions that may have been made Cover illustration: Cover image © CVI Textures / Alamy Stock Photo Printed on acid-free paper This Palgrave Macmillan imprint is published by Springer Nature The registered company is Springer International Publishing AG Switzerland To my parents Alla and Viktor Preface Capital structure is a very interesting and probably one of the most controversial areas of finance It is an area of permanent battles between different managers defending their favorite approaches, between theorists and practitioners looking at the same problems under different angles, and between professors and students since the area is complicated and requires a superior knowledge of econometrics, microeconomics, accounting, mathematics, game theory etc Many of the results obtained in capital structure theory over the last 50–60 years have been very influential and led their authors to great international recognition Among the researchers who contributed significantly to capital structure theory, note Nobel Prize Award winners Franco Modigliani, Merton Miller, Joseph Stiglitz, and most recently Jean Tirole Although until recently capital structure theories did not have strong support from practitioners and were too complicated to teach at colleges and business schools, they are quickly gaining recognition at universities and in the real world This field has become extremely intriguing to potential employees and students The roles of investment banker and corporate treasurer, which require fundamental capital structure education, are very popular This book focuses on the microeconomic foundations of capital structure theory Some areas are based on traditional cost-benefit analyses, but most include analyses of different market imperfections, primarily asymmetric information, moral hazard problems and, more recently vii viii Preface developed, imperfections involving incomplete contracts Knowledge of game theory and contract theory prior to reading this book is beneficial but I aim to present the material in the most accessible way possible, with lots of examples for readers with different levels of knowledge For additional readings in the field of capital structure, I recommend Capital Structure and Corporate Financing Decisions (edited by Baker and Martin, 2011) and Financing Growth in Canada (edited by Halpern, 1997) Both of these editions have a more applied approach to capital structure, including empirical research and econometrics, and cover a lot of interesting topics relating to capital structure and financing decisions I would also recommend the journalofcapitalstructure.com website dedicated to capital structure discussions This book attempts to explain the basic concepts of capital structure as well as more advanced topics in a consistent fashion The first part is focused on providing an introduction to the major theories of capital structure: Modigliani and Miller’s irrelevance result, trade-off theory, pecking-order theory, asset substitution, credit rationing, and debt overhang I think that the majority of the basic ideas in capital structure compliment each other quite logically although significant disagreement between researchers still exists about which theory is more important in practice Part II discusses such topics as capital structure and a firm’s performance, capital structure and corporate governance, capital structure of small and start-up companies, corporate financing versus project financing and examples of optimal capital structure analyses for some companies Many advanced theories of capital structure discussed in Part II are still growing areas of research At the same time, the objective of the book is not to cover as many topics of capital structure as possible but rather to review the major theoretical concepts and provide basic tools to understand the complicated area of capital structure Many of the existing ideas of capital structure were created by “injecting” a new type of market imperfection into different capital structure analyses From my experience, the comprehension of this fact is crucial to understanding the theory of capital structure At the beginning of my PhD studies I was spending a lot of time explaining to my adviser why debt financing and equity financing create different degrees of risk for a company At the time, I was surprised not to see an extremely enthusiastic Preface ix reaction to my “discoveries” from my PhD adviser who was mostly pointing to the importance of market imperfections in my research When teaching capital structure in my classes, I am always primarily concerned with how well students understand the difference between perfect and imperfect markets The challenge for me has been to explain the importance of the marginal differences in models’ assumptions These differences are often responsible for large variations in models’ predictions and their capacities to explain existing empirical evidence It has been a fascinating experience for me to see how much progress students demonstrate in understanding different financial concepts This book was inspired by over 20 years of my experience in capital structure research I was also inspired by my experience with teaching finance courses at different universities in Europe and North America including courses directly related to capital structure such as Financing Strategies and Corporate Governance, Advanced Corporate Finance, Financial Management II, and Entrepreneurial Finance It was also inspired by my working experiences in areas of capital structure management including issuing stocks and bonds in commercial banks The financial crisis of 2008 and 2009 also provided extra motivation It seemed that many companies faced problems that stemmed from their financing policies Some discussions in this book are devoted to this topic Anton Miglo North Bay, Ontario, Canada References Baker, H., & Martin, G (Eds.) (2011) Capital structure and corporate financing decisions, Robert W.  Kolb series in Finance John Wiley and Sons, Inc Halpern, P (Ed.) (1997) Financing growth in Canada University of Calgary Press   Answers/Solutions to Selected Questions/Exercises  239 NPV ( F ) = 0.5* 60 + 0.5 * 60 − 20 = 40 NPV ( S ) = 0.5 * 20 + 0.5 * 90 − 20 = 35 Since F has a higher NPV than S, the shareholders will choose F. For example, the firm can issue a risk-free debt with face value 20 Now suppose that the cost of the project is 50 Now the projects’ NPVs are: NPV ( F ) = 10; NPV ( S ) = Project F still has a higher NPV than S. Which project will be chosen by the shareholders? Suppose the firm can raise the 50 by issuing a bond with a face value of 50 The shareholders earnings from taking project F are: / ( 60 − 50 ) + / ( 60 − 50 ) = 10 And those from S are: / ( 90 − 50 ) + / ( ) = 20 Shareholders will prefer project S which leads to an asset substitution problem Note also that the lender’s expected cash flow from project S is / ( 20 ) + / ( 50 ) = 35 which is less than 50 if the shareholders choose project S What should the face value of debt D be in order for creditors to have an incentive to invest in the project? Suppose that D > 50 If F is chosen, the shareholders’ payoff is / ( 60 − D ) + / ( 60 − D ) = 60 − D if D < 60 Otherwise, it is If S is chosen, the shareholders’ payoff is / ( 90 − D ) + / * = 45 − / D Comparing F and S we find that, since D > 30, S will be chosen How we find the minimal acceptable value of D for creditors? Their expected cash flow should cover the initial investment 50: / * D + / * 20 = 50 This gives D = 80 So the equilibrium scenario in this seemingly very simple problem is that the firm will borrow an amount 50 by promising to return 80 and the shareholders will undertake project S which has a smaller value compared to project F. If the creditors miscalculate the shareholders’ incentives it may lead to their loss in equilibrium (a) Project A’s NPV is 40 (expected earnings minus cost) and Project B’s is 15 (b) Considering a debt with face value 40, the shareholders’ payoffs are: 240  Answers/Solutions to Selected Questions/Exercises If A: / * 40 + / * 40 = 40 If B: / (110 − 40 ) + / * = 35 Therefore, project A will be chosen The creditors will be interested in providing the firm with the needed funds because debt is essentially risk-free when the firm takes project A (c) In order to be able to raise debt, the firm needs to convince the potential creditors that they can earn at least 50 % (on average) Otherwise the creditors would prefer to invest in risk-free government bonds If the debt face value is 60 (= 40 * (1 + 0.5 )), the shareholders’ expected payoffs will be as follows If A: 0.5 ( 20 ) + 0.5 ( 20 ) = 20 If B: 0.5 ( ) + 0.5 ( 50 ) = 25 Therefore, project B will be chosen In this case, the creditors’ expected payoff is 0.5 * 60 + 0.5 * = 30, which is less than the cost of the investment As a result, they will not be willing to lend the money (d) The maximal possible face value of the debt is 110 (otherwise the shareholders not receive any profit) Therefore the maximal expected payoff to the creditors is 0.5 * 110 = 55 < 60 So there is no equilibrium where creditors can count on earning at least at a minimal acceptable interest rate of 50 % Chapter (a) The firm’s expected earnings increase by 100, 000 * 0.4 = 40, 000 which is greater than the 30000 investment cost So the NPV of the project for the firm equals 100, 000 * 0.4 − 30, 000 = 10, 000 (b) Without the new project, the shareholders’ earnings are: (100, 000 − D ) * 0.4 If D = 20, 000, the shareholders’ expected earnings are (10, 000 − 20, 000 ) * 0.4 = 32, 000 If the firm undertakes the new project the shareholders’ expected payoff will be (100, 000 − 20, 000 ) * 0.8 − 30, 000 = 34, 000 > 32, 000 so the project will be undertaken (c) Consider D = 60, 000 Without the new project the shareholders’ expected earnings are (100, 000 − 60, 000 ) * 0.4 = 16, 000 If the firm undertakes the new project the shareholders’ expected payoff will   Answers/Solutions to Selected Questions/Exercises  241 be (100, 000 − 60, 000 ) * 0.8 − 30, 000 = 2, 000 < 16, 000 so the project will not be undertaken (d) Debt overhang; higher debt increases the likelihood of debt overhang (a) The NPV = 3000 − 2000 = 1000 > (b) Without the new project, the shareholders’ expected payoff is: / (10000 − 6000 ) = 2000 Now consider the new investment opportunity Let F be the face value of the new debt The expected payoff to the new debtholders: / * F = 2000 , thus F = 4000 The shareholders’ payoff is * (13000 − 6000 − 4000 ) = 1500 This is less than the shareholders’ payoff without the new project Thus, the project will not be undertaken (c) Now suppose the initial debt is junior and the firm can issue a senior debt to finance the new project The face value of the new senior debt is 2000 (since the total earnings are at least 2000 in both states) So the shareholders’ expected payoff, if the new project is undertaken, is: * (13000 − 6000 − 2000 ) = 2500 This is greater than 2000 So the new project will be undertaken (d) Suppose the incumbent debtholders agree to finance the new project with a new (junior) debt with a face value (including principal and interests) of 2200 Suppose the shareholders accept financing from the incumbent creditors The shareholders’ payoffs with the new project will be 0.5 * (13, 000 − 6, 000 − 2, 200 ) = 2400 This is greater than 2, 000 and hence the shareholders will be interested in having a deal with the incumbent creditors Now consider the incentive for the creditors Without the new project their expected payoff is 0.5 * 6, 000 + 0.5 * 4, 000 = 5, 000 With the project it is: 0.5 * ( 6, 000 + 2, 200 ) + 0.5 * ( 7,000 ) − 2, 000 = 5, 600 So the deal is beneficial for both the shareholders and the creditors (e) Minimal for creditors: 1000 Maximal for shareholders: 3000 Use the proof of Propositions 5.3 and 5.4 (f ) Free rider-problem 242  Answers/Solutions to Selected Questions/Exercises Debtholders will sell the debt for 5000 To see this, note that in the current situation debtholders will receive: / * 10000 + / * = 5000 Will shareholders repurchase the debt? Currently, the shareholders’ expected payoff (given that corporate tax is 40  %) is: / (18000 − 10000 ) * (1 − 0.4 ) + / ( ) = 2400 The new shareholders will be able to pay 5000 for the newly issued shares if they get 25/27 of the firm’s equity To see this note that the firm’s net income after the debt repurchase in the bad state will still be and that in the good state it will be 18000 * 0.6 = 10800 Since this occurs with a 50 % probability, new shareholders will need 10000 in that state So their fraction should be equal to 25/27 The initial shareholders’ fraction of equity is then 2/27 and their expected payoff is / 27 * 10800 = 800, which is less than 2400 Part II Chapter True True True Consider first financing for stage We have 0.25 * D = 0.1 Hence D = / In stage investors require a fraction of equity s1 such that: s1 * 0.7 + s1 * 0.25 * (1 − / ) = 0.1 Therefore s1 = / 17 Now consider the payoff of shareholders of b in case b decides to mimic g This equals 15 * 0.1 + 15 * 0.8 *  −  = 29 If a signaling equilibrium 17 17  5 50 exists, the shareholders’ payoff for type b is pb1 + pb − C1 − C2 = 0.7 (the present value of b) Thus, a separating equilibrium exists because 29 / 50 < 0.7 Consider pooling equilibrium where both firms issue equity We have αe = 0.1 0.1 = 0.3 * 0.3 + 0.7 * 0.1 + m + 0.12 0.28 + m   Answers/Solutions to Selected Questions/Exercises  243 Consider the incentives for type It’s optimal choice depends on 0.1( 0.42 + m ) It holds if m > 0.42 0.12 > 0.28 + m Chapter The expected earnings of project equal 2.5 and they are greater than that of project So from the firm’s point of view, the manager should choose project The manager’s expected payoff if project is chosen equals 0.2 and 0.5 for project If D = the probability of bankruptcy equals zero and the manager chooses project since 0.5 > 0.2 If D > 0, the manager’s expected payoff under project is 0.2 * ( − D ) / and for project it is 0.5 * ( − D ) / The manager will choose project if D > 45 / 19 D = 45 / 19, If the real value of debt equals 45 / 19 * ( − D ) / + 45 / 38 * ( D / ) = 6525 / 3610 This amount can be provided by debtholders and in this case the rest should be raised by selling equity (a) The first-best effort maximizes the firm’s value: 2e − 2e2 Socially optimal e* = / (b) E will maximize 2ke − 2e2 , where k is the fraction of equity that belongs to E Optimal e′ = k / For any k < 1, e′ < e* If the manager owns less than 100 % of the equity, the level of effort is below the first-best level The manager’s profit is then k2/2 To find the optimal contract, we have to find the value of k that will maximize the entrepreneur’s profit under the condition that the investor’s expected profit is not less than b This condition is 2e (1 − k ) = k (1 − k ) ≥ / The left side of this inequality reaches its maximum when k = / In this case I′s expected payoff is 1/4 E′s expected payoff is k2/2 It is increasing in k Hence the optimal k is the largest value of k that satisfies I’s budget constraint, i.e 1/2 Optimal e = / and E′s expected payoff is 1/8 (c) Two cases are possible (1) 2e < D In this case the manager maximizes / ( 4e − D ) − 2e2 So optimal e = / The manager’s pay- 244  Answers/Solutions to Selected Questions/Exercises off is / − D / (2) 2e > D In this case the manager maximizes / ( 2e − D ) + / ( 4e − D ) − 2e2 So optimal e = / The manager’s payoff is / − D / By comparing the manager’s payoffs in each case we find that if D < / the optimal e = / and otherwise e = / Now to find D note that the investor’s payoff should be greater than b So in the second case D = / 2b It is possible only if b < 15 / 18 That is our case So the firm can be financed with debt with face value 3/8 and the manager’s profit is 1/4 in this case (d) The manager’s payoff is higher under debt financing Equity financing As was shown, earnings will not be manipulated in this case E will maximize ke + 2k − e2 , where k is the fraction of equity that belongs to E Optimal e′ = k / To find the optimal contract, we have to find k that will maximize the entrepreneur’s profit under the condition that the investor’s expected profit is not less than 19/32 This condition is (1 − k ) ( e + ) = (1 − k )  k  +  ≥ 19 / 32 2  The left side of this inequality is decreasing in k and equals 19/32 when k = / In this case I′s expected payoff is 19/32 E′s expected k    payoff is k  +  It’s increasing in k Hence the optimal k is the larg2 est value of k that satisfies I′s budget constraint E′s expected net payoff when k = / is 57 / 32 − / 64 = 105 / 64 Debt financing E will use EM if R10 = Otherwise, E loses control of the firm and gets nothing in the second period Optimal e equals e′ = (1 + c ) / = / 16 Since R = regardless the value of r, I′s payoff is D Optimal D= b= 19 / 32 E′s payoff is then 245/128 This is better than E′s payoff in the case of equity financing without EM   Answers/Solutions to Selected Questions/Exercises  245 Chapter (a) Period The first-best effort maximizes the firm’s value: 2e − 2e2 Socially optimal e* = / (b) In the case of equity financing E will maximize 2ke − 2e2 , where k is the fraction of equity that belongs to E Optimal e′ = k / For any k < 1, e′ < e* E′s profit is then k2/2 To find the optimal contract, we have to find k that will maximize E′s profit under the condition that the investor’s expected profit is not less than b This condition is 2e (1 − k ) = k (1 − k ) / ≥ / The left side of the inequality reaches its maximum when k = / In this case, I′s expected payoff is 1/4 E′s expected payoff is k2/2 It is increasing on k Hence the optimal k is the largest value of k that satisfies I′s budget constraint, i.e 1/2 Optimal e = / and E′s expected payoff is 1/8 (c) Now consider debt financing Two cases are possible (1) e < D In this case the manager maximizes / ( 4e − D ) − 2e2 So optimal e = / E′s payoff is / − / 3D (2) e > D In this case the manager maximizes / ( 2e − D ) + / ( 4e − D ) − 2e2 So optimal e = / E′s payoff is / − / D By comparing the manager’s payoffs in each case we find that if D < / optimal e = / and otherwise e = / Now to find D, note that the investor’s payoff should be greater than b So in the second case D = / 2b It is possible only if b < / 8, which is our case So the firm can be financed with debt with face value 3/8 and the manager’s profit is 1/4 in this case (d) Debt is better because E′s payoff is higher in this case (e) Period The first-best effort maximizes the firm’s value: e= / 2e1 + 2e2 − 2e12 − 2e2 Hence e= (f ) Under equity financing, E has a fraction k of the firm’s equity So E will maximize k ( 2e1 + 2e2 ) − 2e12 Optimal e1′ = k / Similarly we find e ′2 = (1 − k ) / I′s payoff equals 246  Answers/Solutions to Selected Questions/Exercises (1 − k ) ( 2e1 + 2e2 ) − 2e22 = − k − (1 − k ) If 2 k = / 2, it equals 3/8. E′s payoff also equals 3/8 (g) Now consider debt financing Two cases are possible (1) ( e1 + e2 ) < D In this case E maximizes / ( ( e1 + e2 ) − D ) − 2e12 So the optimal e1 = / (2) ( e1 + e2 ) > D In this case E maximizes / ( 2e1 + 2e2 − D ) + / ( ( e1 + e2 ) − D ) − 2e12 So optimal e1 = / In this case I′s payoff is 2/3D So D equals 9/16 e2 = so ( e1 + e2 ) > D Similarly to the way we did it in period one can show that the second case is better for E and it works for I So the firm can be financed with debt with a face value of 9/16 E’s profit is 2e1 + 2e2 − 2e12 − / = / (h) So one can see that in period 2, equity is a better financing structure (j) An optimal capital structure in this case is debt financing in period and equity financing in period It can also be interpreted as a convertible debt or convertible preferred equity that are converted into common equity in period 2 The choice between the ID and IE is given by: pj = −0.3 0.2 Fj − D pj = −0.3 0.2 Fj − D It can be rewritten as: The choice between the ID and the OD is given by: p j ( 0.5Fj − D ) = p j ( Fj − D′ ) − 0.3 (1 − p j )   Answers/Solutions to Selected Questions/Exercises  247 This equation can be rewritten as: pj = −0.3 − D + D′ − 0.3 − 0.5Fj Finally, the choice between the OD and IE is given by: p j ( Fj − D′ ) − 0.3 (1 − p j ) = 0.3 p j Fj − 0.3 This equation can be rewritten as: Fj = D′ − 0.3 0.7 The marginal entrepreneur with Fj = F * and p j = p* is indifferent between all types of financing where F* = D′ − 0.3 0.7 and p* = 0.21 0.7 D + 0.2 D′ − 0.06 Chapter True True (a) The new project has a positive net present value (NPV) because / * 2, 000 + / * 5000 > 3500 248  Answers/Solutions to Selected Questions/Exercises (b) The face value, d′, of this debt can be found from the following equation: 3000 = d ′ * / + / * Therefore d ′ = 6000 The shareholders’ expected payoff without the new investment is / * ( 20000 − D ) = 6000 With the new project, it will be / ( 20000 + 5000 − D − d ′ ) = 5500 Since the expected payoff without the new project is more than that with the project, it will not be undertaken (c) The face value d can be found from: 3000 = d * / + / * 2, 000 Here d = 4000 The shareholders’ expected payoff is (note that the shareholders get nothing if B is realized): / * ( 20000 − D + 5000 − d ) = 6500 This is greater than 6000 (the shareholders’ expected payoff without new investment), and thus the project will be undertaken and it will be financed with non-recourse debt (d) The new project has a negative net present value (NPV) because 0.4 * 4, 000 − 0.1 * 20000 + 0.1 * 2000 < (e) The face value, d ′, of this debt can be found from the following equation: 1000 = d ’* 0.4 + 0.6 * This means that if G is realized, the new debtholders will receive the face value of the debt; if, however, B is realized, the firm’s cash flow is 2000, which is less than the face value of the senior debt, leaving the new creditors with nothing Therefore, d' = 2500 The shareholders’ expected payoff without the new investment is 0.5 * ( 20000 − 15000 ) = 2500 With the new project, it will be 0.4 * ( 24000 − 15000 − 2500 ) = 2600 Since the expected payoff with the new project is more than it is without the project, it will be undertaken (f ) In this case, the debtholders’ payoffs depend only on the returns from the new project and not on the returns from the assets already in place Since the NPV is negative, the firm will not able to finance the project (a) It is impossible because the face value of debt will be lower for type than it is for type if the latter were to use it It’s because   Answers/Solutions to Selected Questions/Exercises  249 the profit equals with probability 0.75 * 0.25 and it equals with probability 0.75 * 0.75 + 0.25 * 0.25 Both numbers are lower for type Therefore type will mimic type (b) Suppose that both firms use project financing We have: = d11 0.2 0.2 0.2 0.2 = , d12 = , d21 = , d22 0.75 0.25 0.25 0.6 The shareholders’ expected payoff for type is: EE = 0.6 * 0.25 * (1 + − 0.2 / 0.6 − 0.2 / 0.25 ) + 0.6 * (1 − 0.25 ) * 0.2    0.2  1 −  + 0.4 * 0.25 *  −  + 0.4 * 0.75 * = 0.45  0.25   0.6  Type firms will not mimic type Indeed, if they do, their payoff will be E = 0.6 * 0.25 * (1 + − 0.2 / 0.75 − 0.2 / 0.25 ) + 0.6 * (1 − 0.25 ) * (1 − 0.2 / 0.25 ) + 0.4 * 0.25 * (1 − 0.2 / 0.75 ) + 0.4 * 0.75 * ≈ 0.31 Calculations are similar for type Index A Abhyankar, A., 93 Antweiler, W., 61 asset substitution, viii, 69–94, 97, 139, 146, 163, 164, 223, 224, 237–9 B Baker, M., viii, 125, 126, 128 bank, ix, 4, 29, 34, 61–3, 70, 78–80, 82–5, 89, 90, 106, 108–10, 164, 172, 177, 185, 193, 202, 205, 238 bankruptcy direct bankruptcy costs, 29, 34, 40, 139 indirect bankruptcy costs, 29, 30, 34, 40 Berglöf, E., 139, 143 Berkovitch, E., 146, 187 Brealey, R., 193, 201, 204 Brennan, M., 122, 194, 196 C Chang, C., 153 Chemmanur, T., 202 control, 15–16, 69, 72, 83, 86, 135, 140, 144, 151, 168, 186, 203–5, 218–19, 244 Cooper, I., 193, 201, 204 corporate governance, viii, 135–56, 193 correlation, 37–9, 54, 55, 60, 61, 79, 115, 124, 130, 218 coupon, 17, 89 credit rationing, viii, 69–94, 164, 165 © The Editor(s) (if applicable) and The Author(s) 2016 A Miglo, Capital Structure in the Modern World, DOI 10.1007/978-3-319-30713-8 251 252 Index D debtor-in-possession, 106 debt overhang, 97–111, 139, 187, 189, 190, 205, 223, 224 Degeorge, F., 147, 150 Dewatripont, M., 140, 143, 147 dividend policy, 105, 106 “double taxation”, 31 E Eckbo, B.E., 61 “empire-building”, 136, 138, 139 Esty, B., 184, 186, 193, 201 Ewert, R., 14 exchange, 27, 49, 56, 104, 118, 166, 177, 215 F Fama, E., 37 Fisher, I., Frank, M., 5, 32, 36, 37, 54, 55, 61 Franks, J.R., 139 “free cash-flow”, 116, 135, 137–40, 190, 222 French, K., 37 G Gatti, S., 185, 204, 205 Goyal, V., 5, 32, 36, 37, 54, 55 Graham, J., 5, 32, 34, 37–9, 79, 107 Green, R., 73, 75, 78 Grossman, S., 137, 140 H Habib, M.A., 193, 201, 203, 204 Hart, O., 137, 140 Harvey, C., 5, 79, 107 Hennessy, C., 6, 39, 118 Ho, K., 93 Horvath, M., 14 I incumbent debtholders, 241 Innes, R., 144, 146, 151 insiders, 46–7, 64, 119, 131, 147, 148, 150, 194, 197 investment, vii, 4, 6, 10, 12, 23–6, 47–52, 61, 64, 69, 71–7, 80, 84, 86–8, 97–102, 105, 107, 110, 111, 115, 116, 118, 119, 122, 126, 127, 130–1, 135, 137, 145, 146, 148, 150, 154–6, 166, 171, 172, 176–8, 183, 184, 187, 189–94, 197–200, 203–6, 215, 216, 228, 239, 240 J Jaramillo, F., Jensen, M., 71, 137, 139, 144 John, K., 192, 202 Johnsen, D.B., 203 K Kaplan, S., 141, 169 Kaufman, M., 82 Kensinger, J., 193 Kim, E., 187 Kleimeier, S., 185, 186, 193, 205 Index Korteweg, A., 30 Kraus, A., 32, 122, 194, 196 L Leary, M.T., 5, 32, 39, 55 Lee, Z., 211, 214, 217, 218 Leland, H.E., 56, 61, 118 “lemon” problem, 53 Levi, H., 93 limited liability, 13–14, 16, 30–1, 71, 172, 176 Lindhe, T., 14 Litzenberger, R., 32 Low, A., 154 M Majluf, N., 117, 176, 197, 198, 199 Martin, G., viii, 193 Meckling, W., 71, 144 Megginson, W.L., 186 Miglo, A., 3, 5, 14, 31, 32, 55, 61, 117, 119, 121, 126, 143, 150, 176, 197, 199, 211, 214, 217 Miller, M., vii, 6, 22, 40 Modigliani, F., vii, viii, 6, 22 Myers, S.C., 5, 32, 47, 51, 55, 97, 117, 176, 187, 192, 197, 198, 199 N Nachman, D., 51, 61 Niemann, R., 14 Noe, T., 51, 61, 122 non-recourse debt, 183, 186, 189–93, 196, 199, 201–3, 205, 206, 248 253 O Oberg, A., 14 outsiders, 46–7, 53, 64, 150, 177, 194, 219, 233, 234 overinvestment, 77–9, 140, 175, 186, 190, 238 P Patel, F., 147, 150 pecking-order theory, viii, 5, 47–56, 64, 107, 115, 117, 130, 175, 218, 222, 227 preferred stock convertible preferred stock, 169 participating convertible preferred stock, 169 present value, 32, 52, 120, 123, 203, 242 project, 3, 47, 69, 97, 117, 137, 170, 183, 224 project financing, 183–206 Pyle, D., 56, 61, 118 R Rajan, R., 37, 106 Rajgopal, S., 149 risk, 8, 36, 47, 55, 57, 60, 61, 64, 71–4, 77, 79, 88, 93, 99, 106, 116, 139, 140, 146, 154, 166, 169, 184, 190, 193, 199, 201–5, 214, 217, 219, 224 “risk-bearing” signaling, 56 Roberts, M., 55, 154 Rosenthal, H., 139 Ross, S.A., 56 Roychowdhury, S., 149 254 Index S Schiantarelli, F., Shah, K., 118 Shah, S., 201 Shyam-Sunders, L., 5, 55 Sodersten, J., 14 Stiglitz, J., vii, 45–6, 70, 80, 164, 176, 229 stochastic dominance first-order stochastic dominance, 91 increasing risk, 93 second-order stochastic dominance, 88, 92 Strebulaev, I., 37, 39 Sussman, O., 139 T Thakor, A., 201 Tirole, J., vii, 140, 141, 143, 148 Titman, S., 37, 47, 84, 86, 99, 106 U underinvestment problem, 100–2, 105, 106, 186, 187, 192–3, 199 underpricing, 46, 56, 115, 198, 214 unlimited liability, 13–16, 172, 176 V von Thadden, E.-L., 143 W Weiss, A., 45, 70, 80, 164, 176 Wessels, R., 37 Whited, T., 37–9 Woywode, M., 14 Wright, J., 185 Wright, S., 37 Z Zeckhauser, R., 147, 150 Zender, J., 5, 143, 154, 168 Zhao, H., 93 Zingales, L., 37 .. .Capital Structure in the Modern World Anton Miglo Capital Structure in the Modern World Anton Miglo Nipissing University, Ontario, Canada ISBN 978-3-319-30712-1... microeconomics, accounting, mathematics, game theory etc Many of the results obtained in capital structure theory over the last 50–60 years have been very influential and led their authors to great international... the comprehension of this fact is crucial to understanding the theory of capital structure At the beginning of my PhD studies I was spending a lot of time explaining to my adviser why debt financing