Futures Shock: Are Greedy Brokers Ruining The Economy?

[Excerpt] In a recent public relations document, the New York Stock Exchange defines its mission statement as to: “Support the capital-raising and asset management process by providing the highest quality and most cost-effective, self-regulated marketplace for the trading of financial instruments.” The common thread that runs through this and similar statements made by organized financial markets from Frankfurt to Tokyo is that they hold as their primary goals to help companies raise capital and to provide a liquid and efficient aftermarket for those securities.

Agency, Financial Flexibility, and Firm Value: Evidence from REITs

We show empirically that the use of unsecured debt, whose standard covenants commit management to the preservation of debt capacity, leads to lower and more stable leverage. We then show that firm value is sensitive to leverage levels and leverage stability, decreasing in the former and increasing in the latter. Our results support a liquidity-centric version of Jensen's (1986) free cash flow argument. In this version, self-serving managerial tendencies are reigned in without raising leverage indiscriminately, so that financial flexibility is preserved.