Showing papers on "Capital structure published in 2008"
TL;DR: This paper found that 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.
Abstract: We find that 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. This feature of leverage is largely unexplained by previously identified determinants, is robust to firm exit, and is present prior to the IPO, suggesting that variation in capital structures is primarily determined by factors that remain stable for long periods of time. We then show that these results have important implications for empirical analysis attempting to understand capital structure heterogeneity.
1,166 citations
TL;DR: In this article, the authors investigate how financial and institutional development affects the financing of large and small firms and find that protection of property rights increases external financing of small firms significantly more than of large firms, mainly due to its effect on bank finance.
1,109 citations
01 Jan 2008
1,090 citations
729 citations
TL;DR: In this article, the importance of country-specific and firm-specific factors in the leverage choice of firms from 42 countries around the world was analyzed, and it was shown that there is an indirect impact from countryspecific factors on the capital structure of firms.
Abstract: We analyze the importance of firm-specific and country-specific factors in the leverage choice of firms from 42 countries around the world. Our analysis yields two new results. First, we find that firm-specific determinants of leverage differ across countries, while prior studies implicitly assume equal impact of these determinants. Second, although we concur with the conventional direct impact of country-specific factors on the capital structure of firms, we show that there is an indirect impact because country-specific factors also influence the roles of firm-specific determinants of leverage.
629 citations
TL;DR: In this paper, the authors investigated how firms operating in capital market-oriented economies (the U.K. and the U.S.) and bank oriented economies (France, Germany, and Japan) determine their capital structure and found that the leverage ratio is positively affected by the tangibility of assets and the size of the firm.
Abstract: The paper investigates how firms operating in capital market-oriented economies (the U.K. and the U.S.) 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 fastest in adjusting their capital structure toward their target level and Japanese firms 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 relation, exposure to capital markets, and the level of investor protection in the country in which the firm operates.
562 citations
TL;DR: The authors examined how family ownership affects the performance and capital structure of 613 Canadian firms from 1998 to 2005 and found that freestanding family owned firms with a single share class have similar market performance than other firms based on Tobin's q ratios, superior accounting performance based on ROA, and higher financial leverage based on debt-to-total assets.
Abstract: This study examines how family ownership affects the performance and capital structure of 613 Canadian firms from 1998 to 2005. In particular, we distinguish the effect of family ownership from the use of control-enhancing mechanisms. We find that freestanding family owned firms with a single share class have similar market performance than other firms based on Tobin’s q ratios, superior accounting performance based on ROA, and higher financial leverage based on debt-to-total assets. By contrast, family owned firms that use dual-class shares have valuations that are lower by 17% on average relative to widely held firms, despite having similar ROA and financial leverage.
480 citations
01 Jan 2008
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. This chapter reviews these theories and the related evidence and identifies a number of important empirical stylized facts. To understand the evidence, it is important to recognize the differences among private firms, small public firms, and large public firms. Private firms use retained earnings and bank debt heavily; small public firms make active use of equity financing; and 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.
435 citations
TL;DR: In this article, the authors compare firms' capital structure adjustments across countries and investigate whether institutional differences help explain the variance in estimated adjustment speeds, finding that legal and financial traditions significantly correlate with firm adjustment speeds.
Abstract: Many authors relate a firm’s performance to legal and political features and the regulatory environment in which it operates. This article compares firms’ capital structure adjustments across countries and investigates whether institutional differences help explain the variance in estimated adjustment speeds. We find that legal and financial traditions significantly correlate with firm adjustment speeds. More narrowly, institutional features also relate to adjustment speeds, consistent with the hypothesis that better institutions lower the transaction costs associated with adjusting a firm’s leverage. Such associations between institutional arrangements and leverage adjustment speeds are consistent with the dynamic trade off theory of capital structure choice.
428 citations
TL;DR: In this article, the authors examine the dynamic process by which firms adjust their capital structures and find that most adjustments occur when firms have above-target (below-target) debt with a financial surplus (deficit).
Abstract: If firms adjust their capital structures toward targets, and if there are adverse selection costs associated with asymmetric information, how and when do firms adjust their capital structures? We suggest a financing needs-induced adjustment framework to examine the dynamic process by which firms adjust their capital structures. We find that most adjustments occur when firms have above-target (below-target) debt with a financial surplus (deficit). These results suggest that firms move toward the target capital structure when they face a financial deficit/surplus—but not in the manner hypothesized by the traditional pecking order theory.
383 citations
TL;DR: In this paper, the authors explored two of the most important theories behind financial policy in SMEs, namely, the pecking order and the trade-off theories, and found that SMEs follow a funding source hierarchy (pecking order model), while large firms follow a target or optimum leverage (trade-off model).
Abstract: This paper explores two of the most important theories behind financial policy in Small- and Medium-Sized Enterprises (SMEs), namely, the pecking order and the trade-off theories. Panel data methodology is used to test empirical hypotheses on a sample of 3,569 Spanish SMEs over a 10-year period dating from 1995 to 2004. Results suggest that both theoretical models help to explain SME capital structure. However, despite finding clear evidence that SMEs follow a funding source hierarchy (pecking order model), our results reveal that greater trust is placed in SMEs that aim to reach target or optimum leverage (trade-off model). This remains true even when SMEs take a long time to reach this level, due to the high transaction costs they have to face. Non-debt tax shields (NDTS), growth opportunities and internal resources all seem to play an important role in determining SME capital structure. Both size and age are also found to be significant factors. Moreover, the empirical evidence obtained confirms that SMEs clearly behave differently to large firms where financing is concerned.
TL;DR: In this article, the authors incorporate well-documented managerial traits into a tradeoff model of capital structure to study their impact on corporate financial policy and firm value, finding that managers' investment decisions can increase firm value by reducing this bondholder-shareholder conflict.
Abstract: This article incorporates well-documented managerial traits into a tradeoff model of capital structure to study their impact on corporate financial policy and firm value. Optimistic and/or overconfident managers choose higher debt levels and issue new debt more often but need not follow a pecking order. The model also surprisingly uncovers that these managerial traits can play a positive role. Biased managers' higher debt levels restrain them from diverting funds, which increases firm value by reducing this manager-shareholder conflict. Although higher debt levels delay investment, mildly biased managers' investment decisions can increase firm value by reducing this bondholder-shareholder conflict.
TL;DR: The authors found that firms in bilateral relationships are likely to produce or procure unique products, especially when they are in durable goods industries, consistent with the arguments of Titman and Wessels.
Abstract: Firms in bilateral relationships are likely to produce or procure unique products—especially when they are in durable goods industries. Consistent with the arguments of Titman and Titman and Wessels, such firms are likely to maintain lower leverage. 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 and find results consistent with the predictions of this theory.
TL;DR: In this article, the authors present a model of a multinational firm's optimal debt policy that incorporates international taxation factors, which yields the prediction that multinational firms' indebtedness in a country depends on a weighted average of national tax rates and differences between national and foreign tax rates.
TL;DR: In this article, the authors explored the relevance of capital market supply frictions for corporate capital structure decisions and studied the effect on firms' financial structures of two changes in bank funding constraints: the 1961 emergence of the market for CDs, and the 1966 credit crunch.
Abstract: This paper explores the relevance of capital market supply frictions for corporate capital structure decisions. To identify this relationship, I study the effect on firms' financial structures of two changes in bank funding constraints: the 1961 emergence of the market for CDs, and the 1966 credit crunch. Following an expansion (contraction) in the availability of bank loans, leverage ratios of bank-dependent firms significantly increase (decrease) relative to firms with bond market access. Concurrent changes in the composition of financing sources lend further support to the role of credit supply and debt market segmentation in capital structure choice.
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TL;DR: In this paper, the authors examined how deviations from these targets affect how bidders choose to finance acquisitions and how they adjust their capital structure following the acquisitions, and they found that when a bidder's leverage is over its target level, it is less likely to finance the acquisition with debt and more likely to use equity.
Abstract: In the context of large acquisitions, we provide evidence on whether firms have target capital structures. We examine how deviations from these targets affect how bidders choose to finance acquisitions and how they adjust their capital structure following the acquisitions. We show that when a bidder's leverage is over its target level, it is less likely to finance the acquisition with debt and more likely to finance the acquisition with equity. Also, we find a positive association between the merger-induced changes in target and actual leverage and document that bidders incorporate more than two-thirds of the change to the merged firm's new target leverage. Following debt-financed acquisitions, managers actively move the firm back to its target leverage, reversing more than 75% of the acquisition's leverage effect within 5 years. Overall, our results are consistent with a model of capital structure that includes a target level and adjustment costs.
TL;DR: In this article, the authors employ U.S. data over a 30-year sample period to test the relationship between macroeconomic conditions and capital structure adjustment speed using both two-stage and integrated partial adjustment dynamic capital structure models.
Abstract: Studies show that capital structure choice varies over time and across firms and that macroeconomic conditions are important factors in analyzing firms' financing choices. However, studies have largely ignored the impact of macroeconomic conditions on the adjustment speed of capital structure toward targets. Hackbarth et al. (2006) develop a contingent model for analyzing the impact of macroeconomic conditions on dynamic capital structure choice. Allowing for dynamic capital structure adjustments, their model predicts that firms should adjust their capital structure faster in booms than in recessions. We employ U.S. data over a 30 year sample period to test the relationship between macroeconomic conditions and capital structure adjustment speed using both two-stage and integrated partial adjustment dynamic capital structure models. We find evidence supporting the prediction from Hackbarth et al's theoretical framework that firms adjust to target leverage faster in good states than in bad states, where states are defined by term spread, default spread, GDP growth rate, and market dividend yield. Our results also support the pecking order theory in that under-levered firms adjust faster than firms that are over-levered. We find evidence favoring the market timing theory implication that under-levered firms have less incentive to adjust toward target leverage when stock market performance is good, as measured by dividend yield on the market and price-output ratio. Robustness tests demonstrate that our speed of capital structure adjustment cannot be simply explained by firm size, the degree of deviation from target, or by the definition of debt ratio. Our results are also robust to potential boundary issues.
TL;DR: In this paper, the authors investigated the impact of several corporate governance mechanisms on two alternative proxies for agency costs, namely the ratio of total sales to total assets (asset turnover) and ratio of selling, general and administrative expenses to total sales (SG&A).
Abstract: Purpose – This paper aims to extend the empirical literature on the determinants of agency costs by using a large sample of UK listed firms.Design/methodology/approach – The paper investigates the impact of several corporate governance mechanisms on two alternative proxies for agency costs, namely the ratio of total sales to total assets (asset turnover) and the ratio of selling, general and administrative expenses to total sales (SG&A). The analysis depends on a cross‐sectional regression approach.Findings – The results reveal that the capital structure characteristics of firms, namely bank debt and debt maturity, constitute important corporate governance devices for UK companies. Also, managerial ownership, managerial compensation and ownership concentration are strongly associated with agency costs. Finally, the results suggest that the impact exerted by specific internal governance mechanisms on agency costs varies with firms' growth opportunities.Originality/value – The analysis adds to the empirical...
TL;DR: Li et al. as discussed by the authors found that corporate financing choices are not only affected by firm and industry factors, but also by country institutional factors, focusing on the roles of public governance in firm financing patterns and identifying 23 corruption scandals involving highlevel government bureaucrats in China and a set of publicly traded companies whose senior managers bribed bureaucrats or were connected with bureaucrats through previous job affiliations.
Abstract: Cross-sectional research finds that corporate financing choices are not only affected by firm and industry factors, but also by country institutional factors. This study focuses on the roles of public governance in firm financing patterns. To conduct a natural experiment that avoids endogeneity, we identify 23 corruption scandals involving high-level government bureaucrats in China and a set of publicly traded companies whose senior managers bribed bureaucrats or were connected with bureaucrats through previous job affiliations. We report a significant decline in the leverage and debt maturity ratios of these firms relative to those of other unconnected firms after the arrest of the corrupt bureaucrat in question. These relations persist even if we only focus on the connected firms that were not directly involved in the corruption cases. The relative decline in firm leverage is associated with negative stock price effects. We also examine the possibility that rent seekers are efficient firms and that corruption does not thus result in capital misallocation, but fail to find evidence to substantiate this postulation.
TL;DR: Li et al. as mentioned in this paper found that corporate financing choices are not only affected by firm and industry factors, but also by country institutional factors, focusing on the roles of public governance in firm financing patterns and identifying 23 corruption scandals involving highlevel government bureaucrats in China and a set of publicly traded companies whose senior managers bribed bureaucrats or were connected with bureaucrats through previous job affiliations.
TL;DR: The authors developed a dynamic tradeoff model to examine the importance of manager-shareholder conflicts in capital structure choice and showed that while refinancing costs help explain the patterns observed in the data, their quantitative effects on debt choices are too small to explain financing decisions.
Abstract: We develop a dynamic tradeoff model to examine the importance of manager-shareholder conflicts in capital structure choice. Using panel data on leverage choices and the model's predictions for different statistical moments of leverage, we show that while refinancing costs help explain the patterns observed in the data, their quantitative effects on debt choices are too small to explain financing decisions. We also show that by adding agency conflicts in the model and giving the manager control over the leverage decision, one can obtain capital structure dynamics consistent with the data. In particular, we find that the model needs an average agency cost of 1.5% of equity value to resolve the low-leverage puzzle and to explain the time series of observed leverage ratios. Our estimates also reveal that the variation in agency costs across firms is sizeable and that the levels of agency conflicts inferred from the data correlate with commonly used proxies for corporate governance.
TL;DR: In this paper, the authors quantify the empirical relevance of the pecking order hypothesis using a novel empirical model and testing strategy that addresses statistical power concerns with previous tests, and show that what little pecking-order behavior can be found in the data is driven more by incentive conflicts, as opposed to information asymmetry.
Abstract: We quantify the empirical relevance of the pecking order hypothesis using a novel empirical model and testing strategy that addresses statistical power concerns with previous tests. While the classificatory ability of the pecking order varies significantly depending on whether one interprets the hypothesis in a strict or liberal (e.g., "modified" pecking order) manner, the pecking order is never able to accurately classify more than half of the observed financing decisions. However, when we expand the model to incorporate factors typically attributed to alternative theories, the predictive accuracy of the model increases dramatically --- accurately classifying over 80% of the observed debt and equity issuances. Finally, we show that what little pecking order behavior can be found in the data is driven more by incentive conflicts, as opposed to information asymmetry.
TL;DR: In this article, the importance of country-specific and firm-specific factors in the leverage choice of firms from 42 countries around the world was analyzed, and it was shown that there is an indirect impact from countryspecific factors on the capital structure of firms.
Abstract: We analyze the importance of firm-specific and country-specific factors in the leverage choice of firms from 42 countries around the world. Our analysis yields two new results. First, we find that firm-specific determinants of leverage differ across countries, while prior studies implicitly assume equal impact of these determinants. Second, although we concur with the conventional direct impact of country-specific factors on the capital structure of firms, we show that there is an indirect impact because country-specific factors also influence the roles of firm-specific determinants of leverage.
TL;DR: In this article, the impact of time-varying macroeconomic conditions on optimal dynamic capital structure and the aggregate dynamics of firms in a cross-section is studied. And the authors find that capital structure is procyclical at refinancing dates when firms relever, but counter-cyclical in aggregate dynamics, consistent with empirical evidence.
Abstract: We study the impact of time-varying macroeconomic conditions on optimal dynamic capital structure and the aggregate dynamics of firms in a cross-section. Our structural-equilibrium framework embeds a contingent-claim corporate financing model within a standard consumption-based asset-pricing model. This enables us to investigate the effect of macroeconomic conditions on asset valuation and optimal corporate policies as well as study the impact of preferences on capital structure. We find that capital structure is pro-cyclical at refinancing dates when firms relever, but counter-cyclical in aggregate dynamics, consistent with empirical evidence. Financially constrained firms follow more pro-cyclical policies. Capital structure is path-dependent. Leverage accounts for most of the macroeconomic risk relevant for predicting defaults. The paper also develops a number of novel empirically testable conjectures on capital structure in a dynamic economy.
TL;DR: Li et al. as discussed by the authors examined the relation between leverage and investment in China's listed firms, where corporate debt is principally provided by state-owned banks and obtained three major findings.
TL;DR: Li et al. as discussed by the authors examined the relation between leverage and investment in China's listed firms, where corporate debt is principally provided by state-owned banks and obtained three major findings.
Abstract: This study examines the relations between leverage and investment in China's listed firms, where corporate debt is principally provided by state-owned banks. We obtain three major findings. First, there is a negative relation between leverage and investment. Second, the negative relation between leverage and investment is weaker in firms with low growth opportunities and poor operating performance than in firms with high growth opportunities and good operating performance. Third, the negative relation between leverage and investment is weaker in firms with a higher level of state shareholding than in firms with a lower level of state shareholding. Overall, our results are consistent with the hypothesis that the state-owned banks in China impose fewer restrictions on the capital expenditures of low growth and poorly performing firms and also firms with greater state ownership. This creates an over-investment bias in these firms.
TL;DR: In this article, the zero-inflated beta model is used to analyze corporate capital structure decisions to demonstrate its applicability to the analysis of corporate capital-structure decisions.
TL;DR: In this paper, the authors examine how the process of securitization allowed trillions of dollars of risky assets to be transformed into securities that were widely considered to be safe, and argue that two key features of the structured finance machinery fueled its spectacular growth.
Abstract: The essence of structured finance activities is the pooling of economic assets (e.g. loans, bonds, mortgages) and subsequent issuance of a prioritized capital structure of claims, known as tranches, against these collateral pools. As a result of the prioritization scheme used in structuring claims, many of the manufactured tranches are far safer than the average asset in the underlying pool. We examine how the process of securitization allowed trillions of dollars of risky assets to be transformed into securities that were widely considered to be safe, and argue that two key features of the structured finance machinery fueled its spectacular growth. At the core of the recent financial market crisis has been the discovery that these securities are actually far riskier than originally advertised.
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TL;DR: In this paper, the authors compared the capital structures of publicly quoted firms, large unquoted firms, and small and medium enterprises (SMEs) in Ghana using a panel regression model, and examined the determinants of capital structure decisions among the three sample groups.
Abstract: This study compares the capital structures of publicly quoted firms, large unquoted firms, and small and medium enterprises (SMEs) in Ghana. Using a panel regression model, the paper also examines the determinants of capital structure decisions among the three sample groups. The results show that quoted and large unquoted firms exhibit significantly higher debt ratios than do SMEs. The results did not show significant difference between the capital structures of publicly quoted firms and large unquoted firms. The results reveal that short-term debt constitutes a relatively high proportion of total debt of all the sample groups. The regression results indicate that age of the firm,size of the firm, asset structure, profitability, risk and managerial ownership are important in influencing the capital structure decisions of Ghanaian firms. For the SME sample, it was found that factors such as the gender of the entrepreneur, export status, industry,location of the firm and form of business are also important in explaining the capitalstructure choice. The study provides useful recommendations for policy direction and management of these firms.
TL;DR: In this paper, the authors investigated the relationship between ownership structure and capital structure in an emerging market and found that Jordanian firms follow the same determinants of capital structure as occur in developed markets, namely: profitability, firm size, growth rate, market-to-book ratio, asset structure and liquidity.
Abstract: Purpose – The study aims to investigate the comparatively under‐researched relationship between ownership structure and capital structure in an emerging market. It is also one of the first studies to apply both single and reduced‐form equation methods using a panel data approach. Design/methodology/approach – The study applies econometrics modelling using both single equation and reduces equation models for panel data.Findings – The results demonstrate that Jordanian firms follow the same determinants of capital structure as occur in developed markets, namely: profitability, firm size, growth rate, market‐to‐book ratio, asset structure and liquidity. In addition, institutional ownership structure is found to be determined by: assets structure, business risk (BR), growth opportunities and firm size. Finally, the results reveal that assets tangibility, firm size, growth opportunities and BR are considered to be joint determinants of ownership structure and capital structure.Practical implications – The prac...