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published_or_final_version / Economics and Finance / Master / Master of Philosophy

 This thesis aims to investigate the effects of mean reversion on dynamic corporate finance decisions and stock pricing. In Chapter 1, a continuous-time real option model of mature firm that produces product with exogenous mean reverting price is developed to study the firm’s optimal exit and leverage policies. Simulation results show that both liquidation and bankruptcy triggers are negatively related to the long run price levels, while the speed of mean reversion interacts with the long run price level to affect the firm’s exit decisions in two opposite directions depending on the level’s relative magnitude to total operating expenses (the firm’s instantaneous operation costs plus coupon payments). Regarding the leverage policy, apart from showing the static tradeoff result that firm uses more debts when the current revenues are high, the model exhibits at high long run price levels low-debt scenarios that are analogous to the pecking order prediction, suggesting that both static tradeoff and pecking order effects coexist under a mean reversion environment. Because equity values increase more vigorously with prices than debt values do, the tradeoff effect is overwhelmed and the resulting optimal leverage ratios are generally decreasing with the current price levels. Chapter 2 extends the model in Chapter 1 to derive the closed-form expression of the firm’s equity beta. Because expected stock returns are linearly related to the equity beta by model assumption, several implications to the cross-sectional behaviors of stock returns are obtained. First, it is predicted that firms with mean reverting characteristics should earn lower average returns than others without. The model further reveals the coexistence of positive book-to-market and leverage premiums to stock returns. Most importantly, due to the possession of bankruptcy option by equity holders, high distress risk stocks are expected to earn lower average returns than otherwise similar but low distress risk stocks. This provides an extra dimension to study the ‘distress premium puzzle’. Finally to verify the model predictions, empirical tests using historical market and accounting data from CRSP and COMPUSTAT are conducted, and supportive results are generally obtained. / published_or_final_version / Economics and Finance / Doctoral / Doctor of Philosophy

The dissertation deals with the allocation of resources, among profit producing elements within a company, to achieve satisfactory results over a planning horizon. The company is viewed as a confederation of profit making elements called Strategic Business Units (SBU) which are independent of each other and held together by a central authority. The dissertation uses a computerized simulation model of the deterministic type in a timesharing mode. The model is deterministic with some limited probabilistic The model is deterministic with some limited probabilistic effects. It is used to develop projected balance sheets and profit and loss statements for each period in a predetermined planning horizon and to evaluate the success of a set of alternative futures of the SBU. The set of SBU alternatives to be evaluated as the "company" may be arbitrarily chosen by the operator or chosen through the use of a near-optimal, integer programming algorithm for a variety of measurement criteria and subject to various restraints on the balance sheet. The research uses data generated by the long-range planning process at an intermediate sized, multinational corporation listed on the New York Stock Exchange. The data consist of assets, liabilities, and profit and loss statement items for each period in a planning horizon and for each of three alternatives of each SBU in the study. In addition, a beginning corporate balance sheet is required as are planned corporate expense items and the specification of operating restrictions. Research into the effect of several strategic policies, including dividend rate and debt to equity ratio, on the future prospects of the company in accordance with the optimal value of five different measurement criteria, is reported. The five measurement criteria are present value of shareholder equity, growth in earnings per share, growth in total assets, total assets and growth in sales. The appendix material contains listings of computer programs used in the model (written in the Basic computer language), the research data used, numerous computer printouts, and technical discussions on the model. Several tentative conclusions are listed, many areas for further research are suggested, and strengths and constraints of the model are discussed. It is concluded that the techniques developed have good potential for increasing cash generation and the efficiency of the investment process in a company; the dividend rate has a significant effect on how fast a company can grow; and the model is flexible and can be used for a number of investigative purposes to support company decision-makers. An interesting area for further research is the tentative conclusion that return on assets, when used as an optimization criterion, produces a significantly different set of SBU alternatives from the one which results from using the other measurement criteria.

Hu Bingbing. / "July 2004." / Thesis (Ph.D.)--Chinese University of Hong Kong, 2004. / Includes bibliographical references (p. 69-73). / Electronic reproduction. Hong Kong : Chinese University of Hong Kong, [2012] System requirements: Adobe Acrobat Reader. Available via World Wide Web. / Mode of access: World Wide Web. / Abstracts in English and Chinese.

Leung Shek Ling Olivia. / "August 2004." / Thesis (Ph.D.)--Chinese University of Hong Kong, 2004. / Includes bibliographical references (p. 62-64). / Electronic reproduction. Hong Kong : Chinese University of Hong Kong, [2012] System requirements: Adobe Acrobat Reader. Available via World Wide Web. / Mode of access: World Wide Web. / Abstracts in English and Chinese.

Huang Ming Xi = 三因結構模型之公司債劵定價及其應用 / 黃銘浠. / Thesis (M.Phil.)--Chinese University of Hong Kong, 2003. / Includes bibliographical references (leaves 99-102). / Text in English; abstracts in English and Chinese. / Huang Ming Xi = San yin jie gou mo xing zhi gong si zhai quan ding jia ji qi ying yong / Huang Mingxi. / Abstract --- p.i / Acknowledgements --- p.iii / Contents --- p.iv / List of Figures --- p.vii / List of Tables --- p.xiii / Chapter Chapter 1. --- Introduction --- p.1 / Chapter Chapter 2. --- Structural Models of Credit Pricing --- p.3 / Chapter 2.1 --- Introduction --- p.3 / Chapter 2.2 --- Merton's Model (1974) --- p.4 / Chapter 2.2.1 --- The Framework of the Traditional Contingent Claims Analysis (CCA) --- p.5 / Chapter 2.2.2 --- The Valuation of Corporate Bonds with B-S Option Pric- ing Theory --- p.9 / Chapter 2.2.3 --- The Limitations of Traditional Contingent Claim Ap- proach --- p.12 / Chapter 2.3 --- "Shimko, Tejima and Deventer (1993)" --- p.15 / Chapter 2.3.1 --- The Merton's Model in a Stochastic Interest Rate Frame- work --- p.15 / Chapter 2.4 --- Longstaff and Schwartz (1995) --- p.17 / Chapter 2.4.1 --- A Structure Model of Early Default Mechanism and De- viations from APR --- p.17 / Chapter 2.5 --- Briys and de Varenne (1997) --- p.21 / Chapter 2.5.1 --- A Structure Model of Stochastic Default Barrier --- p.21 / Chapter 2.5.2 --- The Valuation of Risky Zero-Coupon Bonds --- p.22 / Chapter 2.6 --- Stationary-leverage-ratio Models --- p.25 / Chapter 2.6.1 --- Tauren (1999) --- p.25 / Chapter 2.6.2 --- Collin-Dufresne and Goldstein (2001) --- p.27 / Chapter 2.7 --- Summary --- p.29 / Chapter Chapter 3. --- The Valuation Framework of the Three-factor Model --- p.32 / Chapter 3.1 --- Introduction --- p.33 / Chapter 3.2 --- The Framework of the Three-factor Model --- p.35 / Chapter 3.3 --- The Valuation of Risky Bonds --- p.39 / Chapter 3.3.1 --- Imposing an Early Default Mechanism --- p.42 / Chapter 3.3.2 --- Application: The Valuation of Probability of Default --- p.45 / Chapter Chapter 4. --- The Pricing Methodology of the Three-factor Model --- p.46 / Chapter 4.1 --- Simplification of the Problem --- p.47 / Chapter 4.2 --- Methodology of Upper-lower Bound Scheme --- p.48 / Chapter 4.2.1 --- Single-stage Approximation --- p.48 / Chapter 4.2.2 --- Illustrative Examples --- p.53 / Chapter 4.2.3 --- Multistage Approximation --- p.54 / Chapter 4.2.4 --- Summary --- p.58 / Chapter 4.2.5 --- Systematic Multistage Estimation of Bond Price --- p.61 / Chapter 4.3 --- Estimation of Default Probability --- p.63 / Chapter Chapter 5. --- Numerical Results and Discussion --- p.69 / Chapter 5.1 --- Initial Setting of Parameters --- p.69 / Chapter 5.2 --- Numerical Results and Discussion --- p.74 / Chapter Chapter 6. --- Conclusion --- p.89 / Appendix A. The Derivation of the Three-Factor Model --- p.91 / Bibliography --- p.99

Law, Tak Yan. / Thesis (M.Phil.)--Chinese University of Hong Kong, 2008. / Includes bibliographical references (leaves 38-39). / Abstracts in English and Chinese. / Chapter Chapter 1. --- Introduction --- p.1 / Chapter Chapter 2. --- Literature Review --- p.4 / Chapter 2.1 --- Brief Overview --- p.4 / Chapter 2.2 --- Determinants of the Target Debt Ratio --- p.7 / Chapter 2.3 --- Adjustments Toward the Target Ratio --- p.9 / Chapter Chapter 3. --- Methodology --- p.12 / Chapter 3.1 --- Estimation of the Target Leverage Ratio --- p.12 / Chapter 3.2 --- Factors affecting the Long-term Adjustment --- p.16 / Chapter 3.3 --- Persistence and Reversal of Effects --- p.19 / Chapter Chapter 4. --- Expected Signs of Variables --- p.22 / Chapter 4.1 --- Estimation of the Target Ratio --- p.22 / Chapter 4.2 --- Effects of Firm Histories --- p.24 / Chapter 4.2.1 --- Pecking order theory --- p.24 / Chapter 4.2.2 --- Tradeoff theory --- p.25 / Chapter 4.2.3 --- Market Timing Theory --- p.25 / Chapter Chapter 5. --- Data --- p.27 / Chapter Chapter 6. --- Empirical Findings --- p.29 / Chapter 6.1 --- Estimation of the Target Ratio --- p.29 / Chapter 6.2 --- Factors Affecting the Long-term Adjustment --- p.31 / Chapter 6.3 --- Persistence of the Effects --- p.33 / Chapter 6.4 --- Reversal of the Effects --- p.35 / Chapter Chapter 7. --- Concluding Remarks --- p.37 / References --- p.38 / Tables --- p.40

In recent years, several new theories have been developedrelating the value of the firm to its capital structure, or explainingwhy firms issue debt securities. However, empirical testing ofthe varying predictions of these theories has not kept pace. Moreover,most investigations have been done on regulated utilities because ofalleged risk homogeneity. The results are ambiguous and cannot begeneralized due to regulatory treatment of taxes.The present investigation is carried out on a broad crosssectionof industrial firms and takes explicit account of businessrisk variations as well as dealing with other econometric problemsignored in previous studies. The results are consistent with Miller's(1977) hypothesis that the value of the firm is independent of leveragein the absence of bankruptcy costs. However, the results are alsoconsistent with the existence of significant leverage-related costswhich vary directly with business risk. / L'etude de l1incidence du levier financier d'une firme sur sa valeurde marche ainsi que des. differentes raisons pour lesquelles une firmeferait appel au marche des obligations pour assurer son financement asuscite ces dernieres annees le developpement de nouvelles approchestheoriques du probleme. Le travail de verification empirique, toutefois,n'a guere suivi et, en particulier, seules les compagnies etroitementsoumises au controle gouvernemental ont fait l'objet d'une etudeapprofondie, du fait sans doute de leur appartenance presumee a lameme classe de risque et ce, en depit du traitement fiscal particulierdont beneficient ces compagnies. De ce fait, les resultats empiriquesactuellement disponibles ne sont pas depourvus d'ambiguite et ne sauraientetre generalises.[...]

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