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Showing papers on "Capital structure published in 2009"


Journal ArticleDOI
TL;DR: This article examined the relative importance of many factors in the capital structure decisions of publicly traded American firms from 1950 to 2003 and found that the most reliable factors for explaining market leverage are: median industry leverage, market-to-book assets ratio (−), tangibility (+), profits (−), log of assets (+), and expected inflation (+).
Abstract: This paper examines the relative importance of many factors in the capital structure decisions of publicly traded American firms from 1950 to 2003. The most reliable factors for explaining market leverage are: median industry leverage (+ effect on leverage), market-to-book assets ratio (−), tangibility (+), profits (−), log of assets (+), and expected inflation (+). In addition, we find that dividend-paying firms tend to have lower leverage. When considering book leverage, somewhat similar effects are found. However, for book leverage, the impact of firm size, the market-to-book ratio, and the effect of inflation are not reliable. The empirical evidence seems reasonably consistent with some versions of the trade-off theory of capital structure.

2,380 citations


Journal ArticleDOI
TL;DR: This article examined time-series patterns of external financing decisions and showed that publicly traded U.S. firms fund a much larger proportion of their financing deficit with external equity when the cost of equity capital is low.
Abstract: This paper examines time-series patterns of external financing decisions and shows that publicly traded U.S. firms fund a much larger proportion of their financing deficit with external equity when the cost of equity capital is low. The historical values of the cost of equity capital have long-lasting effects on firms’ capital structures through their influence on firms’ historical financing decisions. We also introduce a new econometric technique to deal with biases in estimates of the speed of adjustment toward target leverage. We find that firms adjust toward target leverage at a moderate speed, with a half-life of 3.7 years for book leverage, even after controlling for the traditional determinants of capital structure and firm fixed effects.

875 citations


Journal ArticleDOI
TL;DR: In this paper, the authors investigated the relationship between internal governance structures and financial performance of Indian companies, including board composition, board size, and aspects of board leadership including duality and board busyness using two theories of corporate governance: agency theory and resource dependency theory.
Abstract: Manuscript Type: Empirical Research Question/Issue: This paper investigates the relationship between internal governance structures and financial performance of Indian companies. The effectiveness of boards of directors, including board composition, board size, and aspects of board leadership including duality and board busyness are addressed in the Indian context using two theories of corporate governance: agency theory and resource dependency theory. Research Findings/Insights: The study used a sample of top Indian companies taking into account the endogeneity of the relationships among corporate governance, corporate performance, and corporate capital structure. The study provides some support for aspects of agency theory as a greater proportion of outside directors on boards were associated with improved firm performance. The notion of separating leadership roles in a manner consistent with agency theory was not supported. For instance, the notion that powerful CEOs (duality role, CEO being the promoter, and CEO being the only board manager) have a detrimental effect on performance was not supported. There was some support for resource dependency theory. The findings suggest that larger board size has a positive impact on performance thus supporting the view that greater exposure to the external environment improves access to various resources and thus positively impacts on performance. The study however failed to support the resource dependency theory in terms of the association between frequency of board meetings and performance. Similarly the results showed that outside directors with multiple appointments appeared to have a negative effect on performance, suggesting that “busyness” did not add value in terms of networks and enhancement of resource accessibility. Theoretical/Academic Implications: The two theories of corporate governance, namely agency and resource dependence theory, were each only partially supported, by the findings of this study. The findings add further to the view that no single theory explains the nexus between corporate governance and performance. Practitioner/Policy Implications: This study demonstrates that corporate governance measures utilized in developed economies related to boards of directors have some synergies and relevance to emerging economies, such as India. However, the nature of business structures in India, for example the large number of family businesses, may limit the generalizability of the findings and signals the need for further investigation of these businesses. The evidence related to multiple appointments of directors suggests that there may be support for restricting the number of directorships held by any one individual in emerging economies, given that the “busyness” of directors was negatively associated with firm performance.

798 citations


Journal ArticleDOI
TL;DR: In this article, the impact of capital structure choice on firm performance in Egypt as one of emerging or transition economies is investigated using multiple regression analysis in estimating the relationship between the leverage level and firm's performance.
Abstract: Purpose – The purpose of this paper is to empirically investigate the impact of capital structure choice on firm performance in Egypt as one of emerging or transition economies.Design/methodology/approach – Multiple regression analysis is used in the study in estimating the relationship between the leverage level and firm's performance.Findings – Using three of accounting‐based measures of financial performance (i.e. return on equity (ROE), return on assets (ROA), and gross profit margin), and based on a sample of non‐financial Egyptian listed firms from 1997 to 2005 the results reveal that capital structure choice decision, in general terms, has a weak‐to‐no impact on firm's performance.Originality/value – This is the first study that examines the relationship between leverage level and firm performance in Egypt.

510 citations


Journal ArticleDOI
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 like loans, bonds, and mortgages, and the 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. This ability of structured finance to repackage risks and to create “safe” assets from otherwise risky collateral led to a dramatic expansion in the issuance of structured securities, most of which were viewed by investors to be virtually risk-free and certified as such by the rating agencies. At the core of the recent financial market crisis has been the discovery that these securities are actually far riskier than originally advertised. 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. First, we show that most securities could only have received high credit ratings if the rating agencies were extraordinarily confident about their ability to estimate the underlying securities’ default risks, and how likely defaults were to be correlated. Using the prototypical structured finance security—the collateralized debt obligation (CDO)—as an example, we illustrate that issuing a capital structure amplifies errors in evaluating the risk of the underlying securities.

463 citations


Posted Content
TL;DR: In this article, the authors analyze the strategic use of debt financing to improve a firm's bargaining position with an important supplier, and show that strategic incentives from union bargaining appear to have a substantial impact on corporate financing decisions.
Abstract: I analyze the strategic use of debt financing to improve a firm's bargaining position with an important supplier -- organized labor. Because maintaining high levels of corporate liquidity can encourage workers to raise their wage demands, a firm with external finance constraints has an incentive to use the cash flow demands of debt service to improve its bargaining position with workers. Using both firm-level collective bargaining coverage and state changes in labor laws to identify changes in union bargaining power, I show that strategic incentives from union bargaining appear to have a substantial impact on corporate financing decisions.

423 citations


Posted Content
TL;DR: In this article, the authors show that standard cross-sectional determinants of firm leverage also apply to the capital structure of large banks in the United States and Europe and find that banks appear to have stable capital structures at levels that are specific to each individual bank.
Abstract: This paper documents that standard cross-sectional determinants of firm leverage also apply to the capital structure of large banks in the United States and Europe. We find a remarkable consistency in sign, significance and economic magnitude. Like non-financial firms, banks appear to have stable capital structures at levels that are specific to each individual bank. The results suggest that capital requirements may only be of second-order importance for banks' capital structures and confirm the robustness of current corporate finance findings in a holdout sample of banks.

406 citations


Journal ArticleDOI
TL;DR: In this article, the authors show that incentive conflicts between firms and their creditors have a large impact on corporate debt policy and that the effect of creditor actions on debt policy is strongest when the borrower's alternative sources of finance are costly.
Abstract: We show that incentive conflicts between firms and their creditors have a large impact on corporate debt policy. Net debt issuing activity experiences a sharp and persistent decline following debt covenant violations, when creditors use their acceleration and termination rights to increase interest rates and reduce the availability of credit. The effect of creditor actions on debt policy is strongest when the borrower’s alternative sources of finance are costly. In addition, despite the less favorable terms offered by existing creditors, borrowers rarely switch lenders following a violation. A FUNDAMENTAL QUESTION IN FINANCIAL ECONOMICS is: How do firms choose their financial policies? Extant empirical research on this question has focused primarily on the presence of taxes and bankruptcy costs (e.g., Scott (1976)), information asymmetry (e.g., Myers and Majluf (1984)), and more recently, market timing behavior (e.g., Baker and Wurgler (2002)). However, beginning with Jensen and Meckling (1976), a large body of theoretical research examines how incentive conflicts between managers and external investors affect corporate financial policies. In particular, theoretical research on financial contracting shows that in the presence of incentive conflicts, optimal debt contracts will allocate certain rights to creditors after negative performance in order to help firms secure financing ex ante (e.g., Aghion and Bolton (1992) and Dewatripont and Tirole

382 citations


Journal ArticleDOI
TL;DR: In this paper, the authors investigate the capital structure determinants of Greek, French, Italian, and Portuguese small and medium-sized enterprises (SMEs) and compare the capital structures of SMEs across countries and differences in country characteristics, asset structure, size, profitability, risk, and growth.
Abstract: In this paper we investigate the capital structure determinants of Greek, French, Italian, and Portuguese small and medium-sized enterprises (SMEs). We compare the capital structures of SMEs across countries and differences in country characteristics, asset structure, size, profitability, risk, and growth and how these may impact capital structure choices. The results show that SMEs in these countries determine their capital structure in similar ways. We attribute these similarities to the country institutional and financial characteristics and the commonality of their civil law systems. However, structural differences arise due to firm specific effects. We find that size is positively related to leverage while the relationship between leverage and asset structure, profitability and risk is negative. Growth is not a statistically significant determinant of leverage for any of the four countries. Our main conclusion is that firm-specific rather than country facts explain differences in capital structure choices of SMEs.

344 citations


Journal ArticleDOI
TL;DR: In this article, the authors used an information asymmetry index based on measures of adverse selection developed by the market microstructure literature to test if information asymmetric is the sole determinant of capital structure decisions as suggested by the pecking order theory.
Abstract: Using an information asymmetry index based on measures of adverse selection developed by the market microstructure literature, we test if information asymmetry is the sole determinant of capital structure decisions as suggested by the pecking order theory. Our tests rely 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 capital structure decisions of U.S. firms over the period 1973-2002, especially when firms' financing needs are low and when firms are financially constrained. We also find a significant degree of intertemporal variability in firms' degree of information asymmetry, as well as in its impact on firms' debt issuance decisions. Our findings based on the information asymmetry index are robust to sorting firms based on size and firm insiders' trading activity, two popular alternative proxies for the severity of adverse selection. 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.

344 citations


Journal ArticleDOI
TL;DR: In this article, the authors highlight the importance of interaction among management, labor, and investors in shaping corporate governance and find that strong union laws protect not only workers but also underperforming managers.
Abstract: Our results highlight the importance of interaction among management, labor, and investors in shaping corporate governance. We find that strong union laws protect not only workers but also underperforming managers. Weak investor protection combined with strong union laws are conducive to worker–management alliances, wherein poorly performing firms sell assets to prevent large-scale layoffs, garnering worker support to retain management. Asset sales in weak investor protection countries lead to further deteriorating performance, whereas in strong investor protection countries they improve performance and lead to more layoffs. Strong union laws are less effective in preventing layoffs when financial leverage is high.

Posted Content
TL;DR: In this article, the authors estimate the market's valuation of the net benefits to leverage using panel data from 1994 to 2004, identified from market values and betas of a company's debt and equity.
Abstract: I estimate the market's valuation of the net benefits to leverage using panel data from 1994 to 2004, identified from market values and betas of a company's debt and equity. The median firm captures net benefits of up to 5.5% of firm value. Small and profitable firms have high optimal leverage ratios, as predicted by theory but in contrast to existing empirical evidence. Companies are on average slightly underlevered relative to the optimal leverage ratio at refinancing. This result is mainly due to zero leverage firms. I also look at implications for financial policy.

Journal ArticleDOI
Mark T. Leary1
TL;DR: In this paper, 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 certificates of deposit, 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 certificates of deposit, 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.

Journal ArticleDOI
TL;DR: The authors embeds a structural model of credit risk inside a dynamic continuous-time consumption-based asset pricing model, which allows us to price equity and corporate debt in a unified framework.
Abstract: We embed a structural model of credit risk inside a dynamic continuous-time consumption-based asset pricing model, which allows us to price equity and corporate debt in a unified framework. Our key economic assumptions are that the first and second moments of earnings and consumption growth depend on the state of the economy which switches randomly, creating intertemporal risk, which agents prefer to resolve sooner rather than later, because they have Epstein-Zin-Weil preferences. Agents optimally choose dynamic capital structure and default times. For a dynamic cross-section of firms, our model endogenously generates a realistic average term structure and time series of actual default probabilities and credit spreads, together with a reasonable levered equity risk premium, which varies with macroeconomic conditions.

Journal ArticleDOI
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.

Journal ArticleDOI
TL;DR: In this article, the authors examined time series patterns of external financing decisions and showed that publicly traded U.S. firms fund a much larger proportion of their financing deficit with external equity when the cost of equity capital is low.
Abstract: This paper examines time series patterns of external financing decisions and shows that publicly traded U.S. firms fund a much larger proportion of their financing deficit with external equity when the cost of equity capital is low. The historical values of the cost of equity capital have long-lasting effects on firms' capital structures through their influence on firms' historical financing decisions. We also introduce a new econometric technique to deal with biases in estimates of the speed of adjustment towards target leverage. We find that firms adjust toward target leverage at a moderate speed, with a half-life of 3.7 years for book leverage, even after controlling for the traditional determinants of capital structure and firm fixed effects.

Journal ArticleDOI
TL;DR: In this article, a model based on the trade-off and pecking-order theories was proposed to investigate the factors affecting capital structure decisions of Turkish lodging companies, and the results showed that effective tax rates, tangibility of assets, and return on assets are related negatively to the debt ratio.
Abstract: Purpose – The purpose of this paper is to investigate the factors affecting capital structure decisions of Istanbul Stock Exchange (ISE) lodging companies.Design/methodology/approach – A model based on the trade‐off and pecking order theories is specified and implications of both theories are empirically tested. The model is estimated using a dynamic panel data approach for five ISE companies for the period of 1994‐2006.Findings – The findings suggest that effective tax rates, tangibility of assets, and return on assets are related negatively to the debt ratio, while free cash flow, non‐debt tax shields, growth opportunities, net commercial credit position, and firm size do not appear to be related to the debt ratio. Although the findings partially support the pecking order theory, neither the trade‐off nor the pecking order theory exactly seem to explain the capital structure of Turkish lodging companies.Research limitations/implications – The data used in this paper are limited to five companies traded ...

Journal ArticleDOI
Darren J. Kisgen1
TL;DR: This article showed that firms downgraded to speculative grade ratings are about twice as likely to reduce debt as other firms, and the effect of a downgrade is larger at downgrades to a speculative grade rating and if commercial paper access is affected.
Abstract: Firms reduce leverage following credit rating downgrades. In the year following a downgrade, downgraded firms issue approximately 1.5%–2.0% less net debt relative to net equity as a percentage of assets compared to other firms. This relationship persists within an empirical model of target leverage behavior. The effect of a downgrade is larger at downgrades to a speculative grade rating and if commercial paper access is affected. In particular, firms downgraded to speculative are about twice as likely to reduce debt as other firms. Rating upgrades do not affect subsequent capital structure activity, suggesting that firms target minimum rating levels.

Posted Content
TL;DR: In this article, the authors investigate the capital structure determinants of small and medium-sized enterprises (SMEs) using a sample of Greek and French firms and find that the SMEs in both countries exhibit similarities in their capital structure choices, attributed to their institutional characteristics and in particular the commonality of their civil law systems.
Abstract: We investigate the capital structure determinants of small and medium sized enterprises (SMEs) using a sample of Greek and French firms. We address the following questions: Are the capital structure determinants of SMEs in the two countries driven by similar factors? Are potential differences driven by country-specific or firm-specific factors? Are the size and structure of their financial markets important factors to explain any cross-country differences on SME capital structure? To answer these questions we apply panel data methods to the sample of firms for the period 1998 to 2002. We assess the extent to which the debt to assets ratio of firms depends upon their asset structure, size, profitability and growth rate. The results show that the SMEs in both countries exhibit similarities in their capital structure choices. Asset structure and profitability have a negative relationship with leverage, whereas firm size is positively related to their debt to assets ratio. Growth is statistically significant only for France and is positively related to debt. We attribute these similarities to their institutional characteristics and in particular the commonality of their civil law systems. We find differences in the intensity of the capital structure relationship between the two countries. We provide evidence that these differences are due to firm-specific rather than country factors.

Posted Content
TL;DR: In this article, the authors evaluate the capital-structure determinants of Latin American firms using a comprehensive sample covering seven countries and find a positive relation between leverage and ownership concentration, when losing control becomes an issue.
Abstract: This study evaluates the capital-structure determinants of Latin American firms using a comprehensive sample covering seven countries. Firms in the region have debt levels similar to those of U.S. firms, which is puzzling, given that Latin American firms experience relatively lower tax benefits and higher bankruptcy costs. This study argues that ownership-concentrated firms avoid issuing equity because they do not want to share control rights. Latin American firms have high ownership concentration, which creates an ideal setting to study how ownership concentration explains firms' capital structure. Consistent with the control argument, this study finds a positive relation between leverage and ownership concentration, when losing control becomes an issue. Also, the study shows a positive relation between leverage and growth. In addition, the study reports that other determinants that do not proxy for control rights are consistent with previous findings. Firms that are larger, have more tangible assets, and are less profitable are also more leveraged.

Journal ArticleDOI
TL;DR: In this paper, the authors examine the relation between equity market liquidity and capital structure and find that firms with more liquid equity have lower leverage and prefer equity financing when raising capital, while firms with less liquid equity tend to be more leveraged.

Journal ArticleDOI
TL;DR: In this article, the authors investigate the capital structure choices that firms make in their initial year of operation, using restricted-access data from the Kauffman Firm Survey, and find that the firms in their data rely heavily on external debt sources such as bank financing, and less extensively on friends and family-based funding sources.
Abstract: This paper investigates the capital structure choices that firms make in their initial year of operation, using restricted-access data from the Kauffman Firm Survey. Contrary to many accounts of startup activity, the firms in our data rely heavily on external debt sources such as bank financing, and less extensively on friends and family-based funding sources. This fact is robust to numerous controls for credit quality, industry, and business owner characteristics. The heavy reliance on external debt underscores the importance of well functioning credit markets for the success of nascent business activity.

Journal ArticleDOI
TL;DR: In this article, 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.

Journal ArticleDOI
TL;DR: In this paper, the SEC certified a fourth credit rating agency, Dominion Bond Rating Service (DBRS), for use in bond investment regulations, and showed that bond yields change in the direction implied by the firm's DBRS rating relative to its ratings from other certified rating agencies.
Abstract: In February 2003, the SEC officially certified a fourth credit rating agency, Dominion Bond Rating Service ("DBRS"), for use in bond investment regulations. After DBRS certification, bond yields change in the direction implied by the firm's DBRS rating relative to its ratings from other certified rating agencies. A one notch better DBRS rating corresponds to a 42 basis point reduction in a firm's debt cost of capital. The impact on yields is driven by cases where the DBRS rating is better than other ratings and is larger among bonds rated near the investment-grade cutoff. These findings indicate that ratings-based regulations on bond investment affect a firm's cost of debt capital.

Journal ArticleDOI
TL;DR: In this article, a two-sided jump model for credit risk was proposed by extending the Leland-Toft endogenous default model based on the geometric Brownian motion, which showed that jump risk and endogenous default can have significant impacts on credit spreads, optimal capital structure, and implied volatility of equity options.
Abstract: We propose a two-sided jump model for credit risk by extending the Leland–Toft endogenous default model based on the geometric Brownian motion. The model shows that jump risk and endogenous default can have significant impacts on credit spreads, optimal capital structure, and implied volatility of equity options: (1) Jumps and endogenous default can produce a variety of non-zero credit spreads, including upward, humped, and downward shapes; interesting enough, the model can even produce, consistent with empirical findings, upward credit spreads for speculative grade bonds. (2) The jump risk leads to much lower optimal debt/equity ratio; in fact, with jump risk, highly risky firms tend to have very little debt. (3) The two-sided jumps lead to a variety of shapes for the implied volatility of equity options, even for long maturity options; although in general credit spreads and implied volatility tend to move in the same direction under exogenous default models, this may not be true in presence of endogenous default and jumps. Pricing formulae of credit default swaps and equity default swaps are also given. In terms of mathematical contribution, we give a proof of a version of the “smooth fitting” principle under the jump model, justifying a conjecture first suggested by Leland and Toft under the Brownian model.

Journal Article
TL;DR: In this article, the authors investigated the potential relationship of working capital management policies with the accounting and market measures of profitability of Pakistani firms using a panel data set for the period 1998-2005.
Abstract: (ProQuest: ... denotes formulae omitted.)IntroductionThe corporate finance literature has traditionally focused on the study of long-term financial decisions, particularly investments, capital structure, dividends or company valuation decisions. However, short-term assets and liabilities are important components of total assets and need to be carefully analyzed. Management of these short-term assets and liabilities warrants a careful investigation since the working capital management plays an important role in a firm's profitability and risk as well as its value (Smith, 1980). Efficient management of working capital is a fundamental part of the overall corporate strategy in creating the shareholders' value. Firms try to keep an optimal level of working capital that maximizes their value (Deloof, 2003; Howorth and Westhead, 2003 and Afza and Nazir, 2007).In general, from the perspective of Chief Financial Officer (CFO), working capital management is a simple and straightforward concept of ensuring the ability of the organization to fund the difference between the short-term assets and short-term liabilities (Harris, 2005). However, a 'Total' approach is desired as it can cover all the company's activities relating to vendor, customer and product (Hall, 2002). In practice, working capital management has become one of the most important issues in the organizations where many financial executives are struggling to identify the basic working capital drivers and an appropriate level of working capital (Lamberson, 1995). Consequently, companies can minimize risk and improve the overall performance by understanding the role and drivers of working capital management.A firm may adopt an aggressive working capital management policy with a low level of current assets as a percentage of total assets, or it may also be used for the financing decisions of the firm in the form of high level of current liabilities as a percentage of total liabilities. Excessive levels of current assets may have a negative effect on the firm's profitability, whereas a low level of current assets may lead to a lower level of liquidity and stockouts, resulting in difficulties in maintaining smooth operations (Van Horne and Wachowicz, 2004).The main objective of working capital management is to maintain an optimal balance between each of the working capital components. Business success heavily depends on the financial executives' ability to effectively manage receivables, inventory, and payables (Filbeck and Krueger, 2005). Firms can reduce their financing costs and/or increase the funds available for expansion projects by minimizing the amount of investment tied up in current assets. Most of the financial managers' time and efforts are allocated towards bringing non-optimal levels of current assets and liabilities back to optimal levels (Lamberson, 1995). An optimal level of working capital would be the one in which a balance is achieved between risk and efficiency. It requires continuous monitoring to maintain proper level in various components of working capital, i.e., cash receivables, inventory and payables, etc.In general, current assets are considered as one of the important components of total assets of a firm. A firm may be able to reduce the investment in fixed assets by renting or leasing plant and machinery, whereas the same policy cannot be followed for the components of working capital. The high level of current assets may reduce the risk of liquidity associated with the opportunity cost of funds that may have been invested in long-term assets. Though the impact of working capital policies on profitability is highly important, only a few empirical studies have been carried out to examine this relationship. This study investigates the potential relationship of aggressive/conservative policies with the accounting and market measures of profitability of Pakistani firms using a panel data set for the period 1998-2005. …

Posted Content
TL;DR: In this article, the relationship between corporate governance and capital structure of listed companies in an emerging equity market, Pakistan was explored by using multivariate regression analysis under fixed effect model approach.
Abstract: This paper explores the relationship between corporate governance and capital structure of listed companies in an emerging equity market, Pakistan. The study covers the period 2002 to 2005 for which firm level data for 58 randomly selected non-financial listed companies from Karachi Stock Exchange has been examined by using multivariate regression analysis under fixed effect model approach. Measures of corporate governance employed are board size, board composition, and CEO/Chair duality. Impact of shareholding on financing decisions has also been examined by using managerial shareholding and institutional shareholding. Similarly influence of controlled variables like firm size and profitability on firms’ financing mechanism is also investigated. Results reveal that board size and managerial shareholding is significantly negatively correlated with debt to equity ratio. However corporate’s financing behavior is not found significantly influenced by CEO/Chair duality and the presence of non-executive directors on the board. However, control variables firm size and return on assets are found to have a significant effect on capital structure. No temporal effects are observed. Therefore results suggest that corporate governance variables like size and ownership structure and managerial shareholding play important role in determination of financial mix of the firms.

Journal ArticleDOI
TL;DR: In this paper, the authors exploit Moody's 1982 credit rating refinement to examine its effects on firms' credit market access, financing decisions, and investment policies, and show that credit market information asymmetry significantly affects firms' real outcomes.

Journal ArticleDOI
TL;DR: In this paper, the determinants of capital structure decisions of small and medium enterprises (SMEs) in Ghana are examined and the results of the study suggest that variables such as firm's age, size, asset structure, profitability, and growth affect the capital structure of Ghanaian SMEs.
Abstract: Purpose – The purpose of this study is to examine the determinants of capital structure decisions of small and medium enterprises (SMEs) in Ghana. The issue is very relevant considering that SMEs have been noted as important contributors to the growth of the Ghanaian economy.Design/methodology/approach – Regression model is used to estimate the relationship between the firm level characteristics and capital structure measured by long‐term debt and short‐term debt ratios.Findings – The results of the study suggest that variables such as firm's age, size, asset structure, profitability, and growth affect the capital structure of Ghanaian SMEs. Short‐term debt is found to represent an important financing source for SMEs in Ghana.Originality/value – The findings of this study have important implications for policy makers and entrepreneurs of SMEs in Ghana.

Posted Content
TL;DR: This article investigated the relation between firms' locations and their corporate finance decisions and found that firms located within industry clusters make more acquisitions, and have lower debt ratios and larger cash balances than their industry peers located outside clusters.
Abstract: This paper investigates the relation between firms’ locations and their corporate finance decisions. We develop a model where being located within an industry cluster increases opportunities to make acquisitions, and to facilitate those acquisitions, firms within clusters maintain more financial slack. Consistent with our model we find that firms located within industry clusters make more acquisitions, and have lower debt ratios and larger cash balances than their industry peers located outside clusters. We also document that firms in high tech cities and growing cities also maintain more financial slack. Overall the evidence suggests that growth opportunities influence firms’ financial decisions.