Interesting Links-19 (03/02/2011)

Corporate Finance:
Corporate governance mechanism's objectives are being redefined. As per the Anglo Saxon method of corporations, the shareholders are the key stakeholders and the managers who look after the firm should work for the maximization of shareholders' wealth. And managers contracts and their incentive mechanisms are designed such that their welfare is aligned with that of the shareholders. The benefits of other stakeholders are limited to the transactions they are involved in. The recent crisis brought in the government in particular and society in general on to the board as the prominent stakeholder in corporations. Now the definition of corporate governance is undergoing rapid changes in terms of its objectives.......... time has come it has to look beyond the welfare of shareholders. Here is a nice write up. [Link]

World economy:

Jonathan Parker, Kellog school of Management reports the initial reactions on the report of global financial crisis. (U might remember, i posted a link to it under the title of Official book on finance crisis) [Link]

Interesting Links-18 (02/02/2011)

Focus on grass roots:
Take of practitioners on Malegam Committee report on Microfinance Sector reforms in India, and a response from one of its member. [Link]. ET also carries another report on the recommendations of MC. [Link]. Kshama Fernandes (IFMR Capital) has a piece on the similar issue in Business line. [Link]


Corporate finance:
Stock Buyback: Implications to different classes of investors.......... what is it for dividend players, cash players and growth players. Prof. Damodaran has nice illustration [Link]. This has straight implications to the investors participating in Indian markets. The steep fall in the prices based on global cues and dried up volumes due to choppy market situations.......... triggering many firms to go for buybacks........there is a mad rush among India Inc. ET has a ready example for the same. [Link]

Interesting Links-16 (31/01/2011)

Corporate Finance:
1. On working capital funding....... it can be fund based or non-fund based. Business line carries a nice piece. [Link]
2. On Corporate hedging ....... seems to be interesting one. [Link]

Fund management:
3.On the importance of liquidity and volume for the exchange business by T.S. Narayanasami, CEO of United Stock Exchange. [Link]

Emerging Markets:
4. On the state of Indian corporate bankruptcy policies [Link]. You may find interesting to read my posts on the same issue [Link], [Link]

Interesting Links-11 (26/01/2011)

 World Economy: Opinion
1. 'Increased inequality in American society motivated the government (Bush government) to encourage mainly the state owned banks (Fannie Mae and Freddie Mac) to lend to the poor, which has been the root cause for the current financial crisis' - Fault Lines, by Raghuram Rajan. Few economists' responded to such controversial hypothesis. [Link], Rajan also responded to their criticism.[Link]

Corporate Finance: Stock buyback
2. Prof. Damodaran discusses the issue with nice illustrations. He discussed the present state of stock buyback as a corporate action. [Link]. He also discussed the effect of stock buyback on the wealth of stock holders, he discussed it by relating to two hypothetical worlds such as most pessimistic/lazy market and other most rational world. He argues that stock buyback doesn't have any  effect on the all equity financed firm. He also discussed the issue in various contexts. [Link]

India Focus:

3. Ajay Shah on the inflation forecasts. Video [Link]. He also discusses the credibility of IIP numbers and most other official numbers and he also cites the alternatives such as the data from Automobile association for data related to automobile output figures.

Note: Today i will not be updating this post further during the post-lunch as i will be out to watch No One Killed Jessica and Dhobi Ghat (two hindi movies) in a row at Escape Cinema!!  Happy Republic day! :)

ASSET REDEPLOYABILITY (LIQUIDITY) AND LEVERAGE: POTENTIAL IMPLICATIONS

Surenderrao Komera

20^th May 2010

Conventional wisdom attributes the positive association to tangibility of assets and leverage; it is because of the belief that the resale value of the tangible assets is considerable in the case of financial distress. From the general equilibrium analysis, asset tangibility doesn’t seem to be a sufficient condition for the high leverage. The sufficient condition would be their redeployability or liquidity.  If assets are redeployable for alternative uses, the resale value will be (very close to) their fundamental value, hence the liquid assets are best candidates for the collateral. Here redeployability of assets means, the inherent opportunity of assets to be used for alternative purposes which attribute close to their fundamental value. Thus, the asset liquidity is positively associated with the leverage.

There are three potential buyers for the assets of the distressed firm: a) the other firms in the same industry, b) outsiders who may venture into the industry c) prospective investors who may convert the assets and put them for alternative uses. Here question comes, whether assets are liquid/redeployable? If assets are liquid/redeployable easily at the value close to their fundamental value, the resulting competition for them will drive their liquidation value close to their fundamental value. But most of the assets are not efficiently [1] redeployable and have to be put in for the same use e.g. oil rigs, aircrafts etc. The value of such non-redeployable assets to the internal firms (from the same industry) will be close to their fundamental value and will be relatively higher than the same to the outsiders who incur some agency costs [2].  If the shock is idiosyncratic, the other firms in the industry will out-compete the outsiders and the price for the assets of the distressed firm will be equal to their fundamental value. Hence, creditors will need not to consider the idiosyncratic shocks (mismanagement etc) specific to the particular firm in the industry. If the shock is industry wide, almost all the firms in the industry do face debt-overhang problem and can’t be able to secure finance to buy the assets of the distressed firm. This results in the fire sale of assets to the outsiders who has far lesser value to the assets, causing the private costs to the seller as well as social costs (assets will not be deployed efficiently for their best use).

Implications: While appraising the (secured) loans, the creditors need to consider the following:

• The potential redeployability of pledging assets rather than their tangibility.
• Assigning the more weight to industry wide shocks rather than idiosyncratic shocks.

[1] Efficient redeployment means putting the assets for the alternative uses whose value will be close to their fundamental value.

[2] Agency costs for the outsiders are due to asymmetric information about the nature of assets, industry and so on

(Constructive comments are welcome)