## Capital structure substitution theory

The CSS theory hypothesizes that managements of public companies manipulate capital structure such that earnings per share (EPS) are maximized. Managements have an incentive to do so because shareholders and analysts value EPS growth.

.. The capital structure substitution theory has the potential to close these gaps. It predicts a negative relation between leverage and valuation (=reverse of earnings yield) which in turn can be linked to profitability. But it also predicts that high valued small growth firms will avoid the use of debt as especially for these companies the cost of borrowing ({\displaystyle R_{\text{x,t}}}) is higher than for large companies, which in turn has a negative effect on their EPS. This is consistent with the finding that “…firms with higher current stock prices (relative to their past stock prices, book values or earnings) are more likely to issue equity rather than debt and repurchase debt rather than equity”.[4]

.. In times when the market is under-priced, corporate buyback programs will allow companies to drive up earnings-per-share, and generate extra demand in the stock market. In times when the index was under-priced relative to the model equilibrium, repurchase programs will be stopped and demand is reduced.

## Coronavirus May Kill Our Fracking Fever Dream

### America’s energy independence was an illusion created by cheap debt. All that’s left to tally is the damage.

Ever since the oil shocks of the 1970s, the idea of energy independence, which in its grandest incarnation meant freedom from the world’s oil-rich trouble spots, has been a dream for Democrats and Republicans alike. It once seemed utterly unattainable — until the advent of fracking, which unleashed a torrent of oil. By early 2019, America was the world’s largest producer of crude oil, surpassing both Saudi Arabia and Russia. And President Trump reveled in the rhetoric: We hadn’t merely achieved independence, his administration said, but rather energy dominance.”

Then came Covid-19, and, on March 8, the sudden and vicious end to the truce between Saudi Arabia and Russia, under which both countries limited production to prop up prices. On March 9, the price of oil plunged by almost a third, its steepest one-day drop in almost 30 years.

As a result, the stocks that make up the S.&P. 500 energy sector fell 20 percent, marking the sector’s largest drop on record. There were rumblings that shale companies would seek a federal lifeline. Whiting Petroleum, whose stock once traded for $150 a share, filed for bankruptcy. Tens of thousands of Texans are being laid off in the Permian Basin and other parts of the state, and the whole industry is bracing for worse. On the surface, it appears that two unforeseeable and random shocks are threatening our dream. In reality, the dream was always an illusion, and its collapse was already underway. That’s because oil fracking has never been financially viable. America’s energy independence was built on an industry that is the very definition of dependent — dependent on investors to keeping pouring billions upon billions in capital into money-losing companies to fund their drilling. Investors were willing to do this only as long as oil prices, which are not under America’s control, were high — and when they believed that one day, profits would materialize. Even before the coronavirus crisis, the spigot was drying up. Now, it has been shut off. The industry’s lack of profits wasn’t exactly a secret. In early 2015, the hedge fund manager David Einhorn announced at an investment conference that he had looked at the financial statements of 16 publicly traded shale producers and found that from 2006 to 2014, they spent$80 billion more than they received from selling oil. The basic reason is that the amount of oil coming out of a fracked well declines steeply after the first yearmore than 50 percent in year two. To keep growing, companies have to keep plowing billions back into the ground.

The industry’s boosters argue that technological gains, such as drilling ever bigger wells, and clustering wells more tightly together to reduce the cost of moving equipment, eventually would lead to a gusher of profits. Fracking, they said, was just manufacturing, in which process and human intelligence could reduce costs and conquer geology.

Actually, no. The key issue is the “parent child problem. When wells are clustered tightly together, with so-called child wells drilled around the parent, the wells interfere with one another, resulting in less oil, not more. (This may not surprise anyone who is attempting to be productive while working in close quarters with their children.)

The promised profits haven’t materialized. In the first half of 2019, when oil was around $55 a barrel, only a few top-tier companies were profitable. “By now, it should be abundantly clear that the current shale oil business model does not work — even for the very best companies in the industry,” the investment firm SailingStone Capital Partners explained in a recent note. Policymakers who wanted to tout energy independence disregarded all this, even as investors were starting to lose patience. As early as 2018, some investors had begun to tell companies that they wanted to see free cash flow, and that they were tired of compensation models that rewarded executives with rich paydays for increasing production, but failed to take profits into account. As a result, fracking stocks badly underperformed the market. But with super-low interest rates, investors in search of yield were still willing to buy debt. Over the past 10 years, the entire energy industry has issued over$400 billion in high-yield debt. “They subprimed the American energy ecosystem,” says a longtime energy market observer.

Even as the public equity and debt markets grew cautious, drilling continued. That’s because one big source of funding didn’t dry up: private equity. And why not? Private equity financiers typically get a 2 percent management fee on funds they can raise, so they are incentivized to take all the money that pension funds, desperate for returns to shore up their promises to retirees, have been willing to give them.

In the Haynesville and the Utica Shales, two major natural gas plays, over half of the drilling is being done by private equity-backed companies; in the oil-rich Permian Basin, it’s about a quarter of the drilling. From 2015 through 2019, private equity firms raised almost $80 billion in funds focused mostly on shale production, according to Barclays. Until the capital markets began to get suspicious, private equity investors could flip companies they had funded to larger, public companies, making a profitable exit regardless of whether or not the underlying business was making money. That, too, is ending, as investors in such funds have become disillusioned. You can see how all of this is playing out by looking at Occidental Petroleum. In 2019, Oxy, as it’s known, topped a competing bid from Chevron and paid$38 billion to take over Anadarko Petroleum, which is one of the major shale companies. Since that time, Oxy’s stock has plummeted almost 80 percent in part due to fears that the Anadarko acquisition is going to prove so wildly unprofitable that it sinks the company.

On March 10, the company announced that it would slash its dividend for the first time since the early 1990s, when Saddam Hussein’s invasion of Kuwait sent oil prices plummeting.

Occidental is just one piece of the puzzle. In April, the Energy Information Administration cut its forecast for U.S. oil production, estimating that it will fall both this year and next — suggesting that the days of huge growth in production from shale are over.

On March 10, Scott Sheffield, the chief executive of Pioneer Natural Resources, a major driller in the Permian Basin, told Bloomberg that U.S. oil output could fall by more than two million barrels per day by next year if prices remain where they are today.

“This is late ’80s bad,” a close observer of the industry says.

After the United States engaged in a high-stakes negotiation with Russia and Saudi Arabia to curtail production, a tentative deal was struck on Thursday. Certainly, President Trump, who has staked so much on the American shale industry, wants to save it. “We really need Trump to do something or he’s going to lose all the energy states in this election,” Mr. Sheffield told CNBC in late March.

A deal, and higher oil prices, might help the industry. But they won’t fix its fundamental problem with profitability. Energy independence was a fever dream, fed by cheap debt and frothy capital markets.

All that’s left to tally is the environmental and financial damage. In the five years ending in April, there were 215 bankruptcies for oil and gas companies, involving $130 billion in debt, according to the law firm Haynes and Boone. Moody’s, the rating agency, said that in the third quarter of 2019, 91 percent of defaulted U.S. corporate debt was due to oil and gas companies. And North American oil and gas drillers have almost$100 billion of debt that is set to mature in the next four years.

It’s still unclear where most of this debt is held. Some of it has been packaged into so-called collateralized loan obligations, pieces of which are held by hedge funds. Some of it may be on bank balance sheets. Investors in the equity of these companies have already seen the value of their holdings decimated. Pension funds that have poured money into private equity firms may take a hit soon, too. All we know for sure is that fracking company executives and private equity financiers have made a fortune by touting the myth of energy independence — and they won’t be the ones who have to pick up the pieces.

## There is No Accountability on Social Media for Posting and Retweeting Bad Information

10:10
something that’s not about politics last
10:13
night was just so had it I can’t take it
10:18
I don’t want it I have read that expense
10:20
office all of them and the short stories
10:22
I can’t take it don’t want it but it’s
10:24
not like that was the first time do you
10:25
guys remember 2018 do you remember
10:26
Kansas the night of that primary it was
10:29
ridiculous or in 2016 California like
10:32
how long it took for the results like oh
10:35
it’s just where’s the way you and and
10:38
one of the things that made it even
10:39
worse was like I was tweeting about how
10:42
frustrated I was that people were just
10:43
sharing like like whatever they they
10:46
heard they don’t check it they don’t
10:47
Google it they just share it something
10:49
pops into their head it sounds good like
10:52
you have an inclination you want to
10:53
believe that something is true and so
10:55
people are gonna like and they’re gonna
10:56
retweet what says that they’re there
10:58
right like there was so much
11:00
misinformation and just people not
11:02
caring enough about the material to
11:04
like like all the
11:06
11:07
like obviously there’s problems with the
11:08
app but like the people who were like
11:10
100% Budaj edge made the app
I got it
11:13
and and look we have the disclosures
11:16
that were coming out and and responsible
11:18
11:19
disclosures that they had paid that app
11:22
company okay now before you then take
11:26
that and say and thus he made the app
11:29
and presumably put in some sort of
11:31
backdoor where he could steal the
11:33
election
do just a little bit of
11:35
googling like that company makes other
11:37
apps political canvassing apps things
11:39
for volunteers things that campaigns
11:41
would use and so the fact that he paid
11:44
money to that company does not mean that
11:46
he invested in the construction of that
11:48
app
he could be buying one of the
11:50
political apps that they already have
11:52
and in fact it turns out that over the
11:54
past year I believe Klobuchar Biden and
11:56
Gillibrand all of them gave money to
11:59
this company presumably for one of the
12:01
political canvassing apps
that they have
12:03
sold for some time you know how I found
12:05
out that stuff by googling for like 90
12:08
seconds it was super simple but I
12:10
noticed that when I started tweeting out
12:12
those I guess inconvenient truths nobody
12:16
cared like the people who were like no
12:18
no no Buddha judge definitely made the
12:21
app he stole this thing a hundred times
12:24
as many of retweets a hundred times as
12:25
many likes
someone who’s like hey guys
12:27
you know pump the brakes first of all it
12:30
looks like Bernie’s Bernie’s still gonna
12:31
win second of all it looks like this
12:32
company actually has other apps nobody
12:35
12:37
interested in that is really depressing
12:39
you know because media is a big thing
12:42
it’s not one thing it’s a lot of
12:44
different voices in a lot of different
12:46
forms but the fact that the people who
12:48
are trying to be accurate and reasonable
12:50
are always going to have to compete with
12:52
people who are just their thing is I’m
12:55
going to see what people want to hear
12:57
what they desperately want to believe is
12:58
true
and I’m just gonna tell admit I’m
13:00
just gonna say that it’s true and nobody
13:02
ever tweets you know um you know I just
13:05
I want to apologize because I retweeted
13:08
something last night you know sort of in
13:10
the fervor of what was going on it turns
13:11
out that it was untrue I apologize if I
13:14
helped to misinform anyone
in the future
13:17
I’m going to be
13:19
but more careful
13:20
things and in particular I will not be
13:23
spreading the the people who were
13:26
spreading this misinformation I will be
13:27
more critical of them in particular
13:29
literally no one has ever said that you
13:31
spread things that are false nobody
13:33
cares nobody remembers even theirs the
13:36
incentives are all wrong on social media

13:39
and that is on top of all of the other
13:41
problems of last night that is so
13:43
incredibly frustrating I’m not having a
13:48
stroke down that’ll come later based on
13:51
diet have you seen the Saga comics I
13:54
have not just be reasonable like it’s
14:00
why I’m never gonna be a success
14:01
honestly there’s no there’s no reason
14:03
why would you why would you be
14:04
reasonable yeah nobody at nobody admits
14:06
that they’re wrong that’s where I don’t
14:08
know if you were watching the coverage
14:09
last night but I wanted to add on to
14:11
they were there every conversation they
14:13
were saying no one on TV in political
14:16
media ever pays any sort of price for
14:19
14:21
say you’re right but it ain’t just TV

14:24
nobody in any form of media ever pays
14:26
any sort of price for being wrong not if
14:28
they were wrong in a way that reassured
14:30
their followers their audience that
14:33
things were gonna be okay who who ever
14:36
gets mad at a person for a horrible
14:39
prediction a prediction that when it was
14:40
made was obviously not true nobody cares
14:42
about that they want I want you to be
14:45
wrong in a way that makes me feel warm
14:47
and cozy I want you to tell me the sort
14:49
of things that are a verbal light
14:51
stroking of my head to make me feel a
14:53
little bit better that’s that’s all
14:54
really anyway the reason I talk about
14:58
this now is we were on night one we have
15:01
got a bunch of these nights to go and
15:03
unfortunately I don’t I don’t think that
15:05
any are gonna be as bad as Iowa but
15:07
there’s gonna be a lot of bad nights and
15:08
that’s really unfortunate okay everybody
15:12
I would love to talk longer but we do
15:14
have a show coming up and on it I’m
15:16
gonna be joined by Jordan you’ll as I am
15:18
every other Tuesday you know me also
15:20
were to talk about last night but also
15:21
author podcaster and founder of Vox Ezra
15:25
Klein is also going to be in studio to
15:26
15:29
which seems especially relevant this
15:33
both of last night and with the State of
15:35
the Union so should be an awesome
15:37
conversation there we’ve got so much
15:39
15:41
and I read the first one I wasn’t a huge
15:43
fan maybe I need to read more of them
15:45
but anyway thank you as always for
15:47
joining me this a little live live video
15:48
in ten minutes the full show starts so
15:51
definitely tune in there I’ll see you on
15:53
the other side

## The Secret Sauce Behind Pop-Music Hits

### In their new book, ‘Switched on Pop,’ two podcast hosts discuss why songs by Rihanna, Drake and others break out

Why did Rihanna and Calvin Harris’s “We Found Love” top the charts for 10 weeks? Partly because of the song’s unconventional structure, say podcasters Nate Sloan and Charlie Harding. The two examine “We Found Love”—and more than a dozen other 21st-century hits—in their book, “Switched on Pop,” which comes out Friday.

The volume borrows its title from the podcast the two 33-year-old friends began five years ago about the subtle techniques shaping today’s Top 40 hits. Mr. Sloan is a University of Southern California musicologist and Mr. Harding is a songwriter and musician who plays the guitar, drums and keyboards, as well as other instruments. Their podcast and book are filled with sophisticated but accessible discussions of pop hits from the 2000s and 2010s, from the catchy hook of Ariana Grande’s “Break Free” to Drake’s use of simple rhymes in “God’s Plan.”

In addition to offering a theory-driven take on what the authors call “the bubbliest of bubblegum pop,” the “Switched on Pop” book provides a toolkit for appreciating popular music. The authors delve into musical building blocks like melody, rhyme and sampling.

Messrs. Sloan and Harding spoke with the Journal about how streaming and hip-hop are transforming pop music. An edited transcript:

Charlie Harding, left, and Nate Sloan turned their podcast about popular music into a book. PHOTO: ELLYN JAMESON
You already have a podcast. Why a book?

Mr. Harding: Listeners were saying, “I learned a lot from the show, but I want a comprehensive guide to how to listen more thoughtfully.” That knowledge sits in music-theory textbooks. So we saw an opportunity.

Mr. Sloan: When we’re doing the podcast, we’re responding quickly to what’s happening in the fast-changing world of popular music, which is a great exercise. Forcing yourself to listen to pop makes you confront your own calcifying biases. But the book allows us to think about the things we’ve learned and put them in historical context.

There’s surprisingly little discussion of actual music in the music media. Are you guys an alternative?

Mr. Sloan: People tend to focus on the lyrics of songs and the artist’s personal life. Adding music to that discussion gives even more depth and nuance to how you can think about pop’s role in our culture. There are probably people who think Taylor Swift could release anything and it would be a hit, because of her celebrity. We’d say no. These songs are popular for a reason. You may not like that reason, but there is a reason.

Older listeners often say music isn’t as good as it was. What’s your response?

Mr. Sloan: Pop music reflects the time in which it is made and may not be as relevant to you as you age. But at the same time, what’s been revealing about doing this podcast and book is finding out how pop is changing. One thing we track is how timbre [the quality that lets us distinguish different artists or instruments] and tone are becoming such important elements of pop. Things that might have been privileged in the past—complex harmonies, lyrical creativity, guitar solos—aren’t as privileged now. That can be disorienting, but it doesn’t mean music is bad. The hope is, when you do have to listen to, say, Skrillex, you can at least say, “I don’t like this, but I kind of understand why someone would.”

Mr. Harding: It’s OK to like the things you like, but I also feel strongly that it’s not OK to think other kinds of music are outright bad. By expanding your palette of hearing, you can be more inquisitive.

Are older fans looking for things that are no longer there and then ignoring the innovation? Music, over time, becomes like a foreign language.

Mr. Sloan: I agree. It’s hard to listen to something that doesn’t follow the musical criteria we’ve established. But new music is complex in different ways.

Mr. Harding: Part of Drake’s brilliance, for example, is he is able to say something that sounds utterly familiar—as if you’ve heard it a thousand times—and yet no one has quite put those words together in that way.

Mr. Sloan: It’s a gift, being able to write those catchy nursery rhymes. The way Drake uses rhyme is masterful. One thing he does in the song “God’s Plan” is give you the same phrase, but at different points in the rhythm—keeping it fresh.

The book discusses big hits. Any recent ones you don’t like?

Mr. Sloan: A song we find vexing is “I’m the One,” by DJ Khaled. This is a song we will not redeem. We think it’s derivative, offensive and boring. And yet it was a No. 1 hit. You still have an opportunity to ask why.

Let’s talk Rihanna.

Mr. Harding: Rihanna’s “We Found Love” with Calvin Harris came out in 2011, and while it might seem like any other pop song, it’s upsetting a long-held tradition. Since the 1950s, one thing that’s stayed relatively stable is song form—the verse-chorus form of songs. What this song does is take the structure of electronic-dance-music songs, which is different, and superimpose it on pop.

Mr. Sloan: And now it’s hip-hop that is pushing the verse-chorus form to its breaking point. Take “Sicko Mode” by Travis Scott. It doesn’t have a verse or a chorus. It’s this stitched-together collage of song fragments that seems more at home in the work of an experimental composer.

Will music streaming lead to shorter, simpler songs?

Mr. Harding: The economics of streaming incentivizes songs to be shorter because you get paid per song. We’re also seeing more choruses at the start of songs to hook you in. Listeners have more choices than in the past. It’s forcing producers and songwriters to think intensely about never having a dull moment. But I think there’s always been anxiety about technological change. Songwriters have long paid attention to the medium, from the limits of the vinyl record to the CD.

Mr. Sloan: These developments always circle back to something much older. It’s easy to feel a certain panic about streaming. But “Old Town Road” is still 15 seconds longer than the shortest No. 1 hit ever, in 1960. What’s past is prologue.