2011 - Reprints: Finance, Accounting and Insurance
Conditional versus unconditional persistence of RNOA components: Implications for valuation, Review of Accounting Studies, 16(2), 302-327, 2011.
E. Amir, I. Kama and J. Livnat
(Reprint No. 183)
Financial analysis often involves decomposing variables into components, emphasizing the structured hierarchy among ratios. We distinguish between unconditional persistence (a variable’s autocorrelation coefficient), and conditional persistence (the power of a variable’s persistence to explain the persistence of a variable higher in the hierarchy). We argue that a variable’s conditional persistence determines the magnitude of its market reaction, allowing us to predict the relative magnitude of the market reaction to a ratio depending on its hierarchal level in the analysis. We examine the market reaction to the DuPont ratios and find that, while the unconditional persistence of asset turnover (ATO) is larger than that of operating profit margin (OPM), the conditional persistence of OPM is larger than that of ATO. Thus, we predict and find that the market’s reaction to OPM is stronger than that to ATO. We further decompose OPM and ATO into their second-order components and show that the market reaction depends on a component’s conditional persistence.
Distortion in corporate valuation: Implications of capital structure changes, Managerial Finance, lead article in 37(8), 681-696, 2011.
J. Oded, S. Feinstein and A. Michel
(Reprint No. 186)
Purpose – The traditional discounted cash flows (DCF) valuation procedure used by financial analysts assumes that firms maintain a policy of fixed debt. However, empirical evidence suggests that many firms rebalance their debt. This paper seeks to explore the implication of this discrepancy for valuation of firms that undergo a capital structure change.
Design/methodology/approach – The approach taken is both theoretical and empirical.
Findings – The authors show how the valuation process should be modified for firms that are expected to rebalance their debt and demonstrate the distortion in value that results if the traditional DCF valuation procedure is used instead. Furthermore, they illustrate the significance of their results using a sample of the largest largest leveraged buyouts of the current decade.
Originality/value – To the authors’ knowledge, this is the first investigation into this issue.
Stock repurchases: How firms choose between a self-tender offer and an open-market program, Journal of Banking and Finance, 35, 3174-3187, 2011.
J. Oded
(Reprint No. 187)
In practice, open-market stock repurchase programs outnumber self tender offers by approximately 10-1. This evidence is puzzling given that tender offers are more efficient in disbursing free cash and in signaling undervaluation – the two main motivations suggested in the literature for repurchasing shares. We provide a theoretical model to explore this puzzle. In the model, tender offers disburse free cash quickly but induce information asymmetry and hence require a price premium. Open-market programs disburse free cash slowly, and hence do not require a price premium, but because they are slow, result in partial free cash waste. The model predicts that the likelihood that a tender offer will be chosen over an open-market program increases with the agency costs of free cash and decreases with uncertainty (risk), information asymmetry, ownership concentration, and liquidity. These predictions are generally consistent with the empirical evidence.
Partial vertical integration in telecommunication and media markets in Israel, Israel Economic Review, 9(1), 29-51, 2011.
D. Gilo and Y. Spiegel
(Reprint No. 188)
Partial vertical integration is common in many telecommunication and media markets in Israel. That is, there are many cases in which the supplier of an input holds a partial (often controlling) stake in the input’s customer (which we call the “distributor” for concreteness), or the distributor holds a partial ownership (often controlling) stake in the supplier.2 This is in contrast to full vertical integration, in which the supplier holds 100% of the distributor’s equity, or the distributor holds 100% of the supplier’s equity. For example, since early 2010, when it took over Bezeq, Eurocom Communications Ltd. which imports Nokia cellular phones to Israel has an indirect control over Pelephone, which is the third largest cellular operator in Israel and buys cellular phones from Eurocom for its customers. However, even though Eurocom now indirectly controls Pelephone, its stake in Pelephone is far below 100%. Similarly, Bezeq International Ltd., which is fully owned by Bezeq, currently holds a 67% stake in Walla! Communications Ltd., which operates the Walla internet portal. Walla, Bezeq International and Bezeq, are (partially) vertically integrated because Walla requires internet-access services that Bezeq International supplies, and it also requires access to the infrastructure that Bezeq supplies. When the markets that the supplier or the distributor operate in are concentrated, as is the case in many telecommunication and media markets in Israel, vertical integration raises a concern for either “upstream foreclosure” – the vertically integrated firm will refuse to buy, or will buy at inferior terms from competing suppliers – or “downstream foreclosure” - the vertically integrated firm will refuse to sell, or will sell at inferior terms to competing distributors. This paper examines whether partial vertical integration alleviates or exacerbates these concerns, and assesses the resulting implications for various cases of partial vertical integration in telecommunication and media markets in Israel.
Capital structure and regulation: Do ownership and regulatory independence matter? Journal of Economics and Management Strategy, 20(2), 517-564, 2011.Bortolotti, C. Cambini, L. Rondi and Y. Spiegel
(Reprint No. 189)
We study the effect of ownership structure and regulatory independence on the interaction between capital structure and regulated prices using a comprehensive panel data of publicly traded European utilities. We find that firms in our sample tend to have a higher leverage if they are privately controlled and regulated by an independent regulatory agency. Moreover, the leverage of these firms has a positive and significant effect on their regulated prices, but not vice versa. Our results are consistent with the theory that privately controlled regulated firms use leverage strategically to obtain better regulatory outcomes.
