Answer: nothing.
If you invest in a private equity fund, the general partner is tasked with investing your funds. If she can’t find anything to buy, she returns the unused capital, shrinking the fund. This is the economic equivalent of a share buyback. Distributions of this sort don’t buy anything.
But the word buy in share buyback can be confusing. [Read more…]
In an earlier post we showed that, for a tax-paying firm, WACC is always a declining function of leverage. If firm value is an inverse function of WACC, this suggests funding operations with 100% debt.
In fact we observe that firm value is concave in leverage and appears to peak when there is some equity in the capital structure. We’re forced to conclude that firm value isn’t solely a function of WACC, but instead varies in a more complicated fashion with leverage. In this post we’ll review one theory that explains this, and which can guide us in divining an “optimal” capital structure. [Read more…]
In an earlier post we saw how peer analysis can mislead. In this post we suggest a better method: distance-based peer analysis. [Read more…]
Peer analysis can provide a cross check for the recommendations we derive from more normative analysis. The best peer analyses begin with a narrowly defined population of comparable firms. If the proper care isn’t given to this selection process, the results can prove misleading, as we’ll see in the following example.
There’s a surprising amount of misleading writing about capital distribution, and in particular the issue of dividend vs. share repurchase. In this post we’ll examine some common canards. [Read more…]
A recent article in the Economist suggests that managers with exposure to their firm’s share price would benefit by reducing dividends and instead buying back shares. From a strictly economic point of view, we don’t see the difference. [Read more…]
Once the dominant form of capital return, regular dividends have been in secular decline since the early 1980s. In this post we consider why. [Read more…]
Though quantitative analysis is interesting in its own right, we expect its practice to become more widespread if we can make money doing it. In this post we identify some choices to be made when designing a process for quantitative analysis.
Sustainable strategies for driving revenue include picking up nickels and bagging elephants. The former tack assumes high volumes and admits the following characteristics: [Read more…]
Behavioral finance is a great field, no doubt, and deserved its 2002 Nobel prize. The difficulty for practitioners is to turn its irrefutable findings into actionable recommendations. In this post we highlight a few of the challenges. [Read more…]
There are lies, damn lies, statistics, and regression analyses. In this post we’ll examine some of the abuses of the last style.
Our search for understanding corporate finance leads us to drink from many questionable springs. Statistical analysis can help or hinder during the journey. A good rule of thumb is All regression analyses are wrong, but some are useful.
Our example analysis seeks to discover whether paying a dividend increases firm value. [Read more…]