The Determinants of Capital Structure Choice
TL;DR: In this paper, the explanatory power of some of the recent theories of optimal capital structure is analyzed empirically and a factor-analytic technique is used to mitigate the measurement problems encountered when working with proxy variables.
Abstract: This paper analyzes the explanatory power of some of the recent theories of optimal capital structure. The study extends empirical work on capital structure theory in three ways. First, it examines a much broader set of capital structure theories, many of which have not previously been analyzed empirically. Second, since the theories have different empirical implications in regard to different types of debt instruments, the authors analyze measures of short-term, long-term, and convertible debt rather than an aggregate measure of total debt. Third, the study uses a factor-analytic technique that mitigates the measurement problems encountered when working with proxy variables.
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TL;DR: The authors surveys research on corporate governance, with special attention to the importance of legal protection of investors and of ownership concentration in corporate governance systems around the world, and presents a survey of the literature.
Abstract: This paper surveys research on corporate governance, with special attention to the importance of legal protection of investors and of ownership concentration in corporate governance systems around the world.
13,489 citations
Cites background from "The Determinants of Capital Structu..."
...In the same spirit, Titman and Wessels (1988) and Rajan and Zingales (1995) show for the United States and several OECD economies respectively that debt finance is most common for firms with tangible assets....
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TL;DR: Corporate Governance as mentioned in this paper surveys research on corporate governance, with special attention to the importance of legal protection of investors and of ownership concentration in corporate governance systems around the world, and shows that most advanced market economies have solved the problem of corporate governance at least reasonably well, in that they have assured the flows of enormous amounts of capital to firms, and actual repatriation of profits to the providers of finance.
Abstract: This article surveys research on corporate governance, with special attention to the importance of legal protection of investors and of ownership concentration in corporate governance systems around the world. CORPORATE GOVERNANCE DEALS WITH the ways in which suppliers of finance to corporations assure themselves of getting a return on their investment. How do the suppliers of finance get managers to return some of the profits to them? How do they make sure that managers do not steal the capital they supply or invest it in bad projects? How do suppliers of finance control managers? At first glance, it is not entirely obvious why the suppliers of capital get anything back. After all, they part with their money, and have little to contribute to the enterprise afterward. The professional managers or entrepreneurs who run the firms might as well abscond with the money. Although they sometimes do, usually they do not. Most advanced market economies have solved the problem of corporate governance at least reasonably well, in that they have assured the flows of enormous amounts of capital to firms, and actual repatriation of profits to the providers of finance. But this does not imply that they have solved the corporate governance problem perfectly, or that the corporate governance mechanisms cannot be improved. In fact, the subject of corporate governance is of enormous practical impor
10,954 citations
Posted Content•
TL;DR: In this paper, the authors investigate the determinants of capital structure choice by analyzing the financing decisions of public firms in the major industrialized countries and find that factors identified by previous studies as important in determining the cross-section of the capital structure in the U.S. affect firm leverage in other countries as well.
Abstract: We investigate the determinants of capital structure choice by analyzing the financing decisions of public firms in the major industrialized countries. At an aggregate level, firm leverage is fairly similar across the G-7 countries. We find that factors identified by previous studies as important in determining the cross- section of capital structure in the U.S. affect firm leverage in other countries as well. However, a deeper examination of the U.S. and foreign evidence suggests that the theoretical underpinnings of the observed correlations are still largely unresolved.
5,935 citations
TL;DR: In this article, a survey of capital structure theories based on agency costs, asymmetric information, product/input market interactions, and corporate control considerations is presented, with a brief overview of the papers surveyed and their relation to each other.
Abstract: This paper surveys capital structure theories based on agency costs, asymmetric information, product/input market interactions, and corporate control considerations (but excluding tax-based theories). For each type of model, a brief overview of the papers surveyed and their relation to each other is provided. The central papers are described in some detail, and their results are summarized and followed by a discussion of related extensions. Each section concludes with a summary of the main implications of the models surveyed in the section. Finally, these results are collected and compared to the available evidence. Suggestions for future research are provided.
4,404 citations
Cites background from "The Determinants of Capital Structu..."
...& Hasbrouck (1988), Friend & Lang (1988), Titman & Wessels (1988)*...
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...Lack of growth opportunities Yes: Kim & Sorensen (1986), Titman & Wessels (1988),* Chaplinsky & Niehaus (1990)" N o Kester (1986)...
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...Extent to which product is not uilique and does not require Yes: Titman & Wessels (1988) specialized service...
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...Leverage increases wlth increases In profitability [Ross (1977), Leiand & Pyle (1977), Helnkel No Kcster (1986), Friend & Hasbrouck (1988), (1982), Blazenko (1987), John (1987), Poitevin Frlend & Lang (1988), Gonedes, et a1 (1988),* (1989)l Titman & Wessels (1988)...
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...Yes: Kester (1986),* Kim & Sorensen (1986),* Titman & Wessels (1988)* No: Friend & Hasbrouck (1988),* Friend & Lang (1988)*...
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TL;DR: The authors survey 392 CFOs about the cost of capital, capital budgeting, and capital structure and find some support for the pecking-order and trade-off capital structure hypotheses but little evidence that executives are concerned about asset substitution, asymmetric information, transactions costs, free cash flows, or personal taxes.
4,138 citations
References
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TL;DR: In this article, the authors draw on recent progress in the theory of property rights, agency, and finance to develop a theory of ownership structure for the firm, which casts new light on and has implications for a variety of issues in the professional and popular literature.
49,666 citations
TL;DR: In this article, a general null model based on modified independence among variables is proposed to provide an additional reference point for the statistical and scientific evaluation of covariance structure models, and the importance of supplementing statistical evaluation with incremental fit indices associated with the comparison of hierarchical models.
Abstract: Factor analysis, path analysis, structural equation modeling, and related multivariate statistical methods are based on maximum likelihood or generalized least squares estimation developed for covariance structure models. Large-sample theory provides a chi-square goodness-of-fit test for comparing a model against a general alternative model based on correlated variables. This model comparison is insufficient for model evaluation: In large samples virtually any model tends to be rejected as inadequate, and in small samples various competing models, if evaluated, might be equally acceptable. A general null model based on modified independence among variables is proposed to provide an additional reference point for the statistical and scientific evaluation of covariance structure models. Use of the null model in the context of a procedure that sequentially evaluates the statistical necessity of various sets of parameters places statistical methods in covariance structure analysis into a more complete framework. The concepts of ideal models and pseudo chi-square tests are introduced, and their roles in hypothesis testing are developed. The importance of supplementing statistical evaluation with incremental fit indices associated with the comparison of hierarchical models is also emphasized. Normed and nonnormed fit indices are developed and illustrated.
16,420 citations
"The Determinants of Capital Structu..." refers background in this paper
...A nontechnical introduction to the subject providing many references is Bentler and Bonett [4]....
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...(See Bentler and Bonett [4]....
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TL;DR: In this paper, a firm that must issue common stock to raise cash to undertake a valuable investment opportunity is considered, and an equilibrium model of the issue-invest decision is developed under these assumptions.
13,939 citations
TL;DR: In this article, the authors predict that corporate borrowing is inversely related to the proportion of market value accounted for by real options and rationalize other aspects of corporate borrowing behavior, such as the practice of matching maturities of assets and debt liabilities.
12,521 citations
"The Determinants of Capital Structu..." refers background in this paper
...Work by Galai and Masulis [16], Jensen and Meckling [20], and Myers [26] suggests that stockholders of leveraged firms have an incentive to invest suboptimally to expropriate wealth from the firm's bondholders....
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TL;DR: Miller et al. as discussed by the authors presented a paper on the thirty-fiveth annual meeting of the American Finance Association, Atlantic City, New Jersey, September 16-18, 1976 (May, 1977), pp. 261-275.
Abstract: Debt and Taxes Author(s): Merton H. Miller Source: The Journal of Finance, Vol. 32, No. 2, Papers and Proceedings of the Thirty-Fifth Annual Meeting of the American Finance Association, Atlantic City, New Jersey, September 16-18, 1976 (May, 1977), pp. 261-275 Published by: Blackwell Publishing for the American Finance Association Stable URL: http://www.jstor.org/stable/2326758 Accessed: 10/09/2009 09:53
3,673 citations
"The Determinants of Capital Structu..." refers result in this paper
...In this sense, although the results suggest that capital structures are chosen systematically, they are in line with Miller's [25] argument that the costs and benefits associated with this decision are small....
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