Compliments of: VOLUME 29 | NUMBER 4 | FALL 2017

Journal of APPLIED CORPORATE FINANCE

In This Issue: Financial Regulation

Has Financial Regulation Been a Flop? (or How to Reform Dodd-Frank) 8 Charles W. Calomiris,

Statement of the Financial Economists Roundtable 25 Charles W. Calomiris, Columbia University; Larry Harris, Uni- Bank Capital as a Substitute for Prudential Regulation versity of Southern California; Catherine Schrand, University of Pennsylvania; Roman L. Weil, University of Chicago

High Frequency Trading and the New Stock Market: 30 Merritt B. Fox, Columbia Law School, Lawrence R. Glosten, Sense and Nonsense Columbia Business School, and Gabriel V. Rauterberg, Michigan Law School

Shadow Banking, Risk Transfer, and Financial Stability 45 Christopher L. Culp, Johns Hopkins Institute for Applied Economics, and Andrea M. P. Neves, Seven Consulting

Why European Banks Are Undercapitalized and What Should Be Done About It 65 John D. Finnerty, , and Laura Gonzalez, California State University, Long Beach

Bloomberg Intelligence Roundtable on 72 Participants: Clifford Smith, Gregory Milano, Joel Levington, The Theory and Practice of Capital Structure Management Asthika Goonewardene, Gina Martin Adams, Michael Holland, and Jonathan Palmer. Moderated by Don Chew.

Leverage and Taxes: Evidence from the Real Estate Industry 86 Michael J. Barclay, University of Rochester, Shane M. Heitzman, University of Southern California, Clifford W. Smith, University of Rochester

Formulaic Transparency: The Hidden Enabler of Exceptional U.S. Securitization 96 Amar Bhidé, Tufts University

How Investment Opportunities Affect Optimal Capital Structure 112 Stanley Myint, BNP Paribas and University of Oxford, Antonio Lupi, BNP Paribas, and Dimitrios P. Tsomocos, University of Oxford

How to Integrate ESG into Investment Decision-Making: 125 Robert G. Eccles, Arabesque Partners, and Results of a Global Survey of Institutional Investors Mirtha D. Kastrapeli, and Stephanie J. Potter, State Street

Maximum Withdrawal Rates: A Novel and Useful Tool 134 Javier Estrada, IESE Business School Bloomberg Intelligence Roundtable on The Theory and Practice of Capital Structure Management

Bloomberg Headquarters | New York City | October 25, 2017

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Don Chew: Good morning, I’m Don Chew, they need outside financing, they use debt. in the fields of corporate finance, financial Editor of the Journal of Applied Corporate Equity is viewed only as a very expensive institutions, and risk management that Finance. And I want to join Joel Leving- last resort, something to be avoided unless has led to 15 books and some 100 articles ton, our host and Head of Fixed Income and until their debt capacity has been in leading finance and economics jour- Research here at Bloomberg Intelligence, completely exhausted. And third and last, nals. And to go along with his research, in welcoming you all to this discussion of there’s a variant of the pecking order called Cliff has received 30 Superior Teaching the theory and practice of capital struc- “the market timing hypothesis,” which Awards while at the Simon School. Cliff ture management. The main question we says in effect that if market conditions also has considerable experience working want to address is this: How can corporate favor the use of debt, then issue debt, and with companies and serving on boards. In executives manage their capital structure as much as you can—but if equity markets fact, he recently finished a 21-year stint as and payout policies to increase the value of are strong and stock prices are high, then a member of the Board of a NYSE-listed their companies? And we want to address go with equity. REIT that was recently taken private for these questions from both a theoretical and Cliff Smith, who is the representative some $8 billion through an LBO. a practitioner perspective. academic on this panel, has done some Greg Milano is the founder and man- There are really two or three main interesting research on seasoned equity aging partner of a strategy and corporate theories coming out of the academy that offerings by U.S. public companies that finance consulting firm called Fortuna have tried to address this question. But attempts to make sense of all of these Advisors. Before that, Greg ran a corpo- before we get to them, let me start by theories, to show how each contributes to rate finance advisory group with Credit mentioning the famous Miller-Modigliani our understanding of at least some aspects Suisse, where his focus was integrating “irrelevance” propositions, which at least of corporate behavior. And I’m going to strategic issues into corporate financial seem to say that neither capital structure ask Cliff to start us off this morning by policy. And before that, he was my co- nor dividends matter. The M&M propo- providing a brief review of the theory and partner at Stern Stewart & Company, the sitions show that if we make some very then tell us about this relatively new piece corporate finance consulting firm best restrictive assumptions—like no corporate of research that tries to bring all these the- known for popularizing a measure of per- income taxes or bankruptcy costs, and no ories together. formance known as “EVA.” I should also effects of leverage or dividend policies on But before I do that, let me just go mention that Greg has written a really nice corporate investment decisions—then around the table very quickly and intro- piece on financing and the drivers of value neither a company’s capital structure or duce everyone. in the pharma industry that appeared in its payouts would affect its value. And let’s start with Joel Levington, who the most recent issue of the JACF—and But for those who think that capital as I mentioned is head of Fixed Income I’ve asked him to talk about capital struc- structure does—or at least can—have Research here at Bloomberg Intelligence, ture from that perspective. significant effects on corporate values, and who is both the host and principal Rounding out our group are four ana- there are two, or maybe three, other main organizer of this discussion. Before join- lysts from Bloomberg Intelligence. These theories that get serious attention from ing Bloomberg five years ago, Joel was analysts cover a diversity of investment academics. One is typically referred to a managing director at Brookfield Asset and capital structure types—and, as Joel as the “trade-off” theory, and it says that Management and, prior to that, a Director tells me, they bring to the table over 100 companies weigh the tax and control ben- at S&P Global. years of collective, practical experience in efits of more debt against the increase in Cliff Smith is the Henry and Louise the capital markets analyzing capital struc- the expected costs of financial distress. Epstein Professor of Business Adminis- tures and financing instruments. And then there is the so-called “pecking tration, Finance, and Economics at the Asthika Goonewardene is Bloomberg order” theory, which says that companies University of Rochester’s Simon School Intelligence’s bio-tech equity analyst. The tend to take the path of least resistance by of Business. Since joining the Simon companies he covers range from the big- using internal funds when available; and if School in 1974, Cliff has done research cap biotechs such as Amgen, Gilead, and

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Celgene down to smaller, development- financing policies, as Modigliani and showed that a dollar of dividends paid is stage or early commercial biotechs like Miller suggested back in 1958, pretty a dollar of capital gains lost, and overall Juno, Clovis, and Bluebird. Before joining much “irrelevant”? value again is unchanged. Bloomberg, Asthika was a management Now, these are explanations for why consultant at Datamonitor Heathcare Cliff Smith: I agree that Modigliani and capital structure and dividends don’t Consulting and, before that, an equity Miller is the logical place to begin this dis- matter. But what they say to me is that research analyst at Piper Jaffray. cussion. Their 1958 paper basically said if you want to understand how and why Gina Martin is the Chief U.S. Equity that if you give me three assumptions—no financial decisions might matter, then you Strategist for Bloomberg Intelligence, taxes paid by the corporation or its inves- should start by taking these M&M state- a research platform that provides con- tors, no bankruptcy or other “contracting” ments and turning them on their heads. text on markets, industries, companies, costs, and no effect of financing choices That is, if changes in capital structure and government policy. Prior to joining on managers’ investment and operating and dividends are going to affect corpo- Bloomberg, she was the head of U.S. decisions—the current market value of rate market values, they’re going to do Equity Strategy for Wells Fargo Securities. the firm should not be affected by how so mainly for one of the reasons M&M Mike Holland covers high-yield debt in you structure the liability side of the firm’s assumed away. This means that, to under- the healthcare industry, and spends a good balance sheet, by whether companies stand why capital structure and dividends deal of his time working with Bloomberg’s choose to finance their activities mainly might matter, we want to explore the pos- distressed debt teams. Before joining with equity, or with large amounts of debt. sibility that the firm’s choice of financing Bloomberg, Mike worked at UBS and Given these assumptions, M&M showed and dividend policies can affect the taxes Credit Suisse, following several years on that these financing decisions can’t have a of the firm or its investors. We also want the buyside and a brief stint in financial material effect on the real source of cor- to think about how corporate financing consulting. porate value—which is the operating cash and payout policies can affect companies’ For the past three years, Jonathan flows that are expected to be generated by or their investors’ information or contract- Palmer has worked at Bloomberg Intel- the business over time. ing costs, including the costs associated ligence, covering the medical equipment M&M’s basic insight was that dif- with working through financial distress and supply chain sectors. Prior to that, ferences in leverage and the kinds of or bankruptcy. And third and last—and Jon was an equity analyst at various firms securities a company issues are just differ- this is where I end up focusing the most for more than seven years, and has also ent ways of dividing up and repackaging attention—we want to understand how worked at biopharamceutical giant Pfizer. those cash flows for investors. As long as the firm’s capital structure, and whether these financial decisions don’t affect the it chooses to retain or pay out corporate A Brief Overview of the Theory— “real” decisions in any predictable way— cash, can affect managers’ investment and and Some New Evidence for example, as long as corporate managers operating decisions. Chew: So, now that I’ve told you a little make the same investment and operating The first rule people walk out of a about our panelists, let me begin by ask- decisions whether the leverage ratio is corporate finance class with is to take all ing Cliff Smith to give us a very quick 10% or 90%—financial decisions are not positive net present value projects and overview of the theory of capital struc- going to affect the total value of the firm. walk away from negative NPV projects. In ture. Cliff, what is the current thinking And by that I mean the value of the debt thinking about the right capital structure in the academic finance profession about plus the equity, or what people sometimes and dividend policy, you want to end up optimal capital structure? Can a compa- call “the enterprise value” of the firm. with policies that encourage—or at least ny’s debt-equity ratio play an important M&M made a similar argument about don’t get in the way of—corporate manag- role in management’s efforts to increase corporate dividend policy. Using the same ers following this NPV rule. shareholder value? And what about its assumptions—no taxes or transactions How can a company’s capital structure dividend or payout policies? Or are such cost and a fixed investment policy—they end up affecting its investment decisions?

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In 1977 Stew Myers wrote a classic paper investments—to destroy value by chas- raise capital in external equity markets. called “Determinants of Corporate Bor- ing growth or market share at the expense So if I can finance whatever I want to do rowing” that started out by viewing the of profitability. And as Mike went on to out of internally‑generated funds, that’s values of all companies as having two basic argue, both debt and dividends can play generally going to be my first choice. If components: “assets in place,” which are an important role in solving this prob- I exhaust internally generated funds, the more or less tangible assets that gen- lem; both can be used by management and still have more positive NPV proj- erate the firm’s current cash flows; and to make credible commitments to inves- ects, my next choice is to access debt “growth options,” which can be thought tors that the firm’s excess cash is going to markets. My third choice, selling equity of as opportunities produced by the firm’s wind up in their pockets instead of being in public markets, is viewed as a very current operations and capabilities to wasted on value-reducing investments. expensive proposition, not just in terms make future investments. Stew then went Now, besides thinking about the kinds of out-of-pocket costs, but because of this on to explain why companies whose value of companies that are likely to be hurt, or “informational asymmetry” problem that mainly reflects its assets in place—people helped, by carrying lots of debt, you also ends up imposing large costs on issuers. here at Bloomberg would probably call have to recognize that there are a lot of And thus, for public companies, an equity them “value” companies—tend to use things that can push companies away from offering tends to be the financing alter- much more debt than firms whose value their leverage targets. If it were costless for native of last resort; only companies that is a reflection primarily of its growth companies to access capital markets, then have exhausted their debt capacity would options. The danger with using debt to once you’d figured out your optimal lever- consider issuing equity. finance growth companies is something age ratio—and let’s say your policy was to And that brings me to the subject of Stew called the “underinvestment prob- have debt make up 30% of the firm’s total our recent research on seasoned equity lem.” The basic idea is that companies market cap—then every day after the mar- offerings by U.S. public companies that carrying large amounts of debt, when ket closes at 4 p.m., you’d either issue or Don mentioned earlier. Our initial insight faced with a drop in their operating cash buy back some stock or debt so that when came from working with a Ph.D. student flows—and probably their stock prices you went home that night your firm would at Rochester named Fangjian Fu—who too—are more likely to pass up positive- be leveraged right at 30%. But since mak- now teaches at the Singapore Manage- NPV projects than firms financed mainly ing these adjustments on a regular basis ment University. Mike Barclay and I with equity. I find that a pretty convincing would be pretty expensive, the CFOs of were his thesis advisors and, in a study explanation for why growth companies in companies with leverage targets are going of some 8,500 corporate SEOs over the general carry little debt, and why so many to think mainly in terms of staying within period 1970-2015, we came up with a of them have negative leverage—that is, a targeted range of leverage ratios. set of findings that suggest that neither more cash than debt on their balance The fact that these ranges can get to the tradeoff theory—at least as it’s usu- sheets. be pretty wide brings me to the peck- ally understood—nor the pecking order But now let’s turn to the case of so- ing order theory that Don mentioned describes these decisions made by CFOs called “value” companies, firms in mature earlier—a theory that Stew Myers in very convincing ways. What we found industries with few major investment also had a lot to do with. When Stew is that the typical company announcing opportunities whose value comes mainly was elected President of the American an SEO is nowhere near having exhausted from their current earnings. These kinds Finance Association in 1984, he made its debt capacity. This finding is, of course, of companies face what my former Roch- this theory the cornerstone of his presi- completely inconsistent with the pecking ester colleague Mike Jensen has called dential address. He said, in effect, that order story, which makes CFOs out to be “the free cash flow problem.” By that because corporate managers know a lot incredibly shortsighted, always looking for he means the tendency of managers in more than outside investors about the the cheapest funding with little thought mature, cash-generating industries to use prospects and value of their companies, about the effect of that decision on the their excess cash to pursue low-return it can be very expensive for companies to company’s ability to fund future projects.

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So, the findings of our study suggest cide with the launch of this investment to be a pretty dramatic difference in the a thought process that is quite different spending, you go a long way toward resolv- value—at least as perceived by investors— from both the pecking order and stan- ing investor concerns that your company of the investment opportunities facing dard trade-off theories. As I said earlier, might waste much of that capital—and at these two sets of companies. And as you these SEO issuers tend to raise fairly large the same time you head off the possibility pointed out earlier, if you have a pretty amounts of equity even when they have of an underinvestment problem. limited number of positive NPV projects what looks like substantial unused debt on the horizon, then more debt tends to capacity. And during the next few years Chew: Cliff, as you said, your study pro- be the right choice. after raising that capital, the companies vides evidence of that kind of thinking by use most of the proceeds from those issues showing that these companies invest a lot Smith: That’s right. In our study, we found to make large investments, exercising their of the capital raised in the year or so after that 60% of our 8,500 SEOs were by growth options if you will. they float the equity issue. But if I remem- companies that ranked in the top third Of course, that approach makes perfect ber correctly, aren’t a lot of these equity of U.S. companies in terms of market-to- sense. Let’s suppose that Walmart decides offerings followed by large issues of debt book ratios, while only 10% were in the that it’s going to enter China. Well, it’s not a couple years later? bottom third. going to open just one store in Beijing, they’re going to do it on an appropriately Smith: That’s right. What you see is a Chew: Thanks, Cliff, for that overview large scale. The CFO will say, “Okay, over material step-up in investment spend- of the theory. For a practitioner view of the next two or three years, we’re going to ing that begins in the same quarter as things, let’s now turn to Greg Milano. have to come up with a lot of cash to make the SEO; and after the SEO, the external that happen. To do this, I’m not going to capital required to complete the projects The Case of Healthcare wait until my debt capacity is used up; I is raised in debt markets. Chew: Greg, you recently completed a will line the ducks up early. If I wait until study of the healthcare industry, which the last minute to raise equity, then any Chew: There’s a fairly recent study of very is generally viewed as a growth industry. adjustments I end up having to make are large debt offerings—by Dave Denis of Can you tell us about your findings; and likely to be much more expensive.” In the University of Pittsburgh—that might while you’re at it, can you comment on the other words, if the company doesn’t raise help in interpreting your findings on extent to which they are consistent with enough equity today, and the profits from SEOs. Many of the companies making Cliff’s findings about SEOs? the new investments don’t materialize as these large debt issues appear to be mak- quickly as expected, it could find itself in ing deliberate decisions to go beyond their Greg Milano: Yes, but let me start by men- a financing bind, faced with the under- optimal leverage ratios, and then perhaps tioning that we founded our firm, Fortuna investment problem that Stew Myers to work their way back toward it over Advisors, on March 2, 2009, about a week warned about. time. And one thing that seems to distin- before the market bottomed. And we Now, given that the company has guish these large debt issuers from your determined at that point that there weren’t decided to raise a significant amount of sample of equity issuers is their market-to- a real lot of people looking to hire con- equity to fund what management expects book ratios. These debt-issuing companies sultants. So we started a pretty aggressive will be a profitable investment strategy, the have average market-to-book ratios of research project to figure out what really CFO should make the expansion strategy not much above 1.0, whereas the sample drives valuation and total shareholder and associated capital expenditure require- average of your SEOs is almost 4.0. This return in the capital markets. Margaret ments known to the investing public early seems important because academics often Mead once said, “What people say, what on. By persuading investors that you have use market to book as a proxy for a com- people do, and what they say they do are a productive use for more capital, and by pany’s investment opportunity set. And entirely different things.” We take a dif- having the equity offering roughly coin- to the extent that is correct, there seems ferent angle on this and say to our clients,

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“Go by what investors do, not what they panies and variables that we tested—we mediate term periods. And we replicated say,” because what investors say is often began by calculating the company’s TSR this process for a host of other capital very different from what really happens and our measure of the relevant variable deployment metrics, including the acqui- in the market. over the most recent three-year (or twelve- sition rate, R&D reinvestment rate, and When designing our 2017 Shareholder quarter) period. And then using that as so forth. We also took this approach when Value Project, we were trying to address our base period, for each of the 77 invest- looking at the relationship of TSR with what we saw as two problems with the way ment, financing, and operating variables a group of operating performance mea- researchers typically study the markets. that we examined, we rolled the data back sures, including return on capital, profit Most academic researchers try to under- one quarter at a time over 16 years. This margins, changes in margins, and so forth. stand what determines high valuations. gave us 52 rolling three-year periods— And more relevant to this conversation, But high valuation isn’t what investors and, with 100 companies, that gave us we examined the relationship of TSR to are after. What they want are high total some 5,200 data points for each variable. a number of aspects of financial policy, share returns in the form of dividends and So let’s say that we want to know how including leverage ratios, debt paydowns, share price appreciation. And so we try to a company’s TSR is related to a variable and stock buybacks. Finally, we also exam- evaluate what moves share prices rather that we call the “reinvestment rate”— ined issues of seasoned equity, where I than what makes them high, or keeps that is, the percentage of the cash that thought our findings were pretty strik- them high. a company generates that gets plowed ing—and in fact completely consistent Second, the academic studies that do back into the business. We measured that with the findings of Cliff’s study. look at share price changes are so-called reinvestment as the sum of cash acqui- But before I summarize our findings “event studies” that look at prices changes sitions, Capex, R&D, and increases in on financial strategy, there are a couple of over very short time periods. For example, working capital as a percentage of the things to note. First of all, over the last when trying to evaluate the effect of stock company’s after-tax EBIDTA. And for ten years, health care has been the most repurchases on corporate values, such each of the 52 three-year periods, we value-creating of all the sectors in the studies will focus on, say, the seven days sorted all of the companies in our sample U.S. economy. During the past ten years, before and seven days after a repurchase by that reinvestment rate metric into three it produced almost double the cumula- announcement. These studies implicitly equal groups—which we called “high,” tive total shareholder return of the overall assume that the market reaches the right “medium,” and “low.” We next combined market. And let me emphasize that our price almost immediately after announce- all the high groups, the medium groups findings here are very specific to health ments happen. And I have never been able and the low groups. And then we com- care. If you had an industry that created to get comfortable with that assumption. pared the median TSR of the aggregated less value, the answers undoubtedly would So, in trying to understand the effects high reinvestment group to the median be different on some dimensions. of corporate financing, investment, and for the low reinvestment group. And if we We also resliced the data and pro- distribution decisions on companies’ lon- found a significant difference between the duced separate findings for five different ger-run shareholder returns, we developed median TSRs of the high and low groups, subsectors within healthcare, including an approach where we examine the rela- we felt we had uncovered a relationship pharmaceuticals, biotechnology, health- tionship between such decisions and the worth exploring further. In the case of care equipment and supplies, life sciences companies’ total shareholder returns over the corporate reinvestment rate, that dif- tools and services, and healthcare provid- a fairly long series of rolling three-year peri- ference in TSRs turned out to be 3.3% ers. The study was funded by a couple ods. In our study of the health care study, per year, and was in fact one of our most of large healthcare companies. And we we looked at about 100 public healthcare important findings. used some of these findings in our recent companies in the Russell 1000 over a So, we used this rolling three-year JACF article—we called it “Improving the 16-year period. Starting at the end of that approach to give us a sense of what really Health of Healthcare Companies”—that 16-year period—and for each of the com- drives success over a long series of inter- Don mentioned at the beginning.

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What did we find? For the entire like to think of the capital structure deci- had a TSR that was 7.2% higher than that healthcare sector, the capital deployment sion as a trade-off between minimizing of the low debt paydown group. variable with the strongest positive asso- your weighted average cost of capital by By contrast, healthcare companies ciation with TSR was the percentage of making full use of your debt capacity, and that distributed the largest percentage of operating cash flow that was invested maintaining enough financial flexibility. their operating cash flow in the form of in R&D, or what we called the “R&D And we always say to companies that if dividends and share buybacks had 7.2% reinvestment rate.” The second most you have a lot of investment opportunities, lower TSR than the companies that paid important capital deployment variable and especially if you’re uncertain about out the smallest part of their cash flow to was the reinvestment rate in acquisi- when they’re going to come—which tends their stockholders. The only thing that tions, which, in contrast to much of the to be the case with acquisitions—then you surprised us was that dividends had a published research on acquisitions, had want to have the financing capacity, the more negative relationship to TSR than a strong positive association with TSR. ability to invest opportunistically, that buybacks. We expected worse from In other words, healthcare acquisitions is provided by a large equity base. And buybacks because of a tendency of com- tended to create significant value for the the converse is true for companies with panies to buy back their stock when their acquiring companies. limited opportunities. For example, when stock prices are high. In most industries When examining measures of operat- we work with commodity chemicals busi- we find that dividends are usually more ing performance, we tended to find that nesses that struggle to cover their cost of neutral, and buybacks are usually pretty the increases, or changes, in such mea- capital at the top of the cycle, we tell them bad. But in health care it seems to go the sures had stronger effects on TSR than there’s really not much benefit to keeping other way. the levels. a lot of financial flexibility because they But to us perhaps the most inter- For example, the improvement in lack good investment opportunities. And esting finding on financial policy was EBIT margin had the strongest positive that’s a case where companies are actually that the large equity issuers—mea- association of all the variables we exam- better off having at least moderate lever- sured as the percentage increase in net ined. But at the same time, the level of a age, although they still have to be careful shares outstanding over the three-year company’s EBIT was actually negatively given the cyclicality of commodity prices. period—had median TSR that was 9% related to TSR. And this meant that Most of our findings—though not higher per year than the companies on companies with low or medium EBIT all—are consistent with the view of the other end of the spectrum, which in margins typically had higher TSRs than pharma and biotech, and healthcare gen- most cycles typically reduced their share the high EBIT margin companies, in erally, as having lots of potentially valuable counts. We thought that was phenom- part probably because the high ones had growth options. For our entire sample of enal. Though we really didn’t expect more room to fall and the low ones more healthcare companies, the low leverage issuing shares to be as bad as people room to rise. But by far the overwhelm- group—defined as having low levels of think—they talk about dilution like it’s ing factor on every performance measure debt as a percentage of their debt plus the the end of the world—we never expected was either growth—in the case of revenue book value of their equity—produced such a positive relationship to TSR. or EBITDA—or the change in margins median TSR that was 5.1 percent higher Now, clearly it’s not the act of issu- or in returns. Take operating returns on per year than the high leverage compa- ing equity that creates value. What invested capital; whereas the levels of such nies. We found similar results when we matters is what you’re going to do with returns had no relationship with TSR, the examined other measures of debt such as the equity. The companies in our sample change in returns on invested capital was debt to EBITDA. What’s more, when we that turned to equity finance tended to very positive, almost as positive as the examined the proportion of their gross be companies with good investment change in EBIT margins. cash earnings companies used to pay down ideas, whether a promising acquisition Now, what about our findings in the debt, we found an even stronger relation- or organic investment they were pursu- area of financial policies and strategy? We ship to TSR. The top debt paydown group ing. And as Cliff said, they also tend to

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announce their investments at around But if you think about all this from I was working at a small biotech company, the same time—if not well before—their the perspective of the board of directors of we did a deal with Genentech (which was equity offerings. At the same time, they the small company, you have to question then acquired by Roche), and the access also tended to be somewhat smaller com- what they are getting out of these deals. we got to the prescriber community panies, with less debt capacity, in part The value of the rights they give away through that deal was a huge benefit. For because they hadn’t started to generate often represents a much bigger economic us to come up and create our own sales a lot of cash flow and earnings. cost than the actual cost of dilution. My force with a single product would have suspicion is that in many cases their exces- been prohibitively expensive. We needed Pharma Acquisitions (and Do sive concern about the cost of dilution is to partner with a company that already Big-Brother Deals Really Add leading them to prefer Big Brother deals had a portfolio of drugs they were market- Value?) even when it would have been better for ing. And as I said, the synergies on that Chew: Greg, in your JACF article, you them to issue stock and build the com- turned out to be massive. spend time talking about smaller biotech pany themselves. If they want to sell out, These kinds of deals tend to fall into firms and seem critical of their decisions they should at least try to get to a much two categories. In the first, a Pfizer or other to license their drugs to larger pharma later stage of development and a higher large company buys another big pharma companies instead of issuing equity them- valuation, thereby making their existing company, or even a mid-cap biotech com- selves. Can you elaborate on that point? shareholders richer. pany, takes the IP, and then guts the rest of it, which is essentially what they did with Milano: Smaller biotech companies face Smith: You may be right about the costs Wyatt. But that produces massive syner- the challenge of where to get capital to of dilution. But in thinking about these gies; and the profit margins on the acquired expand in order to reach the next level. big Brother deals, it’s important to keep assets make it very accretive very quickly. Because such biotechs tend to be short in mind that the pharmaceutical industry The second kind of deal has no synergies. on EBITDA and easily marketable assets, is heavily regulated. And it’s not unusual Take, for example, Gilead’s acquisition of they have trouble issuing debt. So they for somebody in a university medical cen- Kite Pharma. They’re basically buying a either issue equity, or they sign what’s ter to come up with a really good idea in technology platform and then trying to known in the industry as a “Big Brother” the lab, yet not have the infrastructure expand into a new area with no connec- deal, where they get one of the big pharma to carry out clinical trials that will satisfy tion to Gilead’s existing operations. companies to provide capital to fund their the requirements of the FDA. Somebody growth in exchange for giving up, say, the like Merck would come in at that point Chew: So, as Greg suggested, then, the international rights to one or all of their and buy them up because they’ve got the market appears to have been rewarding big most promising drugs. And I think that it infrastructure to deal with the FDA and pharma for reducing their own in-house is an excessive, and so misguided, unwill- jump through all those regulatory hoops. R&D and effectively outsourcing to the ingness to bear “dilution” that is behind And then on top of that, they’ve got the small biotech firms that they either buy many of these deals. manufacturing capabilities and distribu- or purchase licenses from using the Big I say that in part because we find such a tion system that you were so appropriately Brother Deals discussed above. strong positive relationship between TSR pointing out. and the acquisitiveness of pharmaceuti- Jonathan Palmer: An ecosystem has cal companies. You might pay two times Chew: Let’s turn to our biotech expert. developed over the last ten or fifteen years or more what a company was trading for Asthika, why do you think small biotechs that is far more sophisticated than it was right before you bought it, but still make tend to go for the big-brother deals? twenty or thirty years ago. The venture it worth three times what you paid for it Dealing with the regulator is one part community finds a lot of these assets because you’ve got this well established of the story. But the commercial roll-out as they spin out of academia or govern- and efficient distribution network. itself is also a very significant part. When ment labs. But rather than trying to grow

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these small projects into the next Pfizer or metrics, dwarfed anything in the other in which R&D is capitalized instead of Merck over twenty or more years, they categories. being expensed immediately. When we want an exit in five to ten years. So as did all the research, we actually got a we think about biotech and pharma and Smith: But wouldn’t you be shocked if much better fit with stock returns when those small companies, we have to think that were not the case? we treated R&D as an investment than not just of the public markets, but also when we treated it as an expense. some of the private markets as well. Milano: Yes, because it’s an outcome In the case of one potential client who instead of an input. was measuring performance in terms of Milano: Our Russell 1000 study included EPS, we pointed out that R&D reduces smaller public companies. But they’re Smith: Right, and it’s also the basic their main performance measure, EPS, actually fairly sizeable companies, with message of M&M. Namely, that what’s even though it is really important to market caps on the order of a billion dol- happening on the asset side of the balance their business. And we asked them if they lars. And our finding that equity offerings sheet—a company’s investment policy, thought it might be a bad idea to ask peo- are associated with higher TSRs probably and the cash flows it produces—is by ple to reduce their bonuses in order to do applies even more to these smaller com- far the most important source of value. the right thing for the company. panies. Capital structure is at most second order of magnitude. And dividend policy and Smith: If you hire only people who are Gina Adams: Did you try to isolate the repurchases are probably third order. close substitutes for Mother Theresa, then small cap effects in those high returns? So you’re unlikely to have problems. But I could you take the largest relative to the Milano: One thing that jumps out in try to teach my students that you want median relative to the smaller companies, our study is that the differences among to design systems to make the right thing and then look at the returns for various companies in return on capital are so to do and the easy thing to do the same factors? much larger than the differences in cost thing. of capital. And this says to me that the Milano: No, we looked at size, but not in risk of losing a good investment oppor- Mike Holland: Well, as a high-yield credit combination with other factors. tunity because you had too much debt analyst who’s been looking at stressed when the opportunity came along is far credit for the past ten years, I tend to Adams: Okay; and when you look at the more important in the pharma industry be skeptical about adjustments of GAAP effect of these various factors on TSR, did than the value of the tax shield provided accounting. About ten years ago, a Gold- you find that leverage was as critical to by that debt. And I think that holds for man banker and a McKinsey consultant performance as, say, profitability or value? most generally successful industries with formed a pharma company called Vale- What we find in our work on health care at least the potential for significant invest- ant, and they decided that big pharma is that leverage falls way below value or ment opportunities. R&D was not only failing to add much profitability or momentum in driving And for pretty much the same reason, value, but in many cases was reducing stock price return. one of the things we do when measur- it. And so Valeant decided to go out and ing corporate performance is to treat buy companies that were already past Milano: Leverage—and all the financial R&D as an investment by capitalizing phase four, that already had drugs on policy factors as a group, as well as the and then amortizing it over time, as if market; and after buying the companies, capital deployment factors—was much it were a kind of plant and equipment. Valeant cut their R&D budgets and less significant than the measures of oper- In fact, one of our health care clients has jacked up the prices of their drugs. And ating performance. The effects on TSR of decided to evaluate the performance of part of the reason why I think health changes in margins and return measures, and compensate its top executives using care has been such a grower for the past and of the revenue and EBITDA growth a kind of cash-based EVA type measure 15 years is because of their ability to raise

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drug prices. I think that probably skews appears to have been gaming the system tal structures with continuous refinancing the data a lot. for their own benefit, generating inflated requirements should target investment Another company that comes to mind earnings to which their own compensa- grade ratings both to manage their risk is called Covis Pharma, which was backed tion was pegged. and meet their business planning needs. by the hedge fund Cerberus. The com- So, if you’re in the treasurer’s seat of a pany bought the rights to a handful of Goonewardene: Analysts like us also pay company with a large balance sheet and off-patent branded drugs that had been attention to the way companies account for you’re being told by top management, “we off patent for 50 years. But in each of these their R&D spending. Celgene’s “adjusted” want to grow the business strategically,” cases, there were very small populations P&L, for example, shows it spending a I think you want to have an investment of folks who took the drugs and were relatively modest percentage of its rev- grade rating. And I think that’s one of viewed by the company as “price insensi- enues on R&D compared to its peers. But the key areas where Valeant fell short: tive.” After basically doubling the prices of what you have to look at is how much they although they were pursuing a strategy these drugs every year, the company was actually spend on licensing deal payments, of growth through acquisitions, they then sold to Concordia, which just went which is not included in the “Adjusted were overleveraged to begin with; and bankrupt and is restructuring in Canada R&D” line on the P&L. These licensing when their growth opportunities didn’t right now. payments include upfront and milestone play out exactly as planned, their leverage So, one of my takes on Greg’s data is payments Celgene makes to other compa- exacerbated the problems and limited the that companies like Valeant figured out nies as part of a deal that gives it access to company’s ability to work through its dif- that, in the case of big pharma, R&D has their research programs and assets in the ficulties, and magnified the downside risk not always proved to be a great way to pipeline. In the company’s adjusted P&L, in its capital structure. spend shareholders’ money. But after cut- these upfront and milestone payments are And I see this happen all the time in ting back on R&D, which may have been presented by the company itself as “one- industrial companies. Gina and I were the right thing to do, Pierson then gamed offs,” and so treated as non-recurring items. working on an analysis last week that the system by using Valeant’s adjusted But by including the licensing payments, showed that, during the last ten years, earnings per share to increase the firm’s the GAAP R&D number provides a more higher-rated entities with investment- reported earnings by hundreds of millions accurate picture of Celgene’s annual spend. grade credit ratings have had higher of dollars—before the market caught on And because Celgene is one of the most total returns, on average, than below- and his fall from grace. active deal-making companies in biotech, investment grade companies, which have And I think health care has been a its GAAP R&D margin puts it at the upper significantly underperformed. Whether space where there are lots of opportuni- end of its peers. it’s a drug that misses or a drug pricing ties to game the system. If you look at that gets slashed, or it’s a sharp downturn hospitals for the past several years, they Deteriorating Credit Standards in in a more cyclical sector, it’s the same basic have been using their excess cash to just Healthcare—and The Importance combination of high cyclicality or operat- buy back shares, instead of reinvesting or of Flexibility ing leverage with financial leverage that so paying down debt. Think about Commu- Joel Levington: I want to add to what Cliff often leads to disaster. nity Health and Tennant, both of which and Greg said earlier about the importance But that said, what I find pretty inter- are now levered eight times as a result of of maintaining financial flexibility to fund esting is that the investment grade side of extensive stock buyback programs that growth opportunities. When I look at the health care has levered up a lot over the have been designed to boost their stock Bloomberg/Barclays High Yield Index, past few years. Between medical services, prices. Though it seems to have worked there are only two issuers that have $20 products, pharma, and biotech, there have for a while, both of these companies are billion or more of debt: Sprint and HCA. been about $4.2 trillion worth of health- struggling to service their debt. The fact that both of these companies are care deals over the past decade. Whether So, in all of these cases, management fallen angels suggests to me that large capi- you pay a relatively low EBITDA of eleven

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times multiple in services, or twenty expose all stakeholders to outside risk Chew: And some of those companies are times with biotech, most deals have been should unforeseen events occur—and they distressed as a result? financed with around 40% stock, 60% almost always do. cash pay. So even if I’m paying just the Holland: Concordia just went bankrupt, as eleven times and it’s 60% cash pay, that’s Chew: Joel, do you think the agencies have I mentioned. But if you look at Mylan and about five and a half times on the leverage gotten it wrong? Teva today, they’re both experiencing pres- side. And taking on that amount of new sures with earnings growth as drug pricing debt is clearly going to increase leverage Levington: I’ve been surprised at the level has come under scrutiny and generic drug for most public companies, if you’re look- of flexibility that the rating agencies have price deflation has entered the picture. ing at the Russell 1000. given their clients to leverage over the past Their leverage is four or five times, and Having worked at a rating agency in several years. As a former analyst, I recall they’re both rated Triple B-, with Teva on the past, I’m surprised by the willing- several times viewing 2.5x leverage as the verge of becoming a fallen angel and ness of the agencies to allow companies about the maximum level of comfort folks Mylan facing potentially costly litigation. to push leverage this far. The assumption might have with an investment grade rat- of the agencies, I think, is that health ing. Times have changed; companies have Adams: The Hillary Clinton tweet in care is very stable, much like the food become bigger and perhaps more global, 2015 also happens to be the exact time industry. I think Kraft was actually the yet the incremental debt capacity provided when the relative performance of health inventor of this game when they went in some cases has really been extraordi- care peaked. after Cadbury, pushing their leverage to nary, and I find it hard to justify. The share price reaction over the two four and a half to five and a half times years following that was incredibly nega- cash flow or EBITDA. To reassure the Holland: I think the agencies may have tive, relative to the rest of the index. So agencies, Kraft probably told them that been caught off guard when drug pric- there is a very strong tie between drug they would pay down the debt over the ing kind of came into the forefront with pricing and the measures that matter most next couple of years and get their metrics Hillary Clinton’s tweet back in September for health care. And that played out in more in line with what investment grade of ’15. That was kind of when the music 2015 and 2017. It wasn’t until earlier this looks like. And so the rating agencies stopped. year when some of that started to wash have allowed leverage to go as high as As an example of what Joel was tell- through, and the sector started to perform four or five times. In the meantime, our ing us about, Mylan was a name that was better again. studies of the credit medians for invest- raised to investment grade after doing ment grade companies in general draw an acquisition. They said to the rating Goonewardene: We have to make an the line at much lower levels, at about agencies, “Trust us. In twelve to eighteen important distinction, though, between 2.7 times for BBB entities. And we see months, we’re going to reduce our leverage the pricing of the innovative drugs, and a lot of companies, at least in my world from six to three and a half.” the pricing of the more specialty and of industrials, now operating with about Back then, however, drug pricing was generic pharmaceutical drugs. The most 2.5 to 3 times leverage. a free for all. The companies just increased susceptible to drug pricing pressures have So, M&A certainly has been a huge their prices, and then kept re-levering up. been the specialty pharma and the generic driver of higher leverage in healthcare. And then they would bring the leverage drugs. Take the case of Abbott, which after back down. But I think that price accel- But even to this day, you can still be a acquiring St. Jude’s and Alere, is now lev- eration has slowed. The average drug price biotech company, and so long as you have eraged at about six times. Agencies have increases are probably under 10% per a very innovative therapy, you can price allowed them to push the envelope, while annum now, and they were much higher at very high levels and find people willing retaining their investment grade rating. than that several years ago. pay for it. There’s speculation that this one When you have multiples that high, you gene therapy drug with the potential to

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restore sight to people clinically diagnosed EBITDA since 2014 because the prior brought together a small group of large as blind might go for as much as a million management team would keep buying sophisticated investors and put together a dollars. So, the innovative drug compa- more companies instead of focusing on deal that enabled Williams to raise equity. nies still have some pricing power. collecting cash. So they ran into some As I recall, that stock was issued at a price But when you see the price increases issues during the last year and a half, of about $28, or about two dollars below of more generic drugs or products, like including cutbacks in reimbursements. the stock price of the firm just before the the Albuterol inhaler—and Mylan’s got a And when faced with a number of financing was announced, which was couple of drugs whose price they tripled liquidity crunches, the company issued about $30. or quadrupled—then you scratch your preferred stock with warrants and then, And my question is, how does a trans- head, and ask yourself how much longer on another occasion, dilutive common action like that end up affecting the value this can go on. It looks to me like a tem- equity. The buyers in both cases were of the company? When the transaction porary imbalance of supply and demand, hedge funds with existing equity invest- and the terms were announced, the price and making that the basis for increases in ments in the companies. And one thing went down—to about $28. Is that the leverage looks pretty risky to me. that was especially interesting to me about reaction you would have expected from these deals is that the company has very the market? Smith: Well, during the the time period low EBITDA, almost no operating cash you’re talking about, I think it’s impor- flow—and so the leverage there is effec- Smith: The answer depends a lot on not tant to recognize that there was a shift in tively infinite. And this suggests to me only the terms of the deal, but who the demand for drugs that came about because that the company’s management—and the person on the other side of the table is. of the Affordable Health Care Act. The hedge funds—either have a plan to make When Goldman was getting a little ner- demand shifted to the right—and a lot the company cash flow positive before too vous about not having enough capital quicker than capacity was increased. long or, more likely, they were trying to during the financial crisis, Warren Buffett protect their existing investments in the came in and bought a lot of stock—or Holland: Right. The other thing that has company. convertible preferred. Goldman offered changed in the last three years is that him an effective purchase price that was health care in general has become much Chew: Mike, but these are clearly both below what the stock price had been the more “consumer discretionary” in the private, not public, issues of equity— day before the deal was announced. And sense that many more consumers now transactions in which the buyers the day after that deal was announced, have very large deductibles that have made presumably have a lot more information Goldman’s stock went up substantially, them much more price-sensitive. And that about the company than public investors? making it an even better deal for Buffett. is a big change in the health care space. There’s a benefit that comes with having Holland: That’s right, it’s very different an investor like Warren Buffett certify The Cost of Raising Equity Capital from the public offerings of seasoned stock that this is a good deal. It’s like the Good Chew: Mike, can you think of companies that Cliff was talking about. Housekeeping Seal of Approval. that have raised equity not to fund growth, but for a different reason—namely, to help Chew: In the last year or so, a publicly Chew: Okay, so the market reaction to them work through the pressures created traded oil and gas limited partnership having somebody like Warren Buffett buy by financial distress? called the Williams Companies raised your stock is very different from its reac- equity through a private process that tion to the average public equity offering. Holland: One that comes to mind is a has some similarities to what you just When public companies announce they home infusion company called BioScrip. described. The company was widely are raising more equity, my understand- Though it has about a billion-dollar top believed to be overleveraged. And my ing is that their stock prices tend to fall line, it has generated minimal to negative understanding is that J.P. Morgan Chase by about 3%, on average.

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Milano: That’s why to us it’s really impor- a great new investment opportunity, before announcement it might drive the share tant to look at longer periods than just a you raise more equity to fund that invest- price down five or ten percent, but you’re couple of days or weeks surrounding the ment, you want to let the market process confident that it’s going to work—and announcement. I think a lot of this nega- the information and decide if those oppor- when it works, two years from now your tive announcement effect reflects investor tunities are credible and real. And so if I’m share price is going to be twenty percent concern about the dilutive effect of new the CFO, I want to announce this equity higher?” equity on earnings per share. But I think offering only when I feel that the stock The only thing that matters is if the it also reflects investor uncertainty about price appropriately reflects the value of price goes down enough that you lose the current value of the firm and man- this opportunity, and of what the company your job. As long as you don’t lose your agement’s motive for issuing equity—is plans to do with the proceeds. job, it’s the long run that should matter management issuing stock because it So, let’s say I’m an investor watching in making the decision. thinks the firm is overvalued?—and, this firm—and let’s say the price was $30 probably most important, uncertainty six months ago and it’s $40 now. But as Smith: That’s right: you want to lay the about the value of what management’s an outside investor I could only estimate alternative outcomes face up on the going to do with the proceeds. Will they a reasonable range of values. Now let’s table. If we announce we’re going to have be doing mostly positive-NPV projects? assume I’m the CFO or a board member, a new equity offering, we should expect So, if you really want to get a sense of and I think I know exactly what the right the stock price to fall by about two per- the value to companies of raising equity, value might be. Let’s say I believe it might cent on the announcement. We need to you have to have a good sense of what be as high as $45, and it might be as low recognize that that price drop as part of they plan to do with the money. And to as $35; but that given what I know right the landscape going into this decision. do that, I think we have to look at much now, $40 seems like a reasonable price. But we also need to keep in mind that longer time periods than the academic However, if the CFO says, we’ve decided the stock price has gone up by 37% over event studies. that today is a particularly good day to the last six months because of what we’re announce that we’re selling equity, what talking about doing with the new capi- Smith: If you open a wider window on does that do to the likelihood that the tal—and that’s in fact why we’re raising how you measure the market’s reaction real value is $45 as opposed to something this capital: to fund those opportunities. to the announcement, you really compli- lower? It reduces it, of course—and so the But what if we don’t raise equity—say, cate the measurement problem. For our price falls, and by a little over 2% accord- we end up issuing debt instead? Then it sample of 8,500 companies, although ing to our study. may be substantially harder for us to carry the average company experienced a 2.2% My point is that part of this stock price out our plan. negative reaction to the announcement of fall is a reflection of the fact that manag- their equity offerings, it had also experi- ers inside the firm have better information Goonewardene: That’s basically what enced a run-up in its stock price of 37% about these issues than external investors happens in the biotech sector. The devel- during the six months leading up to the do; and as representatives of the existing opment process for drugs has different announcement. stockholders, they have an incentive to stages, and the release of good data at Now, it’s true that some people view this sell stock that is “fully valued.” each validates progression to the next. run-up as evidence of the “market timing” Many biotechs are in the development hypothesis that Don mentioned earlier, Milano: Right, and that’s why when stage; they have no real revenues, but are the tendency of corporate managers to I’m with executives talking about a big investing in developing a drug to bring issue equity when—and, in some versions financing decision, before they decide it to market. of the theory, mainly because—they think to go ahead and announce the transac- So these interim data reports create it’s overpriced. I don’t believe that’s really tion, I always ask them, “Would you be binary events for the company’s share what’s going on here. If your company has willing to do this if you knew that on price—and compelling data may drive

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the share price up 50% or even more. us some similar stories about healthcare? Smart biotechs plan their equity offer- Five or six years ago, Pfizer announced Holland: I wouldn’t disagree with that. ings to follow the release of good data, it was cutting its R&D by about $1 bil- We’re definitely still seeing a lot of health and that way they can raise equity on lion, and the stock price went up by about care consolidation and roll-ups across all favorable terms that will be used to fund 10% on the day of the announcement. So healthcare subsectors. At the same time, further research programs and continue there was a clear perception in the market some larger, diversified companies are now development. that some big pharma companies were trying to deconsolidate, including recent overinvesting in R&D, and they needed carve-outs of businesses by J&J and Kim- High Yield in Healthcare (and the to cut it back. And they also talked about berly-Clark, among others. And I think Case for Going Private) outsourcing. So, although they might end private equity is viewing many of those Chew: Mike, let me ask you one more up spending the same amount of dollars carve-outs as creating possible platforms question. What do you consider to be the on R&D, a lot of it was now going to be for roll-ups. legitimate uses of high-yield debt in your done outside the company. One thing I would mention that we industry, if any? What kind of healthcare haven’t addressed here is the fact that most company would consider doing an origi- Palmer: Yes, there’s a huge effort to out- of the buy side analysts and credit ana- nal issue of high yield, and under what source R&D costs. It’s interesting you lysts I talk to spend half if not more of circumstances? mentioned Pfizer because I used to work their time analyzing private debt—that is, there. I remember that in the year of that direct lending by hedge funds and other Holland: To answer that I think you have first big R&D cut, Pfizer was one of the fairly sophisticated and active investors. to step back and think about what finan- best performers in the market. The stock And this means that the corporate issu- cial sponsors are doing, what are the P.E. went up because our investors thought we ers, the companies themselves, don’t have shops doing? There are a lot of decent had a bloated infrastructure, and that it to deal with public disclosures. And they health care credits out there. Take HCA. would be more efficient to outsource our don’t need to deal with short sellers. They It’s been high yield—and it’s been IG. It’s R&D. deal with just one, or maybe two or three, been public—and it’s been private. And lenders. And that’s a trend that I think is the company has grown its earnings nearly Holland: The CRO space—contract worth watching. 50% in the six years since it went public research outsourcing—has been one of in an IPO. They’ve done incredibly well. the fastest growers in health care for the Smith: Well, after things like Sarbanes- And I think their use of debt has been past ten years. But those companies are Oxley and Dodd-Frank, I will go to my very effective in supporting their strategy. all of course private, and funded mainly grave believing that regulatory costs are Chew: Ok, but let me ask a slightly dif- by private equity. the primary reason the company on whose ferent question: When does a company board I served ended up doing an LBO. suddenly start to become underleveraged, Chew: There’s a school of thought that When I joined the board following the and then decide they should take on more says that much of private equity has IPO in 1994, we were a NYSE-list com- debt to satisfy its investors? Do they wake moved from a low-growth, cost-cutting pany worth about $300 million—21 years up one day and see some kind of shrinkage mode to a higher-growth model. And later the LBO valued us at $8.5 billion. It in their investment opportunities? Micro- they’ve done that in part by cutting their just got more and more expensive to be a soft was a famous case where Michael capital structures from the 80-90% lever- public firm. Jensen was complaining about all the cash age of the 1980s to 70% or less. And on the balance sheet, saying you’ve got to thanks to these larger equity cushions, Levington: Okay, let’s leave it at that. pay this out. And Carl Icahn, of course, they’ve been able to increase the amount Thank you all for taking part in this dis- has gone after Apple and said, “You’ve got of new investment they take on. Have you cussion. to pay out some of this cash. Can you tell seen anything like that?

Journal of Applied Corporate Finance • Volume 29 Number 4 Fall 2017 85 ADVISORY BOARD EDITORIAL Yakov Amihud Carl Ferenbach Donald Lessard Charles Smithson Editor-in-Chief High Meadows Foundation Massachusetts Institute of Rutter Associates Donald H. Chew, Jr. Technology Mary Barth Kenneth French Laura Starks Associate Editor Stanford University John McConnell University of Texas at Austin John L. McCormack Purdue University Amar Bhidé Martin Fridson Joel M. Stern Design and Production Tufts University Lehmann, Livian, Fridson Robert Merton Stern Value Management Mary McBride Advisors LLC Massachusetts Institute of Michael Bradley Technology G. Bennett Stewart Assistant Editor Stuart L. Gillan EVA Dimensions Michael E. Chew University of Georgia Stewart Myers Richard Brealey Massachusetts Institute of René Stulz London Business School Richard Greco Technology The Ohio State University Filangieri Capital Partners Michael Brennan Robert Parrino Sheridan Titman University of California, Trevor Harris University of Texas at Austin University of Texas at Austin Los Angeles Columbia University Richard Ruback Alex Triantis Robert Bruner Glenn Hubbard University of Maryland University of Virginia Columbia University G. William Schwert Laura D’Andrea Tyson Charles Calomiris Michael Jensen University of Rochester University of California, Columbia University Berkeley Alan Shapiro Christopher Culp Steven Kaplan University of Southern Ross Watts Johns Hopkins Institute for University of Chicago California Massachusetts Institute Applied Economics of Technology David Larcker Betty Simkins Howard Davies Stanford University Oklahoma State University Jerold Zimmerman Institut d’Études Politiques University of Rochester de Paris Martin Leibowitz Clifford Smith, Jr. Morgan Stanley University of Rochester Robert Eccles Harvard Business School

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