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Weekly Assignment – Write a two-page paper that explains how corporations
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Title:
Database:
GLOBAL REVOLUTION. By: Derby, Meredith, FN: Footwear News,
0162914X, 3/31/2008, Vol. 64, Issue 12
Business Source Complete
GLOBAL REVOLUTION
Section:
news
A PRIORITY FROM THE VERY BEGINNING, HUSH PUPPIES' OVERSEAS BUSINESS IS
PUSHING INTO NEW EMERGING MARKETS, IN CHINA AND RUSSIA.
Hush Puppies' international business is one of the brand's golden tickets.
Accounting for a whopping 75 percent of Hush Puppies' revenues, the brand's overseas
operations are hard to ignore. Total company revenues in 2007 rose 15 percent to $174.1
million (translating into 19 million pairs of shoes), according to Hush Puppies executives. And
while it would not provide speci±c revenue forecasts for ±scal year 2008 and beyond, the
company said it expects continued growth from its international business as it adds markets
and sets its sights on emerging regions, such as China, India, Brazil and Russia.
Hush Puppies' global business, which launched in 1959, has stretched to more than 135
countries represented by 40 international licensees, known as distributors or partners. Today,
when many U.S.-based footwear companies are looking overseas for growth, Hush Puppies is
sitting pretty with a mature international framework that sells its footwear, handbags, eyewear,
apparel, plush toys, luggage, belts, shoe-care products and socks.
But the company worked hard to get there. While "global" was hardly a footwear buzz word in
the late 1950s, Hush Puppies' parent company, Wolverine World Wide, was already thinking
outside the box. "There were progressive people at Wolverine who said, 'What we created is
something special, and we can live beyond the U.S. market,'" said Mark Neal, president of
Hush Puppies. "The people we started with internationally, they were entrepreneurs. They had
a vision and a spirit about the product that they knew would work in their markets." That
capitalism is evident today: Hush Puppies has a stable of 400 standalone concept shops
around the world, in addition to 1,050 stores and shop-in-shops.
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The brand's international structure, however, can be complicated. Whereas Hush Puppies
owns the
businesses
in Europe and Canada,
other
international licensees
invest
in the
brand, directly owning the
businesses
in their respective countries. Licensees are tasked with
fnding retail Franchisees, securing placement in shop-in-shops and opening standalone retail
stores - all with a guiding hand From Hush Puppies. And each quarter, the licensees give an
undisclosed percentage oF revenue royalties to Wolverine World Wide.
Each section oF the globe has an executive who oversees its regions. ±rancisco Perez, Hush
Puppies VP oF international sales For Europe, covers 37 countries in Europe, the Middle East,
AFrica and Russia via 14 licensees. ±or Perez, exciting territories For Hush Puppies expansion
include northern AFrica, Jordan, Turkey, Morocco, Dubai and Egypt. But Russia, he said, has
the most potential For Hush Puppies (as well as For Wolverine's
other
brands, Merrell and
Caterpillar) because Footwear styling in that market has only just started to evolve. His goal is
to have 800 shop-in-shops in Russia by 2012, as well as concept stores in Moscow and St.
Petersburg. "One oF our challenges there is to create product that can be delivered and sold For
the winter months," he said. "They need thicker soles, Fur and waterprooF leathers."
Licensees regularly have a hand in the design oF Hush Puppies shoes. Brand partners can
select styles From core Hush Puppies product developed by the frm's global design team, and
also have the Freedom to create Footwear For their country's specifc tastes. Wolverine
executives responsible For each country then approve the designs to make sure they match the
Hush Puppies "core DNA."
But that's changing, said ±rancisco Perez's brother, Guillermo Perez. He's in charge oF the
business in Latin America, Mexico, Central America, Portugal and Spain and said that 30 years
ago, licensees were even more involved in designing shoes to ft a regional market's needs.
Now, due to stronger collections From the core Hush Puppies collection, it happens less
Frequently. Still, he said, "Maybe pink polka dots are hot in Brazil, but nowhere else. But iF they
ft our brand DNA and our licensees can make money and fll the need, they can do that."
±or his part, Guillermo Perez is most excited about the market in Brazil. "I'm looking For
[licensees] who say they can put 10 stores in So Paulo," he said. "[Through retail] you're able
to tell your own story in your own way with your own elements more consistently throughout
the world. Today, our most successFul licensees around the world have a retail component."
And today, Hush Puppies' non-shoe accessories can be Found in about 45 countries through
20 partners. According to Irene Lau, director oF apparel and accessories licensing, the brand is
a natural to become a Full-²edged liFestyle brand. "We have truly a heritage that's built up,
that's Fun. When [customers] see the Hush Puppies name on eyeglasses, they know the brand
instantly. They connect with that being a quality product."
Lau said China is one oF the brand's most exciting opportunities For non-shoe merchandise.
Hush Puppies has been in the country with an apparel program since 2001, and its success is
largely due to the brand's Footwear heritage. It's particularly gratiFying, Lau said, given how
challenging it is to enter a market like China. "A lot oF people are rushing into [China], and it
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The Financial Review 42 (2007) 191--209
Hedging, Financing and Investment
Decisions: A Simultaneous
Equations Framework
Chen-Miao Lin
∗
Clark Atlanta University
Stephen D. Smith
Georgia State University
Abstract
We empirically investigate the interactions among hedging, financing, and investment
decisions. We argue that the way in which hedging affects a firm’s financing and investing
decisions differs for firms with different growth opportunities. We find that high growth firms
increase their investment, but not leverage, by hedging. However, we also find that firms with
few investment opportunities use derivatives to increase their leverage.
Keywords
: hedging, risk management, capital expenditures, capital structure
JEL Classifications
: D84, G31, G32
∗
Corresponding author:
Department of Finance, School of Business Administration, Clark Atlanta
University, 223 James P. Brawley Drive, SW, Atlanta, GA 30303-3083; Phone:
+
1 404-880-8461;
E-mail: [email protected]
We thank an anonymous referee for helpful suggestions that have improved the paper. We are grateful to
Cynthia Campbell (the editor), Gerald Gay, Omesh Kini, David Nachman, Richard Phillips, and participants
at the Eastern Finance Association Meeting and Financial Management Association Meeting for helpful
comments.
C
°
2007, The Eastern Finance Association
191
192
C.-M. Lin and S. D. Smith/The Financial Review 42 (2007) 191–209
1. Introduction
According to the theory of Modigliani and Miller (1958, 1963), in a perfect
capital market neither hedging nor financing decisions add value to shareholders
since companies can always obtain external funds at the same cost as internal funds
to finance their investment opportunities. Thus, in order for investors to care about
these decisions by corporations, some market imperfections must exist.
Most existing theories discuss imperfections that affect either investment and
financing, investment and hedging, or financing and hedging. Underinvestment theo-
ries proposed by Bessembinder (1991) and Froot, Scharfstein, and Stein (1993) argue
that firms with greater growth opportunities should hedge more because of capital
market imperfections. Tax shields associated with debt financing lead Stulz (1996),
Ross (1996), and Leland (1998) to predict that hedging causes an increase in firm
value by enabling firms to increase leverage. The debt capacity argument thus predicts
a positive relationship between hedging and leverage. When looking at financing and
investment, Myers (1977) demonstrates that firms with good investment opportuni-
ties should carry less debt, because a high level of debt induces managers to forgo
positive net present value (NPV) projects.
However, the theoretical relationship between hedging, financing, and invest-
ment decisions can be different from considering just two of three decisions in iso-
lation. For example, Ross (1996) argues that hedging to increase leverage may not
mitigate the underinvestment problem. If firms increase debt capacity after hedg-
ing, the resulting higher leverage increases the agency cost of debt which, in turn,
increases the incentive for underinvestment. Ross’s (1996) argument indicates that
firms cannot hedge to increase investment and debt capacity simultaneously when
hedging, leverage, and investment are jointly considered.
Therefore, if firms cannot hedge to increase investment and debt capacity si-
multaneously, which firms are more likely to hedge to increase investment and which
firms are more likely to hedge to increase debt capacity? Ross’s (1996) argument
implies that firms with high growth opportunities are more likely to hedge to mitigate
the underinvestment problem and are less likely to increase debt capacity. For firms
with few growth opportunities, Stulz (1996) suggests that a manager whose interests
are aligned with those of shareholders is more likely to hedge to increase leverage
in order to maximize shareholder wealth. Ross (1996) and Stulz (1996) thus indicate
that firms with different growth opportunities have different purposes for hedging.
We empirically investigate the interaction between hedging, financing, and in-
vestment decisions for firms with different growth opportunities. We begin by es-
timating models where each decision is considered in isolation, using fixed-effect
models. We then estimate models for the hedging, financing, and investment deci-
sions using simultaneous equations where we treat each decision as endogenous. We
argue that a three-equation system is more consistent with the idea that the three
decisions are made at the same time. Conducting cross-sectional regressions as well
as tests for new users of derivatives, we find statistically significant interdependence
between the hedging, financing, and investment choices. We also find evidence to
End of preview
MONEY
W hy
dividends
help
you to invest better
BY SCHALK LO UW
Portfolio manager at PSG Wealth
I
t takes a relatively small piece of
dough to bake a fresh loaf of bread.
For better results, leave the dough in
the oven until it is fully proved and
baked. If you become impatient, as I often
do, and open the oven too soon, it will fall
flat and might end up smaller than the
original piece of dough. The patient baker
takes the loaf out of the oven only after it
has been properly baked.
One of our greatest fears is that we
may not have made sufficient provision
for our needs after retirement. Much
like baking bread, your protection lies in
proper planning, the right “ingredients”
and patience. Those who still have enough
time and can afford a little more short-
term volatility may consider shares that
render high dividends.
BUILD FUTURE INCOME
Let’s say you have a portfolio of R2m
from which you would need a monthly
income of R6 300 (in today’s rand
currency terms) after 10 years. By
investing in the stock market at the
current average dividend rate of 3.11%,
you would earn around R5 200 per
month. The actual dividend payments
on the local stock market increased by
nearly 4% more than inflation over the
past 50 years. That means if you invest
your R2m in the stock market and the
dividend payments increase by 10%
(expected inflation of 6%, plus 4%) per
DIVIDEND PAYMENTS
OVER THE PAST 50 YEARS
SHOWED MUCH
LESS
FLUCTUATION
t h a n th e
SHARE PRICES THEMSELVES
annum, you should have the required
R6 300 per month after 10 years, and at
a more tax-favourable rate (15% dividend
tax vs. income tax rates).
Looking at the JS E ’s A ll Share
Index (Alsi), you will see that dividend
payments over the past 50 years showed
much less fluctuation than the share
prices themselves, proving that you
should focus on the long-term ability of
the company to generate income, rather
than short-term price fluctuation.
VALUATION TOOL
We have heard experts tell us the market
is currently expensive. A number of
reports and recommendations over the
past year refer to the current average
historical Price/Earnings (PE) ratio of
17.5 as an “extreme level” (see bottom left
graph), and they may even be right over
the short term.
But compare the income from shares
(dividend yield) relative to the money
market: if you take a closer look at this
ratio (see bottom right graph) you will
see that the historical dividend rate
paints a somewhat different picture.
For the longer term investors seeking
future income for their investments,
the current “expensive” on a PE basis
market shouldn’t cause the least bit of
discouragement.
YOUR OWN ANNUAL “INCREASE”
Investors can buy directly into shares that
have good dividend potential. Based on
Bloomberg consensus, I have identified
five shares that should enjoy good growth
over the next few years, both in price
and dividend yield: Billiton, FirstRand,
Imperial, M TN and Sasol.
These shares currently stand at an
average historical dividend yield of
5.3%, very favourable not just when
compared to other shares, but also the
money market. Had you invested your
R2m in equal parts in these five shares
10 years ago, your income would have
been R47 800 in the first year. It would
have grown to R383 100 at the end of the
10-year period (i.e. by 23.4% per annum).
O f course, we cannot ignore that this
included the market correction o f2008,
where investors simply had to shut their
eyes and “leave the bread in the oven”.
If you want to experience the joy of
freshly baked bread, leave the dough in
the oven for the right period of time. It
will prove itself. ■
[email protected]
JSE ALSI &JSE ALSI PE
SOURCE; PSG Old Oak, INET BFA
FTSE/JSE ALLSHARE DIVIDEND YIELD
RELATIVE TO SA CALL RATES
3 6 FINWEEK
3 SEPTEM BER 2015
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THE ACCOUNTING REVIEW
American Accounting Association
Vol. 89, No. 1
DOI: 10.2308/accr-50575
2014
pp. 331–365
Management Forecast Quality and Capital
Investment Decisions
Theodore H. Goodman
Purdue University
Monica Neamtiu
The University of Arizona
Nemit Shroff
Massachusetts Institute of Technology
Hal D. White
University of Michigan
ABSTRACT:
Corporate investment decisions require managers to forecast expected
future cash flows from potential investments. Although these forecasts are a critical
component of successful investing, they are not directly observable by external
stakeholders. In this study, we investigate whether the quality of managers’ externally
reported earnings forecasts can be used to infer the quality of their corporate investment
decisions. Relying on the intuition that managers draw on similar skills when generating
external earnings forecasts and internal payoff forecasts for their investment decisions,
we predict that managers with higher quality external earnings forecasts make better
investment decisions. Consistent with our prediction, we find that forecasting quality is
positively associated with the quality of both acquisition and capital expenditure
decisions. Our evidence suggests that externally observed forecasting quality can be
used to infer the quality of capital budgeting decisions within firms.
Keywords:
management earnings forecasts
;
voluntary disclosure
;
capital expenditure
;
investment
;
capital budgeting
;
managerial ability
;
forecasting ability
.
JEL Classifcations:
D83
;
G31
;
M41
.
Data Availability:
Data are available from public sources identiFed in the paper.
We appreciate helpful comments from John Harry Evans III (senior editor), Amy P. Hutton (editor), two anonymous
referees, Beth Blankespoor, Lian Fen Lee, Roby Lehavy, Greg Miller, Karl Muller, Shyam Sunder, Bill Waller, Joe
Weber, and workshop participants at Purdue University, Southern Methodist University, and The University of Arizona.
Hal D. White gratefully acknowledges ±nancial support from Ernst & Young.
Editor’s note: Accepted by Amy P. Hutton.
Submitted: January 2012
Accepted: July 2013
Published Online: July 2013
331
I. INTRODUCTION
C
apital budgeting is one of the most fundamental and important responsibilities of Frm
management. A key determinant of successful investment is management’s ability to forecast
project payoffs, because forecasting plays a central role in investment valuation methods (e.g.,
net present value [NPV] calculations, forward-looking price/earnings multiple, or other discounted
cash ±ow analyses). Although these forecasts are a critical component of Frm health, most forecasts are
internal and thus not directly observable by external stakeholders. However, we expect that
management’s forecasting ability used to generate internal project payoff forecasts may transfer to other
managerial tasks that involve forecasting, such as providing external management earnings forecasts.
²or this speciFc type of managerial forecast, the properties are readily observable. Thus, these
voluntarily disclosed earnings forecasts may be valuable to external stakeholders not only because they
provide management’s expectations of next period earnings, but also because they reveal information
about managers’ knowledge of the Frm’s economic environment and their ability to forecast future
business prospects, a major component in the investment decision process (
Trueman 1986
).
This paper investigates whether the quality of voluntarily disclosed management forecasts can
be used to predict the quality of managerial investment decisions. Although prior research views
earnings guidance and capital budgeting as distinct tasks, we argue that both tasks depend on a
common trait—forecasting ability.
1
²or example, when conducting a corporate acquisition,
managers often begin by making earnings forecasts to assess the intrinsic value of the potential
target (
Eccles, Lanes, and Wilson 1999
;
Cullinan, Le Roux, and Weddigen 2004
). Similarly,
managers must predict future project payoffs when selecting among potential capital expenditure
projects (
Graham and Harvey 2001
). These forecasts require managers to understand the economic
environment as well as their competitive position within the environment. This same understanding
is needed when providing earnings guidance as well, because earnings are essentially the aggregate
payoff from past investments. Thus, the quality of managers’ earnings forecasts is potentially an
observable signal of their broader forecasting ability.
Although forecasting future project payoffs is an important part of investment decision-making,
a
priori
, it is unclear whether we can empirically Fnd a relation between external management forecasts
and managerial investment decisions. ²irst, the quality of a manager’s
external
forecasts may not be a
good measure of
internal
forecasting ability, since providing guidance could encourage managers to
engage in earnings management, possibly through suboptimal investment decisions, so that their
forecasts appear more accurate (
Kasznik 1999
;
Roychowdhury 2006
). Second, the quality of external
forecasts may measure only short-term earnings forecasting ability. Thus, it may not be associated
with the long-term forecasting skills required for successful capital budgeting.
To test our hypothesis, we examine the relation between management forecasting quality and
the quality of subsequent investments using both investments in other companies (corporate
acquisitions) and investments in Fxed assets (capital expenditures).
2
We begin by examining the
1
In this study, forecasting ability is comprised of management’s ability to: (1) collect high-quality information
regarding both internal operations (e.g., cost reports, margins, and personnel) and the external environment (e.g.,
competition, industry trends, product demand); and (2) process and synthesize this information, which is a
function of experience and innate talent, to develop accurate forecasts. We provide more detail in Section II.
2
We examine both types of investments because they offer unique advantages that complement each other. We
examine acquisitions because they are large, high-proFle corporate events, with publicly available information,
such as the exact investment date and speciFc investment characteristics that we can use in our analyses to
provide more robust evidence. In contrast, much less information is publicly available about capital expenditure
projects. However, as compared to acquisitions, capital expenditures are less complex investment transactions
that do not involve external parties such as investment bankers. As such, forecasting ability and investment
valuation may be more directly attributable to managers in a capital expenditure setting. We discuss the role of
forecasting ability in both types of investment in Section II.
332
Goodman, Neamtiu, Shroff, and White
The Accounting Review
January 2014
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