We investigate the conditional performance of a sample of German equity mutual funds over the period from 1994 to 2003 using both the beta-pricing approach and the stochastic discount factor (SDF) framework. On average, mutual funds cannot generate excess returns relative to their benchmark that are large enough to cover their total expenses. Compared to unconditional alphas, fund performance sharply deteriorates when we measure conditional alphas. Given that stock returns are to some extent predictable based on publicly available information, conditional performance evaluation raises the benchmark for active fund managers because it gives them no credit for exploiting readily available information. Underperformance is more pronounced in the SDF framework than in beta-pricing models. The fund performance measures derived from alternative model specifications differ depending on the number of primitive assets taken to calibrate the SDF as well as the number of instrument variables used to scale assets and/or factors.
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For a very long time, the financing of German companies was dominated by German universal banks, which functioned as sources of both capital-as equity holders as well as providers of loans-and corporate governance. Although internal finance (retained earnings) has always been and will remain the most important source of finance, several recent developments have forced German companies to search for alternatives to their traditionally heavy dependence on bank lending. As a result, the composition of external finance has changed, with substantial net contributions of corporate bond and equity offerings. Furthermore, both the equity ratios and cash holdings of German companies have increased over the years. Thus, although the German financial system still exhibits many differences from those in the U.S. and U.K., the financing patterns of German companies have to some extent converged with those of their peers from Anglo-American market-based financial systems. The growth in recent years of German capital markets-and of German companies' reliance on them-has led to important changes in both German and European corporate governance, including the evolution of a common European market for corporate control that is still in its early stages.
We investigate the financing strategies and valuation effects of 247 IPO firms at the ‘Neuer Markt’ in Germany that either issued additional equity (SEO) or repurchased shares (SRP) within five years after going public. IPOs issuing additional equity exhibit a temporary outperformance before the event, but negative announcement returns and a long‐run underperformance. In contrast, repurchasing IPOs experience positive announcement returns and no long‐run underperformance. Free cash flow problem resulting from mandatory equity issuance at the IPO explain the SRP decision. Our findings for SEOs are consistent with a staged financing strategy, while we find no evidence for market timing.
Shipping has always been a volatile and cyclical business. The extreme changes in revenues, operating cash flows, and asset values during the recent financial crises have upset the usual means of financing shipping companies. While bank debt will remain important in the future, the new regulatory environment has been forcing shipping banks to shift these risks from their balance sheets to capital markets through instruments such as loan securitization. As a result, the shipping industry will increasingly look to capital markets for external funds. And shipping banks are likely to change from being commercial bank lending institutions to becoming more like investment banks that arrange a variety of financing solutions, including high yield bonds or public equity. Risk management will be central to shipping companies in this new environment. Shipping companies can manage their own risks by modifying operations, employing freight and vessel price derivatives, or adjusting their capital structures. To arrive at the value‐maximizing combination of these three basic methods, they must decide which risks to bear, which to manage internally, and which to transfer to the capital markets. These decisions require shipping financial managers to assess the effect of each risk on firm value, understand how each contributes to total risk, and determine the most cost‐effective way to limit that risk to an acceptable level.
This study conducts tests of the pecking order theory using an international sample with more than 6000 firms over the period from 1995 to 2005. The high correlation between net equity issuances and the financing deficit discredits the static pecking order theory. Rather than analyzing the predictions of the theory, we test its core assumption that information asymmetry is an important determinant of capital structure decisions. Our empirical results support the dynamic pecking order theory and its two testable implications. First, the probability of issuing equity increases with less pronounced firm‐level information asymmetry. Second, firms exploit windows of opportunity by making relatively larger equity issuances and build up cash reserves (slack) after declines in firm‐level information asymmetry. Firms from common law countries use parts of their proceeds from an equity issuance to redeem debt and to rebalance their capital structure. These findings are consistent with a time‐varying adverse selection explanation of firms' financing decisions.
This study investigates the motives and valuation effects of share repurchase announcements of German firms during the 1998–2008 period, addressing the question why initial public offering (IPO) firms repurchase shares soon after going public. While our focus is on IPO firms, we also examine the impact of firm size by differentiating between IPO and established DAX/MDAX firms and by analyzing the source of surplus cash holdings, that is, either from equity issuances or from operating cash flows. We further explore the impact of the regulatory environment. Our empirical analysis reveals significant differences between the IPO and DAX/MDAX subsamples regarding their repurchase motives, stock price performance, and explanatory factors. Standard corporate payout theories are essential in explaining the different valuation effects. Our empirical analysis suggests agency costs of free cash flow as the main reason for the observed valuation effects of both IPO and DAX/MDAX firms, yet for different reasons. While DAX/MDAX firms continuously generate high operating cash flows before and after repurchasing shares, IPO firms exhibit low operating cash flows during the entire period but large surplus cash holdings due to the mandatory equity issuance at their public offering. Overall, the repurchase decisions of IPO firms are best explained by the agency costs of cash holdings and the unique rules and regulations of the German stock exchange.
Over the last decade, various new asset classes have emerged as alternatives to the more traditional investments. Although they appear attractive at a first glance, there exists hardly any historical performance track record, and experience with the return generating variables is limited. For ship funds and the valuation of shipping projects, the prevailing freight rates are important price-determining factors. Therefore, knowledge about the time series properties of spot and forward freight rates is essential for a better understanding of the return generating process of ship funds. There are, however, several peculiarities. Because shipping is a nonstorable service, forward prices need not to be linked to spot prices by any direct arbitrage relationship. We test the implications of this notion by using data for Panamax size bulk carriers and find that even in informationally efficient markets spot freight rates are highly autocorrelated. In addition, spot and forward freight rates are cointegrated, and the equilibrium is established by spot rates converging to forward rates. An extension of the standard vector error correction model reveals time-variation in the adjustment speed. Overall, our empirical findings suggest that the time series properties of freight rates need to be well understood before investing in ship funds. Another important aspect is whether ship funds should hedge their freight rate exposure in the forward market to reduce the return volatility or whether investors can achieve the same outcome by holding ship funds in a portfolio context.
We analyze the zero-leverage phenomenon around the world. Countries with a common law system, high creditor protection, and a dividend imputation or dividend relief tax system exhibit the highest percentage of zero-leverage firms. The increasing prevalence of zero-leverage firms in all sample countries is related to market-wide forces during our sample period, such as IPO waves, shifts in industry composition, increasing asset volatility, and decreasing corporate tax rates. Firm-level comparisons reveal that only a small number of firms deliberately maintain zero-leverage. Most zero-leverage firms are constrained by their debt capacity. Analyzing the time-series dynamics of leverage and investment behavior, we further show that firms which pursue a zero-leverage policy only for a short period of time seek financial flexibility.