Definition of Shirking

Shirking

The tendency to do less work when the return is smaller. Owners may have more incentive to shirk
if they issue equity as opposed to debt, because they retain less ownership interest in the company and
therefore may receive a smaller return. Thus, shirking is considered an agency cost of equity.

shirking

the process of an individual free-riding on a group effort because the individual’s share of the group reward is insufficient to compensate for his or her separate effort

CARs (cumulative abnormal returns)

a measure used in academic finance articles to measure the excess returns an investor would have received over a particular time period if he or she were invested in a particular stock.
This is typically used in control and takeover studies, where stockholders are paid a premium for being taken over. Starting some time period before the takeover (often five days before the first announced bid, but sometimes a longer period), the researchers calculate the actual daily stock returns for the target firm and subtract out the expected market returns (usually calculated using the firm’s beta and applying it to overall market movements during the time period under observation).
The excess actual return over the capital asset pricing model-determined expected return market is called an ‘‘abnormal return.’’ The cumulation of the daily abnormal returns over the time period under observation is the CAR. The term CAR(-5, 0) means the CAR calculated from five days before the
announcement to the day of announcement. The CAR(-1, 0) is a control premium, although Mergerstat generally uses the stock price five days before announcement rather than one day before announcement as the denominator in its control premium calculation. However, the CAR for any period other than (-1, 0) is not mathematically equivalent to a control premium.

fractional interest discount

the combined discounts for lack of control and marketability. g the constant growth rate in cash flows or net income used in the ADF, Gordon model, or present value factor.

Gordon model

present value of a perpetuity with growth.
The end-ofyear Gordon model formula is: 1/(r - g)
and the midyear formula is: SQRT(1 + r)/(r - g).

Abandonment option

The option of terminating an investment earlier than originally planned.

Abnormal returns

Part of the return that is not due to systematic influences (market wide influences). In
other words, abnormal returns are above those predicted by the market movement alone. Related: excess
returns.

Accelerated cost recovery system (ACRS)

Schedule of depreciation rates allowed for tax purposes.

Accrued interest

The accumulated coupon interest earned but not yet paid to the seller of a bond by the
buyer (unless the bond is in default).

Act of state doctrine

This doctrine says that a nation is sovereign within its own borders and its domestic
actions may not be questioned in the courts of another nation.

After-tax real rate of return

Money after-tax rate of return minus the inflation rate.

Agency bank

A form of organization commonly used by foreign banks to enter the U.S. market. An agency
bank cannot accept deposits or extend loans in its own name; it acts as agent for the parent bank.

Agency basis

A means of compensating the broker of a program trade solely on the basis of commission
established through bids submitted by various brokerage firms. agency incentive arrangement. A means of
compensating the broker of a program trade using benchmark prices for issues to be traded in determining
commissions or fees.

Agency cost view

The argument that specifies that the various agency costs create a complex environment in
which total agency costs are at a minimum with some, but less than 100%, debt financing.

Agency costs

The incremental costs of having an agent make decisions for a principal.

Agency pass-throughs

Mortgage pass-through securities whose principal and interest payments are
guaranteed by government agencies, such as the Government National Mortgage Association ("Ginnie Mae"), Federal Home Loan Mortgage Corporation ("Freddie Mac") and Federal National Mortgage Association ("Fannie Mae").

Agency problem

Conflicts of interest among stockholders, bondholders, and managers.

Agency theory

The analysis of principal-agent relationships, wherein one person, an agent, acts on behalf of
anther person, a principal.

All equity rate

The discount rate that reflects only the business risks of a project and abstracts from the
effects of financing.

All-in cost

Total costs, explicit and implicit.

American shares

Securities certificates issued in the U.S. by a transfer agent acting on behalf of the foreign
issuer. The certificates represent claims to foreign equities.

Amortizing interest rate swap

Swap in which the principal or national amount rises (falls) as interest rates
rise (decline).

Annualized holding period return

The annual rate of return that when compounded t times, would have
given the same t-period holding return as actually occurred from period 1 to period t.

Arbitrage-free option-pricing models

Yield curve option-pricing models.

Arithmetic average (mean) rate of return

Arithmetic mean return.

Arithmetic mean return

An average of the subperiod returns, calculated by summing the subperiod returns
and dividing by he number of subperiods.

Asset/equity ratio

The ratio of total assets to stockholder equity.

Authorized shares

Number of shares authorized for issuance by a firm's corporate charter.

Average accounting return

The average project earnings after taxes and depreciation divided by the average
book value of the investment during its life.

Average cost of capital

A firm's required payout to the bondholders and to the stockholders expressed as a
percentage of capital contributed to the firm. Average cost of capital is computed by dividing the total
required cost of capital by the total amount of contributed capital.

Average rate of return (ARR)

The ratio of the average cash inflow to the amount invested.

Bankruptcy cost view

The argument that expected indirect and direct bankruptcy costs offset the other
benefits from leverage so that the optimal amount of leverage is less than 100% debt finaning.

Base interest rate

Related: Benchmark interest rate.

Bellwether issues

Related:Benchmark issues.

Benchmark interest rate

Also called the base interest rate, it is the minimum interest rate investors will
demand for investing in a non-Treasury security. It is also tied to the yield to maturity offered on a
comparable-maturity Treasury security that was most recently issued ("on-the-run").

Benchmark issues

Also called on-the-run or current coupon issues or bellwether issues. In the secondary
market, it's the most recently auctioned Treasury issues for each maturity.

Best-efforts sale

A method of securities distribution/ underwriting in which the securities firm agrees to sell
as much of the offering as possible and return any unsold shares to the issuer. As opposed to a guaranteed or
fixed price sale, where the underwriter agrees to sell a specific number of shares (with the securities firm
holding any unsold shares in its own account if necessary).

Best-interests-of-creditors test

The requirement that a claim holder voting against a plan of reorganization
must receive at least as much as he would have if the debtor were liquidated.

Blue-chip company

Large and creditworthy company.

Book value per share

The ratio of stockholder equity to the average number of common shares. Book value
per share should not be thought of as an indicator of economic worth, since it reflects accounting valuation
(and not necessarily market valuation).

Bottom-up equity management style

A management style that de-emphasizes the significance of economic
and market cycles, focusing instead on the analysis of individual stocks.

Builder buydown loan

A mortgage loan on newly developed property that the builder subsidizes during the
early years of the development. The builder uses cash to buy down the mortgage rate to a lower level than the
prevailing market loan rate for some period of time. The typical buydown is 3% of the interest-rate amount
for the first year, 2% for the second year, and 1% for the third year (also referred to as a 3-2-1 buydown).

Bulldog bond

Foreign bond issue made in London.

Bulldog market

The foreign market in the United Kingdom.

Buydowns

Mortgages in which monthly payments consist of principal and interest, with portions of these
payments during the early period of the loan being provided by a third party to reduce the borrower's monthly
payments.

Capitalized interest

interest that is not immediately expensed, but rather is considered as an asset and is then
amortized through the income statement over time.

Carring costs

costs that increase with increases in the level of investment in current assets.

Cash flow after interest and taxes

Net income plus depreciation.

Cash flow per common share

Cash flow from operations minus preferred stock dividends, divided by the
number of common shares outstanding.

Cheapest to deliver issue

The acceptable Treasury security with the highest implied repo rate; the rate that a
seller of a futures contract can earn by buying an issue and then delivering it at the settlement date.

Collective wisdom

The combination of all of the individual opinions about a stock's or security's value.

Common stock/other equity

Value of outstanding common shares at par, plus accumulated retained
earnings. Also called shareholders' equity.

Company-specific risk

Related: Unsystematic risk

Compound interest

interest paid on previously earned interest as well as on the principal.

Continuous random variable

A random value that can take any fractional value within specified ranges, as
contrasted with a discrete variable.

Corporate processing float

The time that elapses between receipt of payment from a customer and the
depositing of the customer's check in the firm's bank account; the time required to process customer
payments.

Cost company arrangement

Arrangement whereby the shareholders of a project receive output free of
charge but agree to pay all operating and financing charges of the project.

Cost of capital

The required return for a capital budgeting project.

Cost of carry

Related: Net financing cost

Cost of funds

interest rate associated with borrowing money.

Cost of lease financing

A lease's internal rate of return.

Cost of limited partner capital

The discount rate that equates the after-tax inflows with outflows for capital
raised from limited partners.

Cost-benefit ratio

The net present value of an investment divided by the investment's initial cost. Also called
the profitability index.

Covered interest arbitrage

A portfolio manager invests dollars in an instrument denominated in a foreign
currency and hedges his resulting foreign exchange risk by selling the proceeds of the investment forward for
dollars.

Cramdown

The ability of the bankruptcy court to confirm a plan of reorganization over the objections of
some classes of creditors.

Cumulative abnormal return (CAR)

Sum of the differences between the expected return on a stock and the
actual return that comes from the release of news to the market.

Current issue

In Treasury securities, the most recently auctioned issue. Trading is more active in current
issues than in off-the-run issues.

Current-coupon issues

Related: Benchmark issues

Debt/equity ratio

Indicator of financial leverage. Compares assets provided by creditors to assets provided
by shareholders. Determined by dividing long-term debt by common stockholder equity.

Debt

Money borrowed.

Debt capacity

Ability to borrow. The amount a firm can borrow up to the point where the firm value no
longer increases.

Debt displacement

The amount of borrowing that leasing displaces. Firms that do a lot of leasing will be
forced to cut back on borrowing.

Debt instrument

An asset requiring fixed dollar payments, such as a government or corporate bond.

Debt leverage

The amplification of the return earned on equity when an investment or firm is financed
partially with borrowed money.

Debt limitation

A bond covenant that restricts in some way the firm's ability to incur additional indebtedness.

Debt market

The market for trading debt instruments.

Debt ratio

Total debt divided by total assets.

Debt relief

Reducing the principal and/or interest payments on LDC loans.

Debt securities

IOUs created through loan-type transactions - commercial paper, bank CDs, bills, bonds, and
other instruments.

Debt service

interest payment plus repayments of principal to creditors, that is, retirement of debt.

Debt service parity approach

An analysis wherein the alternatives under consideration will provide the firm
with the exact same schedule of after-tax debt payments (including both interest and principal).

Debt-service coverage ratio

Earnings before interest and income taxes plus one-third rental charges, divided
by interest expense plus one-third rental charges plus the quantity of principal repayments divided by one
minus the tax rate.

Debt swap

A set of transactions (also called a debt-equity swap) in which a firm buys a country's dollar bank
debt at a discount and swaps this debt with the central bank for local currency that it can use to acquire local
equity.

Debtor in possession

A firm that is continuing to operate under Chapter 11 bankruptcy process.

Debtor-in-possession financing

New debt obtained by a firm during the Chapter 11 bankruptcy process.

Deferred equity

A common term for convertible bonds because of their equity component and the
expectation that the bond will ultimately be converted into shares of common stock.

Depository Trust Company (DTC)

DTC is a user-owned securities depository which accepts deposits of
eligible securities for custody, executes book-entry deliveries and records book-entry pledges of securities in
its custody, and provides for withdrawals of securities from its custody.

Diffusion process

A conception of the way a stock's price changes that assumes that the price takes on all
intermediate values. dirty price. Related: full price

Discount window

Facility provided by the Fed enabling member banks to borrow reserves against collateral
in the form of governments or other acceptable paper.

Discrete random variable

A random variable that can take only a certain specified set of discrete possible
values - for example, the positive integers 1, 2, 3, . . .

Dividends per share

Amount of cash paid to shareholders expressed as dollars per share.

Dividends per share

Dividends paid for the past 12 months divided by the number of common shares
outstanding, as reported by a company. The number of shares often is determined by a weighted average of
shares outstanding over the reporting term.

Doctrine of sovereign immunity

doctrine that says a nation may not be tried in the courts of another country
without its consent.

Documented discount notes

Commercial paper backed by normal bank lines plus a letter of credit from a
bank stating that it will pay off the paper at maturity if the borrower does not. Such paper is also referred to as
LOC (letter of credit) paper.

Dollar bonds

Municipal revenue bonds for which quotes are given in dollar prices. Not to be confused with
"U.S. dollar" bonds, a common term of reference in the Eurobond market.

Dollar duration

The product of modified duration and the initial price.

Dollar price of a bond

Percentage of face value at which a bond is quoted.

Dollar return

The return realized on a portfolio for any evaluation period, including (1) the change in market
value of the portfolio and (2) any distributions made from the portfolio during that period.

Dollar roll

Similar to the reverse repurchase agreement - a simultaneous agreement to sell a security held in a
portfolio with purchase of a similar security at a future date at an agreed-upon price.

Dollar safety margin

The dollar equivalent of the safety cushion for a portfolio in a contingent immunization
strategy.

Dollar-weighted rate of return

Also called the internal rate of return, the interest rate that will make the
present value of the cash flows from all the subperiods in the evaluation period plus the terminal market value
of the portfolio equal to the initial market value of the portfolio.

Domestic International Sales Corporation (DISC)

A U.S. corporation that receives a tax incentive for
export activities.

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