Clifford Smith

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After 45 years on the faculty of the Simon School of Business, I am the Epstein Professor Emeritus of Business. I have published over 100 articles and 25 books, primarily on topics in financial economics and managerial economics. I’ve served as an officer in several professional associations and been a visiting professor at a number of other universities.

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Corporate Insurance Strategy: The Case of British Petroleum

Journal of Applied Corporate Finance, Mar 1, 2020

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Agency Costs

Palgrave Macmillan UK eBooks, 2018

Strategic financial management part III: Debt maturity and priority and corporate liquidity

Journal of Applied Corporate Finance, Feb 14, 2023

Economics and Ethics: The Case of Salomon Brothers

Journal of Applied Corporate Finance, Mar 1, 2020

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Strategic Financial Management: Lessons from Seasoned Equity Offerings

Journal of Applied Corporate Finance, Mar 1, 2021

Each of today's three dominant academic theories of capital structure has trouble explaining ... more Each of today's three dominant academic theories of capital structure has trouble explaining the financing behavior of companies that have seasoned equity offerings (SEOs). In conflict with the tradeoff theory, the authors’ recent studies of some 7,000 SEOs by U.S. industrial companies over the period 1970‐2017 notes that the vast majority of them—on the order of 80%—had the effect of moving the companies away from, rather than toward, their target leverage ratios. Inconsistent with the pecking‐order theory, SEO issuers have tended to be financially healthy companies with low leverage and considerable unused debt capacity. And at odds with the market‐timing theory, SEOs appear to be driven more by the capital requirements associated with large investment projects than by favorable market conditions. The authors’ findings also show that, in the years following their stock offerings, the SEO companies tend to issue one or more debt offerings, which have the effect of raising their leverage back toward their targets.Whereas each of the three theories assumes some degree of shortsightedness among financial managers, the authors’ findings suggest that long‐run‐value‐maximizing CFOs manage their capital structures strategically as opposed to opportunistically. They consider the company's current leverage in relation to its longer‐run target, its investment opportunities and long‐term capital requirements, and the costs and benefits of alternative sequences of financing transactions. This framework, which the authors call strategic financial management, aims to provide if not a unifying, then a more integrated, explanation—one that draws on each of the three main theories to provide a more convincing account of the financing and leverage decisions of SEO issuers.

Risk and Regulation in Derivatives (or Why Derivatives Are a Blessing, Not a Curse)

Journal of Applied Corporate Finance, Mar 1, 2020

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13. Corporate Insurance Strategy

Columbia University Press eBooks, Dec 31, 2008

On the debt Capacityof growth Options

Strategic Financial Management Part II: Seasoned Equity Offerings, Corporate Payout Policy, and the Case of Regulated Utilities

Journal of Applied Corporate Finance, Sep 1, 2022

Studies in financial institutions - commercial banks

McGraw-Hill eBooks, 1994

The theory of the banking firm the lending process financial distress interest-rate exposure mana... more

Corporate Risk Management

Journal of Derivatives, May 31, 1995

Agency Costs

The New Palgrave Dictionary of Economics, 1987

Bankruptcy, Secured Debt, and Optimal Capital Structure: Comment

Journal of Finance, Mar 1, 1979

THIS PAPER ARGUES THAT THE issuance of secured debt' can increase the total value of a firm, even... more THIS PAPER ARGUES THAT THE issuance of secured debt' can increase the total value of a firm, even in the absence of corporate taxes. To this author's knowledge this constitutes the first rigorous explanation of the widespread use of secured debt contracts? The paper also presents and utilizes a mathematically tractible multiperiod firm valuation model derived under the assumption that bankruptcy is possible. Finally the results provide several plausible conjectures about the effect of bankruptcy law on the private advantages of secured debt relative to financial leases. Previous studies [12, 6, 9, 14, 171 have shown that in taxless, frictionless markets where there is no possibility that the firm will go bankrupt, changes in its debt-equity ratio will not alter the total market value of its debt plus its equity. Even if bankruptcy can occur, Stiglitz [17] has shown that the irrelevance of debt policy will follow if the individual investor is permitted to purchase equity on

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The Economics of accounting policy choice

McGraw-Hill eBooks, 1992

Contracting approach to accounting policy choice debt contracts and accounting policy choice comp... more

The Joint Determination of Leverage and Maturity

Social Science Research Network, 2001

We examine theories of leverage and debt maturity, focusing on the impact of firms' investment op... more We examine theories of leverage and debt maturity, focusing on the impact of firms' investment opportunity sets and regulatory environments in determining these policies. Using results on strategic complementarities, we identify sufficient conditions for the theory to have testable implications for reduced-form and structural-equation regression coefficients. Obtaining testable implications for structural equations requires less from the theory but more from the data than the reduced-form specification because it requires an instrumental-variables approach. We examine this trade-off between theory and statistical methods and provide tests using two decades of data for over 5000 industrial firms.

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The Maturity Structure of Corporate Debt

Social Science Research Network, May 3, 2000

We provide an empirical examination of the determinants of corporate debt maturity. Our evidence ... more We provide an empirical examination of the determinants of corporate debt maturity. Our evidence offers strong support for the contracting-cost hypothesis. Firms that have few growth options, are large, or are regulated have more long-term debt in their capital structure. We find little evidence that firms use the maturity structure of their debt to signal information to the market. The evidence is consistent, however, with the hypothesis that firms with larger information asymmetries issue more short-term debt. We find no evidence that taxes affect debt maturity. FINANCIAL ECONOMICS HAS MADE significant progress in explaining the incentives that lead large public corporations to choose particular financing policies. Increasingly, the profession is moving beyond an examination of the basic leverage choice to more detailed aspects of the financing decision. In this article, we extend this literature by employing data from a large sample of firms to examine hypotheses about the determinants of the maturity structure of the firm's debt. We group the hypotheses that have been offered to explain corporate debt maturity into three categories: contracting-cost hypotheses, signaling hypotheses, and tax hypotheses. Our evidence supports the contracting-cost hypotheses. Consistent with Myers (1977), firms with more growth options in their investment opportunity sets have less long-term debt in their capital structure. Large firms and regulated firms have more long-term debt. The evidence on signaling hypotheses is mixed. We find limited evidence that firms use debt maturity to signal information to the market. However, our evidence is consistent with a pooling equilibrium in which firms with larger potential information asymmetries (measured by the amount of growth options in their investment opportunity sets) issue more short-term debt. Our evidence also suggests a nonmonotonic relation between credit standing and debt maturity as predicted by Diamond (1993). We find no evidence that taxes affect debt maturity. We develop the hypotheses in Section I and describe our data in Section II. In Section III, we test hypotheses about variation in debt maturity structure, and in Section IV, we examine the robustness of our results. We present our conclusions in Section V.

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The Investment Opportunity Set and Corporate Financing, Dividend, and Compensation Policies

Social Science Research Network, Sep 6, 2006

We examine explanations for corporate financing-. dividend-. and compensation-policy choices. We ... more We examine explanations for corporate financing-. dividend-. and compensation-policy choices. We document robust empirical relations among corporate policy decisions and various firm characteristics. Our evidence suggests contracring theories are more important in explaining cross-sectional variation in observed financial. dividend. and compensation policies than either tax-based or signaling theories.

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Advanced Strategies in Financial Risk Management

This book demonstrates how to join the ranks of successful companies which routinely use risk pro... more This book demonstrates how to join the ranks of successful companies which routinely use risk protection products to manage more effectively their asset liability and to tap worldwide commercial markets. Areas discussed include: interest rates, exchange rates, innovative applications (hybrid instruments, derivatives, macro economic hedging), systems and credit, tax, legal and regulatory issues and accounting.

Agency Conflicts and Risk Management*

European Finance Review, 2007

This paper analyzes the relation between agency conflicts and risk management in a contingent cla... more This paper analyzes the relation between agency conflicts and risk management in a contingent claims model of the firm. In contrast to previous contributions, our analysis incorporates not only stockholder-debtholder conflicts but also managerstockholder conflicts. We show that the costs of both underinvestment and overinvestment are essential in determining the firm's hedging policy. In particular, firms that derive more of their value from assets in place (lower market-to-book ratios), although having lower costs of underinvestment, generally display larger costs of overinvestment. Thus, they may be more likely to hedge to control these overinvestment incentives. Our analysis demonstrates that the relation between risk management and agency conflicts is more complex than prior discussions have recognized. It also provides a rationale for the recent findings of Bartram, Brown, and Fehle (2004) and suggests reinterpretation of some of the empirical evidence on corporate risk management.

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Using Organizational Architecture to Lead Change

Journal of Applied Corporate Finance, Mar 1, 2020

Leading the Vision: The Case of Xerox When David Kearns was appointed CEO of Xerox Corporation in... more Leading the Vision: The Case of Xerox When David Kearns was appointed CEO of Xerox Corporation in the early 1980s, the company faced serious problems. Between 1976 and 1982, Xerox's share of installations of new copiers in the U.S. had dropped from about 80% to 13%. Japanese companies such as Canon, Minolta, Ricoh, and Sharp had become major players in this market and were selling copiers at prices below Xerox's cost. ffective leadership involves a great deal more than just developing the right strategic vision for the company. You also have to motivate people throughout the organization to help make that vision a reality. Some argue that leaders motivate people through personal charisma, style, and inspiration. But while business managers can learn a lot from studying the styles of inspirational leaders, charisma is a quality that for most people is difficult to acquire.

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Clifford Smith

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