ACF Tutorial 5: Cross-owner blockholders + gov debt impact on corporate debt

HideShow resource information
  • Created by: charlie
  • Created on: 05-05-18 17:13
Institutional cross-ownership block-holder
Firms that have a large amount of shares in a variety of companies within the same industry
1 of 15
Institutional block-holders: positives 1) Market Collaboration
1) Within industry joint ventures (e.g. drug development) 2) Strategic Alliances (e.g. Star Alliance airlines) 3) Within industry acquisitions (synergy/ revenue/ cost/ taxes/ borrowing costs)
2 of 15
Institutional block-holders: positives 2) Economies of scale info production
Better information for innovation productivity + operating profits through sharing R&D resources + cutting expenses
3 of 15
Institutional block-holders: positives 3) Coordination + reduction in costly rivalry
Institutional blockholders will want to max combined value of their portfolio (creates competitive advantage over non cross-held firms)
4 of 15
Institutional block-holders: positives 4) Reduced information asymmetry
Competing firms within the industry will have more access to information about each other (leading to optimal levels of collaboration)
5 of 15
Institutional block-holders: negatives 1) Lowered competition
Companies will be able to freely raise prices + lower product quality = costly for consumers
6 of 15
Institutional block-holders: negatives 2) Under-diversification cost
Blockholders will face larger idiosyncratic risk from holding companies with-in same industry (increases overall risk of portfolio to industry specific shocks)
7 of 15
Institutional block-holders: negatives 3) Negative influence on management (if activist blockholder)
Activist blockholders will push for management changes ('attacktivists') trying to enforce agendas
8 of 15
Institutional block-holders: negatives 4) Large share sell-off spirals
Despite no change in fundamentals, large SH performance reviews against benchmark = dumping ST under performers + invest in momentum (creates multiplier effect due to sentiment)
9 of 15
Institutional block-holders: Influences on management (opposing view)
Cross-ownership doesn't push profitability as investors explicitly state how they dont have influential roles in management at top level (only activist hedge funds do)
10 of 15
Crowding out effect from government debt on corporate debt
Increases in government debt = decreases in corporate leverage (equity stays equal/ debt decreases)
11 of 15
Why is there a crowding out effect?
1) Higher required return on close subst. corporate bonds is costly for firms (gov debt increases = IR increases = expected return on debt increases) 2) Gov spending in sectors reduces profits/ attractiveness for private firms to enter
12 of 15
Stronger crowding out effect: 1) Gov debt bought by domestic investors
INVESTOR: Due to corporate debt being held more by domestic investors (more substitution takes place)
13 of 15
Stronger crowding out effect: 2) Firms larger + more profitable
INVESTOR: firm debt closer substitute for gov debt (less risk)/ FIRM: less costly to switch from debt to equity
14 of 15
Stronger crowding out effect: 3) Countries with more developed equity markets
FIRM: larger + more liquid markets make it easier for firms to switch from equity to debt
15 of 15

Other cards in this set

Card 2

Front

Institutional block-holders: positives 1) Market Collaboration

Back

1) Within industry joint ventures (e.g. drug development) 2) Strategic Alliances (e.g. Star Alliance airlines) 3) Within industry acquisitions (synergy/ revenue/ cost/ taxes/ borrowing costs)

Card 3

Front

Institutional block-holders: positives 2) Economies of scale info production

Back

Preview of the front of card 3

Card 4

Front

Institutional block-holders: positives 3) Coordination + reduction in costly rivalry

Back

Preview of the front of card 4

Card 5

Front

Institutional block-holders: positives 4) Reduced information asymmetry

Back

Preview of the front of card 5
View more cards

Comments

No comments have yet been made

Similar Economics resources:

See all Economics resources »See all Corporate Finance resources »