Gresham's Law in Corporate Finance
Financing patterns in corporate takeovers and private equity deals over the last twenty years demonstrate the widespread application of Rolnick and Weber’s (1986) extension of one of the most venerable principles of monetary economics: Gresham’s Law. Two currencies, corporate securities (bad money) and cash (good money) circulate together with the former playing the dominant role of par money in times when investors exhibit irrational enthusiasm. Heightened social pressure in the form of herding combined with greater uncertainty about the degree and duration of the overvaluation of securities jointly play the role of transactions costs creating a preference for payment in the par money and most deals are financed with equity or debt securities rather than cash. To illustrate, overvalued bank loans were the most common form of financing in the credit bubble up to 2008 while stock deals predominated in takeover financing during the Internet bubble period of the late 1990s. Normal markets, not characterized by irrational enthusiasm, display the use of both corporate securities and cash in funding takeovers with cash deals (good money) enjoying a premium in the form of more favorable stock market reaction. The analysis provides useful insights for both monetary economists and researchers in corporate finance. For the former, it brings a fresh currency to the interpretation and extension of Gresham’s law relating the classic debate to contemporary, as opposed to historical, events. For the latter, the lesson is that principles of monetary economics can enhance understanding of corporate financing choices.
To our knowledge, this item is not available for
download. To find whether it is available, there are three
1. Check below under "Related research" whether another version of this item is available online.
2. Check on the provider's web page whether it is in fact available.
3. Perform a search for a similarly titled item that would be available.
Volume (Year): 1 (2013)
Issue (Month): 2 ()
|Contact details of provider:|| Postal: 1 More London Place, London SE1 2AF, UK|
Phone: +44 20 7951 2000
Web page: http://www.gfsi.ey.com/
When requesting a correction, please mention this item's handle: RePEc:ris:jofipe:0020. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Prof. Damiano Brigo)
If references are entirely missing, you can add them using this form.