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Efficient Markets and Behavioral Finance: Principles of Corporate Finance
Efficient Markets and Behavioral Finance: Principles of Corporate Finance
13 13-1
EFFICIENT MARKETS
AND BEHAVIORAL FINANCE
• Efficient Markets?
o What is an Efficient Market
o The Evidence Against Market Efficiency
o The Five Lessons of Market Efficiency
• Payout Policy
o Information in Dividends and Stock Repurchases
o Dividends or Repurchases?
o Payout Policy and the Life Cycle of the Firm
Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
Return to NPV
13-3
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Return to NPV: Example
13-4
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Return to NPV: Example
13-5
10 3,000 100,000
NPV 100,000 t
10
t 1 (1.10) (1.10)
100,000 56,988
$43,012
Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
Random Walk Theory
13-6
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Random Walk Theory: Coin Toss Game
13-7
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Random Walk Theory: Coin Toss Game
13-8
Heads
$106.09
Heads
$103.00
$100.43
Tails
$100.00
Heads
$100.43
$97.50
Tails
$95.06
Tails
Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
Random Walk Theory
13-9
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Random Walk Theory
13-10
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Random Walk Theory
13-11
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Random Walk Theory
13-12
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Random Walk Theory
13-13
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Efficient Market Theory
13-14
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Efficient Market Theory
13-15
$80
Actual price as soon as upswing
Microsoft stock price, $
is recognized
60
Upswing
40
Cycles
disappear
once
identified Last This Next
month month month
Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
Efficient Market Theory
13-16
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Efficient Market Theory
13-17
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Efficient Market Theory
13-18
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Efficient Market Theory
13-19
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Efficient Market Theory
13-20
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Efficient Market Theory
13-21
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Efficient Market Theory
13-22
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Price Anomalies
13-23
Log Deviations From Royal Dutch Shell/Shell T&T Parity, 1980 - 2004
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Behavioral Finance
13-24
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Behavioral Finance
13-25
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Lessons of Market Efficiency
13-26
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CHAPTER
16 16-27
PAYOUT POLICY
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Dividend & Stock Repurchases
13-29
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How Firms Pay Dividends
13-30
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How Firms Repurchase Stock
13-32
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How Firms Repurchase Stock
13-33
3. Dutch auction:
o The firm states a series of prices at which it is
prepared to repurchase stock.
o Shareholders submit offers declaring how many
shares they wish to sell at each price
o The company calculates the lowest price at which it
can buy the desired number of shares
Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
Dividend Terms
13-34
• Declaration Date
• Ex-Dividend Date
• Record Date
• Payment Date
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Dividend Payments
13-35
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The Information Content of Dividends
13-36
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Survey on the Payout Decision
13-37
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The Information Content of Dividends
13-38
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The Information Content of Dividends
13-39
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Information Content of Share Repurchases
13-40
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The Information Content: Wrap up
13-41
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Dividends or Repurchases? The Payout
Controversy
13-42
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Dividends or Repurchases? The Payout
Controversy
13-43
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Dividend Policy is Irrelevant
13-44
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Dividend Policy is Irrelevant: Example
13-45
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Dividend Policy is Irrelevant: Example
13-46
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Dividend Policy is Irrelevant: Example
13-47
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Dividend Policy is Irrelevant: Example
13-48
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Dividend Policy is Irrelevant: Example
13-49
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Dividend Policy is Irrelevant: Wrap up
13-50
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Dividend Policy is Irrelevant: Wrap up
13-51
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Stock Repurchases and DCF Models of
Share Price
13-52
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Dividends and Share Issues
13-53
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Dividends and Share Issues
13-54
• How can the firm sell more shares when its assets,
earnings, investment opportunities, and, therefore,
market value are all unchanged?
o Transfer of value from the old to the new stockholders
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Dividend Policy
13-55
Before After
Dividend Dividend
New
stockholders
Total value of firm
Each share
worth this
before … … and
worth
this
after Old
stockholders
Total Total
number of number of
shares shares
Example of 1/3rd of worth paid as dividend and raising money via new shares
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Dividend Policy
13-56
Cash
Old stockholders Old stockholders
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Dividends Increase Value
13-57
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Dividends Increase Value
13-58
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Dividends Increase Value
13-59
• Dividends as Signals
• Dividend increases send good news about
cash flows and earnings. Dividend cuts send
bad news
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Dividends Increase Value
13-60
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Dividends Decrease Value
13-61
• Tax Consequences
• If dividends are taxed more heavily than capital
gains, taxpaying investors should welcome such a
move and value the firm more favorably.
Companies can convert dividends into capital
gains by shifting their dividend policies
• In such a tax environment, the total cash flow
retained by the firm and/or held by shareholders
will be higher than if dividends are paid
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Taxes and the Radical Left
13-62
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Empirical Evidence on Dividends & Taxes
13-63
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1. Payout Policy and the Life Cycle of Firms
13-64
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2. Payout Policy and the Life Cycle of Firms
13-65
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3. Payout Policy and the Life Cycle of Firms
13-66
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Payout Policy and the Life Cycle of Firms
13-67
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Dividends Increase Value
13-68
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