Taxes, bankruptcy costs, transactions costs, adverse selection, and agency conflicts have all been advocated as major explanations for the corporate use of debt financing. These ideas have often been synthesized into the trade-off theory and the pecking order theory of leverage. These theories and the related evidence are reviewed in this survey. A number of important empirical stylized facts are identified. To understand the evidence, it is important to recognize the differences among private firms, small public firms and large public firms. Private firms seem to use retained earnings and bank debt heavily. Small public firms make active use of equity financing. Large public firms primarily use retained earnings and corporate bonds. The available evidence can be interpreted in several ways. Direct transaction costs and indirect bankruptcy costs appear to play important roles in a firm's choice of debt. The relative importance of the other factors remains open to debate. No currently available model appears capable of simultaneously accounting for all of the stylized facts.

Trade-Off and Pecking Order Theories of Debt

We survey managers in 16 European countries on the determinants of capital structure. Financial flexibility and earnings per share dilution are primary concerns of managers in issuing debt and common stock, respectively. Managers also value hedging considerations and use "windows of opportunity" when raising capital. We find that although a country's legal environment is an important determinant of debt policy, it plays a minimal role in common stock policy. We find that firms' financing policies are influenced by both their institutional environment and their international operations. Firms determine their optimal capital structures by trading off costs and benefits of financing.

https://papers.ssrn.com/sol3/Delivery.cfm/SSRN_ID594781_code327021.pdf?abstractid=594781&mirid=1&type=2

Cross-Country Determinants of Capital Structure Choice: A Survey of European Firms

We develop a model that endogenizes dynamic financing, investment, and cash retention/payout policies in order to analyze the effect of financial flexibility on firm value. We show that the value of financing flexibility depends on the costs of external financing, the level of corporate and personal tax rates which determine the effective cost of holding cash, the firm's growth potential and its maturity, and the reversibility of capital. Through simulations, we demonstrate that firms that face financing frictions should simultaneously borrow and lend, and we examine the nature of the dynamic debt and liquidity policies and the value associated with corporate liquidity.

https://papers.ssrn.com/sol3/Delivery.cfm/SSRN_ID997885_code327209.pdf?abstractid=677086

The Value of Financial Flexibility

We develop a model that endogenizes dynamic financing, investment, and cash retention/payout policies in order to analyze the effect of financial flexibility on firm value. We show that the value of financing flexibility depends on the costs of external financing, the level of corporate and personal tax rates that determine the effective cost of holding cash, the firm's growth potential and maturity, and the reversibility of capital. Through simulations, we demonstrate that firms facing financing frictions should simultaneously borrow and lend, and we examine the nature of dynamic debt and liquidity policies and the value associated with corporate liquidity.

In this paper we present the results of an international survey among 313 CFOs on capital structure choice. We document several interesting insights on how theoretical concepts are being applied by professionals in the UK, the Netherlands, Germany, and France and we directly compare our results with previous findings from the US our results emphasize the presence of pecking-order behavior. At the same time this behavior is not driven by asymmetric information considerations. The static trade-off theory is confirmed by the importance of a target debt ratio in general, but also specifically by tax effects and bankruptcy costs. Overall, we find remarkably low disparities across countries, despite the presence of significant institutional differences. We find that private firms differ in many respects from publicly listed firms, e.g. listed firms use their stock price for the timing of new issues. Finally, we do not find substantial evidence that agency problems are important in capital structure choice.

/pdf/capital-structure-policies-in-europe-survey-evidence-33p93w3c4j.pdf

Capital Structure Policies in Europe: Survey Evidence

textIn this paper we present the results of an international survey among 313 CFOs on capital budgeting, cost of capital, capital structure, and corporate governance. We extend previous results of Graham and Harvey (2001) by broadening their sample internationally, by including corporate governance, and by applying multivariate regression analysis. We document interesting insights on how theoretical concepts are applied by professionals in the U.K., the Netherlands, Germany, and France and compare these results with the U.S. We discover compelling variations between large and small firms across all markets. While large firms frequently use present value techniques and the capital asset pricing model when assessing the financial feasibility of an investment opportunity, CFOs of small firms still rely on the payback criterion. Regarding debt policy we document more subtle disparities across firms and national samples. We also find substantial variation in corporate governance structures, which turn out to be more oriented at shareholder wealth in the Anglo-Saxon countries. Corporate finance practice appears to be influenced mostly by firm size, to a lesser extent by shareholder orientation, while national differences are weak at best.

/pdf/corporate-finance-in-europe-confronting-theory-with-practice-1usxtsr3qh.pdf

Corporate Finance in Europe: Confronting Theory with Practice

De vermogensstructuurkeuze van ondernemingen heeft betrekking op de financiering van haar activiteiten. De onderneming moet in eerste instantie bij het aantrekken van nieuw vermogen kiezen tussen eigen vermogen en vreemd vermogen. Maar de keuze is meer complex vanwege het bestaan van tussenvormen en de beschikbaarheid van diverse looptijden voor vreemd vermogen. In deze bijdrage beschrijven wij de resultaten van een onderzoek op basis van vragenlijsten onder 313 Europese financiële directeuren naar de determinanten van de vermogensstructuurkeuze in Nederland, het Verenigd Koninkrijk, Duitsland en Frankrijk, en we vergelijken de resultaten met Amerikaanse data uit eerder onderzoek (Graham en Harvey, 2001). Bij de bespreking van de resultaten concentreren wij ons op twee concurrerende theorieën die in de bestaande literatuur de meeste aandacht krijgen. Dit zijn de statische afruiltheorie (‘static trade-off ’) en de zogenaamde ‘pecking-order’-theorie. De statische afruiltheorie is gebaseerd op een bijdrage uit 1958 van Modigliani en Miller. Deze auteurs bewijzen dat onder stringente veronderstellingen – perfecte, complete en efficiënte markten – de vermogensstructuurkeuze niet relevant is voor de waarde van de onderneming. Latere theoretische studies hebben binnen dit raamwerk factoren afgeleid die bepalend zijn voor de optimale vermogensstructuur van ondernemingen. Op basis van dit raamwerk heeft iedere onderneming een optimale vermogensstructuur waarbij de waarde van de onderneming maximaal is. De theorie voorspelt dat ondernemingen een zogenaamde streefratio (‘target ratio’) van de schuldratio hebben. De statische afruiltheorie voorspelt vervolgens dat ondernemingen de kosten en opbrengsten van vreemd vermogen als gevolg van belastingeffecten, potentiële faillissementskosten en agency-kosten tegen elkaar afwegen.

https://mab-online.nl/article/17527/download/pdf/

C. G. Koedijk

Papers

Corporate Finance in Europe: Confronting Theory with Practice

Theorie en praktijk van ondernemingsfinanciering: vermogensstructuurkeuze