A)
In the article titled Corporate Policies of Republican Managers the authors tested the effect of personal political preferences of corporate managers on corporate policies. The authors specifically focused on the Republican managers who had 73% likelihood of identifying themselves as conservative, 24% chance of identifying as moderate, and only 3% chance of being liberal (Hutton, Danling and Kumar 1279). The study found that majority of the managers identifying themselves as politically more inclined towards the Republican also adopted conservative corporate policies. Consequently, the organizations that they led were characterized by low debt levels, low capital, low investment in research and development, and less risky investments. However, they were also characterized by high profitability over the period in consideration.
B)
Considering the findings published in the report, I would most probably not invest in a company managed by a conservative CEO. In my opinion, the conservative CEO are more skeptical towards risk meaning that they are unlikely to take high risk positions that have the potential to result in high returns. I am at an age where I can afford high risk investments and, therefore, I would be more interested in firms managed by a more liberal CEO.
C)
Diversifiable risk is the risk of an investment that can be reduced or eliminated by adding the investment asset to a diversified portfolio of investments. Diversifiable risk is also referred to as unsystematic risk. Considering this definition and the article in our reference, it is highly unlikely that an organization led by a conservative CEO will have high diversifiable risk. The conservative CEO is more likely to invest only in those assets whose risk is low or closest to the market risk. As the study indicates, conservative corporate leaders are more likely to take positions in less risky investments even though this is not in the interest of the shareholders looking forward to high returns.
Does Geography Matter? Firm Location and Corporate Payout Policy?
A)
In the article titled Does geography matter? Firm location and corporate payout policy?, the researchers tested the impact of shareholder proximity to corporate dividend payout policy. According to the study, firms located in remote areas are more likely to pay regular dividends than other firms (John, Knyazeva, and Knyazeva 535). The rationale is that the remote location raises the information costs and shareholder oversight gets more difficult. To make up for the difficulties, the firms are more likely to pay dividends that are regular. The firms hardly reduce the dividends even when there are cash flow problems. Additionally, the organizations are highly unlikely to pay special dividends considering the problems associated with getting the shareholders to participate in the decisions of the organizations. Notably, the regular payment of dividends comes as an indirect information cost for the firm.
B)
The study found that firms that are remotely located pay higher dividends overall as compared to firms which are centrally located and this is due to the agency costs of information (John, Knyazeva, and Knyazeva 537). However, this is observed in the presence of free cash flows. Rationally, centrally located firms have greater access to investment opportunities and this has implications on the payout policy. If the remotely located firms also have great access to investment opportunities, the influence of location on payout policy changes.
C)
As a potential investor, I would consider investing in firms that pay lower dividends as compared to firms paying higher dividends with all other factors held constant. Lower dividend payouts mean that the funds are reinvested in the firm resulting growth in the capital gains. From an economics perspective, this results from the multiplier effect on invested funds. On the other hand, the dividends are subject to withholding taxes among other taxes; hence, lower dividend payments result in tax savings.
D)
As a financial consultant of wealthy individuals, I would not recommend higher dividend paying stocks based on the capital gains argument of reinvested funds. Every dollar of reinvested funds results in more than a dollar in capital gains. Secondly, the higher dividends result in higher taxes for the wealthy investor while lower dividends result in capital gains that are not taxable or result in lower taxes.
Corruption, Political Connections, and Municipal Finance
A)
In the article titled Corruption, political connections, and municipal finance the authors tested the implications of political connections on municipal bonds in the United States. According to the study, the political connections begin with the underwriters contributing towards political campaigns and in doing so, they open corruption rings in the states (Butler, Fauver, and Mortal). As a result of the favoritism, lower quality underwriters are hired, negotiated bid bonds are underwritten, and the bond yields are higher due to the negotiated bids and the resultant higher credit risk. While the political connections result in high returns for the investors, the credit risk on the municipal bonds increases hence raises the cost of funding for the taxpayers.
B)
On the choice between general obligation bonds and revenue bonds I would invest in the general obligation bonds. The general obligation bonds are generally characterized by lower risk than the revenue bonds and considering that main thing is about getting fixed income, I would consider the GO bonds over the revenue bonds.
C)
I will not invest in municipal bonds issued from a corrupt state. Accepting the bonds means that I support corruption which has direct implications on the taxpayers. There is always the temptation to consider the municipal bonds from corrupt states due to the high bond yields. However, it is important to note that prudence in investing has its own long-term benefits.
D)
As a financial consultant, I would recommend the risk seeking to invest in revenue bonds. The revenue bonds come with high risk considering the possibility of fluctuation in the revenues collected. For instances, revenue on a bond used in the construction of a stadium are likely to greatly fluctuate but when the seasons are good, the returns can be high.
Works Cited
Butler, Alexander W., Larry Fauver, and Sandra Mortal. "Corruption, political connections, and municipal finance." Review of Financial Studies (2009): hhp010.
Hutton, Irena, Danling Jiang, and Alok Kumar. "Corporate policies of Republican managers." Journal of Financial and Quantitative Analysis 49.5-6 (2014): 1279-1310.
John, Kose, Anzhela Knyazeva, and Diana Knyazeva. "Does geography matter? Firm location and corporate payout policy." Journal of financial economics 101.3 (2011): 533-551.
