Vol. 46 No. 2 – May 2011
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Using CFO Surveys as a Motivational Tool to Teach
Corporate Finance
John R. Graham
The Impact of the Corporate Control Market on IPO
Decisions
Thomas J. Boulton
R2:
Does it Matter for Firm Valuation?
John D. Stowe and Xuejing Xing
Dividend Payouts and Corporate Governance Quality: An
Empirical Investigation
Pornsit Jiraporn, Jang-Chul Kim and Young Sang Kim
Managerial Incentives, Fraud, and Monitoring
H. David Robison and Rudy Santore
Les Coleman
Using CFO Surveys as a Motivational Tool to Teach
Corporate Finance
John R. Graham
Abstract
This article is based on the keynote address from the
Eastern Finance Association meeting in South Beach in
April 2010. In this keynote address, I discuss how to
engage and motivate students by using the results from
surveys of corporate finance professionals. Specific
examples are given to motivate capital structure,
capital budgeting, and payout. Actual job interview
questions can also be used as a motivational tool to
teach finance.
Keywords
corporate finance; surveys; capital structure; capital
budgeting; payout; dividends; share repurchases; G00;
G31; G32; G35
The Impact of the Corporate Control Market on IPO
Decisions
Thomas J. Boulton
Abstract
Entrepreneurs who take their firm public during an
active corporate control market face an increased risk
of losing control through a takeover. I examine the
extent to which the threat of takeover impacts IPO
firms’ decisions and find that an active takeover market
in an IPO firm's industry increases the probability that
the firm incorporates in a state with state-level
antitakeover provisions. IPO firms backed by venture
capital investors and reputable underwriters are less
likely to incorporate in a state offering antitakeover
provisions. A closer examination of equity carve-outs
suggests that control is not a first-order consideration
for some IPO firms.
Keywords
corporate control; governance; initial public offering;
state of incorporation; G24; G34
R2: Does
it Matter for Firm Valuation?
John D. Stowe and Xuejing Xing
Abstract
A considerable amount of research has been devoted to
why R2 differs across firms or markets, but little
attention has been paid to the consequences of this
difference. We fill this gap by investigating how
differing R2 affects investors’ assessment of firm
value. Using a sample of 90,111 firm-year observations
from 1970 to 2004, we find that higher R2 leads to
higher firm valuation and that, on average, high-R2
firms experience significant underperformance in the
long run. These results suggest that high-R2 firms tend
to be overpriced.
Keywords
R2; Tobin’s Q; stock price synchronicity; firm value; assessment
G11; G12; G14
Dividend Payouts and Corporate Governance Quality: An
Empirical Investigation
Pornsit Jiraporn, Jang-Chul Kim and Young Sang Kim
Abstract
Motivated by agency theory, we investigate how a firm's
overall quality of corporate governance affects its
dividend policy. Using a large sample of firms with
governance data from The Institutional Shareholder
Services, we find that firms with stronger governance
exhibit a higher propensity to pay dividends, and,
similarly, dividend payers tend to pay larger dividends.
The results are consistent with the notion that
shareholders of firms with better governance quality are
able to force managers to disgorge more cash through
dividends, thereby reducing what is left for
expropriation by opportunistic managers. We employ the
two-stage least squares approach to cope with possible
endogeneity and still obtain consistent results. Our
results are important as they show that corporate
governance quality does have a palpable impact on
critical corporate decisions such as dividend policy.
Keywords
dividend policy; corporate governance; agency theory; agency costs
G30; G32; G34
Managerial Incentives, Fraud, and Monitoring
H. David Robison and Rudy Santore
Abstract
In response to equity compensation contracts that
encourage managers to commit fraud as well as provide
productive effort, owners may choose to monitor the
manager to limit the fraud. We examine the firm owners’
incentives to perform both ex ante monitoring, such as
internal controls, and ex post monitoring, such as
audits, in a model that includes the reputational
damages caused when a fraud is discovered. We provide
conditions under which the owner prefers either more or
less monitoring, and examine the effect of additional
monitoring on the optimal equity package and equilibrium
level of fraud.
Keywords
financial fraud; monitoring; governance; executive compensation; incentive contracts; agency theory
G3; L2; M4
Les Coleman
Abstract
This article examines market efficiency in a natural
environment using minute-by-minute share prices
following fatal industrial disasters and sudden CEO
deaths, and their subsequent media reports. Prices of
affected firms start to react within an hour of shock
events and fall by 3%; half this fall is reversed prior
to the first media reports with the balance reversed by
the next trading day. Spreads behave in similar fashion.
This is interpreted as market overreaction as
risk-averse investors respond to uncertainty created by
the shock; prices return to pre-shock levels once it is
clear that the event is to be expected and already built
into valuations.
Keywords
CEO deaths; industrial accidents; event studies; media reports
G14