Under what conditions will a multinational corporation alter its operations to manage its risk exposure? We show that multinational firms will engage in operational hedging only when both exchange rate uncertainty and demand uncertainty are present. Operational hedging is less important for managing short-term exposures, since demand uncertainty is lower in the short term. Operational hedging is also less important for commodity-based firms, which face price but not quantity uncertainty. When the fixed costs of establishing a plant are low or the variability of the exchange rate is high, a firm may benefit from establishing plants in both the domestic and foreign location. Capacity allocated to the foreign location relative to the domestic location will increase when the variability of foreign demand increases relative to the variability of domestic demand or when the expected profit margin is larger. For firms with plants in both a domestic and foreign location, the foreign currency cash flow generally will not be independent of the exchange rate and consequently the optimal financial hedging policy cannot be implemented with forward contracts alone. We show that the optimal financial hedging policy can be implemented using foreign currency call and put options and forward contracts.

We examine the impact of institutional democracy on firm value through the lens of dividend policies. Using instrumental variables, we find strong evidence that democracy improves dividends in an international sample of 18,410 unique firms across 63 countries over the 1991–2018 period. This effect is more pronounced for firms with high agency costs, or those in countries with weak legal protection for shareholders. Our evidence is robust to alternative measures of democracy and a battery of tests addressing the challenges associated with the instruments. Furthermore, dividends are capitalized at a higher rate in more democratic countries, especially for firms with high growth options. To the extent that investors are willing to pay a premium for firms that distribute more dividends, the democracy-induced dividends add to corporate value beyond the premium associated with shareholder rights-induced dividends. Overall, our results highlight that institutional democracy is an important, yet unexplored, determinant of corporate valuation.

I examine the relative effects of replacement investments (RX) and adaptation investments (AX) on equity value. My analysis draws from the real-options theory that stresses the link between firm value and the option a firm holds to continue current practice or to adapt resources to new opportunities. The key prediction is that replacement and adaptation investments reflect the exercise of different investment options that have different implications for firm value; the effect of each investment type on firm value depends on the relative attractiveness of the underlying investment option. The results show that, in the presence of earnings, the effect of replacement investments on equity value is negative and increasing in earnings performance; by contrast, the effect of adaptation investments on equity value is positive and decreasing in earnings performance. Further analyses show that asset sales mediate the importance of adaptation investments in determining equity value.

Nonfinancial firms that use interest rate swaps are compared with nonusers for the years 1991, 1993, and 1995. Swap use grew from 6% of all firms in 1991 to 8% in 1995. Nonfinancial firms use fixed rate payer swaps more often than floating rate payer swaps. Firms that use swaps are significantly larger and have a higher debt to equity ratio relative to nonusers. Fixed rate payers receive a ratings' upgrade significantly more often than floating rate payers and experience a significantly higher percentage increase in net sales in the year of swap initiation relative to floating rate payers and the industry average. Floating rate payers have a significantly higher S&P bond rating relative to the industry average. The test results lend support to the information asymmetry theory of swap usage [Titman, S., 1992. Interest rate swaps and corporate financing choices, Journal of Finance 47, pp. 1503–1516] and lend some support to the asset substitution portion of the agency cost theory of swap usage [Wall, L.D., 1989. Interest rate swaps in an agency theoretic model with uncertain interest rates. Journal of Banking and Finance 13, pp. 261–270].

Current cost income, Dividends, Historical Cost income, Informational content

Leases, Capitalized leases, Disclosures, SEC Rule 3-16

Internal Control, 17th century

Managers are usually responsible for the control of the level of several process variables, such as cost, quality, rate of output, and so on. The levels of these process variables are known as the states of the system, and they may be represented by the values either of a continuous variable or by a discrete variable. It is assumed that these states can be ordered in terms of their desirability. Some processes may move only from a more desirable to a less desirable state while others may shift in either direction. These shifts may occur with or without the intervention of the manager. The control system is a plan formulated by management to indicate when intervention should take place. Three types of control systems are generally possible. The first involves no intervention by the manager until a breakdown of the process occurs. This approach is to be favored when the continued operation of the control system is less costly than the benefits to be derived from intervention. The second type of control system consists of periodic intervention by the manager for purposes of adjusting or otherwise influencing the process. The most compelling reason for this approach lies in its ease of application. The third approach bases the intervention decision on information obtained from the process. This information is typically obtained by sampling. The present paper will concentrate on this third type of control system. Several components are incorporated into any control system. First, the manager must establish the variable or variables to be controlled. He must