VANDERBILT UNIVERSITY ROUNDTABLE ON THE CAPITAL STRUCTURE PUZZLE

Publisher Website
Google Scholar
Abstract
In this transcript of a recent roundtable discussion at Vanderbilt University, Stewart Myers discusses his current thinking on capital structure with a small group of finance academics and practitioners. While acknowledging the success of LBOs and other leveraged transactions in adding value during the 1980s, Myers describes financing decisions as “second‐order” concerns for most large, publicly traded U.S. corporations. The most important issues for such enterprises are matters not of capital structure, but of financial structure—those having to do with “the allocation of ownership and control, which includes the division of the risk and returns of the enterprise between the insiders in the firm and the outsiders.” The essence of the public corporation is said to be the coinvestment of insiders’“human capital” with outsiders' financial capital; and, as Myers suggests, much corporate financing behavior can be understood as value‐conserving strategies designed to protect a company's human capital.But if capital structure is a second‐order concern for many large public companies, other panelists emphasize the value‐adding role for leverage in firms that are clearly failing to maximize value. Besides shielding operating cash flow from taxes, the substitution of debt for equity in companies with few investment opportunities can also improve corporate performance by strengthening management incentives for efficiency. And this latter role for debt financing is illustrated by three recent leveraged recapitalizations involving large share repurchases—and, in two of the three cases, major changes in dividend policy.

This publication has 0 references indexed in Scilit: