Showing papers on "Capital structure published in 2006"
TL;DR: The authors examine the cross-sectional variation in the marginal value of corporate cash holdings that arises from differences in corporate financial policy and derive a set of intuitive hypotheses to test empirically, and show that the value of cash declines with larger cash holdings, higher leverage, better access to capital markets, and as firms choose greater cash distribution via dividends rather than repurchases.
Abstract: We examine the cross-sectional variation in the marginal value of corporate cash holdings that arises from differences in corporate financial policy. We begin by providing semi-quantitative predictions for the value of an extra dollar of cash depending upon the likely use of that dollar, and derive a set of intuitive hypotheses to test empirically. By examining the variation in excess stock returns over the fiscal year, we find that the marginal value of cash declines with larger cash holdings, higher leverage, better access to capital markets, and as firms choose greater cash distribution via dividends rather than repurchases. WHAT VALUE DO SHAREHOLDERS PLACE ON THE CASH THAT FIRMS HOLD, and how does that value differ across firms? While an extensive literature attempts to estimate the value of adding debt to a firm’s capital structure, the search for estimates of the value of additional cash has not received nearly as much attention. This is a non-trivial oversight considering that corporate liquidity enables firms to make investments without having to access external capital markets, and to thereby avoid both transaction costs on either debt or equity issuance and information asymmetry costs that are often associated with equity issuances. Moreover, corporate liquidity reduces the likelihood of incurring financial distress costs if the firm’s operations do not generate sufficient cash flow to service obligatory debt payments. Corporate liquidity comes at a cost, however, since interest earned on corporate cash reserves is often taxed at a higher rate than interest earned by individuals. Furthermore, cash may provide funds for managers to invest in projects that offer non-pecuniary benefits but destroy shareholder value (Jensen and Meckling (1976)). Given the extent to which the literature examines the effect of these same frictions on capital structure, it is surprising that the value implications of holding cash in the presence of these frictions have not been similarly explored. 1
1,159 citations
TL;DR: This article found that firms with access to the public bond markets, as measured by having a debt rating, have significantly more leverage than firms without a rating, even after controlling for firm characteristics that determine observed capital structure and instrumenting for the possible endogeneity of having a rating.
Abstract: Prior work on leverage implicitly assumes capital availability depends solely on firm characteristics. However, market frictions that make capital structure relevant may also be associated with a firm's source of capital. Examining this intuition, we find firms that have access to the public bond markets, as measured by having a debt rating, have significantly more leverage. Although firms with a rating are fundamentally different, these differences do not explain our findings. Even after controlling for firm characteristics that determine observed capital structure, and instrumenting for the possible endogeneity of having a rating, firms with access have 35% more debt. Copyright 2006, Oxford University Press.
1,110 citations
TL;DR: This paper examined international differences in firms' cost of equity capital across 40 countries and found that firms from countries with more extensive disclosure requirements, stronger securities regulation, and stricter enforcement mechanisms have a significantly lower cost of capital.
Abstract: This paper examines international differences in firms' cost of equity capital across 40 countries. We analyze whether the effectiveness of a country's legal institutions and securities regulation is systematically related to cross-country differences in the cost of equity capital. We employ several models to estimate firms' implied or ex ante cost of capital. Our results support the conclusion that firms from countries with more extensive disclosure requirements, stronger securities regulation, and stricter enforcement mechanisms have a significantly lower cost of capital. We perform extensive sensitivity analyses to assess the potentially confounding influence of countries' long-run growth differences on our results. We also show that, consistent with theory, the cost of capital effects of strong legal institutions become substantially smaller and, in many cases, statistically insignificant as capital markets become globally more integrated.
1,014 citations
TL;DR: Li et al. as discussed by the authors employed a new database containing the market and accounting data (from 1994 to 2003) from more than 1200 Chinese-listed companies to document their capital structure characteristics, and found that leverage in Chinese firms increases with firm size and fixed assets, and decreases with profitability, non-debt tax shields, growth opportunity, managerial shareholdings and correlates with industries.
620 citations
TL;DR: DeMarzo and Sannikov as discussed by the authors derived the optimal dynamic contract in a continuous-time principal-agent setting, and implemented it with a capital structure (credit line, long-term debt, and equity) over which the agent controls the payout policy.
Abstract: We derive the optimal dynamic contract in a continuous-time principal-agent setting, and implement it with a capital structure (credit line, long-term debt, and equity) over which the agent controls the payout policy. While the project’s volatility and liquidation cost have little impact on the firm’s total debt capacity, they increase the use of credit versus debt. Leverage is nonstationary, and declines with past profitability. The firm may hold a compensating cash balance while borrowing (at a higher rate) through the credit line. Surprisingly, the usual conflicts between debt and equity (asset substitution, strategic default) need not arise. IN THIS PAPER, WE CONSIDER A DYNAMIC CONTRACTING ENVIRONMENT in which a riskneutral agent or entrepreneur with limited resources manages an investment activity. While the investment is profitable, it is also risky, and in the short run it can generate arbitrarily large operating losses. The agent will need outside financial support to cover such losses and continue the project. The difficulty is that while the probability distribution of the cash flows is publicly known, the agent may distort these cash flows by taking a hidden action that leads to a private benefit. Specifically, the agent may (i) conceal and divert cash flows for his own consumption, and/or (ii) stop providing costly effort, which would reduce the mean of the cash flows. Therefore, from the perspective of the principal or investors that fund the project, there is the concern that a low cash flow realization may be a result of the agent’s actions, rather than the project’s fundamentals. To provide the agent with appropriate incentives, investors control the agent’s wage, and may also withdraw their financial support for the project and force its early termination. We seek to characterize an optimal contract in this framework and relate it to the firm’s choice of capital structure. We develop a method to solve for the optimal contract, given the incentive constraints, in a continuous-time setting and study the properties of the credit line, debt, and equity that implement the contract as in the discrete-time model of DeMarzo and Fishman (2003). The continuous-time setting offers several ∗ Peter M. DeMarzo is from Stanford University and Yuliy Sannikov is from U.C. Berkeley. We
601 citations
TL;DR: In this article, the authors examine the evolution of corporate capital structures and find that little of the variation in leverage is captured by previously identified determinants, such as size, market-to-book, profitability, industry, etc.
Abstract: We examine the evolution of corporate capital structures and find that little of the variation in leverage is captured by previously identified determinants, such as size, market-to-book, profitability, industry, etc. Instead, the majority of variation in leverage ratios is driven by an unobserved time-invariant effect that generates surprisingly stable capital structures: High (low) levered firms tend to remain as such for over two decades. Additionally, this feature of leverage is robust to firm exit, is present prior to the IPO, and is largely unaffected by the process of going public, suggesting that variation in capital structures is primarily explained by factors that remain relatively stable for long periods of time.
592 citations
TL;DR: This paper examined to what extent credit ratings directly affect capital structure decisions and found that firms near a credit rating upgrade or downgrade issue less debt relative to equity than firms not near a change in rating.
Abstract: This paper examines to what extent credit ratings directly affect capital structure decisions. The paper outlines discrete costs (benefits) associated with firm credit rating level differences and tests whether concerns for these costs (benefits) directly affect debt and equity financing decisions. Firms near a credit rating upgrade or downgrade issue less debt relative to equity than firms not near a change in rating. This behavior is consistent with discrete costs (benefits) of rating changes but is not explained by traditional capital structure theories. The results persist within previous empirical tests of the pecking order and tradeoff capital structure theories.
547 citations
Journal Article•
TL;DR: In this article, the authors investigated the relationship between the cash conversion cycle of a firm and its profitability and found that firms that focus on cash management were larger, with fewer cash sales, more seasonality and possibly more cash flow problems.
Abstract: IntroductionThe Capital structure and working capital management are two areas widely revisited by academia in order to postulate firms' profitability. Working capital management have been approached in numerous ways. Other researchers studied the impact of optimum inventory management while other authors studied the management of accounts receivables in an optimum way that leads to profit maximisation1. According to Deloof2 the way that working capital is managed has a significant impact on profitability of firms. This result indicates that there is a certain level of working capital requirement which potentially maximises returns.Other work in the field of working capital management focuses on the routines employed by firms. This research showed that firms which focus on cash management were larger, with fewer cash sales, more seasonality and possibly more cash flow problems. While smaller firms focused more on stock management and less profitable firms were focused on credit management routines3. It is suggested that high growth firms follow a more reluctant credit policy towards their customers, while they tie up more capital in the form of inventory. Meanwhile accounts payables will increase due to better relations of suppliers with financial institutions which divert this advantage of financial cost to their clients4.According to Wilner3 most firms extensively use trade credit despite its apparent greater cost, and trade credit interest rates commonly exceed 18 per cent. In addition to that he states that in 1993 U.S. firms extended their credit towards customers by 1.5 trillion dollars. Similarly Deloof found out through statistics from the National Bank of Belgium that in 1997 accounts payable were 13 per cent of their total assets while accounts receivables and inventory accounted for 17 per cent and 10 per cent respectively. Summers and Wilson6 report that in the UK corporate sector more than 80 per cent of daily business transactions are on credit terms.PreludeThere seems to be a strong relation between the cash conversion cycle of a firm and its profitability. The three different components of cash conversion cycle (accounts payables, accounts receivables and inventory) can be managed in different ways in order to maximise profitability or to enhance the growth of a company. Sometimes trade credit is a vehicle to attract new customers. Many firms are prepared to change their standard credit terms in order to win new customers and to gain large orders7. In addition to that credit can stimulate sales because it allows customers to assess product quality before paying. Therefore it is up to the individual company whether a 'marketing' approach should be followed when managing the working capital through credit extension. However the financial department of such a company will face cash flow and liquidity problems since capital will be invested in customers and inventory respectively. In order to have maximum value, equilibrium should be maintained in receivables-payables and inventory. According to Pike & Cheng,8 credit management seeks to create, safeguard and realise a portfolio of high quality accounts receivable.Given the significant investment in accounts receivable by most large firms, credit management policy choices and practices could have important implications for corporate value. Successful management of resources will lead to corporate profitability, but how can we measure management success since a period of 'credit granting' might lead to increased sales and market share whilst accompanied by decreased profitability or the opposite? Since working capital management is best described by the cash conversion cycle we will try to establish a link between profitability and management of the cash conversion cycle. This simple equation encompasses all three very important aspects of working capital management. It is an indication of how long a firm can carry on if it was to stop its operation or it indicates the time gap between purchase of goods and collection of sales. …
539 citations
TL;DR: In this article, the authors develop a framework for analyzing the impact of macroeconomic conditions on credit risk and dynamic capital structure choice and demonstrate that when cash flows depend on current economic conditions, there will be a benefit for firms to adapt their default and financing policies to the position of the economy in the business cycle phase.
539 citations
TL;DR: In this paper, the authors gather a unique sample of 44 tax shelter cases to investigate the magnitude of tax shelter activity and whether participating in a shelter is related to corporate debt policy.
468 citations
Book•
08 Jan 2006
TL;DR: The Macroeconomics of Capital Structure as discussed by the authors, an agenda for macroeconomics, is an overview of the current state of the macroeconomic system and its role in the global economy.
Abstract: Part I 1: The Macroeconomics of Capital Structure 2: An Agenda for Macroeconomics Part II 3: Capital-based Macroeconomics 4: Sustainable and Unsustainable Growth 5: Fiscal and Regulatory Issues 6: Risk, Debt and Bubbles: Variation on a Theme Part III 7: Labour-based Macroeconomics 8: Cyclical Unemployment and Policy Prescription 9: Secular Unemployment and Social Reform Part IV 10: Boom and Bust in the Monetarists' Vision 11: Monetary Disequilibrium Theory Part V 12: Macroeconomics: Taxonomy and Perspective
TL;DR: In this paper, a novel information asymmetry index based on measures of adverse selection developed by the market microstructure literature was used to test if information asymmetric is an important determinant of capital structure decisions, as suggested by the pecking order theory.
Abstract: Using a novel information asymmetry index based on measures of adverse selection developed by the market microstructure literature, we test if information asymmetry is an important determinant of capital structure decisions, as suggested by the pecking order theory. Our index relies exclusively on measures of the market's assessment of adverse selection risk rather than on ex ante firm characteristics. We find that information asymmetry does affect the capital structure decisions of U.S. firms over the sample period 1973-2002. Our findings are robust to controlling for conventional leverage factors (size, Q ratio, tangibility, profitability) and several firm attributes, such as funding needs, sales growth, real investment, stock return volatility, stock turnover, and intensity of insider trading. For example, we estimate that on average, for every dollar of financing deficit to cover, firms in the highest adverse selection decile issue 30 cents of debt more than firms in the lowest decile. Overall, this evidence explains why the pecking order theory is only partially successful in explaining all of firms' capital structure decisions. It also suggests that the theory finds support when its basic assumptions hold in the data, as it should reasonably be expected of any theory.
Posted Content•
TL;DR: In this article, the authors investigate the link between a firm's leverage and the characteristics of its suppliers and customers, and find that the leverage is negatively related to the R&D expense intensity in its supplier and customer industries.
Abstract: We investigate the link between a firm's leverage and the characteristics of its suppliers and customers. First, we test the hypothesis that firms use decreased leverage as a commitment mechanism to induce suppliers/customers to undertake relationship-specific investments. We find that the firm's leverage is negatively related to the R&D expense intensity in its supplier and customer industries, and the R&D intensity of its key suppliers and customers. We also find lower debt levels for firms operating in industries where strategic alliances and joint ventures with firms in supplier and customer industries are more prevalent. Further, our results suggest that the firm's leverage and the R&D investments of its key suppliers and customers are simultaneously determined. Finally, consistent with the use of debt as a bargaining tool, we find a positive relation between firm debt level and the degree of concentration in supplier/customer industries.
TL;DR: The authors empirically examined the within-industry relation between leverage and sales performance using data from 115 industries over 30 years and found that moderate debt taking is associated with relative-to-rival sales gains; high indebtedness, however, leads to product market underperformance.
TL;DR: In this paper, the authors present the results of an international survey among 313 CFOs on capital structure choice and find remarkably low disparities across countries, despite the presence of significant institutional differences.
Abstract: 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.
TL;DR: In this paper, a detailed data set on Thai firms before the Asian crisis of 1997 was used to examine whether business connections predicted preferential access to long-term bank credit, and they found that firms with connections to banks and politicians had greater access to a longterm debt than firms without such ties.
Abstract: We used a detailed data set on Thai firms before the Asian crisis of 1997 to examine whether business connections predicted preferential access to long‐term bank credit. We found that firms with connections to banks and politicians had greater access to long‐term debt than firms without such ties. Connected firms needed less collateral, obtained more long‐term loans, and appeared to use fewer short‐term loans than those without connections. We found no connections between banks and firms reducing asymmetric information problems. This is consistent with research implicating weak corporate governance in the extent and severity of the crisis.
TL;DR: In this article, the authors examine the capital structure implications of market timing in a single major financing event, the initial public offering, by identifying market timers as firms that go public in hot issue markets and find that hot-market IPO firms issue substantially more equity and lower their leverage ratios by more, than cold-market firms do.
Abstract: This paper examines the capital structure implications of market timing. I isolate timing attempts in a single major financing event, the initial public offering, by identifying market timers as firms that go public in hot issue markets. I find that hot-market IPO firms issue substantially more equity, and lower their leverage ratios by more, than cold-market firms do. However, immediately after going public, hot-market firms increase their leverage ratios by issuing more debt and less equity relative to cold-market firms. At the end of the second year following the IPO, the impact of market timing on leverage completely vanishes.
TL;DR: The authors found that firms covered by fewer analysts are less likely to issue equity as opposed to debt, but when they do so, it is in larger amounts, and that these firms depend more on favorable market conditions for their equity issuance decisions.
Abstract: We provide evidence that analyst coverage affects security issuance. First, firms covered by fewer analysts are less likely to issue equity as opposed to debt. They issue equity less frequently, but when they do so, it is in larger amounts. Moreover, these firms depend more on favorable market conditions for their equity issuance decisions. Finally, debt ratios of less covered firms are more affected by Baker and Wurgler's (2002)“external finance-weighted” average market-to-book ratio. These results are consistent with market timing behavior associated with information asymmetry, as well as behavior implied by dynamic adverse selection models of equity issuance.
TL;DR: In this article, the authors examined the impact of bank loan ratings on firm financial and investment policy, and found that the introduction of loan ratings leads to an increase in the use of debt by firms that obtain a rating, and in increases in firms' asset growth, cash acquisitions, and investment in working capital.
Abstract: I examine the introduction of syndicated bank loan ratings by Moody's and Standard & Poor's in 1995 to evaluate whether third-party rating agencies affect firm financial and investment policy. I find that the introduction of bank loan ratings leads to an increase in the use of debt by firms that obtain a rating, and in increases in firms' asset growth, cash acquisitions, and investment in working capital. A loan level analysis demonstrates that borrowers that obtain a loan rating gain increased access to the capital of less informed investors such as foreign banks and non-bank institutional investors. The effects of the loan rating are strongest among firms that are of lower credit quality and do not have an existing public bond rating before bank loan ratings are introduced. This pattern suggests that third-party debt certification expands the supply of available debt financing, which leads to real effects on firm investment policy.
TL;DR: In this paper, a dynamic adjustment model and panel methodology are used to investigate the determinants of a time varying target capital structure and reveal interesting interrelations between the adjustment speed and well-known business cycle variables.
Abstract: A dynamic adjustment model and panel methodology are used to investigate the determinants of a time varying target capital structure. Because firms may temporarily deviate from their target capital structure in the presence of adjustment costs, the adjustment process is also endogenized. Specifically, we analyse the impact of firm-specific characteristics as well as macroeconomic factors on the speed of adjustment to the target debt ratio. The sample comprises a panel of 90 Swiss firms over the years from 1991 to 2001. We document that faster growing firms and those that are further away from their optimal capital structure adjust more readily. The results also reveal interesting interrelations between the adjustment speed and well-known business cycle variables. Most important, the speed of adjustment is higher when the term spread is higher and when economic prospects are good.
TL;DR: The authors found that the importance of historical average market-to-book ratios in leverage regressions is not due to past equity market timing, but rather due to the fact that although equity transactions may be timed to equity market conditions, they do not have significant long lasting effects on capital structure.
Abstract: Contrary to Baker and Wurgler (2002), I find that the importance of historical average market-to-book ratios in leverage regressions is not due to past equity market timing. Al though equity transactions may be timed to equity market conditions, they do not have sig nificant long lasting effects on capital structure. Debt transactions exhibit timing patterns that are unlikely to induce a negative relation between market-to-book ratios and leverage. I also find that historical average market-to-book ratios have significant effects on current financing and investment decisions, implying that they contain information about growth opportunities not captured by current market-to-book ratios.
TL;DR: In this paper, the authors relate the value of growth options in a firm's investment opportunity set to the level of debt in the firm's capital structure, which implies that book leverage should fall with the addition of growth option.
Abstract: We relate the value of growth options in the firm's investment opportunity set to the level of debt in the firm's capital structure. Underinestment costs of debt increase and free cash flow benefits fall with additional growth options. Thus, if debt capacity is defined as the amount of debt the firm optimally adds for an incremental project, then the debt capacity of growth options is negative. This result implies that book leverage should fall with the addition of growth options. Our tests, using a large sample of industrial firms, confirm this prediction.
Posted Content•
TL;DR: In this article, a pecking order of cross-border investment in that countries become financially integrated primarily through some types of investment rather than others is identified. But the authors focus on two key determinants of this pecking-order: information frictions and the quality of host country institutions.
Abstract: Is there a pecking order of cross-border investment in that countries become financially integrated primarily through some types of investment rather than others? Using a novel database of bilateral capital stocks for all types of investment - FDI, portfolio equity securities, debt securities as well as loans - for a broad set of 77 countries, we show that such a pecking order indeed exists. Motivated by the theoretical work on the capital structure of firms, the paper focuses on two key determinants of this pecking order: information frictions and the quality of host country institutions. Overall, we find that in particular FDI, and to some extent also loans, are substantially more sensitive to information frictions than investment in portfolio equity and debt securities. We also show that the share as well as the size of FDI that a country receive are largely insensitive to institutional factors in host countries, while portfolio investment is by far the most sensitive to the quality of institutions. This provides new evidence in favor of some hypotheses but contradicts others put forward in the theoretical literature on trade in financial assets.
TL;DR: In this article, the authors explore factors that affect portfolio size among a sample of venture capital financing data from 214 Canadian funds and find decreasing returns to scale in the number of entrepreneurial firms financed by a venture capital fund.
Abstract: This paper explores factors that affect portfolio size among a sample of venture capital financing data from 214 Canadian funds. Four categories of factors affect portfolio size: (1) the venture capital funds’ characteristics, including the type of fund, fund duration, fund‐raising, and the number of venture capital fund managers; (2) the entrepreneurial firms’ characteristics, including stage of development, technology, and geographic location; (3) the nature of the financing transactions, including staging, syndication, and capital structure; and (4) market conditions. The data further indicate decreasing returns to scale in the number of entrepreneurial firms financed by a venture capital fund.
TL;DR: This article examined the corporate financing behavior of listed companies in the People's Republic of China and found that the positive relationship that firm size and asset tangibility have with firm leverage are consistent with the predictions of the static trade-off capital structure model.
Abstract: This paper examines the corporate financing behaviour of listed companies in the People's Republic of China. Our results suggest that some determinants of firm leverage (e.g., size, asset tangibility, growth opportunities and profitability) commonly cited in studies on developed economies also appear to be important in China. In particular, the positive relationships that firm size and asset tangibility have with firm leverage are consistent with the predictions of the static trade-off capital structure model. However, these commonly quoted determinants function in a way different from that reported in developing countries. Moreover, we do not find that State ownership, legal person ownership and foreign ownership have important influences on the capital structure choices of Chinese firms. Given the tight regulatory control over equity issues and acute owner–manager incentive conflicts in State-owned firms, we also hypothesise, and find evidence to support, that Chinese firms have built-in incentives for raising equity. This provides one explanation of the negative effect of profitability on firm leverage and shows that some of the unique Chinese institutional features do help shape corporate financing behaviour.
TL;DR: In this paper, the authors report on a comprehensive survey of corporate financing decision-making in UK listed companies and find that firms are heterogeneous in their capital structure policies, about half of the firms seek to maintain a target debt level, consistent with trade-off theory, but 60% claim to follow a financing hierarchy.
Abstract: Despite theoretical developments in recent years, our understanding of corporate capital structure remains incomplete. Prior empirical research has been dominated by archival regression studies which are limited in their ability to fully reflect the diversity found in practice. The present paper reports on a comprehensive survey of corporate financing decision-making in UK listed companies. A key finding is that firms are heterogeneous in their capital structure policies. About half of the firms seek to maintain a target debt level, consistent with trade-off theory, but 60% claim to follow a financing hierarchy, consistent with pecking order theory. These two theories are not viewed by respondents as either mutually exclusive or exhaustive. Many of the theoretical determinants of debt levels are widely accepted by respondents, in particular the importance of interest tax shield, financial distress, agency costs and also, at least implicitly, information asymmetry. Results also indicate that cross-country institutional differences have a significant impact on financial decisions.
TL;DR: In this paper, the authors studied the capital structure dynamics of central and eastern European firms to understand the quantitative and qualitative development of financial systems in this region and found that firms prefer internal finance over bank debt and adjust leverage only slowly.
Abstract: This paper studies the capital structure dynamics of central and eastern European firms to better understand the quantitative and qualitative development of financial systems in this region. The dynamic model used endogenises the target leverage as well as the adjustment speed towards these targets. It is applied to microeconomic data for 10 countries. We find that during the transition process firms generally increased their leverage, lowering the gap between actual and target leverage. Profitability and age of firms are the most robust determinants of their capital structure targets. Older firms attract more bank debt, whereas profitability decreases firms’ leverage targets. While banking system development has in general enabled firms to get closer to their leverage targets, information asymmetries between firms and banks are still important. As a result, firms prefer internal finance above bank debt (pecking order behaviour) and adjust leverage only slowly.
01 Jan 2006
TL;DR: In this paper, the authors identify the determinants influencing the capital structure of small and medium-sized enterprises (SMEs) in Vietnam and show that the strong impact of such determinants as firm ownership, firm size, relationships with banks, and networking reflects the asymmetric features of the fund mobilization process in a transitional economy like that of Vietnam.
Abstract: The objective of this article is to identify the determinants influencing the capital structure of small and medium-sized enterprises (SMEs) in Vietnam. Empirical results show that SMEs employ mostly short-term liabilities to finance their operations. A firm’s ownership also affects the way a SME finances its operations. The capital structure of SMEs in Vietnam is positively related to growth, business risk, firm size, networking, and relationships with banks; but negatively related to tangibility. Profitability seems to have no significant impact on the capital structure of Vietnamese SMEs. The strong impact of such determinants as firm ownership, firm size, relationships with banks, and networking reflects the asymmetric features of the fund mobilization process in a transitional economy like that of Vietnam.
TL;DR: In this article, the impact of local taxes and lending conditions on the financial structure of multinationals' foreign affiliates is analyzed and it is shown that adverse local credit market conditions are found to reduce external borrowing, internal debt is increasing, supporting the view that two channels of debt finance are substitutes.
Abstract: This paper analyzes the impact of taxes and lending conditions on the financial structure of multinationals' foreign affiliates. The empirical analysis employs a large panel of affiliates of German multinationals in 26 countries in the period from 1996 until 2003. In accordance with the theoretical predictions, the effect of local taxes on leverage is positive for both types of debt. Moreover, while adverse local credit market conditions are found to reduce external borrowing, internal debt is increasing, supporting the view that the two channels of debt finance are substitutes.
TL;DR: In this article, three proxies of political patronage are developed and applied to a group of Malaysian firms over a 10-year period, and they find a positive and significant link between leverage and each of the three measures.
Abstract: This paper extends prior work on the links between political patronage and capital structure in developing economies. Three proxies of political patronage are developed and applied to a group of Malaysian firms over a 10-year period. We find a positive and significant link between leverage and each of the three measures of political patronage. We also find evidence of an indirect link between political patronage and capital structure through firm size and profitability.