:)
Advanced Corporate
Finance – Final Exam
Inspection with Answers
Block 1, Autumn 2023
1
,:)
Question 1
According to Agency Theory of Dividends, value firms (that is firms with low market to
book ratio) should pay high dividends, low dividends, no dividends or the amount of
dividend they pay does not matter to determine their worth? Motivate your answer. In
particular, explain:
a) What is the typical profile of a value company?
b) How do you relate this profile to the main conclusion of the agency theory of
dividends?
Feedback answer Q1:
Value firms usually operate in well-established technologies and their future cash flow
is expected to be steady and to not outperform the average cash flow delivered by
companies in an economy. Value firms are not expected to make large investments
in, for instance, new technologies that will deliver high cash flows in the future.
The agency theory of dividends assume that managers have an inventive to use
companies’ cash flow for projects or purposes that increase their benefits and pay
but are detrimental to shareholders’ value. This type of proposition is especially true
for value firms, which have little current investment opportunities and little use for the
cash in their balance sheets. As a results, value firms should be more likely to pay
dividends because managers have little justification to retain cash within the firms
and shareholders will put pressure on managers of value firms to pay dividends.
2
, :)
Question 2
See Table 3 and read very carefully its caption. Table 3 reports results of a regression
that relates various characteristics of banks to the introduction if the NID in Belgium.
Table A2 reports the basic definitions of the variables used in Table 3. Belgium is the
treated country (the country that introduced the NID), Germany, France, the
Netherlands and Luxembourg are the control countries (the countries that did not
introduce the NID). Focus now on Table 3, column 1. There the dependent variable,
In(ETA) is the natural logarithm of banks' Equity Ratio. How do you interpret the
coefficient of Treated*Post? What is its economic intuition? How do you relate it to the
coefficient of Post? (5 points)
EXTRA INFORMATION: Notice that in the case of "Retained Earnings", Table 3
means "Retained Income Share" in Table A2. Similarly, "Loans" in Table 3 correspond
to "Loan shares" in Table A2
*Other Equity means total preference shares. The other variables listed in Table A2
are control variables that are not reported in Table 3.)
Table 3:
Equity ratio: components.
This table analyzes the underlying drivers of the equity ratio after the introduction of
the notional interest rate deduction. The sample period is 2003-
2007. The Post dummy equals one in 2006-2007, the Treated dummy equals one for
the Belgian banks, The first column retakes the baseline result from Table 6. Columns
2, 5, 6 and 7 analyze the impact on equity and its sub-components, while Columns 3
and 4 look at the impact on the asset side. All left hand side variables are in natural
logarithms. Retained income share is the ratio of retained income over after-tax profits.
All regressions include bank-fixed effects, standard errors are clustered at the bank
level, ***,* and * denote p < 0.01, p < 0.05 and p < 0.1, respectively.
3
Advanced Corporate
Finance – Final Exam
Inspection with Answers
Block 1, Autumn 2023
1
,:)
Question 1
According to Agency Theory of Dividends, value firms (that is firms with low market to
book ratio) should pay high dividends, low dividends, no dividends or the amount of
dividend they pay does not matter to determine their worth? Motivate your answer. In
particular, explain:
a) What is the typical profile of a value company?
b) How do you relate this profile to the main conclusion of the agency theory of
dividends?
Feedback answer Q1:
Value firms usually operate in well-established technologies and their future cash flow
is expected to be steady and to not outperform the average cash flow delivered by
companies in an economy. Value firms are not expected to make large investments
in, for instance, new technologies that will deliver high cash flows in the future.
The agency theory of dividends assume that managers have an inventive to use
companies’ cash flow for projects or purposes that increase their benefits and pay
but are detrimental to shareholders’ value. This type of proposition is especially true
for value firms, which have little current investment opportunities and little use for the
cash in their balance sheets. As a results, value firms should be more likely to pay
dividends because managers have little justification to retain cash within the firms
and shareholders will put pressure on managers of value firms to pay dividends.
2
, :)
Question 2
See Table 3 and read very carefully its caption. Table 3 reports results of a regression
that relates various characteristics of banks to the introduction if the NID in Belgium.
Table A2 reports the basic definitions of the variables used in Table 3. Belgium is the
treated country (the country that introduced the NID), Germany, France, the
Netherlands and Luxembourg are the control countries (the countries that did not
introduce the NID). Focus now on Table 3, column 1. There the dependent variable,
In(ETA) is the natural logarithm of banks' Equity Ratio. How do you interpret the
coefficient of Treated*Post? What is its economic intuition? How do you relate it to the
coefficient of Post? (5 points)
EXTRA INFORMATION: Notice that in the case of "Retained Earnings", Table 3
means "Retained Income Share" in Table A2. Similarly, "Loans" in Table 3 correspond
to "Loan shares" in Table A2
*Other Equity means total preference shares. The other variables listed in Table A2
are control variables that are not reported in Table 3.)
Table 3:
Equity ratio: components.
This table analyzes the underlying drivers of the equity ratio after the introduction of
the notional interest rate deduction. The sample period is 2003-
2007. The Post dummy equals one in 2006-2007, the Treated dummy equals one for
the Belgian banks, The first column retakes the baseline result from Table 6. Columns
2, 5, 6 and 7 analyze the impact on equity and its sub-components, while Columns 3
and 4 look at the impact on the asset side. All left hand side variables are in natural
logarithms. Retained income share is the ratio of retained income over after-tax profits.
All regressions include bank-fixed effects, standard errors are clustered at the bank
level, ***,* and * denote p < 0.01, p < 0.05 and p < 0.1, respectively.
3
