Corporate Finance Summary
2022-2023
Period 5
Luud Dortants
1
,Table of Contents
Tutorial 1: Introduction & Capital Structure ................................................................................................................... 3
Heider, F., and Ljungqvist, A. (2015). As certain as debt and taxes: Estimating the tax sensitivity of leverage from state tax
changes. ....................................................................................................................................................................................3
Tutorial 2: Initial Public Offering .................................................................................................................................... 9
Ritter, J. R. (2011). Equilibrium in the Initial Public Offerings Market. .....................................................................................9
Bajo, E., Chemmanur, T. J., Simonyan, K., and Tehranian, H. (2016). Underwriter Networks, Investor Attention, and Initial
Public Offerings. ......................................................................................................................................................................12
Jenkinson, T., Jones, H., and Suntheim, F. (2018). Quid Pro Quo? What Factors Influence IPO Allocations to Investors? ....15
Chang, C., Chiang, Y.-M., Qian, Y., and Ritter, J. R. (2017). Pre-market Trading and IPO Pricing. .........................................20
Tutorial 3: Seasoned Equity Offering.............................................................................................................................26
Kim, E. H., and Purnanandam A. (2014). Seasoned Equity Offerings, Corporate Governance, and Investments. .................26
Alti, A., and Sulaeman, J. (2012). When do high stock returns trigger equity issues? ...........................................................33
Tutorial 5: Mergers & Acquisitions ...............................................................................................................................35
Barraclough, K., Robinson, D.T., Smith, T., Whaley, R.E. (2013). Using Option Prices to Infer Overpayments and Synergies
in M&A Transactions. .............................................................................................................................................................35
Li, X. (2013). Productivity, restructuring, and the gains from takeovers. ...............................................................................38
Cunningham, C., Ederer, F., and Ma, S. (2021). Killer Acquisitions ........................................................................................46
Tutorial 6: Payout Policies ............................................................................................................................................51
Farre-Mensa, J., Michaely, R., and Schmalz, M. (2021). Financing Payouts. .........................................................................51
Busch, P. and Obernberger, S. (2016). Actual Share Repurchases, Price Efficiency, and the Information Content of Stock
Prices.......................................................................................................................................................................................57
Tutorial 8: Private Equity Buyouts.................................................................................................................................60
Davis, S.J., Haltiwanger, J.C., Handley, K., Lipsius, B., Lerner, J., and Miranda, J (2021). The (Heterogenous) Economic
Effects of Private Equity Buyouts. ...........................................................................................................................................60
Bernstein, S. and Sheen, A. (2016). The Operational Consequences of Private Equity Buyouts: Evidence from the
Restaurant Industry. ...............................................................................................................................................................67
Tutorial 9: Corporate Risk Management .......................................................................................................................71
Campello, M., and Lin, C., and Ma, Y., and Zou,H. (2011). The Real and Financial Implications of Corporate Hedging. ......73
Gilje, E., and Taillard, J. P. (2017). Does Hedging Affect Firm Value? Evidence from a Natural Experiment. ........................77
2
, Tutorial 1: Introduction & Capital Structure
Heider, F., and Ljungqvist, A. (2015). As certain as debt and taxes: Estimating the tax
sensitivity of leverage from state tax changes.
This paper contributes to two discussions:
1) Whether taxes are a first-order determinant of US firms’ capital structure decisions.
2) whether static or dynamic tradeoff models best describe firms’ capital structure choices.
What happens when tax increases?
• At the firm’s current level of debt, the marginal tax benefit exceeds the marginal default cost
and so shareholders are better off if the increases leverage. (Unless the firm is already highly
leveraged and are prevented to increase it) → shareholders approve debt issue.
• How much they raise depends on the shape of their marginal cost curve. Estimate → flat
marginal cost curve → estimated slope of $403 in extra cost for every $1 million in new debt.
What happens when tax falls?
• Marginal costs exceed the marginal benefit: the firm has too much default risk given the
reduced tax benefit: firm value would be higher if it has less debt → however, this will not
happen in dynamic models due to two reasons:
• Reducing debt would reduce the value of shareholders option to default.
• The value of debt would rise to the point where the firms’ current debtholders captured the
entire benefit of the reduction in risk, leaving shareholders with no incentive to reduce
leverage.
Static trade-off theory
• This proposition states that in perfect markets, the capital structure a company uses doesn't
matter because the market value of a firm is determined by its earning power and the risk of its
underlying assets.
• With a static trade-off theory, since a company's debt payments are tax-deductible and there is
less risk involved in taking out debt over equity, debt financing initially cheaper than equity
financing. This means a company can lower its weighted average cost of capital through a
capital structure with debt over equity.
Consider this: Tax rise → marginal tax benefit exceeds the marginal default costs → increase leverage.
3
, A: the optimal level of debt D* maximizes firm value by maximizing the difference between the tax
benefit and the expected bankruptcy costs.
B: a leverage increase is the same as a leverage decrease.
The dynamic trade-off theory suggests that capital structure adjustment does not take place
frequently because firms allow leverage to deviate from the target as long as adjustment costs
(transactional and contractual costs) outweigh the benefits of reverting to the target
C: Tax-shield is similar, but what is different is the perceived costs. They don’t change the leverage in
• Perceived costs of changing the leverage is the same as the leverage at that specific moment.
People are sticking with their current level of leverage.
• Shareholders’ Put option stock → buying back in leverage, increases certainty which is assumed
to be related with lower profits (not beneficial) therefore a tradeoff.
This literature test which models holds:
• If leverage responds symmetrically to tax changes (static models predict) the marginal cost-of-
debt curve will be smooth around the firm's existing debt level, as in Fig. 1b.
• If firms increase leverage after tax rises but do not respond to tax cuts, as dynamic models
predict, the marginal cost-of-debt curve will be kinked, as in Fig. 1d.
• The fact that we have a large number of tax changes that are staggered over time also allows us
to test the earlier proved statement that tax increases leave a permanent mark on leverage.
Empirically identifying the effect of taxes on capital structure is hard due to endogeneity problems:
• Using variations in state corporate taxes as they are both numerous and affect only some firms
at a time: those who are doing business in that specific state.
• Therefore, it also provides data of firms in the absence of a tax change & it allows them to
distinguish the effect of taxes on leverage from other forces shaping debt policy.
o For example, investment opportunities in NC may have changed which could led increase
in debt desirability’s.
o For example, compare leverage changes among North Carolina firms where a tax change
occurred and South Caroline, where no tax change occurred. → NC would have evolved
the same as SC (with the extent of similar investment opportunities), absent the tax
increase.
o The diff-in-diff, → difference across firms in different states of the within firm change in
leverage, gives the estimate of the tax sensitivity of corporate debt policy.
• Federal tax rates would affect all firms at the same time (therefore, not useful).
4
2022-2023
Period 5
Luud Dortants
1
,Table of Contents
Tutorial 1: Introduction & Capital Structure ................................................................................................................... 3
Heider, F., and Ljungqvist, A. (2015). As certain as debt and taxes: Estimating the tax sensitivity of leverage from state tax
changes. ....................................................................................................................................................................................3
Tutorial 2: Initial Public Offering .................................................................................................................................... 9
Ritter, J. R. (2011). Equilibrium in the Initial Public Offerings Market. .....................................................................................9
Bajo, E., Chemmanur, T. J., Simonyan, K., and Tehranian, H. (2016). Underwriter Networks, Investor Attention, and Initial
Public Offerings. ......................................................................................................................................................................12
Jenkinson, T., Jones, H., and Suntheim, F. (2018). Quid Pro Quo? What Factors Influence IPO Allocations to Investors? ....15
Chang, C., Chiang, Y.-M., Qian, Y., and Ritter, J. R. (2017). Pre-market Trading and IPO Pricing. .........................................20
Tutorial 3: Seasoned Equity Offering.............................................................................................................................26
Kim, E. H., and Purnanandam A. (2014). Seasoned Equity Offerings, Corporate Governance, and Investments. .................26
Alti, A., and Sulaeman, J. (2012). When do high stock returns trigger equity issues? ...........................................................33
Tutorial 5: Mergers & Acquisitions ...............................................................................................................................35
Barraclough, K., Robinson, D.T., Smith, T., Whaley, R.E. (2013). Using Option Prices to Infer Overpayments and Synergies
in M&A Transactions. .............................................................................................................................................................35
Li, X. (2013). Productivity, restructuring, and the gains from takeovers. ...............................................................................38
Cunningham, C., Ederer, F., and Ma, S. (2021). Killer Acquisitions ........................................................................................46
Tutorial 6: Payout Policies ............................................................................................................................................51
Farre-Mensa, J., Michaely, R., and Schmalz, M. (2021). Financing Payouts. .........................................................................51
Busch, P. and Obernberger, S. (2016). Actual Share Repurchases, Price Efficiency, and the Information Content of Stock
Prices.......................................................................................................................................................................................57
Tutorial 8: Private Equity Buyouts.................................................................................................................................60
Davis, S.J., Haltiwanger, J.C., Handley, K., Lipsius, B., Lerner, J., and Miranda, J (2021). The (Heterogenous) Economic
Effects of Private Equity Buyouts. ...........................................................................................................................................60
Bernstein, S. and Sheen, A. (2016). The Operational Consequences of Private Equity Buyouts: Evidence from the
Restaurant Industry. ...............................................................................................................................................................67
Tutorial 9: Corporate Risk Management .......................................................................................................................71
Campello, M., and Lin, C., and Ma, Y., and Zou,H. (2011). The Real and Financial Implications of Corporate Hedging. ......73
Gilje, E., and Taillard, J. P. (2017). Does Hedging Affect Firm Value? Evidence from a Natural Experiment. ........................77
2
, Tutorial 1: Introduction & Capital Structure
Heider, F., and Ljungqvist, A. (2015). As certain as debt and taxes: Estimating the tax
sensitivity of leverage from state tax changes.
This paper contributes to two discussions:
1) Whether taxes are a first-order determinant of US firms’ capital structure decisions.
2) whether static or dynamic tradeoff models best describe firms’ capital structure choices.
What happens when tax increases?
• At the firm’s current level of debt, the marginal tax benefit exceeds the marginal default cost
and so shareholders are better off if the increases leverage. (Unless the firm is already highly
leveraged and are prevented to increase it) → shareholders approve debt issue.
• How much they raise depends on the shape of their marginal cost curve. Estimate → flat
marginal cost curve → estimated slope of $403 in extra cost for every $1 million in new debt.
What happens when tax falls?
• Marginal costs exceed the marginal benefit: the firm has too much default risk given the
reduced tax benefit: firm value would be higher if it has less debt → however, this will not
happen in dynamic models due to two reasons:
• Reducing debt would reduce the value of shareholders option to default.
• The value of debt would rise to the point where the firms’ current debtholders captured the
entire benefit of the reduction in risk, leaving shareholders with no incentive to reduce
leverage.
Static trade-off theory
• This proposition states that in perfect markets, the capital structure a company uses doesn't
matter because the market value of a firm is determined by its earning power and the risk of its
underlying assets.
• With a static trade-off theory, since a company's debt payments are tax-deductible and there is
less risk involved in taking out debt over equity, debt financing initially cheaper than equity
financing. This means a company can lower its weighted average cost of capital through a
capital structure with debt over equity.
Consider this: Tax rise → marginal tax benefit exceeds the marginal default costs → increase leverage.
3
, A: the optimal level of debt D* maximizes firm value by maximizing the difference between the tax
benefit and the expected bankruptcy costs.
B: a leverage increase is the same as a leverage decrease.
The dynamic trade-off theory suggests that capital structure adjustment does not take place
frequently because firms allow leverage to deviate from the target as long as adjustment costs
(transactional and contractual costs) outweigh the benefits of reverting to the target
C: Tax-shield is similar, but what is different is the perceived costs. They don’t change the leverage in
• Perceived costs of changing the leverage is the same as the leverage at that specific moment.
People are sticking with their current level of leverage.
• Shareholders’ Put option stock → buying back in leverage, increases certainty which is assumed
to be related with lower profits (not beneficial) therefore a tradeoff.
This literature test which models holds:
• If leverage responds symmetrically to tax changes (static models predict) the marginal cost-of-
debt curve will be smooth around the firm's existing debt level, as in Fig. 1b.
• If firms increase leverage after tax rises but do not respond to tax cuts, as dynamic models
predict, the marginal cost-of-debt curve will be kinked, as in Fig. 1d.
• The fact that we have a large number of tax changes that are staggered over time also allows us
to test the earlier proved statement that tax increases leave a permanent mark on leverage.
Empirically identifying the effect of taxes on capital structure is hard due to endogeneity problems:
• Using variations in state corporate taxes as they are both numerous and affect only some firms
at a time: those who are doing business in that specific state.
• Therefore, it also provides data of firms in the absence of a tax change & it allows them to
distinguish the effect of taxes on leverage from other forces shaping debt policy.
o For example, investment opportunities in NC may have changed which could led increase
in debt desirability’s.
o For example, compare leverage changes among North Carolina firms where a tax change
occurred and South Caroline, where no tax change occurred. → NC would have evolved
the same as SC (with the extent of similar investment opportunities), absent the tax
increase.
o The diff-in-diff, → difference across firms in different states of the within firm change in
leverage, gives the estimate of the tax sensitivity of corporate debt policy.
• Federal tax rates would affect all firms at the same time (therefore, not useful).
4
