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The U.S. and Germany rank #1 and #3, respectively, in the world, in terms of the total amount of international trade. U.S. and German firms compete with one another for a larger market share in other countries and in each other’s local markets. And yet, there are no published studies that compare the financial management practices of U.S. and German firms. In this paper, we make a contribution to the finance literature on this subject by comparing the financial characteristics of U.S. and German manufacturing firms. Our findings provide valuable insights for corporate financial managers and for investors who invest in these countries. Using a sample of 1166 firms, we find that the financial characteristics of U.S. manufacturing firms differ significantly from those of German manufacturing firms. MANOVA test results indicate that U.S. firms exhibit higher liquidity, lower debt, higher profitability, and lower total assets turnover. These findings are also supported by the logistic regression results. We suggest that better financial performance of U.S. firms could be attributed to more business-friendly employment laws and lower levels of unionization in the United States.

Given that prior research into industry cost of equity indicates that CAPM-derived estimates are no worse than estimates from more complex models, we investigate the bias of the standard CAPM approach for each industry separately, and examine the effectiveness of alternative beta estimators. We find that constant betas produce better estimates of cost of equity for particular industries (mostly either ‘defensive’ or ‘highrisk’ industries). The paper succeeds in offering a meaningful assessment of the empirical reality of the CAPM, as well as offering guidance concerning the appropriate practical application of the CAPM when estimating industry cost of equity.

This study investigates whether investors efficiently incorporate changes in defined benefit pension plan information in stock prices. The sample is comprised of public US companies with available data from 1980 to 2005. Fama and French three factor (1993) and four factor models results reveal that the market inefficiently incorporates changes in defined benefit pension plan information. The results suggest that investors are not paying enough attention to the implications of the changes in funding status for future earnings and cash flows. Investors’ reactions to changes in defined benefit pension plan information were compared to reactions to changes in long-term debt account ratios. The results reveal that the market is also inefficient incorporating changes in long-term debt information. Hedge-portfolio tests are performed to verify if there is an opportunity to outperform the market by identifying market inefficiencies. The hedge-portfolio results support the notion that the market overprices firms that have the most negative changes in funding ratio and increases in long-term debt ratio.

Considerable empirical evidence suggests that firm’s time equity issues to market movements and that this behavior impacts capital structures. Based on a survey of investigations of this phenomenon, this study observes capital structures in different financial markets and identifies different situations related to the effect of timing on leverage. This study also explains optimal leverage with a simplified dynamic adjusted model. Firms facing financial constraints in debt financing may increase equity issues resulting in considerable leverage variance. On the other hand, firms with fewer financial constraints can time the market when issuing equity. This study takes regional samples from the United Kingdom and Japan, to summarize circumstances involving partial financial constraints and no financial constraints. The market timing effects tests in the United Kingdom are insignificant but the results for Japan are significant. This phenomenon improves understanding of the market timing model under different circumstances.

This paper examines the influence of bond design on the long-run operating performance of convertible bond issuers and the determinants of this performance. Bonds are classified as equity-like and debt-like according to their probability of conversion at the time of the issue. The measure of long-run operating performance is the pre-tax cash flows of the firm. The results show that in the three years before the offering equity-like convertibles have better performance than debt-like convertibles while the performance in the three years after the offering is similar for the two groups of firms. The results also show that the factors that determine the long-run operating performance of equity-like and debt-like offerings are different. For example, the rating of the bond issued has a more positive influence on the performance of equity-like issues compared to debt-like issues. The level of information asymmetry, on the other hand, has a more negative influence on the performance of equity-like issues. The study contributes to the literature by incorporating convertible bond design into the study of the long-run operating performance of these bonds.

In light of multiple motivations for the use of trade credit, firms tend to supply and receive trade credit at the same time, so the choice to engage in one of these activities could influence the other. Many studies proposed in the literature define models of trade credit and provide empirical evidence, looking mainly at only one aspect of trade policy at a time. The few studies comparing gross and net exposure models are based on a limited set of variables or on a limited time horizon. In the context of one of the more relevant world markets (Italy), this paper compares models for gross and net exposure, demonstrating a significant difference in the statistical fitness of the two models and in the characteristics of the explanatory variables. The results demonstrate the existence of a strict relationship between trade credit and debt choices and suggest some unique features of net models compared to gross ones.

This paper examines one of the major problems in credit risk models widely used in the financial industry to forecast future defaults and bankruptcies. We find that even after proper calibration, a representative credit risk model can severely underestimate default correlation. We further find that a likely reason for the underestimation of default correlation is the problematic common practice in the financial industry of using observable equity correlation as a proxy for unobservable asset correlation when the model is applied to predict default correlation. However, our results show that this proxy in common practice is not valid.

In this study, we examine the impact of concentrated ownership on cash valuation and the level of cash holdings in firms the emerging nations of China and India. Agency theories suggest that firms with high levels of concentrated ownership are subject to greater extraction of private benefits from cash holdings. Our study utilizes Chinese firms data from 1993-2006 and Indian firms data from 2003-2006. We examine the relationship between firm valuation and cash holdings with different levels of governmental ownership concentration, family ownership levels and foreign ownership levels. Our findings show that Chinese firms with high levels of government ownership have larger cash holdings suggesting more opportunities for private benefits extraction thus leading to lower firm valuation. In contrast, we find that Indian firms with high level of family ownership have low cash holdings and record better performance. Chinese investors view governmental ownership as a determinant that reduces firm value. Indian investors see high levels of family ownership as a factor that enhances firm value. This study enhances the body of knowledge concerning the nature of cash holdings and firm value in emerging nations of China and India.

This paper theoretically investigates the effect of uncertainty about future investment on expected stock returns. Based on a real options framework, we incorporate the learning-by-doing effect to analyze the irreversible investment problem. In our investment decision framework, the timing of expansion is endogenous and results from a value-maximizing decision. In addition, there are two important implications of our framework. First, we show that an increase in the relative valuation ratio, as measured by the book-to-market ratio, raises average stock returns. This positive relationship helps to explain the value premium. Second, we investigate how uncertainty about investment affects expected stock returns. Based on the closed-form solution in our framework, we suggest that less uncertainty about investment induces lower expected stock returns.