This is an exploration of how bidding behavior of firms in various auctions is affected by their capital structure. The theoretical model considers a first-price sealed bid and an English auction. We find that as debt levels increase, firms tend to reduce their bids. The lower bids give the competition incentives to reduce their bids as well. These results are investigated empirically using data from the 1994-1995 FCC spectrum auctions. Consistent with the theoretical model, higher debt levels of the bidding firm and of the competition tend to lead to lower bids. Additional determinants of bidding behavior in these auctions are also analyzed.

[We use a movie industry project-by-project dataset to analyze the choice of financing a project internally versus financing it through outside alliances. The results indicate that project risk is positively correlated with alliance formation. Movie studios produce a variety of films and tend to develop their safest projects internally. Our findings are consistent with internal capital market explanations. We find mixed evidence regarding resource pooling, i.e., sharing the cost of large projects. Finally, the evidence shows that projects developed internally perform similarly to projects developed through outside alliances.]

We analyze new Swedish data on the portfolio holdings of large blockholders and find that firm value increases with the weight of a stock in a large blockholder's portfolio. In our sample, this weight may be greater than 50%. We are the first to show that this value premium is correlated with portfolio weights for any large blockholders, not just institutions. We find some evidence that indicates that “stock importance” (high portfolio weight) can mitigate the negative effects of a dual-class structure on firm value. Further, it does not seem that a large blockholder's tenure as a CEO or as a board chairman affects this value premium. We conduct a variety of tests to rule out endogeneity and reverse causality.

As demonstrated by Boyce and Kalotay (1979) and Brick and Ravid (1985), the use of long-term debt may be preferred because of tax-related advantages. Brick and Ravid show that if there exists a tax advantage to debt and nonstochastic interest rates, long-term debt will increase the present value of the tax benefits of debt if the term structure of interest rates, adjusted for risk of default, is increasing. A decreasing term structure, on the other hand, calls for short-term debt. The present paper extends the tax-induced argument of Brick and Ravid to allow for the presence of stochastic interest rates. Once interest rates are uncertain, pricing even under risk neutrality becomes a complex issue. We analyze the debt maturity decision under two competing pricing equations: the return to maturity expectations hypothesis and the local expectations hypothesis. (This terminology is used in Cox, Ingersoll, and Ross (1981) and Campbell (1986).) Under uncertainty, a debt capacity factor will create an additional incentive to issue long-term debt. Our other results may be interpreted to indicate that if the term premium, the difference between the implied forward interest rate and the future expected spot rate, is positive (sufficiently negative) then long-term (short-term) debt maturity strategy is optimal.

We analyze a model in which firms signal their quality by using financial policies to commit to cash outflows. Two financial policies may be used: dividend and debt-service obligations. We find sufficient conditions for the informational equilibrium to entail concommitant use of both dividends and leverage in the cost-minimizing combination of the commitment signal. In this equilibrium, better firms pay higher dividends and are more highly levered than lower quality firms.

This paper investigates how firms’ bidding behavior in various auctions is affected by capital structure. A theoretical model is developed where the first price sealed bid and the English auction are examined. We find as debt levels increase, firms tend to decrease their bids. The lower bids give the competition incentives to decrease their bid as well. These results are then investigated empirically using the recent FCC spectrum auctions. Consistent with the theoretical model, larger debt levels of the bidding firm and the competition tend to lead to lower bids. Additional determinants of bidding behavior in these auctions are also analyzed.

Robert H. Smiley, S. Abraham Ravid; The Importance of Being First: Learning Price and Strategy*, The Quarterly Journal of Economics, Volume 98, Issue 2, 1

This study analyzes the interaction between the optimal level of investment and debt financing. For this purpose, a model is structured in which a firm, facing an uncertain price, has to decide on its optimal level of investment and debt. The amount of investment sets a limit on output whose optimal level is determined after price is realized. The debt involved is risky (there exists a possibility of bankruptcy). The analysis proves that investment and its optimal financing have to be simultaneously determined and that a negative relationship exists between operating and financial leverage. We also demonstrate that as the tax rate increases, optimal capacity decreases and optimal leverage increases. An analysis of the impact of changes in the expected price shows that under some conditions, an increase in expected price would lead to an increase in optimal investment (firm size) and a decrease in optimal debt.

This study analyzes the interaction between the optimal level of investment and debt financing. For this purpose, a model is structured in which a firm, facing an uncertain price, has to decide on its optimal level of investment and debt. The amount of investment sets a limit on output whose optimal level is determined after price is realized. The debt involved is risky (there exists a possibility of bankruptcy). The analysis proves that investment and its optimal financing have to be simultaneously determined and that a negative relationship exists between operating and financial leverage. We also demonstrate that as the tax rate increases, optimal capacity decreases and optimal leverage increases. An analysis of the impact of changes in the expected price shows that under some conditions, an increase in expected price would lead to an increase in optimal investment (firm size) and a decrease in optimal debt.

This paper studies the impact of career concerns on technological change by analyzing the adoption of digital cinematography in the U.S. motion picture industry. This setting allows us to collect rich data on the adoption of this new technology at the project level (i.e., movie) and on the career of the main decision-maker (i.e., director). We find that early-career directors played a leading role in the adoption of digital technology, an effect that appears to be explained by career concerns, rather than alternative motives we consider and analyze. Technological savviness also plays a role.