Robert M. Hull

We examine a sample of 674 SEOs from 1999-2010 where reduced R&D spending is significantly associated with the lowering of insider ownership proportions. With this association established, we derive an R&D manipulation variable measuring underinvestment in R&D. We add to the SEO-R&D literature by examining the relation between R&D underinvestment and common stock valuation around SEOs. In contrast to the IPO research, we do not find that underinvestment in R&D leads to greater SEO stock valuations during the offer price setting process. Like the IPO research, we find that underinvestment in R&D leads to lower stock valuations for short-run post-offering tests. In contrast to the long-run IPO results, we find a significant association between R&D manipulation and stock valuation for long-run post-offering tests where underinvestment in R&D is associated with lower stock valuations. We also find the five % owner group for SEOs is important in explaining R&D manipulation and discover that underpricing for SEOs is not related to R&D manipulation. These latter two findings are different from IPOs. In conclusion, SEOs can be quite different from IPOs when examining the association between the insider manipulation of R&D and stock valuation

This paper extends the Capital Structure Model (CSM) research by performing the following tasks. First, a correction is offered on the corporate tax rate adjustment found in the break-through concept of the levered equity growth rate (g_L) given by Hull (2010). This correction is important because g_L links the plowback-payout and debt-equity choices and so its accuracy is paramount. Second, this paper introduces a retained earnings (RE) constraint missing from the CSM growth research when a firm finances with internal equity. The RE constraint governs the plowback-payout and debt-equity choices through the interdependent relation between RE and interest payments (I). Third, a by-product of the RE constraint is a second constraint that governs a no-growth situation so that I does not exceed the available cash flows. Fourth, with the g_L correction and two constraints in place, updated applications of prior research and new applications are provided. These applications reveal lower gain to leverage (G_L) values than previously reported with more symmetry around the optimal debt-to-equity ratio (ODE) while minimizing steep drop-offs in firm value. For larger plowback ratios, the optimal debt level choice can change. The new constraints serve to point out the need for further research to incorporate external financing within the CSM framework.

A topic of relevance to financial managers is the relation between a credit rating and firm value (VL). The general aim of this paper is to elucidate this relation with a specific objective of helping C corp managers choose an optimal target rating (OTR). To achieve these goals, we use the Capital Structure Model (CSM) to compute a series of firm value (VL) outcomes matched to credit ratings. The maximum VL (max VL), among all VL outcomes, identifies OTR. This identification begins with the matching of credit spreads and ratings by Damodaran (2019) for three firm categories: small, large, and financial service (FS). Given these spreads, we can compute costs of borrowing with these costs needed to compute VL and other numerical outcomes. Besides costs of borrowing, our numerical outcomes are based on other key inputs including US $1,000,000 in before-tax cash flows, C corp tax rates, and a sustainable growth rate. Major findings that guide managers include the following. First, Moody’s A3 is the most common OTR. Second, growth firms generally require higher ranked OTRs. Third, compared to small and large firms, FS firms attain greater max VL values, higher optimal debt-to-firm value ratios (ODVs), and generally lower ranked OTRs. Fourth, relative to small firms, large firms gain less from growth even though they attain greater max VL outcomes. Fifth, only for FS firms can we find outcomes where operational cash flows are better spent on interest payments than retained internally for growth.