The Covid-19 crisis added great uncertainty to the world economy which had a negative effect on private investment. Some corporations reacted to this crisis by borrowing massively which increased their debt-to-equity ratio and the risk of bankruptcy. Under these conditions, some corporations changed their dividend policy and announced that they would not pay dividends in the coming years, whereas other corporations did not change their dividend policy and borrowed money to pay the dividend that had been promised.

a. Which of the above dividend policies is the best? Justify your answer. (7 marks)

b. In February 2022, the war between Ukraine and Russia began and business uncertainty increased considerably all over the world. Conventional wisdom says higher business delays corporations investment decisions. Relying on the real option theory, explain why there is a negative relationship between business uncertainty and the timing of investment decisions. (7 marks)

c. Developed countries are perceived by investors as locations where corporate governance quality is higher, and there is empirical evidence suggesting that, ceteris paribus, corporations with good corporate governance are more valuable than corporations without a good corporate governance. Discuss the possible reasons behind the above empirical finding. (10 marks)

d. As the business of a private firm grows continuously over time, there is a moment when, eventually, it might be optimal for the owner(s)-entrepreneur(s) to make the firm public. However, there is empirical evidence (see, e.g., Azevedo et al., 2022) showing that, in the last decades in the US, the number of IPOs (listings) is lower than the number of delistings.

i) State both the advantages and the disadvantages of being a public firm.

ii) Describe the main reasons underlying the delisting decision and explain why in the US in the last decades there have been more delistings than listings. In addition, discuss why there might be different delisting motives across countries.