Students of corporate finance should remember learning about homemade leverage and the Modigliani and Miller theory of capital structure irrelevance. In a nut shell (absent taxes and bankruptcy costs), leverage doesn't matter. This is because an investor can lever up or de-lever a position to attain his or her own desired level of leverage.
Hedge funds make bets on securities and also lever up. On Portfolio.com there is a nice posting talking about why hedge fund managers shouldn't use leverage, and why hedge fund investors should choose the level of leverage that they desire.
It's a nice example of an application of capital structure irrelevance.
I had set up a screen for high dividend paying stocks and saw many REITs and that led me to something fishy currently happening with the REIT stocks. Couple of them announced new stock offerings and their stocks went up after the announcements. Is there a rational explanation for the stock price to go up after a company announces a secondary offering?
ReplyDeleteAnd then I found this -
http://zerohedge.blogspot.com/2009/04/wall-street-back-to-its-criminal-ways.html
Thanks for the link to that article. Very interesting.
ReplyDelete