This paper uses the Capital Asset Pricing Model to link the financial policy of the firm with the firm's real decisions including output, input mix, and investment. Whereas the M-M leverage theorems were derived for a given set of real decisions, this paper considers the impact of leverage on firm optimization when interest is tax-deductible. In general, leverage impacts upon factor proportions, capital stock, and output decisions. In the final proposition, the author demonstrates that the ‘cost of capital’ need not decline with leverage even in perfect capital markets and with default-free debt.

Gailen L. Hite, The Timing and Substance of Divestiture Announcements: Individual, Simultaneous and Cumulative Effects: Discussion, The Journal of Finance, Vol. 41, No. 3, Papers and Proceedings of the Forty-Fourth Annual Meeting of the America Finance Association, New York, New York, December 28-30, 1985 (Jul., 1986), pp. 696-697

Since prices are constrained to discrete tick multiples while dividends are essentially continuous, ex day price changes will not equal dividends. We argue that the expected price drop is strictly less than the dividend but within one tick of the dividend. The price-drop-to-dividend ratio will (i) be less than one, (ii) increase with dividends generally, and (iii) decline between tick multiples, giving a sawtooth pattern in the data. Since dividends and dividend yields are highly correlated, discreteness will give the impression of tax-induced dividend clienteles even if there are none. Taxable cash dividends and nontaxable stock dividends exhibit similar ex day behavior.

In the Sixties, the qualified stock option was the predominant form of long-term incentive compensation contract for major industrial firms in the U.S. In the early Seventies these same firms replaced their tax-qualified stock option plans with non-qualified sttock options and later modified these plans to include a variety of new contingent compensation arrangements, some of which were based on accounting numbers instead of stock prices. This paper develops the hypothesis that tax considerations play an important role in explaining the form of compensation contracts. The pattern and timing of changes in the compensation plans of the top 100 industrial firms provides evidence consistent with the tax hypothesis.

William W. Alberts, Gailen L. Hite, The Modigliani-Miller Leverage Equation Considered in a Product Market Context, The Journal of Financial and Quantitative Analysis, Vol. 18, No. 4 (Dec., 1983), pp. 425-437

We examine security price reactions around the announcements of 123 voluntary spin-offs by 116 firms between 1963 and 1981 involving a pro-rata distribution of the common stock of a subsidiary to the stockholders of the parent firm. The median spin-off in the sample is 6.6% of the original equity value and is associated with an abnormal return of 7.0% from 50 days prior to the announcement through completion of the spin-off. No evidence is found to indicate the gains to stockholders represent wealth transfers from senior securityholders. Over the entire event period we find positive gains for firms engaging in spin-offs to facilitate mergers or to separate diverse operating units but negative returns to firms responding to legal and/or regulatory difficulties. In the two-day interval surrounding the first press announcement we find positive average excess returns for all groups.

This paper examines the wealth effects to parent company shareholders around the announcement of divisional management buyouts. Despite the relative absence of “arm's-length” bargaining between buyer and seller, there is no evidence that divisional management buyouts result in reductions in parent company share prices. Instead, small but statistically significant wealth gains are found during the two-day period surrounding the buyout announcement. This evidence suggests that divisional buyouts reallocate ownership of corporate assets to higher valued uses and that parent company stockholders share in the expected benefits of this change in ownership structure.

This paper examines the wealth effects to parent company shareholders around the announcement of divisional management buyouts. Despite the relative absence of “arm's‐length” bargaining between buyer and seller, there is no evidence that divisional management buyouts result in reductions in parent company share prices. Instead, small but statistically significant wealth gains are found during the two‐day period surrounding the buyout announcement. This evidence suggests that divisional buyouts reallocate ownership of corporate assets to higher valued uses and that parent company stockholders share in the expected benefits of this change in ownership structure.

We investigate the valuation consequences of voluntary proposals to sell part or all of a corporation's assets. For partial sell-offs, successful sellers and buyers reap statistically significant abnormal returns of 1.66% and 0.83%, respectively. Unsuccessful sellers realize gains at the bid announcement of 1.41% that are lost at the offer termination. In contrast, proposals to liquidate the firm are associated with significant average abnormal returns of 12.24%. We interpret these findings as evidence that asset sales are associated with the movement of resources to higher-valued uses rather than as evidence of market mispricing before the divestiture announcements.