Capital structure and firm response to poor performance
Article Abstract:
A study of 358 companies undergoing short-term financial problems suggests that operational and financial responses are more likely to be undertaken by companies which are highly-leveraged, than by companies which are less leveraged. Selection criteria for the sample was based on a year of very poor performance following a year when the company performed normally. An operational response is less likely when management holds a large proportion of the company's equity. In these circumstances, value-maximizing action may be hindered, while in contrast, debt may help a company to maintain its value, through imposing discipline.
Publication Name: Journal of Financial Economics
Subject: Economics
ISSN: 0304-405X
Year: 1993
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Leverage, investment, and firm growth
Article Abstract:
The relationship of leverage, investments and economic growth is examined. Focus is given on the effects of high leverage on growth opportunities. It is postulated that the adverse relationship between leverage and growth applies not only to the main business of diversified firms but also to its supporting businesses. It is concluded that the existence of high leverage limits growth because it decreases the available capital needed to take advantage of such opportunities.
Publication Name: Journal of Financial Economics
Subject: Economics
ISSN: 0304-405X
Year: 1996
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Diversification's effect on firm value
Article Abstract:
A study of a representative sample of diversified firms for the period 1986-1991 shows that diversification has both value-reducing and value-enhancing effects with the former appearing to more significant. By computing the individual values of various segments of the diversified firm, a 13%-15% average value loss is obtained. This value reduction is observed to be less when the segments belong to closely related industries. Tax benefits somehow mitigate the value loss.
Publication Name: Journal of Financial Economics
Subject: Economics
ISSN: 0304-405X
Year: 1995
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