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Volume 8, 2019

Guest Editor:  Prof. Peter Brusov

Journal of Reviews in Global Economics invites economists and researchers to submit their research results of their investigations on this topic to journal (This email address is being protected from spambots. You need JavaScript enabled to view it. ) or directly to Guest Editor Prof. Peter Brusov, Financial University, Moscow (This email address is being protected from spambots. You need JavaScript enabled to view it.).

Scope:
One of the main and most important problems in corporate finance is the problem of cost of capital, the impact of capital structure on its cost and capitalization of the companies and problem of an optimal capital structure of the companies (at which the company capitalization is maximal, and weighted average cost of capital is minimal). The importance of these problems is connected to the fact, that one can doing nothing, just by change the ratio between debt and equity (change the capital structure) increase the capitalization of the company. However, to date, even the question of the existence of an optimal capital structure of the companies still remains open. Numerous theories and models, including the first and the only one until recently quantitative theory by Nobel laureates Modigliani and Miller (MM), not only does not solve the problem, but also because of the large number of restrictions (such as, for example, theory of MM) have a weak relationship to the real economy. Herewith the qualitative theories and models, based on the empirical approach, do not allow to carry out the necessary assessment.

This special issue is devoted to recent development of capital structure theory and its applications. Discussions will be made within both main theories: modern theory by Brusov, Filatova and Orekhova (BFO theory) and its perpetuity limit - classical Modigliani-Miller (MM) theory, which will be compared in details. The BFO theory has replaced  the famous theory of capital cost and capital structure by Nobel laureates Modigliani and Miller. The authors have moved from the assumption of Modigliani-Miller concerning the perpetuity (infinite time of life) of companies and further elaborated quantitative theory of valuation of core parameters of financial activities of companies of arbitrary age as well as arbitrary time of life.

   Results of modern BFO theory turn out to be quite different from ones of Modigliani-Miller theory. They show, that later, via its perpetuity, underestimates the assessment of weighted average cost of capital, the equity cost of the company and substantially overestimates the assessment of the capitalization of the company.

   Such an incorrect assessment of key performance indicators of financial activities of companies has led to an underestimation of risks involved, and impossibility, or serious difficulties in adequate managerial decision-making, that was one of the implicit reasons of global financial crisis of 2008 year.

   Within new theory of capital cost and capital structure (BFO theory) a lot of qualitatively new results have been obtained, among them:

- Bankruptcy of the famous trade off theory has been proven. BFO theory has destroyed some main existing principles of financial management: among them trade off theory, which was considered as keystone of formation of optimal capital structure of the company during many decades, as well as some others.

-The qualitatively new effect in corporate finance, discovered by authors: abnormal dependence of equity cost on leverage,  which significantly alters the principles of the company's dividend policy.

- Mechanism of formation of the company optimal capital structure, different from suggested by trade off theory has been suggested.

- "A golden age" of the company has been discovered. It was shown for the first time that valuation of WACC in the Modigliani – Miller theory is not minimal and valuation of the company capitalization is not maximal, as all financiers supposed up to now: at some age of the  company its WACC value turns out to be lower, than in Modigliani – Miller theory and company capitalization V turns out to be greater, than V in Modigliani – Miller theory.

- The inflation in both Modigliani-Miller as well as  in Brusov-Filatova-Orekhova theories has been taken into account in explicit form, with the detected its non-trivial impact on the dependence of equity cost on leverage.

- Study of the role of taxes and leverage has been done, that allows to the Regulator to set the tax on profits rate, and to businesses to choose the optimal level of debt financing.

- Investigation of the influence of tax on profit rate on effectiveness of investment projects at different debt levels showed, that increase of tax on profit rate from one side leads to decrease of project NPV, but from other side it leads to decrease of sensitivity of NPV with respect to leverage level. At high leverage level L the influence of tax on profit rate change on effectiveness of investment projects becomes significantly less.

- Studying the influence of growth of tax on profit rate on the efficiency of the investment as well has led to two qualitatively new effects in investments:

1. the growth of tax on profit rate changes the nature of the NPV dependence on leverage L at some value t*: there is a transition from diminishing function NPV(L) at t<t*, to growing function NPV(L) at t>t*.

2. at high leverage levels the growth of tax on profit rate leads to the growth of the efficiency of the investments.

Discovered effects in investments can be applied in a real economic practice for optimizing of the management of investments.

  Established BFO theory allows to conduct a valid assessment of the core parameters of financial activities of companies, such as weighted average cost of capital and equity capital cost of the company, its capitalization. It allows to a management of company to make adequate decisions, that improves the effectiveness of the company management. More generally, the introduction of the new system of evaluation of the parameters of financial activities of companies into the systems of financial reporting (IFRS, GAAP etc.) would lead to lower risk of global financial crisis.

  Corporate management in the modern world is the management of financial flows. The proposed Brusov-Filatova-Orekhova theory allows correctly identify a discount rates - basic parameters for discounting of financial flows to arbitrary time moment, compare financial flows with a view to adoption of literate managerial decisions. The discount rate is a key link of the existing financial system, by pulling on the which modern finance can be adequately build, and  BFO theory can assist in this.

Applications of BFO theory in corporate finance and investments will be discussed in the following areas: 1. Optimal capital structure in companies and corporations; 2. Rating agencies; 3. Investment companies; 4. Banks and credit organizations;  5. Valuation of business; 6. Insurance companies; 7. Financial reports (ISFR, GAAP etc). In each area using the results of BFO theory, correct discount rate etc. will be very important.

While main results of BFO theory one can see from the monograph by Brusov et al. Modern Corporate Finance, Investments and Taxation, Springer, 2015, http://www.springer.com/gp/book/9783319147314, in this issue the father development of modern capital structure theory and its application in different areas of corporate finance, mentioned above, will be discussed.

And the first paper of this issue "The ratings: new approach" will be devoted to application of the perpetuity limit of BFO theory (MM theory) to rating methodology: for the first time we will incorporate the main parameters of ratings - rating "ratios" -directly into modern capital structure theory. This allows to use the powerful methods and "toolkit" of this theory in rating and creates practically the new basis of a rating methodology, that allows make more correct ratings.

List of articles already lined up on this topic:
Ratings: a new approach
Peter Brusov, Tatiana Filatova, Natali Orekhova, Veniamin Kulik

New meaningful effects in modern capital structure theory
Peter Brusov, Tatiana Filatova, Natali Orekhova, Veniamin Kulik

Improving business performance through financial modeling and analysis
Olga Efimova