Showing papers on "Capital structure published in 2014"
TL;DR: In this paper, the authors investigated and examined the effect of capital structure on Jordanian corporate performance using a panel data sample representing of 167 Jordanian companies during 1989-2003 and found 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.
Abstract: The central objective of this study is to investigate and examine the effect which capital structure has had on corporate performance using a panel data sample representing of 167 Jordanian companies during 1989-2003. This paper also examines the effect which external shocks have had on Jordanian corporate performance and industrial sectors. 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. This result suggests that agency issues may lead to higher debt in the capital structure than there should be. 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), which could support Myers' (1977) argument that firms with a high STDTA have a high growth rate and high performance. The Gulf Crisis 1990-1991 was found to have a positive impact on Jordanian corporate performance as the Jordanian market was the only market that was open to Iraq. On the other hand, the outbreak of Intifadah in the West Bank and Gaza in September 2000 had a negative impact on corporate performance, as most of the Jordanian companies exported to the West Bank.
475 citations
TL;DR: In this paper, the authors show that peer firms play an important role in determining corporate capital structures and financial policies, and quantify the externalities generated by peer effects, which can amplify the impact of changes in exogenous determinants on leverage by over 70%.
Abstract: We show that peer firms play an important role in determining corporate capital structures and financial policies In large part, firms' financing decisions are responses to the financing decisions and, to a lesser extent, the characteristics of peer firms These peer effects are more important for capital structure determination than most previously identified determinants Furthermore, smaller, less successful firms are highly sensitive to their larger, more successful peers, but not vice versa We also quantify the externalities generated by peer effects, which can amplify the impact of changes in exogenous determinants on leverage by over 70%
468 citations
TL;DR: In this article, the authors study the capital structure choices that entrepreneurs make in their firms' initial year of operation, using restricted-access data from the Kauffman Firm Survey, and find that 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: We study capital structure choices that entrepreneurs make in their firms' initial year of operation, using restricted-access data from the Kauffman Firm Survey. Firms in our data rely heavily on external debt sources, such as bank financing, and less extensively on friends-and-family-based funding sources. Many startups receive debt financed through the personal balance sheets of the entrepreneur, effectively resulting in the entrepreneur holding levered equity claims in their startups. This fact is robust to numerous controls, including credit quality. The reliance on external debt underscores the importance of credit markets for the success of nascent business activity.
418 citations
TL;DR: It is shown that, when banks can adjust their capital structures, reductions in real interest rates lead to greater leverage and higher risk for any downward sloping loan demand function, but if the capital structure is fixed, the effect depends on the degree of leverage.
321 citations
TL;DR: In this paper, the authors show that high leverage is optimal for banks in a model that has just enough frictions for banks to have a meaningful role in liquid-claim production.
Abstract: Liquidity production is a central function of banks. High leverage is optimal for banks in a model that has just enough frictions for banks to have a meaningful role in liquid-claim production. The model has a market premium for (socially valuable) safe/liquid debt, but no taxes or other traditional motives to lever up. Because only safe debt commands a liquidity premium, banks with risky assets use risk management to maximize their capacity to include such debt in the capital structure. The model can explain why banks have higher leverage than most operating firms, why risk management is central to banks’ operating policies, why bank leverage increased over the last 150 years or so, and why leverage limits for regulated banks impede their ability to compete with unregulated shadow banks.
212 citations
TL;DR: In this article, the authors exploit inter-temporal variations in employment protection across countries and find that rigidities in labor markets are an important determinant of firms' capital structure decisions.
Abstract: This paper exploits inter-temporal variations in employment protection across countries and finds that rigidities in labor markets are an important determinant of firms' capital structure decisions. Over the 1985-2007 period, we find that reforms increasing employment protection are associated with a 187 basis point reduction in leverage. We interpret this finding to suggest that employment protection increases operating leverage, crowding out financial leverage. This result is robust across measures of employment protection and leverage, and does not appear to be due to pre treatment differences between treated and control firms, omitted variables, unobserved changes in regional economic conditions, and reverse causality. Heterogeneous treatment effects are consistent with our economic intuition: we find that the negative effect is more pronounced in firms that are subject to frequent hiring and firing.
207 citations
TL;DR: This paper found that firms affected more by conservatism issue less debt, have lower leverage, hold more cash, are less likely to obtain a debt rating, and experience lower growth than unaffected firms with the same rating.
Abstract: Rating agencies have become more conservative in assigning corporate credit ratings over the period 1985 to 2009; holding firm characteristics constant, average ratings have dropped by three notches. This change does not appear to be fully warranted because defaults have declined over this period. Firms affected more by conservatism issue less debt, have lower leverage, hold more cash, are less likely to obtain a debt rating, and experience lower growth. Their debt spreads are lower than those of unaffected firms with the same rating, which implies that the market partly undoes the impact of conservatism on debt prices. This evidence suggests that firms and capital markets do not perceive the increase in conservatism to be fully warranted.
198 citations
TL;DR: In this article, the most important determinants of capital structure of 870 listed Indian firms comprising both private sector companies and government companies for the period 2001-2010 were identified using regression analysis, and it was concluded that factors such as profitability, growth, asset tangibility, size, cost of debt, tax rate, and debt serving capacity have significant impact on the leverage structure chosen by firms in the Indian context.
Abstract: The paper identifies the most important determinants of capital structure of 870 listed Indian firms comprising both private sector companies and government companies for the period 2001–2010. Ten independent variables and three dependent variables have been tested using regression analysis. It has been concluded that factors such as profitability, growth, asset tangibility, size, cost of debt, tax rate, and debt serving capacity have significant impact on the leverage structure chosen by firms in the Indian context.
147 citations
TL;DR: In this article, the impact of capital structure choice on firm performance in India as one of the emerging economies is investigated based on the agency theory, which is in contrast with the assumptions of agency theory as commonly received and accepted in other developed as well as emerging economies.
Abstract: Purpose – Based on the agency theory, the purpose of this paper is to empirically investigate the impact of capital structure choice on firm performance in India as one of the emerging economies. Design/methodology/approach – Fixed effect panel regression model is used to analyse ten years of data (2003-2012) on the sample units, to find the relation between leverage and firm performance after controlling for factors such as size, age, tangibility, growth, liquidity and advertising. Findings – Empirical results suggest that leverage has a negative influence on financial performance of Indian firms, which is in contrast with the assumptions of agency theory as commonly received and accepted in other developed as well as emerging economies. Consequently, postulates of agency theory have to be seen with different perspective in India given the underdeveloped nature of bond markets and dominance of state-owned banks in lending to corporate sector. Practical implications – The findings of the paper will enable...
146 citations
TL;DR: In this paper, the authors analyze whether the capital structure decisions of SMEs are closer to the assumptions of Trade-Off Theory or to those of Pecking Order Theory, and they conclude that the most profitable and oldest SMEs resort less to debt, which corroborates the forecasts of PEcking order theory.
Abstract: This paper seeks to analyse whether the capital structure decisions of Small and Medium-Sized Enterprises (SMEs) are closer to the assumptions of Trade-Off Theory or to those of Pecking Order Theory. We use a sample of SMEs located in the interior region of Portugal, using the LSDVC dynamic estimator as method of estimation, the empirical evidence obtained allows us to conclude that the most profitable and oldest SMEs resort less to debt, which corroborates the forecasts of Pecking Order Theory. SMEs, with greater size, resort more to debt, corroborating the forecasts of Trade-Off Theory and Pecking Order Theory. In addition, SMEs adjust noticeably their current level of debt towards the optimal debt ratio, which corroborates what is forecast by Trade-Off Theory. Therefore, this paper enhances that Trade-Off and Pecking Order Theories are not mutually exclusive in explaining the capital structure decisions of SMEs. The results suggest that younger and smaller SMEs should be object of public financing support, when the internal financing is clearly insufficient to fund those firms’ activities.
140 citations
TL;DR: In this article, a time-lagged sample, estimated via structural equation modeling of 118 German family firms, supports a behavioral approach to the study of financing decisions, and the authors show that family norms and attitude toward external debt and external equity affect behavioral intention to use the respective financing choices, which in turn affects financing behavior.
Abstract: Adapting the theory of planned behavior to the area of financial choices in family firms, we argue that these choices in family firms are largely affected by family norms, attitude, perceived behavioral control, and behavioral intentions. A time-lagged sample, estimated via structural equation modeling of 118 German family firms, supports a behavioral approach to the study of financing decisions. Specifically, we show that family norms and attitude toward external debt and external equity affect behavioral intention to use the respective financing choices, which in turn affects financing behavior. Perceived behavioral control, however, was shown to negatively affect behavioral intentions to use external equity and was positively related to the use of internal funds. Implications of these capital structure decisions and ideas for future research are discussed.
TL;DR: In this article, a model with bankruptcy costs and segmented deposit and equity markets is proposed to endogenize the cost of equity and deposit finance for banks, showing that despite risk neutrality, equity capital earns a higher expected return than direct investment in risky assets.
Abstract: In a model with bankruptcy costs and segmented deposit and equity markets, we endogenize the cost of equity and deposit finance for banks. Despite risk neutrality, equity capital earns a higher expected return than direct investment in risky assets. Banks hold positive capital to reduce bankruptcy costs, but there is a role for capital regulation when deposits are insured. Banks may no longer use capital when they lend to firms rather than invest directly in risky assets. This depends on whether the firms are public and compete with banks for equity capital, or private with exogenous amounts of capital.
01 Jan 2014
TL;DR: In this article, the authors investigated the relationship between capital structure on the performance of non-financial companies listed in the Nairobi Securities Exchange (NSE), Kenya and found that financial leverage had a statistically significant negative association with performance as measured by return on assets and return on equity.
Abstract: Corporate failure among companies in Kenya has often been associated with the financing behaviour of the firms. Momentous efforts to revive the ailing and liquidating companies have focused on financial restructuring. A great dilemma for management and investors alike is whether there exists an optimal capital structure and how various capital structure decisions, both short-term and long-term, influence business performance. This study therefore investigated the relationship between capital structure on the performance of non-financial companies listed in the Nairobi Securities Exchange (NSE), Kenya. The study employed an explanatory non- experimental research design. A census of 42 non-financial companies listed in the Nairobi Securities Exchange, Kenya was taken. The study used secondary panel data contained in the annual reports and financial statements of listed non-financial companies. The data were extracted from the Nairobi Securities Exchange hand books for the period 2006-2012.The study applied panel data models (random effects). Feasible Generalised Least Square (FGLS) regression results revealed that financial leverage had a statistically significant negative association with performance as measured by return on assets (ROA) and return on equity (ROE). The study recommended that managers of listed non-financial companies should reduce the reliance on long term debt as a source of finance.
TL;DR: In this paper, the authors study the executive compensation structure in 14 of the largest U.S. financial institutions during 2000-2008 and find that managerial incentives are correlated with excessive risk-taking by banks.
TL;DR: This paper found that strong creditor protection is associated with low long-term leverage across countries, and that strong protection discourages firms from making longterm cash flow commitments to service debt because managers and shareholders avoid the risk of losing control in the case of financial distress.
TL;DR: In this paper, the authors examined the effect of access to debt markets on investment decisions by using debt ratings to indicate bond market access and found that rated firms are more likely to undertake acquisitions than non-rated firms.
TL;DR: Li et al. as mentioned in this paper identified profitability, industry leverage, asset growth, tangibility, firm size, state control, and the largest shareholding as reliable core factors explaining book leverage.
Abstract: Existing studies disagree over the basic determinants of capital structure in Chinese firms. We identify profitability, industry leverage, asset growth, tangibility, firm size, state control, and the largest shareholding as reliable core factors explaining book leverage. Compared with evidence from the United States and other countries, we identify three new core factors, and observe that the relative importance of four common core factors for Chinese firms is diverse. In particular, the state-control dummy is negatively associated with book leverage, contrary to findings in certain previous studies. Additional tests indicate that such a negative effect of state-control derives primarily from easier access to equity financing.
TL;DR: In this article, the authors revisited the well-established puzzle that leverage is negatively correlated with measures of profitability and found that at times when firms are at or close to their optimal level of leverage, the cross-sectional correlation between profitability and leverage is positive.
Abstract: We revisit the well-established puzzle that leverage is negatively correlated with measures of profitability. In contrast, we find that at times when firms are at or close to their optimal level of leverage, the cross-sectional correlation between profitability and leverage is positive. At other times, it is negative. These results are consistent with dynamic trade-off models in which infrequent capital structure rebalancing is optimal. The time series of market leverage and profitability in the quarters prior to rebalancing events match the patterns predicted by these models. Our results are not driven by investment layouts, market timing, payout, or mechanical mean reversion of leverage.
Posted Content•
TL;DR: The authors examined the impact of thin capitalization rules that limit the tax deductibility of interest on the capital structure of the foreign affiliates of US multinationals and found that thin capitalisation rules affect multinational firm capital structure in a significant way.
Abstract: This paper examines the impact of thin capitalization rules that limit the tax deductibility of interest on the capital structure of the foreign affiliates of US multinationals. We construct a new data set on thin capitalization rules in 54 countries for the period 1982-2004. Using confidential data on the internal and total leverage of foreign affiliates of US multinationals, we find that thin capitalization rules affect multinational firm capital structure in a significant way. Specifically, restrictions on an affiliate’s debt-to-assets ratio reduce this ratio on average by 1.9%, while restrictions on an affiliate’s borrowing from the parent-to-equity ratio reduce this ratio by 6.3%. Also, restrictions on borrowing from the parent reduce the affiliate’s debt to assets ratio by 0.8%, which shows that rules targeting internal leverage have an indirect effect on the overall indebtedness of affiliate firms. The impact of capitalization rules on affiliate leverage is higher if their application is automatic rather than discretionary. Furthermore, we show that thin capitalization regimes have aggregate firm effects: they reduce the firm’s aggregate interest expense bill but lower firm valuation. Overall, our results show than thin capitalization rules, which thus far have been understudied, have a substantial effect on the capital structure within multinational firms, with implications for the firm’s market valuation.
TL;DR: In this paper, the influence of macroeconomic factors on corporate capital structure in different European countries is analyzed, and correlation and regression techniques are used to identify the relations between these external determinants and capital structure.
TL;DR: This article examined the role of private equity firms in the resolution of financial distress using a sample of 2,151 firms that borrow in the leveraged loan market between 1997 and 2010 and found that PE-backed firms are no more likely to default than other leveraged loans borrowers.
Abstract: We examine the role private equity (PE) firms play in the resolution of financial distress using a sample of 2,151 firms that borrow in the leveraged loan market between 1997 and 2010. Controlling for leverage, PE-backed firms are no more likely to default than other leveraged loan borrowers. When firms do default, PE-backed firms restructure more often out of court, restructure faster, and are more likely to remain an independent going concern following the restructuring. PE owners are also more likely to retain control of the firm following the restructuring. The propensity for PE owners to infuse capital as firms approach distress is positively related to measures of the success of the restructuring. Overall, our results show that PE sponsors resolve distress in portfolio firms relatively efficiently.
TL;DR: In this paper, the authors consider two effects of debt originating from agency theory, namely the takeover defense and the disciplinary effect of debt, on the speed of adjustment to the optimal capital structure and find that both overlevered and underlevered firms with weak governance adjust slowly toward their target debt levels.
Abstract: The effects of corporate governance on optimal capital structure choices have been well documented, though without offering empirical evidence about the impact of corporate governance quality on the adjustment speed toward an optimal capital structure. This study simultaneously considers two effects of debt originating from agency theory—the takeover defense and the disciplinary effects of debt—on the speed of adjustment to the optimal capital structure. Corporate governance has a distinct effect on the speed of capital structure adjustment: weak governance firms that are underlevered tend to adjust slowly to the optimal capital structure, because the costs of the disciplinary role of debt outweigh the benefits of using debt as a takeover defense tool. Although overlevered weak governance firms also adjust slowly, they do so because they are reluctant to decrease their leverage toward the target level to deter potential raiders, especially if they face a serious takeover threat. Therefore, this study finds that both overlevered and underlevered firms with weak governance adjust slowly toward their target debt levels, though with different motivations.
Journal Article•
TL;DR: In this article, the determinants of capital structure in Turkey were investigated by using panel data methods for 79 firms in the manufacturing sector traded on the Istanbul Stock Exchange, and the base model was expanded with firm size and sector-specific effects.
Abstract: This study investigates the determinants of capital structure in Turkey by using panel data methods. The sample period spans from 1993 to 2010 for 79 firms in the manufacturing sector traded on the Istanbul Stock Exchange. The base model was expanded with firm size and sector-specific effects. This study compares also effects on capital structure according to sectors and firm size of variables used in models. Growth opportunities, size, profitability, tangibility and non-debt tax shields are used as the firm-specific variables that affect a firm’s capital structure decision. Empirical results present that there are significant relationships between growth opportunities, size, profitability, tangibility and leverage variables. But non-debt tax shields explanatory variable has insignificant effect on leverage 1 (book value of total debt / total assets) variable. Growth opportunity has effect on capital structure that this result supports the trade-off theory. Size, profitability and tangibility have effects and support the pecking order theory. On the other hand, profitability and growth opportunity variables have more significant effects than other variables on Leverage 1 and Leverage 2 (book value of total debt / book value of equity) for all sectors. Furthermore, in two leverage models, profitability variable of small and large firm groups has effect on capital structure and there is no a significant difference between two groups. Keywords: Capital structure; leverage; financing choice; the determinants of capital structure; panel data analysis. JEL Classifications: G32
01 Jan 2014
TL;DR: In this paper, the effect of capital structure on financial performance of firms listed at the NSE was investigated and a negative and significant relationship between capital structure (DE) and all measures of performance was found.
Abstract: The research aims at establishing, the effect of capital structure on financial performance of firms listed at the NSE. The population of interest of this study was the firms quoted at the NSE, and a census of all firms listed at the NSE from year 2002-2011 was the sample. Secondary data was collected from the financial statements of the firms listed at the NSE. The study used Causal research design and Gretl statistical software to perform the panel Regression analysis. The study concluded that debt and equity are major determinants of financial performance of firms listed at the NSE. There was evidence of a negative and significant relationship between capital structure (DE) and all measures of performance. This implies that the more debt the firms used as a source of finance they experienced low performance. The study also concluded that firms listed at NSE used more short-term debts than long term.
TL;DR: The authors empirically investigate the relation between chief executive officer (CEO) inside debt holdings and mergers and acquisitions (M&As), and find evidence consistent with the agency theory's prediction of a negative relation between CEO inside debt holding and corporate risk taking, and they find evidence that acquirers restructure the postmerger composition of CEO compensation that mirrors their capital structure to alleviate incentives for wealth transfer from shareholders to bondholders or vice versa.
Abstract: I empirically investigate the relation between chief executive officer (CEO) inside debt holdings and mergers and acquisitions (M&As), and find evidence consistent with the agency theory’s prediction of a negative relation between CEO inside debt holdings and corporate risk taking Further analysis shows that CEO inside debt holdings are positively correlated with M&A announcement abnormal bond returns and long-term operating performance, but negatively correlated with M&A announcement abnormal stock returns Finally, I find evidence that acquirers restructure the postmerger composition of CEO compensation that mirrors their capital structure in order to alleviate incentives for wealth transfer from shareholders to bondholders or vice versa
TL;DR: In this article, the association between board of directors composition and capital structure was analyzed and the results provided strong evidence that firms with a larger fraction of independent directors on the board have a capital structure composed with more external capital when compared with retained earnings.
Abstract: The present study empirically analyses the association between board of directors’ composition and capital structure. Particularly, the fraction of independent directors on the board, the fraction of female directors, the board size, and whether the Chief Executive Officer (CEO) is also the chairman of the board are analysed. Consistent with the pecking order theory of Myers (1984) and Myers and Majluf (1984) the results provide strong evidence that firms with a larger fraction of independent directors on the board have a capital structure composed with more external capital when compared with retained earnings; have more short term debt in relation with retained earnings; have more long term debt compared with short term debt; and have more external equity than long term debt. The results also provide some evidence that a more gender diversified board of directors and where the chairman is non-executive (i.e. the CEO is a different person from that of the chairman) can improve the board of directors’ independence and efficiency and therefore lead the firm to have a capital structure composed with more long term sources of financing.
04 Apr 2014
TL;DR: In this paper, the influence of profitability, growth opportunity, and capital structure on firm value was examined on 150 listed companies on the Indonesia Stock Exchange during 2006 to 2010, and the results showed that profitability positively and significanctly affect the company's value.
Abstract: This paper examines the influence of profitability, growth opportunity, and capital structure on firm value. We apply Structural Equation Model (SEM) on 150 listed companies on the Indonesia Stock Exchange during 2006 to 2010. The result shows that profitability, growth opportunity and capital structure positively and significanctly affect the company’s value. Secondly, the capital structure intervene the effect of growth profitability on company’s value, but not for profitability. Keywords: profitability, growth opportunitiy, capital structure, firm value, SEM. JEL Classification: C51, G32, L25
TL;DR: Li et al. as mentioned in this paper identified profitability, industry leverage, asset growth, tangibility, firm size, state control, and the largest shareholding as reliable core factors explaining book leverage.
Abstract: Existing studies disagree over the basic determinants of capital structure in Chinese firms. We identify profitability, industry leverage, asset growth, tangibility, firm size, state control, and the largest shareholding as reliable core factors explaining book leverage. Compared with evidence from the United States and other countries, we identify three new core factors, and observe that the relative importance of four common core factors for Chinese firms is diverse. In particular, the state-control dummy is negatively associated with book leverage, contrary to findings in certain previous studies. Additional tests indicate that such a negative effect of state-control derives primarily from easier access to equity financing.
TL;DR: In this paper, the effect of financial leverage on financial performance of the Nigeria pharmaceutical companies over a period of twelve (12) years (2001 - 2012) for the three (3) selected companies.
Abstract: A common phenomenon in the financial reports of Nigerian pharmaceutical companies is the volume of short-term and long-term liabilities that forms a considerable size of their capital structure. Explaining the role of financial leverage in companies' financial performance is one of the primary objectives of contemporary researches and this role remains a questionable subject which has continued to attract the attention of many researchers. The main objective of this study is to determine the effect of financial leverage on financial performance of the Nigeria pharmaceutical companies over a period of twelve (12) years (2001 - 2012) for the three (3) selected companies. This work employed three (3) financial leverage for the independent variables such as: debt ratio (DR); debt-equity ratio (DER) and interest coverage ratio (ICR) in determining their effect on financial performance for Return on Assets (ROA) as dependent variable. The ex-post facto research design was used for this study. The secondary data were obtained from the financial statement (Comprehensive income statement and Statement of financial position) of the selected pharmaceutical companies' quoted on the Nigerian Stock Exchange (NSE). Descriptive statistics, Pearson correlation and regressions were employed and used for this study. The results of the analysis showed that debt ratio (DR) and debt-equity ratio (DER) have negative relationship with Return on Assets (ROA) while interest coverage ratio (ICR) has a positive relationship with Return on Assets (ROA) in Nigeria pharmaceutical industry. The analysis also revealed that all the independent variables have no significant effect on financial performance of the sampled companies. The results further suggested that only 16.4% of the variations on the dependent variable are caused by the independent variables in our model suggesting that 83.6% of the variations in financial performance are caused by other factors outside our model. Based on the above findings, the researchers now recommend that companies' management should ensure that financial decisions made by them are in consonance with the shareholders' wealth maximization objectives which encompasses the profit maximization objective of the firm. The amount of debt finance in the financial mix of the firm should be at the optimal level so as to ensure adequate utilisation of the firms' assets. The management should also monitor the interest charged on debt financing to avoid liquidation of the company.
TL;DR: Both stock returns and performance improve after the takeover attempt and are consistent with the argument that the control threat has important spillover effects for the other firms in the industry.
Abstract: This paper studies how industry peers respond when another firm in the industry is the subject of a hostile takeover attempt. The industry peers cut their capital spending, free cash flows, and cash holdings, and increase their leverage and payouts to shareholders. They also adopt more takeover defenses. The stock price reaction upon announcement of the takeover is positive and larger for peer firms with higher capital spending and higher free cash flows. Before the takeover attempt, the peer firms borrow less and invest more than predicted. Both stock returns and performance improve after the takeover attempt. These results are consistent with the argument that the control threat has important spillover effects for the other firms in the industry.
This paper was accepted by Wei Xiong, finance.