Showing papers on "Capital structure published in 2007"
TL;DR: Taxes, bankruptcy costs, transactions costs, adverse selection, and agency conflicts have all been advocated as major explanations for the corporate use of debt financing as mentioned in this paper, and these ideas have often been synthesized into the trade-off theory and the pecking order theory of leverage.
Abstract: 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.
748 citations
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TL;DR: In this paper, the authors investigated how firms operating in capital market oriented economies and bank oriented economies determine their capital structure and found that the leverage ratio is positively affected by the tangibility of assets and the size of the firm, but declines with an increase in firm profitability, growth opportunities and share price performance.
Abstract: The paper investigates how firms operating in capital market oriented economies (the United Kingdom and the United States) and bank oriented economies (France, Germany and Japan) determine their capital structure. Using panel data and a two-step system-GMM procedure, the paper finds that the leverage ratio is positively affected by the tangibility of assets and the size of the firm, but declines with an increase in firm profitability, growth opportunities and share price performance in both types of economies. The leverage ratio is also affected by the market conditions in which the firm operates. The degree and effectiveness of these determinants are dependent on the country's legal and financial traditions. The results also confirm that firms have target leverage ratios, with French firms being the quickest in adjusting their capital structure towards their target level, and the Japanese are the slowest. Overall, the capital structure of a firm is heavily influenced by the economic environment and its institutions, corporate governance practices, tax systems, the borrower-lender relationship, exposure to capital markets, and the level of investor protection in the country in which the firm operates.
671 citations
TL;DR: In this paper, the authors use a calibrated dynamic trade-off model to simulate firms' capital structure paths and find that in the presence of frictions, firms adjust their capital structure infrequently.
Abstract: In the presence of frictions, firms adjust their capital structure infrequently. As a consequence, in a dynamic economy the leverage of most firms is likely to differ from the “optimum” leverage at the time of readjustment. This paper explores the empirical implications of this observation. I use a calibrated dynamic trade-off model to simulate firms' capital structure paths. The results of standard cross-sectional tests on these data are consistent with those reported in the empirical literature. In particular, the standard interpretation of some test results leads to the rejection of the underlying model. Taken together, the results suggest a rethinking of the way capital structure tests are conducted.
647 citations
TL;DR: This article examined how cash flows, investment expenditures, and stock price histories affect debt ratios and found that these variables have a substantial influence on changes in capital structure, but in contrast to previous conclusions, their effects are partially reversed.
609 citations
TL;DR: In this article, the authors developed an agency model of financial contracting and derived long-term debt, a line of credit, and equity as optimal securities, capturing the debt coupon and maturity; the interest rate and limits on the credit line; inside versus outside equity; dividend policy; and capital structure dynamics.
Abstract: We develop an agency model of financial contracting. We derive long-term debt, a line of credit, and equity as optimal securities, capturing the debt coupon and maturity; the interest rate and limits on the credit line; inside versus outside equity; dividend policy; and capital structure dynamics. The optimal debt-equity ratio is history dependent, but debt and credit line terms are independent of the amount financed and, in some cases, the severity of the agency problem. In our model, the agent can divert cash flows; we also consider settings in which the agent undertakes hidden effort, or can control cash flow risk.
449 citations
TL;DR: In this paper, a continuous time model of a firm that can dynamically adjust both its capital structure and its investment choices is presented, where the investment choice and the firm value are both determined by an exogenous price process that describes the firm's product market.
Abstract: This paper presents a continuous time model of a firm that can dynamically adjust both its capital structure and its investment choices. In the model we endogenize the investment choice as well as firm value, which are both determined by an exogenous price process that describes the firm's product market. Within the context of this model we explore cross-sectional as well as time-series variation in debt ratios. We pay particular attention to interactions between financial distress costs and debtholder/equityholder agency problems and examine how the ability to dynamically adjust the debt ratio affects the deviation of actual debt ratios from their targets. Regressions estimated on simulated data generated by our model are roughly consistent with actual regressions estimated in the empirical literature. Copyright 2007, Oxford University Press.
413 citations
TL;DR: This paper examined how shocks to the supply of credit impact corporate financing and investment using the collapse of Drexel Burnham Lambert, Inc., the passage of the Financial Institutions Reform, Recovery, and Enforcement Act, and regulatory changes in the insurance industry as an exogenous contraction in a supply of below-investment-grade credit after 1989.
Abstract: We examine how shocks to the supply of credit impact corporate financing and investment using the collapse of Drexel Burnham Lambert, Inc., the passage of the Financial Institutions Reform, Recovery, and Enforcement Act, and regulatory changes in the insurance industry as an exogenous contraction in the supply of below-investment-grade credit after 1989. A difference-in-differences empirical strategy coupled with a variety of treatment-control comparisons reveals that substitution to bank debt and alternative sources of capital (e.g., equity, cash balances, trade credit) was extremely limited. Consequently, net investment decreased almost one-for-one with the contraction in net issuing activity. Further, the impact of the credit contraction on financing and investment varied cross-sectionally as a function of geographic heterogeneity in the cost of bank capital and the credit risk of borrowers. Despite this sharp change in behavior, corporate leverage ratios remained relatively stable, a result of the contemporaneous decline in debt issuances and investment. Overall, our findings highlight how even large firms with access to public credit markets are susceptible to fluctuations in the supply of capital.
396 citations
TL;DR: In this article, the authors investigated whether traditional capital structure theory developed to explain western economies can explain companies' leverage decisions in emerging Central and Eastern European (CEE) countries, and found that neither the trade-off, pecking order, nor agency costs theories explain the capital structure choices.
369 citations
TL;DR: Li et al. as discussed by the authors explored the role of ownership structure and institutional development in debt financing of non-publicly traded Chinese firms and found that state ownership is positively associated with leverage and firms' access to long-term debt, while foreign ownership is negatively associated with all measures of leverage.
Abstract: We employ a unique data set to explore the role of ownership structure and institutional development in debt financing of non-publicly traded Chinese firms. We show that state ownership is positively associated with leverage and firms' access to long-term debt, while foreign ownership is negatively associated with all measures of leverage. Surprisingly, firms in better developed regions are associated with reduced access to long-term debt, suggesting the availability of alternative financing channels and the tightening of the lending standards under the on-going banking reform. The combination of ownership structures and institutions explains up to six percent of the total variation in firms' leverage decisions, while firm characteristics alone explain no more than eight percent of the variation. Finally, we show that the negative effect of institutional development on firms' access to long-term debt is mitigated when the level of state or foreign ownership is high, and state ownership plays no role in foreign-controlled firms' access to long-term debt while its positive effect on access to long-term debt is strengthened for firms in well developed regions. Our evidence is consistent with state-owned banks' incentives to grant long-term loans only to state-owned firms in the absence of well-developed risk management.
344 citations
TL;DR: In this article, the authors examined the relationship between corporate governance and the capital structure decisions of listed firms in Ghana and found statistically significant and positive associations between capital structure and board size, board composition, and CEO duality.
Abstract: Purpose – This paper seeks to examine the relationship between corporate governance and the capital structure decisions of listed firms in Ghana.Design/methodology/approach – Multiple regression analysis is used in the study in estimating the relationship between the corporate governance characteristics and capital structure.Findings – The empirical results show statistically significant and positive associations between capital structure and board size, board composition, and CEO duality. The results generally indicate that Ghanaian listed firms pursue high debt policy with larger board size, higher percentage of non‐executive directors, and CEO duality. The results also show a negative (though statistically insignificant) relationship between the tenure of the CEO and capital structure, suggesting that, entrenched CEOs employ lower debt in order to reduce the performance pressures associated with high debt capital.Originality/value – The main value of this paper is the analysis of the effect of corporat...
336 citations
TL;DR: In this article, the determinants of disclosure level in the accounting for financial instruments of Portuguese listed companies were studied and an index of disclosure based on IAS 32 and IAS 39 requirements was computed for each company.
TL;DR: In this paper, the authors develop and test a new theory of security issuance that is consistent with the puzzling stylized fact that firms issue equity when their stock prices are high, thus maximizing the likelihood of agreement with investors.
Abstract: We develop and test a new theory of security issuance that is consistent with the puzzling stylized fact that firms issue equity when their stock prices are high. The theory also generates new predictions. Our theory predicts that managers use equity to finance projects when they believe that investors’ views about project payoffs are likely to be aligned with theirs, thus maximizing the likelihood of agreement with investors. Otherwise, they use debt. We find strong empirical support for our theory and document its incremental explanatory power over other security-issuance theories such as market timing and time-varying adverse selection. A CENTRAL QUESTION IN CORPORATE FINANCE IS: Why and when do firms issue equity? Recent empirical papers have exposed significant gaps between the stylized facts and theories of security issuance and capital structure, so we seem to lack a coherent answer to this question. Our purpose is to develop a new theory of security issuance that is consistent with these difficult-to-explain stylized facts. One empirical regularity is the genesis of the current debate: Firms issue equity when their stock prices are high. This fact is inconsistent with the two main theories of security issuance and capital structure: tradeoff and pecking order. The tradeoff theory asserts that a firm’s security issuance decisions move its capital structure toward an optimum that is determined by a tradeoff between the marginal costs (bankruptcy and agency costs) and benefits (debt tax shields and reduction of free cash flow problems) of debt. Thus, an increase in a firm’s stock price, which effectively lowers its leverage ratio, should lead to debt issuance. However, the evidence suggests the opposite is true. While CEOs do consider stock prices to be a key factor in security issuance decisions (Graham and Harvey (2001)), firms issue equity rather than debt when stock prices are high (e.g., Asquith and Mullins (1986), Baker and Wurgler (2002), Jung, Kim, and Stulz (1996), Marsh (1982), and Mikkelson and Partch (1986)). Moreover, Welch (2004) finds that firms let their leverage ratios drift with their stock
TL;DR: In this paper, the authors investigate the link between a firm's leverage and the characteristics of its suppliers and customers and find a positive relation between firm debt level and the degree of concentration in supplier/customer industries.
TL;DR: In this article, the authors investigated the effect of the capital structure on the performance of Jordanian companies and found that the short-term debt to total assets (STDTA) level has a significantly positive effect on the market performance measure (Tobin's Q).
Abstract: This study is to investigate the effect which capital structure has had on corporate performance using a panel data sample representing of 167 Jordanian companies during 1989-2003. Our results showed that a firm’s capital structure had a significantly negative impact on the firm’s performance measures, in both the accounting and market’s measures. We also found that the short-term debt to total assets (STDTA) level has a significantly positive effect on the market performance measure (Tobin’s Q). The Gulf Crisis 1990-1991 was found to have a positive impact on Jordani an corporate performance while the out break of Intifadah in the West Bank and Gaza in September 2000 had a negative impact on corporate performance.
TL;DR: In this article, the impact of capital structure on the performance of micro finance institutions was examined in sub-Saharan Africa, where the authors found that highly leveraged microfinance institutions perform better by reaching out to more clientele, enjoy scale economies, and therefore are better able to deal with moral hazard and adverse selection.
Abstract: Purpose – The purpose of this paper is to examine the impact of capital structure on the performance of microfinance institutions.Design/methodology/approach – Panel data covering the ten‐year period 1995‐2004 were analyzed within the framework of fixed‐ and random‐effects techniques.Findings – Most of the microfinance institutions employ high leverage and finance their operations with long‐term as against short‐term debt. Also, highly leveraged microfinance institutions perform better by reaching out to more clientele, enjoy scale economies, and therefore are better able to deal with moral hazard and adverse selection, enhancing their ability to deal with risk.Originality/value – This is the first study of its kind in the sector, especially within sub‐Saharan Africa.
TL;DR: In this article, the authors analyzed the firm characteristics that affect the capital structure of 129 Greek companies listed on the Athens Stock Exchange during 1997-2001 and found that there is a negative relation between the debt ratio of the firms and their growth, their quick ratio and their interest coverage ratio.
Abstract: Purpose – The aim of this study is to isolate the firm characteristics that affect capital structure.Design/methodology/approach – The investigation has been performed using panel data procedure for a sample of 129 Greek companies listed on the Athens Stock Exchange during 1997‐2001. The number of the companies in the sample corresponds to the 63 per cent of the listed firms in 1996. The firm characteristics are analyzed as determinants of capital structure according to different explanatory theories. The hypothesis that is tested in this paper is that the debt ratio at time t depends on the size of the firm at time t, the growth of the firm at time t, its quick ratio at time t and its interest coverage ratio at time t. The firms that maintain a debt ratio above 50 per cent using a dummy variable are also distinguished.Findings – The findings of this study justify the hypothesis that there is a negative relation between the debt ratio of the firms and their growth, their quick ratio and their interest cov...
TL;DR: In this article, the effect of debt policy on the financial performance of small and medium-sized enterprises (SMEs) in Ghana and South Africa was examined, and the results indicated that capital structure, especially long-term and total debt ratios, negatively affect performance of SMEs.
Abstract: Purpose – The purpose of this research is to examine the effect of debt policy (capital structure) on the financial performance of small and medium‐sized enterprises (SMEs) in Ghana and South Africa. Previous studies, especially on large firms, have shown that capital structure affects firm performance. Though the issue has been widely studied, largely missing from this body of literature is the focus on SMEs.Design/methodology/approach – Panel data analysis is used to investigate the relations between measures of capital structure and financial performance.Findings – Using various measures of performance, the results of this study indicate that capital structure influences financial performance, although not exclusively. By and large, the results indicate that capital structure, especially long‐term and total debt ratios, negatively affect performance of SMEs. This suggests that agency issues may lead to SMEs pursuing very high debt policy, thus resulting in lower performance.Originality/value – The main...
TL;DR: This paper found that the fraction of entrepreneurs who work in the region where they were born is significantly higher than the corresponding fraction for dependent workers in more developed regions and positively related to the degree of local financial development.
Abstract: We document that the fraction of entrepreneurs who work in the region where they were born is significantly higher than the corresponding fraction for dependent workers. This difference is more pronounced in more developed regions and positively related to the degree of local financial development. Firms created by locals are more valuable and bigger (in terms of capital and employment), operate with more capital intensive technologies, and are able to obtain greater financing per unit of capital invested, than firms created by non-locals. This evidence suggests that there are so many local entrepreneurs because locals can better exploit the financial opportunities available in the region where they were born. This can help explaining how local financial development cause persistent disparities in entrepreneurial activity, technology, and income.
TL;DR: In this article, the authors investigated the relationship between firm efficiency and leverage and found that the reverse causality effect of efficiency on leverage is positive at low to mid-leverage levels and negative at high leverage ratios.
Abstract: This paper investigates the relationship between firm efficiency and leverage. We consider both the effect of leverage on firm performance as well as the reverse causality relationship. In particular, we address the following questions: Does higher leverage lead to better firm performance? Does efficiency exert a significant effect on leverage over and above that of traditional financial measures of capital structure? Is the effect of efficiency on leverage similar across different capital structures? What is the signalling role of efficiency to creditors or investors? Using a sample of 12,240 New Zealand firms we find evidence supporting the theoretical predictions of the Jensen and Meckling (1976) agency cost model. Efficiency measured as the distance from the industry's ‘best practice’ production frontier is positively related to leverage over the entire range of observed data. The frontier is constructed using the non-parametric Data Envelopment Analysis (DEA) method. Using quantile regression analysis we show that the reverse causality effect of efficiency on leverage is positive at low to mid-leverage levels and negative at high leverage ratios. Firm size also has a non-monotonic effect on leverage: negative at low debt ratios and positive at mid to high debt ratios. The effect of tangibles and profitability on leverage is positive while intangibles and other assets are negatively related to leverage.
TL;DR: In this article, the authors combine elements of the pecking order and trade-off theories of capital structure to develop a more powerful and empirically descriptive theory in which firms have low long-run leverage targets, debt issuances are temporary deviations from target to meet unanticipated capital needs, firms rebalance to target with a lag despite zero adjustment costs, and mature firms pay substantial dividends to foster access to external equity while limiting internal funds to control agency costs and reduce corporate taxes.
Abstract: We combine elements of the pecking order and trade-off theories of capital structure to develop a more powerful and empirically descriptive theory in which firms have low long-run leverage targets, debt issuances are temporary deviations from target to meet unanticipated capital needs, firms rebalance to target with a lag despite zero adjustment costs, and mature firms pay substantial dividends to foster access to external equity while limiting internal funds to control agency costs and reduce corporate taxes. The theory generates new testable hypotheses and resolves the main capital structure puzzles including (i) why equity is not "last resort" financing, (ii) why profitable firms pay dividends and maintain low leverage despite the corporate tax benefits of debt, (iii) why firms fail to "lever up" after stock price increases, and (iv) why leverage rebalancing occurs with a lag despite trivial adjustment costs.
TL;DR: In this article, a database of firms' principal customers (those that account for at least 10% of sales or are otherwise considered important for business) from the Business Information File of Compustat 98 and test the predictions of this theory.
Abstract: Leverage affects a firm's liquidation decision and may therefore affect the value of relation-specific investments made by the firm's stakeholders (Titman, 1984). As a result, firms may want to maintain lower debt ratios if stakeholder relationships are especially important. We compile a database of firms' principal customers (those that account for at least 10% of sales or are otherwise considered important for business) from the Business Information File of Compustat 98 and test the predictions of this theory. We argue that a firm with suppliers that rely heavily on its purchases ("dependent suppliers") is likely to be particularly concerned about the effect its leverage ratio may have on the supplier firms' incentives to make specific investments. Consistent with our expectation, we find that the customers' leverage ratios are lower if their purchases from "dependent suppliers" constitute a higher proportion of their cost of goods sold. Moreover, consistent with Titman (1984) and Titman and Wessels (1988), only the proportion of purchases from suppliers in industries producing durable products (where specific investments are likely to be more important) drives this result. We also examine whether the supplier's leverage ratios are affected by the presence of principal customers. We find evidence of a negative relationship between the supplier's leverage ratio and the proportion of sales to principal customers; however, again, this result only holds for suppliers in industries producing durable products. Additional results suggest that firms producing durable products maintain lower leverage to attenuate potential stakeholder-driven costs associated with the loss of principal customers.
TL;DR: This paper examined the relative importance of many factors in the leverage decisions of publicly traded American firms from 1950 to 2003 and found that the most reliable factors are median industry leverage, market-to-book ratio, tangibility, profits, log of assets, and expected inflation.
Abstract: This paper examines the relative importance of many factors in the leverage decisions of publicly traded American firms from 1950 to 2003. The most reliable factors are median industry leverage (+ effect on leverage), market-to-book ratio (-), tangibility (+), profits (-), log of assets (+), and expected inflation (+). Industry subsumes a number of smaller effects. The empirical evidence seems reasonably consistent with some versions of the tradeoff theory of capital structure. JEL classification: G32
TL;DR: In this article, the authors investigate the dynamics involved in the determination of capital structure of banks in Ghana and show that profitability, corporate tax, growth, asset structure and bank size influence banks' financing or capital structure decision.
Abstract: Purpose – The purpose of this paper is to investigate the dynamics involved in the determination of capital structure of banks in Ghana.Design/methodology/approach – The study employs panel regression model in examining the capital structure of banks in Ghana.Findings – The results of this study show that profitability, corporate tax, growth, asset structure and bank size influence banks' financing or capital structure decision. The significant finding of this study is that, more than 87 per cent of the banks' assets are financed by debts and out of this, short‐term debts appear to constitute more than three quarters of the capital of the banks. This highlights the importance of short‐term debts over long‐term debts in Ghanaian banks' financing.Originality/value – The main value of this paper is identification of factors that determine capital structure of banks in Ghana.
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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.
TL;DR: In this paper, the authors investigate which of the two competing capital structure theories, the pecking order of financing choices or the traditional static trade-off model, better describes the financing decisions in Polish companies traded on the Warsaw Stock Exchange (WSE).
Abstract: The main objective of this paper is to investigate which of the two competing capital structure theories – the pecking order of financing choices or the traditional static trade-off model – better describes the financing decisions in Polish companies traded on the Warsaw Stock Exchange (WSE). The data come from financial statements of the companies and cover a 5-year period, 2000–2004. First, a correlation is run in order to separate a set of significant factors influencing the capital structure from the list of the following independent variables: assets structure, profitability, growth opportunities, liquidity, firm size, product uniqueness, earnings volatility, non-debt tax shields, dividend policy, and the effective tax rate. Next, in order to test the relationship between capital structure and its potential determinants, multiple regression is run. The evidence generally suggests the relevance of the pecking order hypothesis in explaining the financing choices of Polish firms.
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TL;DR: In this paper, the determinants of capital structure of KSE listed none-financial firms for the period 1994-2002 were analyzed using two variants of panel data analysis, and the results approve the prediction of trade-off theory in case of tangibility variable whereas the earning volatility (EV), and depreciation (NDTS) variables fail to confirm to tradeoff theory.
Abstract: Using two variants of panel data analysis, we attempt to find the determinants of capital structure of KSE listed none-financial firms for the period 1994-2002. Pooled regression analysis was applied with the assumption that there were no industry or time effects. However, using fixed effect dummy variable regression, the coefficients for a number of industries were significant showing there were significant industry effects hence we accepted the later model for our analysis. We used six explanatory variables to measure their effect on leverage ratio. Three of our variables were significantly related to leverage ratio whereas the remaining three variables were not statistically significant in having relationship with the debt ratio. Our results approve the prediction of trade-off theory in case of tangibility variable whereas the earning volatility (EV), and depreciation (NDTS) variables fail to confirm to tradeoff theory. The growth (GT) variable confirms the agency theory hypothesis whereas profitability (PF) approves the predictions of pecking order theory. Size (SZ) variable neither confirms to the prediction of tradeoff theory nor to asymmetry of information theory.
TL;DR: In this article, the optimal mixture and priority structure of bank and market debt using a tradeoff model where banks have the unique ability to renegotiate outside formal bankruptcy was examined, and the tradeoff theory offers an explanation for why young/small firms use bank debt exclusively; why large/mature firms employ mixed debt financing; and why bank debt is senior.
Abstract: We examine the optimal mixture and priority structure of bank and market debt using a tradeoff model where banks have the unique ability to renegotiate outside formal bankruptcy. Flexible bank debt offers a superior tradeoff between tax shields and bankruptcy costs. Ease of renegotiation limits bank debt capacity, however. Optimal debt structure hinges upon which party has bargaining power in private workouts. Weak firms have high bank debt capacity and utilize bank debt exclusively. Strong firms lever up to their (lower) bank debt capacity, augment with market debt, and place the bank senior. Therefore, the tradeoff theory offers an explanation for: (i) why young/small firms use bank debt exclusively; (ii) why large/mature firms employ mixed debt financing; and (iii) why bank debt is senior. The tradeoff theory also generates predictions consistent with international evidence. In countries where the bankruptcy regime entails soft (tough) enforcement of contractual priority, bank debt capacity is low (high), implying greater (less) reliance on market debt.
TL;DR: In this paper, the authors present a theory of a firm's investment dynamics in the presence of agency problems and optimal long-term financial contracts and derive results relating firms' investment decisions, current and past cash flows, firm size, capital structure, and dividends.
Abstract: Agency problems limit firms' access to capital markets, curbing investment. Firms and investors seek contractual ways to mitigate these problems. What are the implications for investment? We present a theory of a firm's investment dynamics in the presence of agency problems and optimal long-term financial contracts. We derive results relating firms' investment decisions, current and past cash flows, firm size, capital structure, and dividends. Among the results, optimal investment is increasing in current and past cash flow; and optimal investment is positively serially correlated over time (after controlling for investment opportunities). These results hold for a range of agency problems. (JEL G30, G31, G32, G35, D82, D86, D92) Copyright 2007, Oxford University Press.
TL;DR: In this article, the authors examined the effects of ownership structures on capital structure and firm valuation and found that the effect of separation of control from cash flow rights on the firm value also depend on the separation of controlling from management as well as on legal rules and enforcement defining investors protection.
Abstract: The present paper examines the effects of ownership structures on capital structure and firm valuation. It argues that the effects of separation of control from cash flow rights on capital structure and firm value also depend on the separation of control from management as well as on legal rules and enforcement defining investors’ protection. We obtain firm-level panel data (three stage least squares, 3SLS) estimates from four of the East Asian countries worst affected by the last crisis. There is evidence that the general wisdom that higher control than cash flow rights may lower firm value may be reversed among owner-managed family firms in the sample countries.
TL;DR: In this paper, the effect of top managers on corporate financing decisions was studied and the CFO seems to play at least as important a role as the CEO in determining corporate leverage.
Abstract: This paper studies the effect of top managers on corporate financing decisions. Differences among CEOs account for a great deal of the variation in leverage among firms. After a CEO is forced out, leverage typically declines. Firms that offer higher pay-for-performance to the top executives adjust leverage to target more rapidly. CEO personal characteristics are not closely connected to corporate leverage choices. To some extent the CEO may be serving as a proxy for an entire management team. The CFO seems to play at least as important a role as the CEO in determining corporate leverage. JEL classification: G32