How Capital Structure Affects UK Cost of Capital

How Capital Structure Affects UK Cost of Capital Abstract Firms require a reasonable capital structure to meet the required target. To raise the finance, firms normally choose to review some different factors that are taken into account in considering. In this study, the author will examine the correlation between capital structure and the cost of the capital. As the cost will be a main factor for the firms to raise the finance. And different of capital structure will cause variable cost. This report will review the literature in capital structure and cost of finance. Along with the availability of source of finance, including the matching principle, a famous tools trade-off theory. As well as the argument follows, pecking order theory and agency cost theory. Drawing a conclusion based on the research survey data collection. Justify the relationship in how capital structure affects capital cost. Introduction The term capital structure refers to the mix of different types of funds which a company uses to finance its activities. Capital structure varies greatly from one company to another. For example, some companies are financed mainly by shareholders funds whereas others make much greater use of borrowings. Since the seminal publication of Modigliani and Miller (1958), corporate finance researchers have devoted considerable effort to investigating capital structure decisions (e.g. Myers, 1977 and 1984). Significant progress has been made in understanding the determinants of corporate capital structure with an increased emphasis on financial contracting theory (for example, Barclay and Smith, 1995; Mehran et al., 1999; and Graham et al., 1998 and, for an international view, Rajan and Zingales, 1995). This theory suggests that firm characteristics such as risk and investment opportunity set affect contracting costs. In turn, these costs impact on the choice between alternative forms of finance such as debt and equity, and between different classes of fixed-claim finance such as debt and leasing. The author will examine the relationship between the cost of capital and the structure of capital, and the effect of cost to raise finance in terms of making financial decision in the firms. Literature review 2.1 Theory of capital The origins of capital structure theory lie in the models of optimal capital structure that were developed in the wake of the famous Modigliani-Miller irrelevance theorem. These models later became to be known as the static trade-off theory (see e.g. Modigliani and Miller, 1958, 1963; Baxter, 1967; Gordon, 1971; Kraus and Litzenberger, 1973; Scott, 1976; Kim, 1978; Vinso, 1979). In this theory, the combination of leverage related costs (associated with e.g. bankruptcy and agency relations) and a tax advantage of debt produces an optimal capital structure at less than a 100% debt financing, as the tax advantage is traded off against the likelihood of incurring the costs. This theoretical result is now widely accepted in the profession. However, in seeking to model the wide diversity of capital structure practice, a number of additional factors have been proposed in the literature. 2.2 Factors that affect capital structure First, the use of debt finance can reduce agency costs between managers and shareholders by increasing the managers share of equity (Jensen and Meekling, 1976) and by reducing the free cash available for managers personal benefits (Jensen, 1986). Second, Myers and Majluf (1984) argue that, under asymmetric information, equity may be mispriced by the market. If firms finance new projects by issuing more equity, under pricing may cause les profit for existing shareholders in terms of the project NPV. Myers (1984) refers to this as pecking order theory of capital structure. The underinvestment can be reduced by financing the mispriced equity by the market. Internal funds involve no undervaluation and even debt that is not too risky will be preferred to equity. If external finance was required, firms tended first to issue the safest security, debt, and only issued equity as a last resort. Under this model, there is no well-define target mix of debt and equity finance. Each firms observed debt ratio reflects its cumulative requirements for external finance. Generally, profitable firms will borrow less because they can rely on internal resources and retain earnings. The preference for internal equity implies that firms will use less debt than suggested by the trade-off theory. Other factors that have been invoked to help explain the diversity of capital structures include: management behaviour (Williamson, 1988), firm-stakeholder interaction (Grinblatt and Titman, 1998), and corporate control issues (Harris and Raviv, 1988 and 1991). 2.3 How to finance The conventional discussion on a firms choice between long-term and short-term debt has generally focused on three aspects: matching debt maturity with asset life; extending the term-to-maturity of loans to stretch the firms debt capacity; and concentrating long-term debt issues in periods of relatively low interest rates. Recent development in the financial research literature has advanced several economics concepts such as transaction and agency costs, tax-timing option, and information asymmetry, to the debt maturity choice paradigm. Brick and Ravid (1985) show that taxes can also imply an optimal debt maturity structure. Depending on the term-structure of interest rates, long-term (short-term) is optimal, since it accelerates the tax benefit of debt given an increasing (decreasing) term structure. When firms cannot reveal the true quality of their cash flows, i.e. when information asymmetry exists, they can prevent or abate undervaluation by using a variety of signalling devices, such as debt (leverage), dividend payments or the maturity structure of debt. Thus, information asymmetry gives firms an incentive to signal their quality and credibility by taking on more debt and shortening their debt maturity. A higher leverage, especially more short-term debt, signals favourable inside information to the market because it offers the possibility to renegotiate terms in the future, when more information has become available. Long-term debt entails higher information costs than short-term debt, because the market expects a stronger deterioration of quality than insiders do. Firms with a low level of information asymmetry are therefore more likely to issue long-term debt (Flannery, 1986). In the study of international capital structures, Rajan and Zingales (1995) argue that it is important to test the robustness of US finds in different environments. They identify as potentially important the cross-country differences in tax and bankruptcy codes, in the market for corporate control and in the historical role played by banks and security markets. Methodology This survey focuses primarily on the determinants of the capital structure policy of firms but also includes some questions on topics that are closely related to the capital structure. For example, the questions address their approximate cost of equity to the managers, how they estimate their cost of equity (with CAPM or other methods), and whether the impact on the weighted average cost of capital is a consideration in their capital structure choice. The survey was developed after a careful review of the capital structure literature pertaining to the U.S. and European countries. For ease of comparability, the author tried to keep the format and design the survey similar to that of Graham and Harvey (2001), but modified or simplified some questions that are likely to be relevant in the UK context. For example, literature suggests that there are strong differences in corporate objectives between American and UK financial systems since the former system focuses on maximizing shareholder wealth while the later emphasizes the welfare of all stakeholder including employees, creditors and even he government. To examine this difference, the author ask the CFOs about the extent to which different stakeholders influence their firms financial decisions, the author also ask the firms the percentage of their free float share and whether they have preference or common share. 3.1 Sampling The initial samples for mailing the survey consist of a total of 57 firms from UK. The choice of initial sample was based on selecting firms that are representative of the UK firms, are widely traded, are comparable across country, and are public limited with available information. These criteria are important to justify the firms specific difference. From this sample, 9 firms were deleted because of non-availability of addresses and another 17 firms were deleted because they declined to participate in the survey, leaving a final sample of 31 firms. The survey was anonymous as this was an important criterion to obtain honest responses. In the mailing a letter was included that was addressed to the CFO or CEO explaining the objective of the study and promising to send a copy of the findings to those who wished to receive. A total of 12 responses were received by mail, which represents a response rate about 38 percent. 3.3 Summary of findings The respondent firms represent a wide variety of industries with a larger concentration in manufacturing; mining; energy and transportation sector; high technology; and financial sectors. About three forth of firms have a target debt to equity ratios, and about half of these firms maintain a target debt to equity ratios of one. Further, many respondents have a large percentage of their total debt in short term. About 80 percent of respondents report that they calculate their cost of equity, and over 77% of them employ the Capital Asset Pricing Model (CAPM) to calculate this cost. The estimated cost of equity reported by respondents ranges between 9%-15% only few firms report cost of capital greater than 15% The correlations among the demography variables of this survey are largely as predicted in the literature. These correlations will be discussed in detail in the next section. Analysis Three sets of factors in managers opinion that are likely to influence capital structure of firms are selected based on a review of literature. The first set is based on the implications of different capital structure theories such as the trade-off theory, the pecking order theory, and the agency cost theory. Generally the managers will make the financial decisions based on theories and through these decisions to affect their cost of capital. The second set relates to the managers timing of debt or equity issues since literature suggests that managers are concerned about financial flexibility. With evidence support in the findings, most of managers within all industries consider the financial flexibility as the most important issue when raise finance. Finance by short term may give the company advantage in changing their status to meet the changing world environment and provide less risks in investments. Finally, the last set of factors is based on common beliefs among managers about the impact of capital structure changes on financial statements such as the potential impact of equity issue on earnings. This factor shows the important of experience in managers mind and how it will be impact on the decisions. In summary, to analyse a companys capital structure, we assume that the company is only financed by two ways, either by shareholders equity or borrowings. It is just to consider how cost of capital affect the different proportion of debt in capital structure. Figure 8: Two advantages and two disadvantages of borrowing Advantages Disadvantages 1. Cheap direct cost because debt is less risky to the investor 1. Financial leverage causes shareholders to increase their cost of capital 2. Cheap direct cost because interest is a tax deductible expense. 2. Bankruptcy risks if borrowings are too high. The main advantage of borrowing is that the debt has a cheaper direct cost than equity. Debt is less risky to the investor than equity (low risk result a low required return) Interest payments are tax deductable whereas dividends are not. However, borrowing has two distinct disadvantages. Firstly it causes shareholders to suffer increased volatility of earnings. This is known as financial leverage. The increased volatility to shareholders returns resulting from financial leverage causes shareholders to demand a higher rate of return in compensation. The second disadvantage of borrowing is that if the company borrows too much, it increases its bankruptcy risks. At reasonable levels of gearing this affect will be imperceptible, but it becomes significant for highly geared companies and results in a range of risks and costs which have the effect of increasing the companys cost of capital. Limitation and Ethical issue The research focus on the UK market and respondents are from different areas of industry. The limitation has been carried out. First will be the time of the research. As a three months research, the data was not examined as correct enough to support the authors point. The data collection should be carrying continually in a long period of time and often reviewed at some certain time. Second, the way of collecting these data is limited by mailing. The survey may not represent the whole market as the limited number of respondents. A research should conduct all the possible methods including quantitative and qualitative. Finally, as this is not a professional research, lots of objectives in the research declined to give feedback in judging their financial structure in the case some of this could be their classified information. The ethical issue has been raised in this research; this will be honesty in the feedbacks from the respondents. As this survey is anonymous research, the managers may not give the right information in case of rising threats in competition. The importance of financial structure in firms causes the mangers to think before they actually answer the questions. The privacy issue in their mind raised that they may not want to share all the information regarding to the financial statement. Conclusion The purpose of this article is to supplement the existing literature with an analysis of the factors determining the financial structure affecting the cost of capital. The analyses give rise to the following conclusions. The study presents a dynamic model to address the possibility of adjustment costs incurred in reaching an optimal capital structure. And examine the literature in the factors in capital structure in affecting the cost of financing a firm through the facts in reality. The conclusion can be drawn as the cost of capital is a key factor that firms taken into account when raise finance along with the financial flexibility. On the other hand, the capital structure of a firm will affect the firms cost in both short term and long term. The firms raise the finance to meet the required target, there is no such a way to limit firms financial structure. They may want to choose a short term loan to meet flexibility of cash flow, in the contrast; the long term finance may require more information and satisfaction of the firms. The cost of capital depends on how firms finance their capital structure. Reference and bibliography Barclay, M.J. and C.W. Smith (1995), The Priority Structure of Corporate Liabilities, Journal of Finance, Vol. 50, No. 3 (July) Baxter, N. D. (1967) Leverage, the Risk of Ruin and the Cost of Capital, Journal of Finance, 22 Brick, I. and Ravid, A. (1985) On the relevance of debt maturity structure, Journal of Finance, 40 Flannery, M. (1986) Asymmetric information and risky debt maturity choice, Journal of Finance, 41 Gordon, M. (1971) Towards a theory of financial distress, Journal of Finance, 26 Graham, J.R., M.L. Lemmon and J.S. Schallheim (1998), Debt, Leases, Taxes and The Endogeneity of Corporate Tax Status, Journal of Finance, Vol. 53, No. 1 (February) Graham, J.R. and C.R. Harvey (2001), The Theory and Practice of Corporate Finance: Evidence from the Field, Journal of Financial Economics, Vol. 60, Nos. 2/3 (May) Grinblatt, M. and S. Titman (1998), Financial Markets and Corporate Strategy (Irwin/McGraw- Hill, USA) Harris, M. and A. Raviv (1988), Corporate Control Contests and Capital Structure, Journal of Financial Economics, Vol. 20 Harris, M. and A. Raviv (1991), The Theory of Capital Structure, Journal of Finance, Vol. 46, No. 1 (March) Jensen, M.C. (1986), Agency Costs of Free Cash Flow, Corporate Finance and Takeovers, American Economic Review, Vol. 76, No. 2, Jensen, M.C. and W. Meckling (1976), Theory of the Firm: Managerial Behaviour, Agency Costs, and Capital Structure, Journal of Financial Economics, Vol. 3, No. 4 Kim, E. (1978) A mean-variance theory of optimal capital structure and corporate debt capacity, Journal of Finance, 23 Kraus, A. and Litzenberger, R. (1973) State preference model of optimal leverage, Journal of Finance, 28 Mehran, H., R.A. Taggart and D. Yermack (1999), CEO Ownership, Leasing and Debt Financing, Financial Management, Vol. 28, No. 2 Modigliani, F.F. and M.H. Miller (1958), The Cost of Capital, Corporation Finance, and the Theory of Investment, American Economic Review, Vol. 48, No. 3 (June) Myers, S.C. (1977), Determinants of Corporate Borrowing, Journal of Financial Economics, Vol. 5, No. 2 (November) Myers, S.C. (1984), The Capital Structure Puzzle, Journal of Finance, Vol. 39, No. 3 (July) Myers, S. and Majluf, N. (1984) Corporate financing and investment decisions when firms have information that investors do not have, Journal of Financial Economics, 13, Rajan, R.G. and L. Zingales (1995), What Do We Know About Capital Structure Choice? Some Evidence from International Data, Journal of Finance, Vol. 50, No. 5 Scott, J. (1976) A theory of optimal capital structure, Bell Journal of Economics, 7 Vinso, J. (1979) A determination of the risk of ruin, Journal of Financial and Quantitative Analysis, 14 Williamson, O.E. (1988), Corporate Finance and Corporate Governance, Journal of Finance, Vol. 43, No. 3 (July) Advantage and disadvantage of borrowing, available on website www.accaglobal.com, access on 28.04.2010 How Capital Structure Affects UK Cost of Capital How Capital Structure Affects UK Cost of Capital Abstract Firms require a reasonable capital structure to meet the required target. To raise the finance, firms normally choose to review some different factors that are taken into account in considering. In this study, the author will examine the correlation between capital structure and the cost of the capital. As the cost will be a main factor for the firms to raise the finance. And different of capital structure will cause variable cost. This report will review the literature in capital structure and cost of finance. Along with the availability of source of finance, including the matching principle, a famous tools trade-off theory. As well as the argument follows, pecking order theory and agency cost theory. Drawing a conclusion based on the research survey data collection. Justify the relationship in how capital structure affects capital cost. Introduction The term capital structure refers to the mix of different types of funds which a company uses to finance its activities. Capital structure varies greatly from one company to another. For example, some companies are financed mainly by shareholders funds whereas others make much greater use of borrowings. Since the seminal publication of Modigliani and Miller (1958), corporate finance researchers have devoted considerable effort to investigating capital structure decisions (e.g. Myers, 1977 and 1984). Significant progress has been made in understanding the determinants of corporate capital structure with an increased emphasis on financial contracting theory (for example, Barclay and Smith, 1995; Mehran et al., 1999; and Graham et al., 1998 and, for an international view, Rajan and Zingales, 1995). This theory suggests that firm characteristics such as risk and investment opportunity set affect contracting costs. In turn, these costs impact on the choice between alternative forms of finance such as debt and equity, and between different classes of fixed-claim finance such as debt and leasing. The author will examine the relationship between the cost of capital and the structure of capital, and the effect of cost to raise finance in terms of making financial decision in the firms. Literature review 2.1 Theory of capital The origins of capital structure theory lie in the models of optimal capital structure that were developed in the wake of the famous Modigliani-Miller irrelevance theorem. These models later became to be known as the static trade-off theory (see e.g. Modigliani and Miller, 1958, 1963; Baxter, 1967; Gordon, 1971; Kraus and Litzenberger, 1973; Scott, 1976; Kim, 1978; Vinso, 1979). In this theory, the combination of leverage related costs (associated with e.g. bankruptcy and agency relations) and a tax advantage of debt produces an optimal capital structure at less than a 100% debt financing, as the tax advantage is traded off against the likelihood of incurring the costs. This theoretical result is now widely accepted in the profession. However, in seeking to model the wide diversity of capital structure practice, a number of additional factors have been proposed in the literature. 2.2 Factors that affect capital structure First, the use of debt finance can reduce agency costs between managers and shareholders by increasing the managers share of equity (Jensen and Meekling, 1976) and by reducing the free cash available for managers personal benefits (Jensen, 1986). Second, Myers and Majluf (1984) argue that, under asymmetric information, equity may be mispriced by the market. If firms finance new projects by issuing more equity, under pricing may cause les profit for existing shareholders in terms of the project NPV. Myers (1984) refers to this as pecking order theory of capital structure. The underinvestment can be reduced by financing the mispriced equity by the market. Internal funds involve no undervaluation and even debt that is not too risky will be preferred to equity. If external finance was required, firms tended first to issue the safest security, debt, and only issued equity as a last resort. Under this model, there is no well-define target mix of debt and equity finance. Each firms observed debt ratio reflects its cumulative requirements for external finance. Generally, profitable firms will borrow less because they can rely on internal resources and retain earnings. The preference for internal equity implies that firms will use less debt than suggested by the trade-off theory. Other factors that have been invoked to help explain the diversity of capital structures include: management behaviour (Williamson, 1988), firm-stakeholder interaction (Grinblatt and Titman, 1998), and corporate control issues (Harris and Raviv, 1988 and 1991). 2.3 How to finance The conventional discussion on a firms choice between long-term and short-term debt has generally focused on three aspects: matching debt maturity with asset life; extending the term-to-maturity of loans to stretch the firms debt capacity; and concentrating long-term debt issues in periods of relatively low interest rates. Recent development in the financial research literature has advanced several economics concepts such as transaction and agency costs, tax-timing option, and information asymmetry, to the debt maturity choice paradigm. Brick and Ravid (1985) show that taxes can also imply an optimal debt maturity structure. Depending on the term-structure of interest rates, long-term (short-term) is optimal, since it accelerates the tax benefit of debt given an increasing (decreasing) term structure. When firms cannot reveal the true quality of their cash flows, i.e. when information asymmetry exists, they can prevent or abate undervaluation by using a variety of signalling devices, such as debt (leverage), dividend payments or the maturity structure of debt. Thus, information asymmetry gives firms an incentive to signal their quality and credibility by taking on more debt and shortening their debt maturity. A higher leverage, especially more short-term debt, signals favourable inside information to the market because it offers the possibility to renegotiate terms in the future, when more information has become available. Long-term debt entails higher information costs than short-term debt, because the market expects a stronger deterioration of quality than insiders do. Firms with a low level of information asymmetry are therefore more likely to issue long-term debt (Flannery, 1986). In the study of international capital structures, Rajan and Zingales (1995) argue that it is important to test the robustness of US finds in different environments. They identify as potentially important the cross-country differences in tax and bankruptcy codes, in the market for corporate control and in the historical role played by banks and security markets. Methodology This survey focuses primarily on the determinants of the capital structure policy of firms but also includes some questions on topics that are closely related to the capital structure. For example, the questions address their approximate cost of equity to the managers, how they estimate their cost of equity (with CAPM or other methods), and whether the impact on the weighted average cost of capital is a consideration in their capital structure choice. The survey was developed after a careful review of the capital structure literature pertaining to the U.S. and European countries. For ease of comparability, the author tried to keep the format and design the survey similar to that of Graham and Harvey (2001), but modified or simplified some questions that are likely to be relevant in the UK context. For example, literature suggests that there are strong differences in corporate objectives between American and UK financial systems since the former system focuses on maximizing shareholder wealth while the later emphasizes the welfare of all stakeholder including employees, creditors and even he government. To examine this difference, the author ask the CFOs about the extent to which different stakeholders influence their firms financial decisions, the author also ask the firms the percentage of their free float share and whether they have preference or common share. 3.1 Sampling The initial samples for mailing the survey consist of a total of 57 firms from UK. The choice of initial sample was based on selecting firms that are representative of the UK firms, are widely traded, are comparable across country, and are public limited with available information. These criteria are important to justify the firms specific difference. From this sample, 9 firms were deleted because of non-availability of addresses and another 17 firms were deleted because they declined to participate in the survey, leaving a final sample of 31 firms. The survey was anonymous as this was an important criterion to obtain honest responses. In the mailing a letter was included that was addressed to the CFO or CEO explaining the objective of the study and promising to send a copy of the findings to those who wished to receive. A total of 12 responses were received by mail, which represents a response rate about 38 percent. 3.3 Summary of findings The respondent firms represent a wide variety of industries with a larger concentration in manufacturing; mining; energy and transportation sector; high technology; and financial sectors. About three forth of firms have a target debt to equity ratios, and about half of these firms maintain a target debt to equity ratios of one. Further, many respondents have a large percentage of their total debt in short term. About 80 percent of respondents report that they calculate their cost of equity, and over 77% of them employ the Capital Asset Pricing Model (CAPM) to calculate this cost. The estimated cost of equity reported by respondents ranges between 9%-15% only few firms report cost of capital greater than 15% The correlations among the demography variables of this survey are largely as predicted in the literature. These correlations will be discussed in detail in the next section. Analysis Three sets of factors in managers opinion that are likely to influence capital structure of firms are selected based on a review of literature. The first set is based on the implications of different capital structure theories such as the trade-off theory, the pecking order theory, and the agency cost theory. Generally the managers will make the financial decisions based on theories and through these decisions to affect their cost of capital. The second set relates to the managers timing of debt or equity issues since literature suggests that managers are concerned about financial flexibility. With evidence support in the findings, most of managers within all industries consider the financial flexibility as the most important issue when raise finance. Finance by short term may give the company advantage in changing their status to meet the changing world environment and provide less risks in investments. Finally, the last set of factors is based on common beliefs among managers about the impact of capital structure changes on financial statements such as the potential impact of equity issue on earnings. This factor shows the important of experience in managers mind and how it will be impact on the decisions. In summary, to analyse a companys capital structure, we assume that the company is only financed by two ways, either by shareholders equity or borrowings. It is just to consider how cost of capital affect the different proportion of debt in capital structure. Figure 8: Two advantages and two disadvantages of borrowing Advantages Disadvantages 1. Cheap direct cost because debt is less risky to the investor 1. Financial leverage causes shareholders to increase their cost of capital 2. Cheap direct cost because interest is a tax deductible expense. 2. Bankruptcy risks if borrowings are too high. The main advantage of borrowing is that the debt has a cheaper direct cost than equity. Debt is less risky to the investor than equity (low risk result a low required return) Interest payments are tax deductable whereas dividends are not. However, borrowing has two distinct disadvantages. Firstly it causes shareholders to suffer increased volatility of earnings. This is known as financial leverage. The increased volatility to shareholders returns resulting from financial leverage causes shareholders to demand a higher rate of return in compensation. The second disadvantage of borrowing is that if the company borrows too much, it increases its bankruptcy risks. At reasonable levels of gearing this affect will be imperceptible, but it becomes significant for highly geared companies and results in a range of risks and costs which have the effect of increasing the companys cost of capital. Limitation and Ethical issue The research focus on the UK market and respondents are from different areas of industry. The limitation has been carried out. First will be the time of the research. As a three months research, the data was not examined as correct enough to support the authors point. The data collection should be carrying continually in a long period of time and often reviewed at some certain time. Second, the way of collecting these data is limited by mailing. The survey may not represent the whole market as the limited number of respondents. A research should conduct all the possible methods including quantitative and qualitative. Finally, as this is not a professional research, lots of objectives in the research declined to give feedback in judging their financial structure in the case some of this could be their classified information. The ethical issue has been raised in this research; this will be honesty in the feedbacks from the respondents. As this survey is anonymous research, the managers may not give the right information in case of rising threats in competition. The importance of financial structure in firms causes the mangers to think before they actually answer the questions. The privacy issue in their mind raised that they may not want to share all the information regarding to the financial statement. Conclusion The purpose of this article is to supplement the existing literature with an analysis of the factors determining the financial structure affecting the cost of capital. The analyses give rise to the following conclusions. The study presents a dynamic model to address the possibility of adjustment costs incurred in reaching an optimal capital structure. And examine the literature in the factors in capital structure in affecting the cost of financing a firm through the facts in reality. The conclusion can be drawn as the cost of capital is a key factor that firms taken into account when raise finance along with the financial flexibility. On the other hand, the capital structure of a firm will affect the firms cost in both short term and long term. The firms raise the finance to meet the required target, there is no such a way to limit firms financial structure. They may want to choose a short term loan to meet flexibility of cash flow, in the contrast; the long term finance may require more information and satisfaction of the firms. The cost of capital depends on how firms finance their capital structure. Reference and bibliography Barclay, M.J. and C.W. Smith (1995), The Priority Structure of Corporate Liabilities, Journal of Finance, Vol. 50, No. 3 (July) Baxter, N. D. (1967) Leverage, the Risk of Ruin and the Cost of Capital, Journal of Finance, 22 Brick, I. and Ravid, A. (1985) On the relevance of debt maturity structure, Journal of Finance, 40 Flannery, M. (1986) Asymmetric information and risky debt maturity choice, Journal of Finance, 41 Gordon, M. (1971) Towards a theory of financial distress, Journal of Finance, 26 Graham, J.R., M.L. Lemmon and J.S. Schallheim (1998), Debt, Leases, Taxes and The Endogeneity of Corporate Tax Status, Journal of Finance, Vol. 53, No. 1 (February) Graham, J.R. and C.R. Harvey (2001), The Theory and Practice of Corporate Finance: Evidence from the Field, Journal of Financial Economics, Vol. 60, Nos. 2/3 (May) Grinblatt, M. and S. Titman (1998), Financial Markets and Corporate Strategy (Irwin/McGraw- Hill, USA) Harris, M. and A. Raviv (1988), Corporate Control Contests and Capital Structure, Journal of Financial Economics, Vol. 20 Harris, M. and A. Raviv (1991), The Theory of Capital Structure, Journal of Finance, Vol. 46, No. 1 (March) Jensen, M.C. (1986), Agency Costs of Free Cash Flow, Corporate Finance and Takeovers, American Economic Review, Vol. 76, No. 2, Jensen, M.C. and W. Meckling (1976), Theory of the Firm: Managerial Behaviour, Agency Costs, and Capital Structure, Journal of Financial Economics, Vol. 3, No. 4 Kim, E. (1978) A mean-variance theory of optimal capital structure and corporate debt capacity, Journal of Finance, 23 Kraus, A. and Litzenberger, R. (1973) State preference model of optimal leverage, Journal of Finance, 28 Mehran, H., R.A. Taggart and D. Yermack (1999), CEO Ownership, Leasing and Debt Financing, Financial Management, Vol. 28, No. 2 Modigliani, F.F. and M.H. Miller (1958), The Cost of Capital, Corporation Finance, and the Theory of Investment, American Economic Review, Vol. 48, No. 3 (June) Myers, S.C. (1977), Determinants of Corporate Borrowing, Journal of Financial Economics, Vol. 5, No. 2 (November) Myers, S.C. (1984), The Capital Structure Puzzle, Journal of Finance, Vol. 39, No. 3 (July) Myers, S. and Majluf, N. (1984) Corporate financing and investment decisions when firms have information that investors do not have, Journal of Financial Economics, 13, Rajan, R.G. and L. Zingales (1995), What Do We Know About Capital Structure Choice? Some Evidence from International Data, Journal of Finance, Vol. 50, No. 5 Scott, J. (1976) A theory of optimal capital structure, Bell Journal of Economics, 7 Vinso, J. (1979) A determination of the risk of ruin, Journal of Financial and Quantitative Analysis, 14 Williamson, O.E. (1988), Corporate Finance and Corporate Governance, Journal of Finance, Vol. 43, No. 3 (July) Advantage and disadvantage of borrowing, available on website www.accaglobal.com, access on 28.04.2010

Leadership :: essays research papers

Webster's Dictionary defines leadership as the position or guidance of a person or thing that leads, directing, commanding, or guiding head, as of a group or activity. However Leadership has not one single definition, but many. Leadership is often an intangible factor that makes one group more effective than another. It exists at different levels within organizations and should be woven throughout the entire organization. Different organizations use different ways in effectively teaching or molding their employees how to be an effective leader. One such company is the R.E. Brown Company and Associates, who have developed a yearlong program that is strictly used as a program to teach their employees how to become a more effective leader. They use what they believe as the Nine Behaviors of leaders. This program doesn't directly start off with the introduction of the nine behaviors, but of little tasks given to the participants. They are broken into small groups where they interact with each other, summarize common threads, and then present their findings to the larger group. Then once this has taken place they develop specific action plans to take back to their groups and from there on they work coherently together as a team. This develops a bond, and creates a model of team leadership, sharing, and reflection. Once this has happened then the teams are introduced to the nine behaviors of leadership where they discuss each one and try to use the information that they have gathered to take back to their own jobs were they can become even more successful then they have ever been before. The Nine Behaviors that develop exception leaders are: 1.  Ã‚  Ã‚  Ã‚  Ã‚  Motivating others through adaptive leadership, who knows when to direct, coach, facilitate, or delegate, depending on the task and person. 2.  Ã‚  Ã‚  Ã‚  Ã‚  Empowering others, which is a sort of delegation that will help you as a leader to control the situation with the help of others. 3.  Ã‚  Ã‚  Ã‚  Ã‚  Encouraging teamwork, which is balancing results, process, and relationships. 4.  Ã‚  Ã‚  Ã‚  Ã‚  Preparing people for change allowing you to understand their psychological responses and helping them to create a positive change with force-field analysis. 5.  Ã‚  Ã‚  Ã‚  Ã‚  Vision/Mission, which establishes guidelines for accomplishing a specific goal. 6.  Ã‚  Ã‚  Ã‚  Ã‚  Using multiple options by allowing you to see different strategic possibilities and being open to more day-to-day options. 7.  Ã‚  Ã‚  Ã‚  Ã‚  Taking intelligent risks, relating decision-making to risks and getting consensus. 8.  Ã‚  Ã‚  Ã‚  Ã‚  Stretching personal creativity that renews personal resources. 9.  Ã‚  Ã‚  Ã‚  Ã‚  Showing passion for work by demonstrating presence, inspiration, and energy.   Ã‚  Ã‚  Ã‚  Ã‚  Each company has their own way of developing programs that center on ones ability to become an effective leader; this was just one aspect that I was able to find.

How does a government budget deficit affect the economy Essay

Identify two periods in recent history in which the United States has run budget deficits. What were the reasons for the deficits during those time periods? A government budget deficit occurs when the governments expenses exceeds its revenues. Because of this spending the government has to find alternatives to finance this added expense through borrowing. A government deficit in the long-run can reduce savings, growth, and income. In the short-run if the economy is performing below its output potential deficits are good because it increases expenditures moving output closer to potential. Two periods in recent history when the U. S. was running on a deficit were 2000-2008 and 2008-present. Within the two time periods the country went to war adding roughly $1. 1 trillion to the national debt we also had a significant tax cut that also added to the debt by $2 trillion. There also was a recession that caused the unemployment rates to go up increasing the government spending to cover unemployment insurance. The financial crisis of 2007-2008 was also played an important part in deficits. During this time there was a threat of collapse of large financial institutions and decline in the stock market Dow Jones lost 33. 8% of its value in 2008. The housing and auto industries suffered many companies that relied heavily on credit also suffered. Banks simply stopped trusting people to pay them back so they stopped making loans that most businesses needed to regulate their cash flows. Unfortunately this recession was not only felt in the U. S. but it also had a damaging affect too many foreign countries.

The Costs of Unemployment - Free Essay Example

Sample details Pages: 3 Words: 817 Downloads: 10 Date added: 2019/05/30 Category Society Essay Level High school Tags: Unemployment Essay Did you like this example? When workers become involuntarily unemployed, there are several costs associated which they will unquestionably have to bear. These could come from the fact that there are certain firm-specific skills that an individual has, thus leading to scarce opportunities for individuals searching for jobs matching their specific skills (Lazear, 2003). Moreover, the costs could be associated with the model proposed by Harris and Holmstrom (1982), in which they stated that the workers have to be assumed to be risk averse and of unknown productivity or capability, meaning, only through experience the employers can really know about an employee’s productivity, and so, in an unemployment context, there is a lack of information regarding this. Don’t waste time! Our writers will create an original "The Costs of Unemployment" essay for you Create order Furthermore, the costs could also come from large expenses in the process of searching for a new job (Mortensen, 1986). Several other labor market frictions can also be associated with the costs borne by the workers. Owing to the high costs of unemployment present when a worker is involuntarily let go, both the worker and the firm will suffer substantial changes in their behavior. Previous literature found that, for the worker to be willing to bear the risks of unemployment, he or she will require an extra compensation which could take the form of higher wages, better working conditions or several extra benefits. This extra compensation is generally specified as compensating wage differential. Firms must, therefore, compensate the workers ex ante to bear the nontrivial costs of unemployment. More precisely, Abowd and Ashenfelter (1981) presented a model in which they proved that there is a competitive equilibrium wage rate which will vary according to the unemployment risk, concluding that the compensating wage differential varies across industries and is larger the higher the risk. Similarly, Topel (1984) found strong evidence that unemployment insurance (UI) benefits have a significant impact o n both wage differences and unemployment. More authors, such as Hamermesh and Wolfe (1990), while approaching it differently, have focused on this same idea that the workers must gain a premium to bear the risk of unemployment. The two authors also found strong evidence that a large percentage of differences in wage differentials (from 14% to 41%) can be attributed to the divergences existing in unemployment risk between industries. Several authors have studied this subject looking at it in different ways, although all of them have reached similar conclusions. The size of the premium mentioned above will be higher, the higher the risk. One can say that an increase in risk can be associated not only with a higher probability of unemployment in a given firm, but also, with an increase in the costs incurred by workers during an unemployment spell, as well as the higher the worker’s degree of risk aversion. A crucial matter for this paper is whether or not these compensating wage differentials, associated to the unemployment risk, affect the firm’s financing decisions. Though, one could look at this in another perspective, i.e., what if an increase in the leverage of the firm has an impact in the unemployment risk? An increase in the financial leverage of a company will have an impact on the company’s probability of entering into financial distress. As previously studied by several authors, Ofek (1993) found that a firm’s response to financial distress has several dimensions, one of which being employee layoffs. Since a company in financial distress usually has to lay off workers so as to be able to meet its debt obligations, this will lead to an increase in the workers’ exposure to lay off risk. Given this, it is reasonable to assume that if a firm raises its levels of leverage, the costs associated with the compensating wage differentials will also increase , owing to the increase in the risk the workers will have to bear. Despite this conclusion, this paper goes the other direction. The aim is therefore to understand what is the impact, if any, the unemployment risk has on the firm’s financing decisions. The trade-off theory, which is the traditional theory of capital structure and the one in which this paper will be focused on, stresses the existence of an optimal level of equity capital and debt. This ideal level between equity and debt can only be achieved by a balance between tax benefits and the costs of financial distress (Kraus and Litzenberger, 1973). In accordance with Myers (1984), a firm following this strategy will have to set an ideal debt-to-value ratio and then continuously move towards the goal. As stated in this theory, the total value of a levered firm will be equal to the total value of an unlevered firm plus the present value of the tax shields the firm will get from debt, less the present value of the costs of financial distress. In other words, the net present value of a debt issue will equal the net present value of the tax shields plus the net present value of the costs of financial distress.

Persuasive Essay On Underage Drinking - 739 Words

In the United States today many teens have the problem of underage drinking. Whether they do it to look cool or to have fun, it is an enormous problem. In fact, one our four teens state that the would ride with a driver that is intoxicated (â€Å"Underage Drinking†). This shows that teenagers and not only irresponsible with alcohol, but also uniformed of the serious consequences. Although the rates of underage drinking have dropped within time, there are still ways to lower these rates more (Klass). With much research and problem solving, I have come up with three different ways to lessen the issue of underage drinking. The three options I focused my research on was changing the way colleges teach, lowering the drinking age, and informing†¦show more content†¦Along with that, sports coaches could have their teams stay late on Friday nights for a team bonding experience or a late night practice to keep the athletes from going to parties (Fennell). These processes are w ays to keep the average college student too busy to deal with underage drinking. Out of these few systems, I believe changing the way professors post their information online would create a small change in the amount of partying that college students participate in. Last but not least, there could be many things adults can do to prevent underage kids from binge drinking or drinking in general. If teenagers receive strong messages from their parents that underage drinking is dangerous, then they may think more about the decisions that they make. The more parents allow their children to drink and throw parties at home, the more likely they will also go out of the house and drink as well. If teenagers are well educated on the side effects of underage drinking the percent of underage drinking will decline. In May of this year, a study showed that 1 in 6 highschool students reported that they were binge drinking. That is a crazy amount, and with that number, we can tell that teenages are not well educated on the aftermath that can come with underage drinking (â€Å"Underage Drinking†). It would be helpful if parents simply informed the teenagers that if they choose to drink it should not be done excessively.Show MoreRelatedPersuasive Essay On Underage Drinking1515 Words   |  7 Pagesor the ones around them. The topic of lowering the drinking age has been in discussion for many decades. â€Å"Between 1970 and 1976, 29 states lowered their age for drinking alcohol. The results were catastrophic. Highway deaths among teenagers and young adults skyrocketed. Almost immediately, states began raising the minimum drinking age again.† â€Å"In 1984, Congress passed the Uniform Drinking Age Act, which required states to have a minimum drinking age of 21 for all types of alcohol consumption if theyRead MorePersuasive Essay On Underage Drinking1075 Words   |  5 Pagesthe prohibition of alcohol. â€Å"The legal drinking age in the United States is 21. Howe ver, this was not the case until 1984, when the National Minimum Drinking Age Act required the 50 states to raise their drinking age to 21 or lose 10 percent of their federal highway money. While this was expected to prevent the dangerous behavior, it actually has made young Americans more likely to binge-drink† (Warvin and Hall 1). Thus, causing a problem with underage drinking. Banning the sale of alcohol to anyoneRead MorePersuasive Essay On Underage Drinking1291 Words   |  6 PagesUnderage drinking is one of the largest problems that we have in the United States. This is a problem because alcohol is an item that nobody under twenty-one years of age is allowed to purchase or consume. People who are underage are punished by law when they consume or attempt to purchase alcohol illegally. This makes people under twenty-one want alcohol even more. In other countries where the drinking age is lower, there are less problems because it gives parents the push to teach their chil drenRead MorePersuasive Essay On Underage Drinking1580 Words   |  7 Pages Underage drinking has been a huge problem in the United States of America. Underage drinking need to be regulated more closely so it can be stopped. Unfortunately, minors tend to see drinking as an adult thing which makes it fall into the category of being â€Å"cool†. More teenagers are giving into peer pressure and are getting involved in the consumption of alcohol. A study done in 2003 by the U.S Department of Health and Human Resources shows that most teenagers start drinking at the age of fourteenRead MoreDrinking and Driving Persuasive Essay858 Words   |  4 PagesDrinking and Driving Persuasive Essay Comm215 July 12, 2010 Drinking and Driving Each year numerous lives are lost due to careless and irrational driving. The disregard for safe driving has been a predicament to the United States of America for years. Many years Police have relied heavily on speed cameras, breathalyzer tests and heavy fines as a deterrent against unlawful drivers. Over the years fatality rates have increased, so the Department of Transportation and Highway Safety hasRead More Controversial Television Advertising Essay1498 Words   |  6 PagesControversial Television Advertising We all know from our personal experience that one person’s idea of something offensive often differs from another’s. This essay is to determine the consequences towards negative advertising towards certain controversial products/services and why they are so offensive. All major media organizations need advertising to exist, thats how they pay their bills. At the same time, though, each organization sets its own advertising standards. Some ads a media companyRead MoreThe Legal Drinking Age Of The United States1783 Words   |  8 PagesPersuasive-Research Essay The legal drinking age in the United States is 21, while in other countries the legal age ranges from 16-18. The argument in the United States is â€Å"Should the United States lower its drinking age?† There are many sides to this argument but research has given many good points to back up both sides of the question. First thing is the difference between a teen’s brain with alcohol and an adult’s brain with alcohol. Another thing is drinking at a younger age can help teach cultureRead MoreInfluences of Advertising to Consumer Attitude Towards Buying a Product4796 Words   |  20 PagesBenefits to Consumers 1. Connect easily to the Company 2. Consumers can see the product form their houses than going to the store. V. Possible effects of Advertising A. To Children B. To teens C. To adult IV. Advertising and behavior A. Children underage of 4 maybe unable to distinguish advertising. B. Advertising increase consumption C. Public perception of the medium Conclusion: TV advertisements are likely to be more influential to the public and greatly influence company’s lifeline to succeedRead MoreStephen P. Robbins Timothy A. Judge (2011) Organizational Behaviour 15th Edition New Jersey: Prentice Hall393164 Words   |  1573 PagesCommunication 341 †¢ Nonverbal Communication 341 Organizational Communication 342 Formal Small-Group Networks 343 †¢ The Grapevine 343 †¢ Electronic Communications 345 †¢ Managing Information 349 Choice of Communication Channel 350 xiv CONTENTS Persuasive Communications 351 Automatic and Controlled Processing 351 †¢ Interest Level 352 †¢ Prior Knowledge 352 †¢ Personality 352 †¢ Message Characteristics 352 Barriers to Effective Communication 353 Filtering 353 †¢ Selective Perception 353 †¢ Information

Biography of John Adams Essay - 783 Words

John Adams was born October 30, 1735 in Braintree Massachusetts to his father John Adams and mother Susanna Boylston Adams. His father was a deacon, lieutenant in the militia, and farmer. John looked up to his father, more than anyone. Recounting later in his life that if he could go back in time he would become a farmer like his father. John was the eldest to two younger brothers Peter and Elihu. He was also the second cousin to Samuel Adams who will later convince him to join the revolution, and third cousin to his future wife Abigail Smith. Growing up on a farm the young John Adams was opened to the world around him. Having a natural love for the outdoors he occasionally skipped class, though he was intelligent he hated school.†¦show more content†¦The soldiers fired on the crowd killing five and injuring many more. The soldiers were arrested on criminal charges and would be given a fair trial while Samuel Adams and his Sons of Liberty group protest that these soldiers be hung for their killing of innocent protesters and the withdraw of British soldiers from Boston. Captain Preston and his men seek the aid of a lawyer who will try their case. Every lawyer, not wanting their reputations to be diminished, because they would be siding with the British soldiers, they enlist the help of John Adams. Who is a stout supporter for the law, justice, and innocence, he accepts the case; even though he and his family may become endangered. The trial began on October 24, 1770. Going into the trial Adams realized that it would be an uphill battle, faced with a Bostonian jury and the threats and badgering against anyone who would be a witness. Adams has to convince the jury that Captain Preston did not order his men to fire, and were attacked by the crowd, while also proving that the crowd was a mob rather than a lawful assembly. From an eye witness that was standing next to the Captain proclaims that he did not tell his soldiers to fire. More witness confirm that the crowd was carrying clubs and sticks, while throwing oyster shells, snowballs, and rocks at the soldiers. The most alarming find was that some witnesses confess that the crowd was daring the soldiers to fire. ThroughShow MoreRelatedBiography of John Quincy Adams709 Words   |  3 Pages Did you know that John Quincy Adams is the most fit president because he walked three miles every day ? These facts are really interesting! To learn about John Quincy Adams. During his childhood these are some important events that happened. A little boy was born on July 11, 1767 in Braintree, Massachusetts. This little boy’s name is John Quincy Adams. When John was 10, he went with his father to France on a mission and acted as his father’s secretary. Also, from a hilltop near the family farmRead MoreEssay on John Adams: A Brief Biography780 Words   |  4 PagesJohn Adams was born on October 30th 1735, in Braintree, Massachusetts on his family farm. His father Deacon John Adams was a deacon of the church and also at times the town’s tax collector, constable, and lieutenant of the militia. Senior John Adams passed away in 1761 from the flu epidemic. Johns mother Susanna Boylston Adams was known to have a fiery temper. She remarried to Lt. John Hall, in 1766. John Adams did not seem to get along with his new stepfather. As a child John’s father taughtRead Moreâ€Å"Abigail Adams† by Janet Whitney1093 Words   |à ‚  5 Pagesthis world. One of these women is Abigail Adams, the only woman so far to be both wife and mother of a president. Sadly, however, â€Å"Abigail Adams† by Janet Whitney is far from being a biography of her life. Janet Whitney arranges her material in chronological presentation. She starts from how Abigail Adams and John Adams fell in love and got married. She continues on with the biography describing how John Adams came to presidency as Abigail Adams gave birth to his kids one by one. TheRead MoreAbigail Adams And The Revolutionary Time Period1585 Words   |  7 Pagesshould have learned women.† – Abigail Adams (Brainy Quote). In the 1700’s, most women were uneducated and thought little about education and knowledge of the intricate workings of government and society. However, one woman saw the value of education and free thinking way before most of her contemporaries. In Abigail Adams, a biography by Charles W. Akers, a unique perspective of the revolutionary time period is displayed through the eyes of Abigail Adams by contrasting the way women were treatedRead MoreThe Role Of The First Lady From Nothing Essay1617 Words   |  7 PagesArielle Cohen Mr. Clark US History I 28 September 2015 Martha Washington, Abigail Adams, and Dolley Madison invented and created the role of the first lady from nothing. They were able to put content into a role that did not even exist beforehand. when there was no one that came before to teach them. Known as the first three first ladies, Martha Washington, Abigail Adams, and Dolley Madison defined the role of the first lady to society before anyone else had the chance to. By handled hostess dutiesRead MoreThe Legacy Of John Adams Essay813 Words   |  4 PagesThe Legacy of John Adams In the early history of the United States, many founding fathers and people before them helped shape the underpinning for our nation’s liberty. Of the founding fathers and persons who were essential in the naissance of the great nation known today as the United States of America, John Adams is undoubtedly one of the most vital of them all. John Adams by David McCullough did not only do Adams’ life story justice, it also painted the man and his works so vividly in everyRead MoreThe Invisible Hand By Adam Smith923 Words   |  4 Pagesperson. Obvious that is Adam Smith. Even though, after ten years or thousand years the economists will recall Adam Smith. Moreover, if you visit United Kingdom you can recognize Adam Smith face in the 50 and 20 pounds. ‘Man is an animal that makes bargains†- Adam Smith (Brainy Quote, (n.d)). That is underling the people’s instinct when they make a deal. â€Å"A person, who received his education through hard work, is lik e an expensive Car’- Adam Smith (Brainy Quote, (n.d)). Adam Smith encouraged peopleRead MoreSummary Of Abigail And John Adams Debate Womens Rights992 Words   |  4 PagesPrimary Source Analysis #2 â€Å"Abigail and John Adams Debate Women’s Rights,† is of two letters first from Abigail and the second was John Adams with his response to Abigail. The 1774 letters showed how Abigail was advocating for women’s rights as John Adams defines the authority males really have in society. Abigail Adams was the wife of John Adams and was vital for his successes. Before she became his wife she was part of a â€Å"picture perfect nuclear family† (Biography), with her father being a minister;Read MoreAbigail Adams : American History1560 Words   |  7 PagesAbigail Adams Throughout the early times of this country, the idea of women having rights was far from necessary, but there were a few women out there, such as Abigail Adams who held high hopes that one day this nation that the founding fathers were building up, would allow for women to be treated equally as men. Although Abigail Adams was filled with these hopes, she always found ways to be involved in political issues, not only because she was John Adams wife, but she also aspired that one dayRead MoreAnnotated Bibliography : The Biography.com Website 1155 Words   |  5 PagesAnnotated Bibliography Biography.com Editors. Abigail Adams Biography. The Biography.com Website. AE Networks Television, n.d. Web. 16 Nov. 2015. This source has credible authors. The fact that it has more than one authors makes it much more credible, considering that there is more credible information. This article has 5 main head titles. They go in this order; synopsis, early life, marriage to John Adams, political involvement and later life. They all give very important information and the

Attribution theory Essay Example For Students

Attribution theory Essay ATTRIBUTION THEORY OF FRITZ HEIDERIntroductionThis article starts off by a man having his wife serve on a jury in a federal case involving conspiracy, racketeering, drug dealing, armed robbery, and extortion. There were seven defendants and one that escaped from police custody. The key government witness was an ex-gang member named Larry who was called the Canary by the defendants because he turned informer. For two months Jean, the wife, listened to Larrys testimony and tried to figure out whether his account of the incident was credible or not. A question in her mind was that whether his behavior on the stand was that of pathological liar, a rejected pal seeking revenge, a petty crook who would say anything to save his own skin, or and honest witness dedicated to the truth? All this falls into Fritz Heiders attribution theory saying that we all tend to rationalize in the same way. Fritz said that the theory of attribution is the process of drawing inferences. This would be seeing a person act and immediately reaching a conclusion that goes beyond mere sensory information. Example: Larry yawns while on the stand. Your immediate conclusive reaction would be is he bored, afraid, tired, or indifferent. In the article it says that Heider would see us as nave psychologist bringing common sense to bear on an interpersonal judgment. It also says that we cant help it to make these judgments. This is because we make personality judgments in order to explain otherwise confusing behavior. Heider says that theres another reason for making causal inferences from behavior. The reason is because we want to know what to expect in the future. He says prediction is a survival skill. Example: Jean comes face-to-face with one of the defendants, in her jury trail, outside a train station. Mildly anxious, she quickly turned aside. Accurate attributions can help us know which people might do us harm. The article also talks about attribution as being a three-step process through which we perceive others as causal agents. The three-step process talked about includes perception of the action (You saw it), judgment of intention (You/they meant to do that), and attribution of disposition (What you think of the action). AnalysisTo begin, in the case with Jean trying to figure out whether Larrys story was credible and how to categorize his behavior. In my opinion I would think him turning informer would have been for some type of personal gain whether it be maybe he was in to deep with the gang, he could have been charged with a crime and investigators could have promised him a minor sentencing of some sort, clearing his name as an ex-gang member, or just making him feel good that he did he something to put the criminals away (Which I think would be less likely to be. More like thanking that those ex-gang members of his are out of his face). The article was interesting but left me with some questions. It was very truth unfolding about things that I never really thought about like when it talked about the common biases in judging intention. All those five examples to me were very true. What was also an eye opening topic was that about the freedom of choice where that we assume that people are responsible for the things that happen to them. This had a lot of truth to it but it jeopardized the thought that some things happen for a certain reason and not that we looked for it to happen. Im very religious and that brought some controversy with the way I thought about things. .u79829c06ce45484f3275ca756f80cc6c , .u79829c06ce45484f3275ca756f80cc6c .postImageUrl , .u79829c06ce45484f3275ca756f80cc6c .centered-text-area { min-height: 80px; position: relative; } .u79829c06ce45484f3275ca756f80cc6c , .u79829c06ce45484f3275ca756f80cc6c:hover , .u79829c06ce45484f3275ca756f80cc6c:visited , .u79829c06ce45484f3275ca756f80cc6c:active { border:0!important; } .u79829c06ce45484f3275ca756f80cc6c .clearfix:after { content: ""; display: table; clear: both; } .u79829c06ce45484f3275ca756f80cc6c { display: block; transition: background-color 250ms; webkit-transition: background-color 250ms; width: 100%; opacity: 1; transition: opacity 250ms; webkit-transition: opacity 250ms; background-color: #95A5A6; } .u79829c06ce45484f3275ca756f80cc6c:active , .u79829c06ce45484f3275ca756f80cc6c:hover { opacity: 1; transition: opacity 250ms; webkit-transition: opacity 250ms; background-color: #2C3E50; } .u79829c06ce45484f3275ca756f80cc6c .centered-text-area { width: 100%; position: relative ; } .u79829c06ce45484f3275ca756f80cc6c .ctaText { border-bottom: 0 solid #fff; color: #2980B9; font-size: 16px; font-weight: bold; margin: 0; padding: 0; text-decoration: underline; } .u79829c06ce45484f3275ca756f80cc6c .postTitle { color: #FFFFFF; font-size: 16px; font-weight: 600; margin: 0; padding: 0; width: 100%; } .u79829c06ce45484f3275ca756f80cc6c .ctaButton { background-color: #7F8C8D!important; color: #2980B9; border: none; border-radius: 3px; box-shadow: none; font-size: 14px; font-weight: bold; line-height: 26px; moz-border-radius: 3px; text-align: center; text-decoration: none; text-shadow: none; width: 80px; min-height: 80px; background: url(https://artscolumbia.org/wp-content/plugins/intelly-related-posts/assets/images/simple-arrow.png)no-repeat; position: absolute; right: 0; top: 0; } .u79829c06ce45484f3275ca756f80cc6c:hover .ctaButton { background-color: #34495E!important; } .u79829c06ce45484f3275ca756f80cc6c .centered-text { display: table; height: 80px; padding-left : 18px; top: 0; } .u79829c06ce45484f3275ca756f80cc6c .u79829c06ce45484f3275ca756f80cc6c-content { display: table-cell; margin: 0; padding: 0; padding-right: 108px; position: relative; vertical-align: middle; width: 100%; } .u79829c06ce45484f3275ca756f80cc6c:after { content: ""; display: block; clear: both; } READ: Deforestation In Brazil EssayWhat grabbed my attention a lot were the two topics of self-perception and critique. In my opinion I think people interpret behavior they see by relating it to behavior of their own and what they would do in a circumstance involving the same environment. The wrong thing about that would be that not everybody thinks alike or acts the same if introduced to the same circumstances. An example of that would be saying that everybody acts stupid when they are drunk. Put twenty people in one room get them drunk and see if they all carry out in the same manner. One thing that I didnt comprehend was in issue of self-perception where it talked about that conventional wisdom suggests that behavior follows attitude and that it is the other way around that actions precede attitude. The example show is: I like tennis because I play it and not I play tennis because I like it. I just really didnt understand that. ConclusionI viewed the article as being truth unfolding but with many controversial issues to it. Some of which I didnt understand. All in all the article served as a good stepping stone in how not to jump to quick judgments or conclusions. Look for adequate evidence or information to seek the right conclusive judgment. ReferenceGriffin, Em, McGraw Hill Inc. (1994) A First Look at Communication Theory