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There is some evidence of persistent fund manager performance but this could be explained by survivorship b_
(1995) Defend CAPM despite emprical limitations. It is 'not useless' for managers. Helps find cost of capital.
'Why are actual stock price movements more volatile than what our models predict?'
(1977) Signalling theory of capital structure. Debt issue implies value spotted and share price up. Requires asymmetric information.
Excess volatility driven by uncertainty of short term dividend payments.
(1988) With tax, debt becomes cheaper than equity. Awkward for managers proud of their low debt ratios.
The equity premium puzzle might be a case of a special _ _ . Earlier periods in history did not have the same premium
(2003) Increasing openness in 90s-00s has not prompted a significant increase in foreign holdings
(2000) Showed that the pecking order does not seem to hold for smaller firms (which are those that it should apply to most).
'Why do equity investments generate such high returns above risk free assets?'
(2005) Testing capital structure theories is difficult since they are not mutually exclusive
(2005) There are many different types of debt in terms of maturity, convertibility etc. and this also affects cap structure decisions
If a portfolio is not on the _ _ _ then greater return for the same risk or lower risk for the same return is possible
(2005) The fact that fund managers don't beat the market supports EMH. We are sometimes misguided by survivorship bias. Active fund management is a loser's game
(1990) Empirically showed that higher-tax-paying firms favour debt.
(1988) Countries are highly correlated in crisis times (so international diversification is not that great)
The fact that P-O theory fits better for larger firms does not align with the fact that smaller firms suffer greater informational asymmetries
(2005) Frame the question: 'Is there a way of dividing a company's capital base between debt and equity that can be expected to maximise firm value?'
In 2014, XX% of active large-cap fund managers failed to beat the market (S&P500) and this was not a blip
(2012) Capital structure depends on regulation, society, company and industry
In CAPM world, everyone selects a combination of the riskless asset and _ portfolio
The _ _ _ is derived as the tangent between the efficient frontier and the risk free rate
(2001) Mutual fund managers perform better when they pick stocks local to them
_ _ Problem: we could only properly test EMH with a perfect asset pricing model which doesn't exist
The _ _ _ lies in beta-expected return space
Herding is a result of informational asymmetry (inability to know about fundamentals)
(2004) Empirical record of CAPM is poor.
(2003) We should expect newly opened emerging markets to experience a dramatic inflow of capital
EMH does not rely on correct prices, perfect financial markets, efficient portfolios etc.
(1977) Explained 'debt overhang'
One weakness of CAPM is that it is a _shot model
(2007) Equity issuance idea. Managers cares for immediate stock price effect + future equity value. Expectation of extent investors agree is a factor of whether to issue.
(2014) Home bias might be diminishing. US foreign stock holdings went from 12% (2001) to 28% (2010)
Argued that the gap between equity and treasury bond returns implies an absurd level of risk aversion
(2001) Carried out a qualitative survey and found 71% of CFOs aimed for a target D/E
Holding stock in multinational companies could provide _ _ (but still moves closely with domestic market)
(2000) Showed that emerging markets 'only' see 25% increases in equity in the first 7 months of 'opening'
Securities off the SM are _priced
Free cash flow theory - debt issued to correct agency problems.
View of dividend taxation that says double taxation is not relevant because investments are internally financed
beta levered = beta unlevered X (_+(_-_)_/_)
performance of ccapm is about the same as capm
The theory that market prices reflect all available information that is relevant to price
(2001) Described the 'tradeoff theory' - firms seek D/E ratios that balance the tax advantages of additional debt against the costs of possible financial distress
(2012) There is evidence on both sides of the argument but EMH is not falsifiable.
(2003) 3 underlying factors of contagion - capital flows, surprises, common creditors.
The EMH only says - if i have an incentive to use information from which I can make money then I will use that information
(2003) Contagion theories: herding, trade linkages, financial linkages, wake up call
We observe realised returns, not _ returns
History suggests the stock market does not follow a _ _
The correlation between dividends and prices could still be faddy if managers are affected by the same fads as investors
(1988) Equity is double taxed - once through earnings then again through dividends. Debt is only taxed once.
(2003) Blockholdings of foreign companies might be a barrier that limits international diversification
(1977) Found that that stocks with high earnings-price ratios returned more than predicted by CAPM
(1999) found that profitability was the “single largest determinant of [low] debt-asset ratios
The level of risk aversion implied by the equity risk premium means that the demand for money now (and interest rate) should be much higher
Assumptions of MM no t_, t_ c_, b_ c_ and individuals and firms b_ at the same rate
CAPM is weak because it is hard to estimate m_ r_, b_ and r_ free rate
Equity risk premium puzzle could be a case of s_ b_
View of dividend taxation that states return on dividends from stocks must exceed return on bond investment
A risk-adjusted measure of how much a stock or portfolio is 'beating the market'
(2008) Managers might hold excessive cash in order to avoid scrutiniy
(1973) Developed ICAPM (intertemporal CAPM) which extends the model to incorporate risk and consumption preferences over multiple time periods
Difficult to test CAPM because of unobservable _ and _ portfolio. Roll: tautological
___ is phenomenally difficult to reject
(1963) ‘all [debt financed] investment projects which are worth being carried out in the absence of taxation…retain this property despite taxation'
(1980) develop an EMH model that contains an 'equilibrium degree of disequilibrium' to ensure some investors spend resources to find and analyse information.
(2007) 20-30% of home bias might be explained by exchange rate volatility (if no PPP)
CAPM and APT assume _ markets and no _
CAPM assumes preferences can be represented by _ _ preferences
(2001) Overconfident investors think they can predict the performance of local stocks
(2005) Evidence suggests there is an optimal DE: firm DEs are clustered within individual industries but vary widely between industries
(1996) Some fund managers do manage to beat the market but then this is captured by fees
(1977) Argued that its impossible to test CAPM because the 'market portfolio' it is founded on is 'theoretically and empirically elusive'.
_ _ when comparing WACCs across countries can be significant
Indirect costs of bankruptcy: loss of _
(1974) Showed that when insiders sold shares, those stocks went on to underperform the market. Thus disproves strong-form efficiency
Free cash flow theory of capital structure (Principal - agent)
Long term correlations between price and dividends seem to add up but short term price movements are too volatile
CAPM assumes investors diversify perfectly and only care about _ risk. _ expectations and all assets are _
When a company exchanges low risk assets for high risk assets it passes value for debt-holders to shareholders since risk of default rises
The _ _ _ lies in sigma-expected return space
(2003) Contagion is when an event in one country acts fast and furious to trigger shocks in other countries
(2003) With perfect global capital markets, all investors would hold the world market portfolio
When the level of debt is so high that shareholders reject positive NPV project because the gains will go to the debtholders and not them.
(2010) EMH mostly holds but doesn't account for irrational investors (behavioural finance).
The proposition that debtequity doesn't matter. Only cash flows. Therefore value is independent of DE ratio.
(1988) The assumptions of MM proposition must be important, given that firms in reality do not all have massive levels of debt.
(1976) Developed 'arbitrage pricing theory' which is essentially an extension of CAPM that models the expected return on as many factors as you think are needed.
EMH technically isn't testable because you need a perfect asset-pricing model for that (which doesn't exist)
(1995) Find that leverage ratios are pretty similar internationally (given significant gove and taxation) which supports both trade-off and pecking order theories.
(2007) Managers must consider how debtholders might have different objectives and thus restrict investment choices.
EMH does not require price=true value at every point but errors must be
Many foreign investments do not have high _ _
(1991) The old view of dividend taxation implies huge economic distortions since the required return for investments would be so lareg
All portfolios lie on the _ _ _ all efficient portfolios lie on the _ _ _
(1981) Found that stocks with lower levels of market capitalisation outperform CAPM
Direct costs of bankruptcy: _ and _ costs
(2005) Firms frequently issue stock, 86% of sample issued some between 1993-2003 (bad for pecking order).
EMH is ___ because it requires profit-seeking investors to continually seek inefficiencies when there are none by definition
(1976) Suggested that diversification benefits could be achieved with fewer stocks by international diversification (rather than domestic)
(2002) Few events meet the strict criteria for contagion: a significant increase in comovement
(1986) Empirically showed that the announcement of equity issuance lowered share prices
(1991) In early 90s investor portfolios (in USA/Japan e.g.) had about a 90% domestic weighting
There is a small autocorrelation between short term price changes but not enough for arbitrage
CAPM assumes investors are _ and _ _
CAPM valuation is based only on ___ risk
Anomalies such as small cap effect either mean CAPM is wrong or _ are systematically inefficient
APT assumes factors are _
(2000) Showed that US subsidiaries of Japanese banks were credit constrained when there was a housing shock in Japan.
(1991) The cost of capital in a particular country might explain how much investment takes place there
Trade off theory predicts a correlation between gearing and p_
(2006) Patriotism is positively related with domestic bias
beta unlevered = beta levered / (1+(1-_)_/_)
(1995) Show that larger firms have greater DE and more profitable firms have smaller DE
(1984) Described the 'pecking order theory' - internal cash flow, then riskless debt, then risky debt, then equity
P-O theory explains negative relationship between gearing and profits. V profitable firms can just use _ financing

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