Testing Trade-Off and Pecking Order Predictions about Dividends and Debt

Purpose – The purpose of this paper is to study the key determinants of capital structure for Indian manufacturing firms and which theory implications, i.e. trade off vs pecking order are more applicable in current Indian manufacturing sector scenario. Design/methodology/approach – A sample size of 422 listed Indian manufacturing companies on Bombay Stock Exchange has been considered to do the empirical evaluation. A ten year period from 2003-2004 to 2012-2013 and annual financial standalone data have been considered for study. Ratio analysis and panel data approach have been applied to perform the empirical evaluation. Total debt to total capital and total debt to total assets are used as the proxy for firm financial leverage. Findings – It was empirically found that size, age, asset tangibility, growth, profitability, non-debt tax shield, business risk, uniqueness and ownership structure are significantly correlated with the firm financial leverage or key determinants of capital structure in Indian manu...

Determinants of capital structure: an empirical evaluation from India

Research background: Indebtedness indicators are used to monitor the structure of corporate financial resources. The company's share of its own and foreign resources affects the financial stability of the company. A high share of own re-sources makes the company stable, and independent. With a low share, on the contrary, the company is unstable, market fluctuations and credit uncertainty can have serious consequences. However, foreign capital is cheaper, and too high indebtedness ratios can jeopardize the existence of enterprises.
Purpose of the article: In general, the economic recession worsens the capital structure of enterprises, especially their debt management. Thus, the paper aims to apply the set of 13 indebtedness ratios to a sample of 779 Slovak and Czech enterprises from the construction sector to determine key microeconomic determinants that may influence the level of indebtedness.
Methods: A non-parametric one-way analysis of variance ? the Kruskal-Wallis test ? was used to determine whether the set of indebtedness ratios is the same across countries, districts, and sizes. For analyzing the specific sample pair of stochastic dominance, the pairwise comparison was realized using the Dunn'stest with Bonferonni correction. The Mann-Whitney test was used to compare the differences in the set of indebtedness ratios between two independent groups of enterprises, based on their legal form and country.
Findings & value added: The level of total indebtedness ratio and the self-financing ratio depends on the region as well as on the size of the enterprise and the legal form. In the case of credit indebtedness and debt-to-cash-flow indebted-ness, their dependence on the size of the enterprise and the legal form is obvious. The importance of the region and the legal form of enterprises, vice versa, affect the level of the financial independence ratio. These outputs are relevant for au-thorities, policy makers, or financial institutions to identify financial constraints that construction enterprises face and, as a result, make a long-term contribution to theory in this field.

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Distinctive determinants of financial indebtedness: evidence from Slovak and Czech enterprises

The purpose of the study is to explore how financial leverage influences profitability of 1,503 listed manufacturing firms in China.,The sample of the study is composed of the listed manufacturing firms in China. For the manufacturing firms, the annual financial information from 2008 to 2016 is obtained from the ORBIS database. In this study, initially a simultaneous equation approach is used to control for potential endogeneity. Then, additional regression analyses are conducted with panel data over the period of 2008-2016 using OLS, Fixed-effects, First-difference, Random-effects and Arellano and Bond’s (1991) two-step Generalized Method of Moments (GMM) methods.,The results reveal that the impact of leverage on profitability is inverted U-shaped. In this inverted U-shaped relationship, the positive impact of financial leverage on profitability could be attributed to tax shield, whereas the negative impact might be because of bankruptcy cost, financial distress, severe agency problems and information asymmetry that the listed Chinese firms suffer from because of some institutional characteristics of China.,First, this study focuses on only listed manufacturing firms in China. Second, ownership types are not taken into account in this study.,First, the Chinese government should direct its efforts toward developing the bond markets and promoting alternative privately owned loan creditors to state-owned banks. Parallel to this, the transformation process toward market economy should be accelerated to facilitate the privatization of state-owned enterprises (SOEs). In addition to this, development of the bond market and privatization of SOEs will also mitigate the agency conflict between creditors and managers and between shareholders and managers.,To the best of the author’s knowledge, this is the first study which investigates the impact of capital structure on profitability of the listed firms in China.

Impact of financial leverage on profitability of listed manufacturing firms in China

We examine the impact of managerial overconfidence on corporate debt maturity. We build upon the argument that managerial overconfidence is likely to mitigate the underinvestment problem, which is often the major concern for long-term debt investors. Within this context, we hypothesise that managerial overconfidence increases debt maturity. Our empirical evidence, based on time-varying measures of overconfidence derived from computational linguistic analysis and directors’ dealings in their own companies’ shares, supports this hypothesis. Specifically, we find that the changes in both first person singular pronouns and optimistic tone are positively related to the change in debt maturity. Moreover, we find that the insider trading-based overconfidence of CEO, who is most likely to influence investment decision and thus the underinvestment problem, has a stronger impact on debt maturity than the overconfidence of other directors (e.g. CFO). Overall, our study provides initial evidence for a positive overconfidence-debt maturity relation via overconfidence mitigating the agency cost of long-term debt.

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Time-varying managerial overconfidence and corporate debt maturity structure

The study examines the determinants of debt maturity structure decisions, using a sample of companies chosen from two broad indices, viz., the BSE 500 and the CNX 500 index. The study results suggest that collateralizable assets and leverage are the important determinants of debt maturity choice. Size and firm quality have the predicted effect on debt maturity; however, results are statistically significant only in the case of fixed effect firm and time model. It finds no evidence of the impact of effective tax rate, asset maturity, and growth prospects on debt maturity in the Indian context.

The Determinants of Corporate Debt Maturity: A Study of Indian Firms

Purpose As the world tries to come to terms with the exact economic and human cost of the Covid-19 pandemic, businesses are trying to discern and act on the implications of the "new normal" in order to survive and grow. Amongst all the industries impacted by the Covid-19 pandemic, travel and tourism has been the hardest hit. Operators across the value chain are trying to innovate and improvise in order to mitigate the impact of the pandemic on cash flows and working capital. The primary purpose of this paper then is to take a closer look at the measures adopted by the Indian hotel industry to restore revenues, conserve resources and attain greater operational and cost efficiencies in the midst of the Covid-19 crisis. The article also brings to the fore the growth-enhancing measures adopted by the industry in anticipation of a "new normal" in the post-Covid world. Design/methodology/approach This study is based on primary data collected via a survey, followed by a series of interviews with a select group of senior finance managers from a wide spectrum of hotels based in India. Findings Our findings suggest that Indian hotels have adopted several measures to enhance cash flows/revenues, reduce operating costs and cash outflows and conserve resources in order to tide themselves over during the crisis. Prominent cash flow-enhancing measures include price drops on special offers and reductions on list prices. Cost-cutting measures include economizing on energy consumption, reductions in labour costs and the postponement of maintenance expenses and discretionary spending. Resource conservation measures that have been adopted focus on postponement of capital expenditure and an increasing shift to localizing supply chains. Growth-enhancing measures adopted by the industry in anticipation of the long-term "new normal" include restructuring of the workforce and measures aimed at attracting domestic tourists and increasing product diversity. Originality/value This study attempts to understand the short-term and long-term financial management strategies adopted by Indian hotels in the face of unprecedented disruption caused by the Covid-19 pandemic. To the best of our knowledge, this paper is the first of its kind in the Indian context.

Surviving and growing in the post-Covid world: the case of Indian hotels

Purpose – The purpose of this paper is to examine the financing practices of unlisted manufacturing firms in India. In particular, the authors seek to explore how unlisted firms finance their growth and the extent to which they rely on external source of finance. Additionally, they explore whether the determinants of indebtedness that explain the borrowing behavior of listed Indian manufacturing firms are capable of explaining the financing decisions of unlisted firms as well. Design/methodology/approach – This paper uses panel data technique to determine the factors determining indebtedness of unlisted private manufacturing firms in India. Findings – Unlisted Indian manufacturing firms are largely dependent on bank borrowing for their growth, and access to finance is largely dependent on collateral capacity. The authors results show that the dominant firm factors affecting indebtedness of unlisted firms in India are asset tangibility, firm growth, size, profitability and firm age. Institutional and macro...

The determinants of indebtedness of unlisted manufacturing firms in India: A panel data analysis

This research examined the borrowing behavior of unlisted private stand-alone manufacturing firms in India over the period 2006-07 to 2009-10 using balance sheet data. Findings suggest that total indebtedness is lower in unlisted manufacturing firms compared to their listed counterparts, and the difference is more pronounced in long-term borrowing ratio compared to short-term borrowing ratio. Unlisted manufacturing firms depend predominantly on banks for financing purposes in order to circumvent their inability to tap financial resources from capital markets, and they borrow predominantly on a secured basis. It seems collateralized borrowings enables these firms to overcome the problem of information opacity; asset tangibility enhances debt capacity in general and secured debt capacity in particular as the agency theory would suggest. This research does not provide any evidence to suggest that a close bank-firm relationship ease collateral requirements for unlisted firms, nor is there any evidence of the monitoring role of secured debt enhancing firm performance and hence profits. The ‘pecking order’ of financing as the asymmetric information theory of capital structure suggests, does not seem valid for unlisted firms; internal resource generating capacity only influences reliance on short-term funding, with no bearing on long term fund need.

The Determinants of Indebtedness in Unlisted Manufacturing Firms in India: A Panel Data Analysis

IntroductionThe literature on corporate borrowing in the post-liberalized India has so far focused attention on the determinants of financing choice of large public corporations. Available evidence in this regard from Kakani (1999), Bhaduri (2002 and 2002a), Guha-Khasnobis and Bhaduri (2002), Mahakud and Bhole (2003), Bhole and Mahakud (2004), Datta and Majumdar (2006) and Mahakud (2006) reveals that the determinants of capital structure choice in the Indian context are not too different from those of developed and other developing markets. Increasingly, however, research is moving beyond an examination of the basic leverage choice to more detailed aspects of the financing decision. In this study, we extend the existing literature on corporate borrowing in India to examine the determinants of the maturity structure of the firm's debt using a sample of manufacturing firms listed on the Bombay Stock Exchange (BSE).The existing literature on debt maturity structure is far from adequate, although a number of research studies have dealt with the issue indirectly; for instance, Titman and Wessels (1988), Barclay and Smith (1995), Beevan and Danbolt (2002) employ alternative measures of borrowing (long-term and short-term) and relate them to firm-specific factors while analyzing the determinants of borrowing behavior of the firms. Available literature dealing directly with the issue of debt maturity focuses upon the developed markets of the US and the UK (for example, Mitchell, 1993; Barclay and Smith, 1995; Stohs and Mauer, 1996; Ooi, 1999; Ozkan, 2000 and 2002; and Scherr and Hulburt, 2001). Cross-country studies (Antoniou et al., 2006 examine the case of France, Germany and the UK) on the issue are far too few, as are studies in the context of developing economies (Korner, 2007 provides evidence from Czech firms). There have been no empirical studies with regard to debt maturity structure in the Indian context, and the primary objective of this study is to bridge this gap and, at the same time, analyze the necessity and desirability of government intervention in fostering the availability of long-term debt finance, as also the role of term lending institutions.Literature ReviewThe finance literature provides several leading theories on debt maturity structure, viz., agency costs, taxes, leverage, maturity matching, and signaling.Agency CostMyers (1977) argues that part of a firm's market value is derived from the future (discretionary) investment opportunities, i.e., the present value of future growth opportunities. Given that such investments contain an option element in them, the value realization becomes contingent on whether the investments are undertaken or not. Myers' study shows that a firm with risky debt outstanding and which acts in its stockholders' interest will follow a different decision rule than one which can issue risk-free debt or which has no debt at all. The firm financed with risky debt will, in some states of nature, pass up valuable investment opportunities-opportunities that could make a positive net contribution to the market value of the firm (In some cases, bondholders capture a larger pie of the benefits so that a profitable project does not offer stockholders a normal return. In these cases, stockholders have incentives to reject positive net present value projects). This is termed as the underinvestment problem and its magnitude increases with more growth options in the firm's investment opportunity set.A possible solution to this underinvestment problem is that firms with high growth opportunities shorten the maturity of debt; if debt matures before the option to invest is exercised, the hindrance to investment is eliminated. Hence, firms with high growth opportunities should employ short-term rather than long-term debt.Smith and Warner (1979) argue that the potential conflict of interest between stockholders and bondholders is likely to be greater in the case of smaller firms compared to large firms, and Barnea et al. …

Raju Majumdar

Papers

The Determinants of Corporate Debt Maturity: A Study of Indian Firms

Surviving and growing in the post-Covid world: the case of Indian hotels

The determinants of indebtedness of unlisted manufacturing firms in India: A panel data analysis

The Determinants of Indebtedness in Unlisted Manufacturing Firms in India: A Panel Data Analysis

The Determinants of Corporate Debt Maturity: A Study of Indian Firms