Professional Documents
Culture Documents
Chapter Thirteen
Corporate Financing
Corporate
and Efficient Capital
Decisions
Finance
Ross Westerfield Jaffe
Markets
13
Sixth Edition
Prepared by
Gady Jacoby
University of Manitoba
and
Sebouh Aintablian
American University of
Beirut
McGraw-Hill Ryerson © 2003 McGraw–Hill Ryerson Limited
13-1
Chapter Outline
1. Fool Investors
Empirical evidence suggests that it is hard to fool investors
consistently.
2. Reduce Costs or Increase Subsidies
Certain forms of financing have tax advantages or carry other
subsidies.
3. Create a New Security
Sometimes a firm can find a previously-unsatisfied clientele
and issue new securities at favourable prices.
In the long-run, this value creation is relatively small,
however.
Stock
Price Overreaction to “good
news” with reversion
Delayed
response to
“good news”
Efficient market
response to “good news”
• Weak Form
– Security prices reflect all information found in past prices
and volume.
• Semi-Strong Form
– Security prices reflect all publicly available information.
• Strong Form
– Security prices reflect all information—public and
private.
Time
McGraw-Hill Ryerson © 2003 McGraw–Hill Ryerson Limited
13-11
Information set
of publicly available
information
Information
set of
past prices
1.2
0.8
0.6
0.4
0.2
0
1
11
13
15
17
19
21
23
25
Double-click on this Excel chart to see a different random series. With
different patterns, you may believe that you can predict the next value in
the series—even though you know it is random.
Dividend Omissions
0.146 0.108
(%)
0.032 0
-0.244
-8 -6 -4
-0.72 -2 -0.483 0 2 4 6 8
-1
Efficient market
-2
response to “bad news”
-3
-3.619
-4
-4.563-4.747-4.685-4.49
-5 -5.015 -4.898
-5.183
-5.411
-6
• Magnitude Issue
• Selection Bias Issue
• Lucky Event Issue
• Possible Model Misspecification
0.00%
Annual Return Performance
All funds Small- Other- Growth Income Growth and Maximum Sector
-10.00% company aggressive funds funds income capital funds
growth growth funds gains
funds funds funds
-20.00%
-30.00%
-40.00%
-50.00%
-60.00%
Taken from Lubos Pastor and Robert F. Stambaugh, “Evaluating and Investing in Equity Mutual Funds,” unpublished paper,
Graduate School of Business, University of Chicago (March 2000).