Bloomberg Intelligence Roundtable on the Theory and Practice of Capital Structure Management

16 Pages Posted: 21 Feb 2018

See all articles by Clifford W. Smith

Clifford W. Smith

Simon Graduate School of Business, University of Rochester

Gregory V. Milano

Fortuna Advisors LLC

Joel Levington

Bloomberg L.P.

Asthika Goonewardene

Bloomberg L.P.

Gina Martin Adams

Bloomberg L.P.

Michael K. Holland

Holland & Company

Jonathan Palmer

Bloomberg L.P.

Don Chew

Journal of Applied Corporate Finance

Date Written: Fall 2017

Abstract

Since the formulation of the M&M propositions almost 60 years ago, financial economists have been debating whether there is such a thing as an optimal capital structure—a proportion of debt to equity that maximizes shareholder value. Some finance scholars have followed M&M in arguing that both capital structure and dividend policy are largely “irrelevant” in the sense that they have no significant, predictable effects on corporate market values. Another school of thought holds that corporate financing choices reflect an attempt by corporate managers to balance the tax shields and disciplinary benefits of greater debt against the costs of financial distress. Yet another theory says that companies do not have capital structure targets, but simply follow a financial “pecking order” in which retained earnings are preferred to outside financing, and debt is preferred to equity when outside funding is required. In this roundtable, a leading finance professor is joined by six practitioners in discussing whether and how capital structure decisions and payout policies can create value, with special attention to the healthcare industry. The consensus is that for those parts of the pharma industry with large growth opportunities, equity financing should be the main source of capital. But for those parts of the industry with shrinking prospects, increasing levels of debt and raising dividends are recommended.

Suggested Citation

Smith, Clifford W. and Milano, Gregory Vincent and Levington, Joel and Goonewardene, Asthika and Martin Adams, Gina and Holland, Michael K. and Palmer, Jonathan and Chew, Don, Bloomberg Intelligence Roundtable on the Theory and Practice of Capital Structure Management (Fall 2017). Journal of Applied Corporate Finance, Vol. 29, Issue 4, pp. 72-85, 2017. Available at SSRN: https://ssrn.com/abstract=3127153 or http://dx.doi.org/10.1111/jacf.12263

Clifford W. Smith

Simon Graduate School of Business, University of Rochester ( email )

Carol Simon Hall 3-202C
Rochester, NY 14627
United States
585-275-3217 (Phone)
585-442-6323 (Fax)

Gregory Vincent Milano

Fortuna Advisors LLC ( email )

One Penn Plaza
36th Floor
New York, NY 10119
United States

HOME PAGE: http://www.fortuna-advisors.com

Joel Levington

Bloomberg L.P.

731 Lexington Avenue
New York, NY 10022
United States

Asthika Goonewardene

Bloomberg L.P.

731 Lexington Avenue
New York, NY 10022
United States

Gina Martin Adams

Bloomberg L.P.

731 Lexington Avenue
New York, NY 10022
United States

Michael K. Holland

Holland & Company

375 Park Avenue
New York, NY 10152
United States

Jonathan Palmer

Bloomberg L.P.

731 Lexington Avenue
New York, NY 10022
United States

Don Chew (Contact Author)

Journal of Applied Corporate Finance

United States

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