Tradeoff or Pecking Order: Capital Structure Policy Suitable
for Financially Distressed Firms
-- Hsin-Yu Liang and Chenchuramaiah Bathala
Most of the previous studies have analyzed the validity of Tradeoff and Pecking Order in the context of firms that are financially sound,
not under financial distress. This study departs from that approach and analyzes the firms in financial distress to find empirical evidence on
the issue as to whether the firms in financial distress follow a target debt ratio model or pecking order in adjusting their debt ratios. The
findings show a weak support for the target adjustment model. Specifically, the firms in financial distress are found to be making a
downward adjustment to the debt ratios, apparently due to potential increase in bankruptcy costs. Further, the study finds that transaction costs
and bankruptcy costs influence the speed of adjustment towards the optimal debt ratio as well as the financing behavior of the firms in
financial distress. The results are also supportive of the pecking order approach to capital structure adjustments by firms in financial distress.
© 2009 IUP. All Rights Reserved.
Valuation Errors and the Initial Price Efficiency
of the Malaysian IPO Market
-- John Murugesu and A Solucis Santhapparaj
This paper examines the valuation and initial price performance of Malaysian Initial Public Offerings (IPOs).
A number of theoretical models have been put forward to explain why new equity issues are issued at a discount. Foremost among them
are explanations involving the adverse selection problem arising from information asymmetry, moral hazard issues relating to the
underwriters, and signaling incentives. In this study, three alternative reasons are considered. The first one examines the errors arising from
the valuation methods used to price the IPOs. The second one looks at the market conditions at the time of the offer, and the last one tests
the efficiency of the Malaysian stock market. The sample consists of 264 companies that were listed on the Malaysian Stock Exchange
from 1999 to 2004. The results indicate that IPO market prices are efficient in early trading and that underpricing is not influenced by
market conditions. However, the results do suggest that underpricing is the result of industry risk and errors arising from the valuation
methods used.
© 2009 IUP. All Rights Reserved.
The Effect of Changes in Corporate Taxes
and Corporate Governance on Equity Prices
-- Ken MacAulay, Shantanu Dutta, Mary Oxner
and Tim Hynes
Prior research has established the relationship between corporate governance and firm performance. This paper investigates
that relationship in the context of a change in cash flows and earnings generated by an exogenous shock—an unexpected change in
corporate tax policy. The impact of an unexpected change in taxes should be more evident for those companies with better prospects for
future profitability. Furthermore, the study argues that the effects of a change in tax policy should have a greater impact on firms with
superior corporate governance structures, as better governed companies will more effectively direct the impact on cash flows to
shareholders. Results of the study suggest that an interaction between corporate governance and future profitability exists and is most pronounced
in smaller sized companies.
© 2009 IUP. All Rights Reserved.
Rating and Ranking Firms
with Fuzzy Expert Systems:
The Case of Camuzzi
-- Stefano Malagoli, Carlo Alberto Magni, Fabio Buttignon
and Giovanni Mastroleo
This paper presents a real-life application of a fuzzy expert system aimed at rating and ranking firms. Unlike standard
Discounted Cash Flow (DCF) models, it integrates financial, strategic and business determinants and processes both quantitative and
qualitative variables.Twenty-one value drivers are defined concerning the target firm (strategic assets in place and prospective financial
performance), the acquisition (synergies, quality of management) and the sector (intensity of competition, entry barriers). Their
combination via `if-then' rules leads to the definition of an output represented by a real number in the interval (0, 1). Such a number expresses
the value-generating power of the target firm inclusive of synergies with the bidder (here named Strategic Enterprise Value). The
system may be used for rating and ranking firms operating in the same sector. A regression analysis, using hostile takeover multiples, may
be employed to translate the score into price. The real-life case refers to Camuzzi, a natural gas distributor, acquired by Enel, the
Italian ex-monopolist of electric energy.
© 2009 IUP. All Rights Reserved.
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