It is not possible to believe what they say because CFOs motives that they declare publicly might not be always be what their actual behind the door motives are. Harvey along with Graham back on 2001 conducted an examination to understand how their declaration drives their equity issues and debt issues. Both of them inferred something really exciting and puzzling at the same time.
Firstly, you must know CFOs are not bothered about the benefits from tax against debt in Corporate Sector. They are very much bothered regarding the ratings of credit. Management may be conscious about the foundation of trade off along with the distress of financial conditions.
A lot of arguments of capital set up is already present and they seem to have to base to managers keeping their personal motive in mind from income taxes which are like a burden to the shoulders of the stake holders, in order to focus on all creditors that they have to market product strategy and taking into consideration certain factors, to keep an eye on the financial flows, the calculated announcement of confidential information to cost of transaction contemplation. Firstly, it might not have bad effects as you may think it will. There are chances managers will pay heed to all the above mentioned points, as the capital costing will mirror itself through all the considerations. Take an example; if an investor of the firm faces higher tax repercussions, it will increase the firm’s capital costing and by now you know how bothered managers are about their capital expenditure. Secondly, entities without needing cash hike; then managers might not calculate the proper obstacle against their venture. The obstacle rate could be really high or really for a particular project.
These firms have a firm belief that dividends have a tendency to draw more individual shareholders from retail exempting big companies tax-exempted vectors. So, in this case it can be said that investors are wrong in decision making, in case the Management is right.
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