Valuation, Capital Structure Decisions and the Cost of Capital

This thesis consists of six essays in Corporate Finance. In Chapter 1 we examine the relation between the quality of corporate governance and the value of excess cash for large European firms. We use ratings for Shareholder rights, Takeover defenses, Disclosure and Board structure as proxies for the quality of corporate governance. We find that the value of excess cash is negatively related to anti-takeover provisions only. Chapter 2 discusses the relation between corporate governance and the cost of debt. We find a negative relation between Disclosure and the cost of debt and uncover that this relation depends on the quality of Shareholder rights. This novel interaction effect is explained by our share rights or disclose hypothesis. In Chapter 3 and 4 we formulate the capital structure decision within a multi-criteria framework. We conclude that the capital structure decision is unfit for consideration as an optimization problem. Rather, it makes sense to solicit a variety of solutions from finance specialists that can be compared on criteria considered to be important. In Chapter 4 we discuss a merger and acquisition case as illustration. We compare different solutions generated by mutually independent financial experts on criteria which are relevant for the shareholders and for the management. In Chapter 5 we derive a general formula for the cost of government’s claim. We show that the present value of tax shields is equal to the difference between the present value of the expected taxes paid by the unlevered firm and those paid by the levered firm. In Chapter 6 the required return of intangible assets is determined for a variety of business sectors. The required returns are subsequently compared to several proxies used in practice. For most sectors, the levered cost of equity seems to be the best proxy.

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