The Journal of Finance

Debt, Agency Costs, and Industry Equilibrium

Published: 12/01/1991   |   DOI: 10.1111/j.1540-6261.1991.tb04637.x

VOJISLAV MAKSIMOVIC, JOSEF ZECHNER

We show that risk characteristics of projects' cash flows are endogenously determined by the investment decisions of all firms in an industry. As a result, in reasonable settings, financial structures which create incentives to expropriate debtholders by increasing risk are shown not to reduce value in an industry equilibrium. Without taxes, capital structure is irrelevant for individual firms despite its effect on the equityholders' incentives, but the maximum total amount of debt in the industry is determinate. Allowing for a corporate tax advantage of debt, capital structure becomes relevant but firms are indifferent between distinct alternative debt levels.

Influence Costs and Capital Structure

Published: 07/01/1993   |   DOI: 10.1111/j.1540-6261.1993.tb04027.x

LAURIE SIMON BAGWELL, JOSEF ZECHNER

This paper analyzes the role of capital structure in the presence of intrafirm influence activities. The hierarchical structure of large organizations inevitably generates attempts by members to influence the distributive consequences of organizational decisions. In corporations, for example, top management can reallocate or eliminate quasi rents earned by their employees, while at the same time, they must rely on these employees to provide them with information vital to their decision making. This creates the opportunity for lower level managers to influence top management's discretionary decisions. As a result, divisional managers may attempt to inflate the corporate perception of their relative contributions to the firm, or to take actions that make the elimination of their rents more costly for the firm. This incentive to influence is especially acute when managers fear losing their jobs, for example in the event of a divestiture.

Comment on Forward Markets, Stock Markets, and the Theory of the Firm

Published: 06/01/1989   |   DOI: 10.1111/j.1540-6261.1989.tb05072.x

VOJISLAV MAKSIMOVIC, GORDON SICK, JOSEF ZECHNER

In a recent article, MacMinn [5] argues that the presence of forward markets eliminates the incentives of the firm's manager to choose production levels that maximize firm value. In this comment, we show that his results do not depend on the presence of forward markets. The critical assumptions are that the manager is endowed with money rather than stock in the firm and that there is no competitive labor market for managers. In addition, his results require time‐inconsistent behavior on the part of the firm's manager.

The Cross‐Section of Credit Risk Premia and Equity Returns

Published: 01/16/2014   |   DOI: 10.1111/jofi.12143

NILS FRIEWALD, CHRISTIAN WAGNER, JOSEF ZECHNER

We explore the link between a firm's stock returns and credit risk using a simple insight from structural models following Merton (): risk premia on equity and credit instruments are related because all claims on assets must earn the same compensation per unit of risk. Consistent with theory, we find that firms' stock returns increase with credit risk premia estimated from CDS spreads. Credit risk premia contain information not captured by physical or risk‐neutral default probabilities alone. This sheds new light on the “distress puzzle”—the lack of a positive relation between equity returns and default probabilities—reported in previous studies.

Low‐Risk Anomalies?

Published: 04/26/2020   |   DOI: 10.1111/jofi.12910

PAUL SCHNEIDER, CHRISTIAN WAGNER, JOSEF ZECHNER

This paper shows that low‐risk anomalies in the capital asset pricing model and in traditional factor models arise when investors require compensation for coskewness risk. Empirically, we find that option‐implied ex ante skewness is strongly related to ex post residual coskewness, which allows us to construct coskewness factor‐mimicking portfolios. Controlling for skewness renders the alphas of betting‐against‐beta and betting‐against‐volatility insignificant. We also show that the returns of beta‐ and volatility‐sorted portfolios are driven largely by a single principal component, which in turn is explained largely by skewness.

Intermediated Investment Management

Published: 05/23/2011   |   DOI: 10.1111/j.1540-6261.2011.01656.x

NEAL M. STOUGHTON, YOUCHANG WU, JOSEF ZECHNER

Intermediaries such as financial advisers serve as an interface between portfolio managers and investors. A large fraction of their compensation is often provided through kickbacks from the portfolio manager. We provide an explanation for the widespread use of intermediaries and kickbacks. Depending on the degree of investor sophistication, kickbacks are used either for price discrimination or aggressive marketing. We explore the effects of these arrangements on fund size, flows, performance, and investor welfare. Kickbacks allow higher management fees to be charged, thereby lowering net returns. Competition among active portfolio managers reduces kickbacks and increases the independence of advisory services.

Human Capital, Bankruptcy, and Capital Structure

Published: 05/07/2010   |   DOI: 10.1111/j.1540-6261.2010.01556.x

JONATHAN B. BERK, RICHARD STANTON, JOSEF ZECHNER

We derive the optimal labor contract for a levered firm in an economy with perfectly competitive capital and labor markets. Employees become entrenched under this contract and so face large human costs of bankruptcy. The firm's optimal capital structure therefore depends on the trade‐off between these human costs and the tax benefits of debt. Optimal debt levels consistent with those observed in practice emerge without relying on frictions such as moral hazard or asymmetric information. Consistent with empirical evidence, persistent idiosyncratic differences in leverage across firms also result. In addition, wages should have explanatory power for firm leverage.

The Geography of Equity Listing: Why Do Companies List Abroad?

Published: 12/17/2002   |   DOI: 10.1111/1540-6261.00509

Marco Pagano, Ailsa A. Röell, Josef Zechner

This paper documents aggregate trends in the foreign listings of companies, and analyzes their distinctive prelisting characteristics and postlisting performance. In 1986–1997, many European companies listed abroad, mainly on U.S. exchanges, while the number of U.S. companies listed in Europe decreased. European companies that cross‐list tend to be large and recently privatized firms, and expand their foreign sales after listing abroad. They differ sharply depending on where they cross‐list: The U.S. exchanges attract high‐tech and export‐oriented companies that expand rapidly without significant leveraging. Companies cross‐listing within Europe do not grow unusually fast, and increase their leverage after cross‐listing.

Vendor Financing

Published: 12/01/1988   |   DOI: 10.1111/j.1540-6261.1988.tb03960.x

MICHAEL J. BRENNAN, VOJISLAV MAKSIMOVICs, JOSEF ZECHNER

This paper shows that, even in the presence of a perfectly competitive banking industry, it is optimal for firms with market power to engage in vendor financing if credit customers have lower reservation prices than cash customers or if adverse selection makes it infeasible to write credit contracts that separate customers according to their credit risk. We analyze how the advantage of vendor financing depends on the relative size of the cash and credit markets, the heterogeneity of credit customers, and the number of firms in the industry.

Dynamic Capital Structure Choice: Theory and Tests

Published: 03/01/1989   |   DOI: 10.1111/j.1540-6261.1989.tb02402.x

EDWIN O. FISCHER, ROBERT HEINKEL, JOSEF ZECHNER

This paper develops a model of dynamic capital structure choice in the presence of recapitalization costs. The theory provides the optimal dynamic recapitalization policy as a function of firm‐specific characteristics. We find that even small recapitalization costs lead to wide swings in a firm's debt ratio over time. Rather than static leverage measures, we use the observed debt ratio range of a firm as an empirical measure of capital structure relevance. The results of empirical tests relating firms' debt ratio ranges to firm‐specific features strongly support the theoretical model of relevant capital structure choice in a dynamic setting.