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Showing papers on "Capital structure published in 2016"


Journal ArticleDOI
TL;DR: This article exploit the adoption of state-level labor protection laws as an exogenous increase in employee firing costs to examine how the costs associated with discharging workers affect capital structure decisions and find that firms reduce debt ratios following the adoption, with this result stronger for firms that experience larger increases in firing costs.
Abstract: I exploit the adoption of state-level labor protection laws as an exogenous increase in employee firing costs to examine how the costs associated with discharging workers affect capital structure decisions. I find that firms reduce debt ratios following the adoption of these laws, with this result stronger for firms that experience larger increases in firing costs. I also document that, following the adoption of these laws, a firm's degree of operating leverage rises, earnings variability increases, and employment becomes more rigid. Overall, these results are consistent with higher firing costs crowding out financial leverage via increasing financial distress costs.

252 citations


Journal ArticleDOI
TL;DR: In this article, the authors show that sovereign debt impairments can have a significant impact on financial markets and real economies through a credit ratings channel and identify these effects by exploiting exogenous variation on corporate ratings due to rating agencies' sovereign ceiling policies that require firms' ratings to remain at or below the sovereign rating of their country of domicile.
Abstract: We show that sovereign debt impairments can have a significant impact on financial markets and real economies through a credit ratings channel. Specifically, we find that firms reduce their investment and reliance on credit markets due to a rising cost of debt capital following a sovereign rating downgrade. We identify these effects by exploiting exogenous variation on corporate ratings due to rating agencies' sovereign ceiling policies that require firms' ratings to remain at or below the sovereign rating of their country of domicile.

175 citations


Journal ArticleDOI
TL;DR: The authors survey 79 private equity investors with combined assets under management of more than $750 billion about their practices in firm valuation, capital structure, governance, and value creation, and explore how the actions that PE managers say they take group into specific firm strategies and how those strategies are related to firm founder characteristics.

147 citations


Journal ArticleDOI
TL;DR: In this article, the authors review the empirical literature on the corporate governance of banks and highlight the main differences between banks and non-financial firms and focus on three characteristics that make banks special: (i) regulation, (ii) the capital structure of banks, and (iii) the complexity and opacity of their business and structure.
Abstract: This paper reviews the empirical literature on the corporate governance of banks. We start by highlighting the main differences between banks and nonfinancial firms and focus on three characteristics that make banks special: (i) regulation, (ii) the capital structure of banks, and (iii) the complexity and opacity of their business and structure. Next, we discuss the characteristics of corporate governance in banks and how they differ from the governance of nonfinancial firms. We then review the evidence on three governance mechanisms: (i) boards, (ii) ownership structures, and (iii) executive compensation. Our review suggests that some of the empirical regularities found in the literature on corporate governance of nonfinancial institutions, such as the positive (negative) association between board independence (size) and performance, do not hold for banks. Also, existing work provides no conclusive results regarding the relationship between different governance mechanisms and various measures for banks' performance. We discuss potential explanations for these mixed results.

146 citations


Journal ArticleDOI
TL;DR: This paper exploit the adoption of state-level labor protection laws as an exogenous increase in employee firing costs to examine how the costs associated with discharging workers affect capital structure decisions and find that firms reduce debt ratios following the adoption, with this result stronger for firms that experience larger increases in firing costs.
Abstract: I exploit the adoption of state-level labor protection laws as an exogenous increase in employee firing costs to examine how the costs associated with discharging workers affect capital structure decisions. I find that firms reduce debt ratios following the adoption of these laws, with this result stronger for firms that experience larger increases in firing costs. I also document that, following the adoption of these laws, a firm’s degree of operating leverage rises, earnings variability increases, and employment becomes more rigid. Overall, these results are consistent with higher firing costs crowding out financial leverage via increasing financial distress costs.

100 citations


Journal ArticleDOI
TL;DR: In this article, the authors provide evidence on firm-and country-level determinants of firm capital structure decisions in the MENA region using a sample of 444 listed firms from ten countries, over the 2003-2011 period, and find that firms have target leverage ratios towards which they adjust over time.

95 citations


Journal ArticleDOI
TL;DR: In this paper, the authors used data from the Surveys of Small Business Finances to classify small privately held firms into four groups based upon their need for credit, and found strong and significant differences among each of these four groups of firms.

93 citations


Journal ArticleDOI
TL;DR: In this paper, the authors analyzed the impact of leverage deviation on the implied cost of equity capital and found that firms whose costs of equity are more sensitive to leverage deviation exhibit faster speed of adjustment toward the target.

84 citations


Journal ArticleDOI
TL;DR: In this paper, the role of capital structure in the performance of China's renewable energy firms was analyzed and it was found that capital structure is more important to downstream firms, indicating that policy makers may provide support that enables these firms to finance their investments through corporate bonds, commercial credit, or long-term debts.

82 citations


Journal ArticleDOI
TL;DR: This paper developed a dynamic model of banking to assess the effects of liquidity and leverage requirements on banks' insolvency risk and showed that combining liquidity requirements with leverage requirements reduces both the likelihood of default and the magnitude of bank losses in default.
Abstract: We develop a dynamic model of banking to assess the effects of liquidity and leverage requirements on banks' insolvency risk. In this model, banks face taxation, flotation costs of securities, and default costs and maximize shareholder value by making their financing, liquid asset holdings, and default decisions in response to these frictions as well as regulatory requirements. Our analytic characterization of the bank policy choices shows that imposing solely liquidity requirements leads to lower bank losses in default at the cost of an increased likelihood of default. Combining liquidity requirements with leverage requirements reduces drastically both the likelihood of default and the magnitude of bank losses in default.

75 citations


Journal ArticleDOI
TL;DR: This paper investigated how concentration in debt ownership relates to Chapter11 restructurings, and how claims trading during the restructuring influences ownership concentration, finding that the overall concentration of debt ownership increases the speed with which a restructuring is completed, both via pre-filing, out-of-court prepack/prearranged restructuring and traditional in-court proceedings.

Journal ArticleDOI
TL;DR: In this paper, the authors investigated the linkage of corporate sector performance with the capital structure and macroeconomic environment using a balanced panel data of 1594 Indian corporate firms over 14 years (1998 to 2011).

Journal ArticleDOI
TL;DR: In this paper, the authors explore the relationship between capital structure and firm cash flow volatility using several measures of a firm's volatility and econometric methods that account for the non-linear relationship of proportional variables.

Journal ArticleDOI
TL;DR: In this paper, the authors examined whether and to what degree agency conflicts in ownership structure affect firm leverage ratios and external financing decisions, using a universal sample of UK firms from 1998 to 2012.
Abstract: This paper examines whether and to what degree agency conflicts in ownership structure affect firm leverage ratios and external financing decisions, using a universal sample of UK firms from 1998 to 2012. We use two distinctive measures to capture ownership structure, namely, managerial share ownership (MSO) and institutional ownership. Our empirical results show a non-monotonic relation between MSO and the debt ratio, supporting two competing theories: interest alignment theory and the management entrenchment hypothesis. Nevertheless, institutional ownership is found to be positively related to firm leverage levels. Our results further suggest that firms with concentrated MSO decrease their leverage by increasing the probability of issuing equity over bonds, an effect strengthened during hot market periods.

Journal ArticleDOI
TL;DR: In this paper, the authors analyze how direct employee voice affects financial leverage and find that higher employee power increases financial leverage. But, their analysis only applies to firms with over 2,000 domestic employees.
Abstract: We analyze how direct employee voice affects financial leverage. German law mandates that firms' supervisory boards consist of an equal number of employees' and owners' representatives. This requirement, however, applies only to firms with over 2,000 domestic employees. We exploit this discontinuity and the law's introduction in 1976 for identification and find that direct employee power increases financial leverage. This is explained by a supply side effect: as banks' interests are similar to those of employees, higher employee power reduces agency conflicts with debt providers, leading to better financing conditions. These findings reveal a novel mechanism of direct employee influence.

Journal ArticleDOI
TL;DR: This article examined the effect of earnings management on financial leverage and how this relation is influenced by institutional environments by employing a large panel of 25,777 firms across 37 countries spanning the years 1989-2009.
Abstract: This paper examines the effect of earnings management on financial leverage and how this relation is influenced by institutional environments by employing a large panel of 25,777 firms across 37 countries spanning the years 1989–2009. We find that firms with high earnings management activities are associated with high financial leverage. More importantly, this positive relation is attenuated by strong institutional environments. Our results lend strong support to the notions that (1) both corporate debt and institutional environments can be served as external control mechanisms to alleviate the agency cost of free cash flow; and (2) it is less costly to rely on institutional environments than debt. After meticulously addressing the possible endogeneity issues and conducting various robustness tests, our main conclusions remain confirmed.

Journal ArticleDOI
TL;DR: In this paper, the authors consider a model in which the threat of bank liquidations by creditors as well as equity-based compensation incentives both discipline bankers, but with different consequences, such as greater use of equity leads to lower ex-ante bank liquidity, whereas higher use of debt leads to a higher probability of inefficient bank liquidation.

Journal ArticleDOI
TL;DR: In this article, the authors investigated how start-up capital structure influences the time to either new firm founding or quitting the startup process and found that external equity has an appreciable impact on new firm emergence over time, and the percentage of ownership held by the founders attenuates the benefits of external equity.
Abstract: Why are some entrepreneurs able to start a new firm more quickly than others in the venture creation process? Drawing on pecking order and agency theory, this study investigates how start-up capital structure influences the time to either new firm founding or quitting the start-up process. The temporal aspect of the start-up process is one that is often discussed, but rarely studied. Therefore, we utilize competing risk and Cox regression event history analysis on a nationally representative sample of US entrepreneurs to investigate how start-up capital structure impacts the time in gestation to particular kinds of start-up outcomes. Our findings suggest that external equity has an appreciable impact on new firm emergence over time, and that the percentage of ownership held by the founders attenuates the benefits of external equity.

Journal ArticleDOI
TL;DR: In this article, the authors investigated the extent to which environmental incentives influence German non-financial firms in revealing risk information in their annual report narratives and found that the decision to provide or withhold such risk information is less likely to be significantly associated with environmental incentives.

Journal ArticleDOI
TL;DR: This article explored whether and how the main capital structure determinants of SMEs affected capital structure determination in different ways during the years of economic crisis and found that the main determinants affected SMEs' capital structure determined by the economic cycle.
Abstract: The objective of this paper was to explore whether and how the main capital structure determinants of SMEs affected capital structure determination in different ways during the years of economic cr...

Journal ArticleDOI
TL;DR: In this paper, the influence of the corporate governance and financial ratios on the probability of financially distressed family firms in Indonesia that are listed in Indonesia Stock Exchange in the period of 2008-2013.

Journal ArticleDOI
TL;DR: In this paper, the authors analyze the internal consistency of using the market price of a firm's equity to trigger a contractual change in the firm's capital structure, given that the value of the equity itself depends on the capital structure.
Abstract: We analyze the internal consistency of using the market price of a firm's equity to trigger a contractual change in the firm's capital structure, given that the value of the equity itself depends on the firm's capital structure. Of particular interest is the case of contingent capital for banks, in the form of debt that converts to equity, when conversion is triggered by a decline in the bank's stock price. We analyze the problem of existence and uniqueness of equilibrium values for a firm's liabilities in this context, meaning values consistent with a market-price trigger. Discrete-time dynamics allow multiple equilibria. In contrast, we show that the possibility of multiple equilibria can largely be ruled out in continuous time, where the price of the triggering security adjusts in anticipation of breaching the trigger. Our main condition for existence of an equilibrium requires that the consequences of triggering a conversion be consistent with the direction in which the trigger is crossed. For the design of contingent capital with a stock price trigger, this condition may be interpreted to mean that conversion should be disadvantageous to shareholders, and it is satisfied by setting the trigger sufficiently high. Uniqueness follows provided the trigger is sufficiently accessible by all candidate equilibria. We illustrate precise formulations of these conditions with a variety of applications.

Journal ArticleDOI
TL;DR: In this article, the authors used a large sample of firms from developed and developing countries over the 1990 to 2010 period, and found that firms with zero leverage have a lower cost of equity capital in countries where a zero-leverage policy is more compatible with the local culture.
Abstract: Using a large sample of firms from developed and developing countries over the 1990 to 2010 period, we document evidence of zero-leverage firms around the world. Further, we find strong and robust evidence that in countries with high scores on Schwartz’s Conservatism and Mastery indices as well as high levels of trust, firms are more likely to employ a zero-leverage policy, after controlling for various firm- and country-level determinants of leverage. Finally, we find that firms with zero leverage have a lower cost of equity capital in countries where a zero-leverage policy is more compatible with the local culture.

Journal ArticleDOI
TL;DR: This article investigated the evolution of entrepreneurial firms' debt policies over a period of 15-years after startup, considering leverage, debt specialization, debt maturity and debt granularity, and found that the debt policy in the initial year of operation is a very important determinant of future debt policies.
Abstract: We investigate the evolution of entrepreneurial firms’ debt policies over a period of 15 years after startup, considering leverage, debt specialization, debt maturity and debt granularity. Our analysis is based on a unique sample covering all non-financial Belgian firms founded between 1996 and 1998. We find that the debt policy of entrepreneurial firms is remarkably stable over time. The debt policy in the initial year of operation is a very important determinant of future debt policies, even after controlling for traditional contemporaneous determinants. The founder-CEO has an important impact on the stability of debt policies: the influence of initial debt policies on future debt policies is significantly reduced when the founder-CEO is replaced or when (s)he dies. Combined, our findings support imprinting theory.

Journal ArticleDOI
TL;DR: In this article, the authors examined how the corporate governance mechanisms adopted by firms on the newly established Growth Enterprise Market (GEM) in China influence their use of debt and found that the financial leverage of GEM firms is positively influenced by executives' shareholding and their excess cash compensation.
Abstract: Prior work examining the antecedents of capital structure for small and medium-sized enterprises in emerging markets is limited. This paper sheds light on how the corporate governance mechanisms adopted by firms on the newly established Growth Enterprise Market (GEM) in China influence their use of debt. We find that the financial leverage of GEM firms is positively influenced by executives’ shareholding and their excess cash compensation. Ownership concentration appears to reduce leverage, whereas the percentage of tradable shares increases leverage. In contrast, institutional investors’ shareholding does not influence the level of debt. Traditional factors such as tax and operating cash flow are insignificant in explaining the debt levels among GEM firms.

Journal ArticleDOI
TL;DR: In this article, the authors examine how production flexibility affects financial leverage and find that production flexibility increases financial leverage via the channels of reduced expected cost of financial distress and higher present value of tax shields.
Abstract: We examine how production flexibility affects financial leverage. A worldwide sample of energy utilities allows us to apply direct measures for production flexibility based on their power plants. We find that production flexibility increases financial leverage. For identification, we exploit privatizations and deregulations of electricity markets, geographical variations in natural resources, the technological evolution of gas-fired power plants, and differences in electricity prices and recapitalization cost across regions. Production flexibility affects financial leverage via the channels of reduced expected cost of financial distress and higher present value of tax shields. The relative importance of these channels depends on firms’ profitability.

Journal ArticleDOI
TL;DR: In this article, the authors demonstrate the effect of operating leverage on firms' financial leverage decisions during the financial crisis and find empirically that, by removing operating leverage from profitability, the negative association between the profitability and financial leverage decreases by about 70%, confirming the channel.
Abstract: Operating leverage crowds-out financial leverage while also increasing profitability. Thus, operating leverage generates the negative relation between profitability and financial leverage that appears to be inconsistent with the trade-off theory, but is commonly observed in the data. We find empirically that, by removing the effect of operating leverage from profitability, the negative association between the profitability and financial leverage decreases by about 70%, confirming the channel. We demonstrate the effect of operating leverage on firms’ financial leverage decisions during the financial crisis.

Journal ArticleDOI
TL;DR: In this paper, the effect of leverage and liquidity on the behavior of earnings and capital management in U.S. commercial banks over the period from 1999 to 2013 was examined, and it was shown that aggressive earnings management behavior carries over to aggressive leveraged and liquidity policies.

Journal ArticleDOI
TL;DR: In this article, the authors examine whether the values of equity options traded on individual firms are sensitive to the firm's capital structure and estimate the compound option (CO) model, which views equity as an option on the firm.

Journal ArticleDOI
TL;DR: In this paper, the authors provided a comprehensive view on the financing state of small and medium enterprises (SMEs) in India using information from the financial statements of 1524 SMEs, provided by the database of Centre for Monitoring the Indian Economy, PROWESS, and analyzed the financial ratios of SMEs and the components of debt during the period of 2006-2013.
Abstract: The main purpose of the study is to provide a comprehensive view on the financing state of small and medium enterprises (SMEs) in India. Using the information from the financial statements of 1524 SMEs, provided by the database of Centre for Monitoring the Indian Economy, PROWESS, it analyses the financial ratios of SMEs and the components of debt during the period of 2006–2013. The study describes the financing pattern of SMEs by examining differences across the firm characteristics, namely size, age, ownership, sector, and region. The major findings revealed the dependence of SMEs on short-term debt, and the most frequently used sources of finance are trade credit and bank loans. Hierarchical regression analysis revealed that the major determinants of the capital structure of SMEs are age, profitability, tangibility, and liquidity. Overall, this study concludes that the financing condition of SMEs in India needs to be improved and, therefore, suggests exploring new financing avenues specifically designe...