Showing papers on "Capital structure published in 2018"
TL;DR: In this paper, the Inevitable Disclosure Doctrine was recognized by US state courts, which exogenously increases the protection of a firm's trade secrets by reducing the mobility of its workers who know its secrets to rivals.
153 citations
TL;DR: This article found that the effects of firm age on how much debt a firm uses is primarily due to the interaction between firm age and its governance features, implying that over time, managers allow their risk preferences to dominate their firm capital structure decisions when they are protected from discipline.
146 citations
05 Apr 2018
TL;DR: In this article, the authors examined the optimum level of capital structure through which a firm can increase its financial performance using annual data of ten firms spanning a five-year period and found evidence of a negative and significant relationship between asset tangibility and ROA as a measure of performance.
Abstract: This paper examines the optimum level of capital structure through which a firm can increase its financial performance using annual data of ten firms spanning a five-year period. The results from Im, Pesaran & Shine unit root test show that all the variables were non-stationary at level. The study hypothesized negative relationship between capital structure and operational firm performance. However, the results from Panel Least Square (PLS) confirm that asset turnover, size, firm’s age and firm’s asset tangibility are positively related to firm’s performance. Findings provide evidence of a negative and significant relationship between asset tangibility and ROA as a measure of performance in the model. The implication of this is that the sampled firms were not able to utilize the fixed asset composition of their total assets judiciously to impact positively on their firms’ performance. Hence, this study recommends that asset tangibility should be a driven factor to capital structure because firms with more tangible assets are less likely to be financially constrained. Keywords: Capital structure, Corporate finance, Firms, Performance, Regression Nigeria.
117 citations
TL;DR: It is shown that the equilibrium order quantity is a function of market parameters, and deviates from the classical newsvendor solution, which leads to an upper limit on the potential loss faced by the bank, and thus helps manage bankruptcy risk.
Abstract: Problem definition: Banks commonly use asset-based lending (ABL) to provide loans collateralized by a borrower firm’s inventory. We study the implications of ABL by examining how banks should deter...
86 citations
TL;DR: In this article, the authors examine the relationship between financial literacy, access to finance and growth among small and medium-sized enterprises (SMEs) within the Midlands region of the UK.
Abstract: The purpose of this paper is to examine the relationship between financial literacy, access to finance and growth among small- and medium-sized enterprises (SMEs) within the Midlands region of the UK. It assesses whether financial literacy assists SMEs to overcome information asymmetry, mitigates the need for collateral, optimizes capital structure and improves access to finance.,To gain a deeper insight into the complex relationship between financial literacy, access to finance and growth, a qualitative research is carried out among SMEs that have operated for over five years or longer. Using the purposive sampling technique, 37 firms were selected based on size, location and characteristics, mainly from the city of Birmingham and the joining conurbations. Open-ended and a combination of dichotomous questions were used for the survey. Interviews were recorded, transcribed and thematically analyzed.,Financial literacy is an interconnecting resource that mitigates information asymmetry and collateral deficit when evaluating loan applications, therefore financial literacy should be part of school curriculum. The analysis suggests enhanced financial literacy, reduces monitoring cost and serves to optimize firms’ capital structure that positively impacts on SMEs growth. Financial management knowledge is recognized as the core resource that aids an effective decision making by owners of SMEs.,The limitation of this research is the small sample that limits its generalization. Its findings could be enhanced by a larger sample and by conducting comparative studies in other regions or economies. SMEs growth is seen as a strategic policy to stimulate enterprise but the finance gap tends to constrain that objective. The UK Government’s effort to improve access to finance and to mitigate excessive collateral demands by lenders has proved elusive. This empirical research provides evidence that financial literacy enhances access to finance and, in turn, promotes growth potentials.,The results of this study advocate the provision of financial literacy at schools and target support for SMEs to acquire financial management skills in order to mitigate information asymmetry between lenders and borrowers.,Findings suggest that financial literacy mediates access to finance, enables enterprises to use optimal financial structure to mitigate business failure, creates employment and reduces public sector support for social benefits.,This study is novel in that it examines financial literacy and its implications for access to finance and firm growth in the UK. The study is an effort to highlight the role of financial information in mitigating barriers to finance for SMEs.
78 citations
TL;DR: In this paper, a broad range of uncertainty measures are used to show that uncertainty dramatically slows down firms' adjustments toward their optimal capital structure, and that the estimated speed of leverage adjustments almost halves when uncertainty is high.
72 citations
TL;DR: In this article, the authors analyzed the evolution of the main theories regarding the capital structure and the related impact on risk and corporate performance in the Romanian market, and they showed that leverage is positively correlated with the size of the company and share price volatility.
Abstract: This paper analyzes the evolution of the main theories regarding the capital structure and the related impact on risk and corporate performance. The capital structure is a dynamic process that changes over time, depending on the variables that influence the overall evolution of the economy, a particular sector, or a company. It may also change depending on the company’s forecasts of its expected profitability, capital structure being, in fact, a risk–return compromise. This study contributes to the literature by investigating the drivers of capital structure of the firms from the Romanian market. For the econometric analysis, we applied multivariate fixed-effects regressions, as well as dynamic panel-data estimations (two-step system generalized method of moments, GMM) on a panel comprising the companies listed on the Bucharest Stock Exchange. The analyzed period, 2000–2016, covers a cycle with significant changes in the Romanian economy. Our results showed that leverage is positively correlated with the size of the company and the share price volatility. On the other hand, the debt structure has a different impact on corporate performance, whether this calculated on accounting measures or seen as market share price evolution.
63 citations
TL;DR: In this paper, the authors developed a new perspective on capital structure differences between for-profit social and commercial enterprises by combining imprinting and social entrepreneurship theory, and found that forprofit social enterprises have 40% to 13% lower leverage and up to four times greater leverage stability over time than commercial enterprises.
58 citations
TL;DR: In this article, the authors examine the flexibility of multinational firms to adjust their income-shifting strategies during the tax year to react to affiliates' operating losses, and they develop the concept that under flexibility, multinationals can adjust their inter-affiliate payments ex-post (i.e., after financial outcomes are revealed, but before the end of tax year) to minimize worldwide tax payments.
Abstract: This study examines the flexibility of multinational firms to adjust their income-shifting strategies—whether using transfer pricing or internal debt—during the tax year to react to affiliates' operating losses. We develop the concept that under flexibility, multinationals can adjust their inter-affiliate payments ex post (i.e., after financial outcomes are revealed, but before the end of the tax year) to minimize worldwide tax payments. Without flexibility, multinationals must commit to their affiliates' income-shifting strategies ex ante (i.e., before financial outcomes are revealed). Our central prediction is that under ex post income shifting, loss affiliates report lower transfer prices and internal leverage than profitable affiliates; under ex ante income shifting, affiliates report the same transfer prices and internal capital structure, regardless of making losses. Using novel data on direct transfer payments and internal debt of Norwegian affiliates, we find empirical evidence that tran...
55 citations
TL;DR: In this article, the most reliable debt determinants identified in the literature on both firm types were analyzed and the impact of these determinants on firms' capital structure was shown to be consistent with the Pecking order theory and the trade-off theory.
Abstract: Many Muslim individual and institutional investors seek to invest only in stocks that are compliant with the Shari'ah (i.e. Islamic law). Among others, Dow Jones addressed this demand and has developed their proprietary screening methodologies to identify Shari'ah compliant firms (SC). One key factor that distinguishes SC firms from their non-compliant peers (SNC) is that the former is not allowed to cross the leverage threshold of 33%. Due to the restrictions imposed on them, it is expected that SC firms exhibit different capital structure compared to the SNC firms. The purpose of this initial comparative study is to analyze the most reliable debt determinants identified in the literature on both firm types. This study utilizes static panel data techniques on the sample consisting of SC and SNC firms from 7 countries and 7 industries over the years 2004–2014. Our study is inconclusive and it shows that most of the determinants do exhibit different effects among both firm types. Depending on the leverage measure, the effect of different independent variables on firms' capital structure varies. A uniform effect can be exerted for debt determinants profitability for both leverage measures, and growth opportunities, firm size and tangibility for market leverage only. Our robustness tests reveal that the impact of some debt determinants on firms leverage remains consistent. The coefficient sign and significance suggests, that the capital structure decision of both firm types, both are better explained by the Pecking Order Theory for book and by the Trade-Off Theory for market leverage, respectively.
50 citations
TL;DR: This article developed a model of the joint capital structure decisions of banks and their borrowers and showed that bank leverage of 85% or higher emerges because bank seniority both dramatically reduces bank asset volatility and incentivizes risk-taking by producing a skewed return distribution.
TL;DR: In this article, the determinants of leverage firms in five sub-Saharan African countries (South Africa, Ghana, Kenya, Nigeria and Zimbabwe) over the period 2006-2016 were examined.
TL;DR: In this paper, the authors study a novel aspect of a firm's capital structure, namely, the profile of its debt maturity dates, and show that the dispersion of debt maturities constitutes an important dimension of capital structure choice, driven by firm characteristics and debt rollover risk.
TL;DR: In this paper, the authors demonstrate that generic revenue-based token contracts are indeed economically inferior to equity and lead to over- or under-production, and that an optimally designed token contract, which is a combination of an output presale and an incremental revenue sharing agreement, yields the same payoffs as equity.
Abstract: In an initial coin offering, investors fund a venture in exchange for tokens that grant rights to future economic output. To many financial industry insiders, tokens have no intrinsic merit and exist only as a way to evade regulations. We demonstrate that generic revenue-based token contracts are indeed economically inferior to equity and lead to over- or under-production. However, an optimally designed token contract, which is a combination of an output presale and an incremental revenue sharing agreement, yields the same payoffs as equity. Moreover, with entrepreneurial moral hazard, tokens can finance a strictly larger set of ventures than equity.
TL;DR: In this paper, the authors show that while businesses require funding to start and grow, they also rely on human capital, which affects how they raise funds, and that labor market frictions make financing labor different than financing capital.
TL;DR: Wang et al. as discussed by the authors explored how financial leverage influences profitability of 1,503 listed manufacturing firms in China, and the results revealed that the impact of leverage on profitability is inverted U-shaped.
Abstract: The purpose of the study is to explore how financial leverage influences profitability of 1,503 listed manufacturing firms in China.,The sample of the study is composed of the listed manufacturing firms in China. For the manufacturing firms, the annual financial information from 2008 to 2016 is obtained from the ORBIS database. In this study, initially a simultaneous equation approach is used to control for potential endogeneity. Then, additional regression analyses are conducted with panel data over the period of 2008-2016 using OLS, Fixed-effects, First-difference, Random-effects and Arellano and Bond’s (1991) two-step Generalized Method of Moments (GMM) methods.,The results reveal that the impact of leverage on profitability is inverted U-shaped. In this inverted U-shaped relationship, the positive impact of financial leverage on profitability could be attributed to tax shield, whereas the negative impact might be because of bankruptcy cost, financial distress, severe agency problems and information asymmetry that the listed Chinese firms suffer from because of some institutional characteristics of China.,First, this study focuses on only listed manufacturing firms in China. Second, ownership types are not taken into account in this study.,First, the Chinese government should direct its efforts toward developing the bond markets and promoting alternative privately owned loan creditors to state-owned banks. Parallel to this, the transformation process toward market economy should be accelerated to facilitate the privatization of state-owned enterprises (SOEs). In addition to this, development of the bond market and privatization of SOEs will also mitigate the agency conflict between creditors and managers and between shareholders and managers.,To the best of the author’s knowledge, this is the first study which investigates the impact of capital structure on profitability of the listed firms in China.
TL;DR: In this article, the influence of family ownership on firm leverage across different subgroups of family and non-family firms was investigated, and they found that family ownership affects both decisions positively, namely, when the firm is large or located in a metropolitan area.
Abstract: In this article, we investigate the influence of family ownership on firm leverage across different subgroups of family and non-family firms. In addition, we examine the influence of firm size, geographical location and the 2008 global financial crisis on the capital structure of family firms. In both cases, we study the probability of firms using debt and, conditional on its use, the proportion of debt issued. We find that family ownership affects both decisions positively, namely, when the firm is large or located in a metropolitan area. For small firms located outside metropolitan areas, there is no clear family ownership effect. We also find the 2008 crisis had a substantial, but diversified, impact on family firm leverage. On the one hand, all family firms were more prone to use debt after 2008; on the other, the proportion of debt held by levered family firms decreased for micro and small firms, but increased for large firms. Overall, the crisis effects on family firm leverage seem to be the result ...
TL;DR: In this paper, the effect of non-executive directors and board size on the growth and capital structure of Jordanian non-financial firms has been investigated by using a cross-sectional study.
Abstract: The objective of this research is to investigate, in emerging markets Jordanian non-financial firms, the effect of two main measurements/indicators of board feature on a firm’s growth/capital structure. The two main measurements are: the non-executive directors; and the board of directors’ size. In addition, for this research the analysis was by using a cross-sectional study. The hypotheses were made by statistical analysis from collection data sample of 100 firms that was made available by nonfinancial sector in Jordan. Statistical Software programs were used by the current research; SPSS and EViews to analyze the data. Multiple regressions were utilized to test the hypotheses of the effect of the number non-executive directors appointed to a board of directors and the board size on the growth/ capital structure of firms taking in the consideration industry type as a control variable. The data of the present research used the annual reports to obtain the data that issued by ASE for the year 2014. To measure the dependent variable of the current research; growth/capital structure, the present research chose financial leverage. The results showed that increasing the number of non-executive directors in the board, in another meaning increasing size of the board, has a negative and significant effect on financial leverage. Therefore, greater financial leverage is a result of the existence of small board. Yet, a testing of independent boards (non-executive directors) showed that non-executive directors have insignificant effect on capital structure. Moreover, the type of industry, as a control variable, has no impact on capital structure of the non financial firms. The present research practically presents evidence to different interested parties in emerging markets, such as scholars, policy makers and academics especially in Jordan context. The current study contributes to the literature in the middle East because it is the first study in Jordan to investigate board composition in non-financial sector (industrial and service firms) particularly from the perspective of capital structure and Manuscript received January 31, 2018; revised April 30, 2018 independent boards (non-executive directors). In that, using data from undeveloped country that has an inefficient financial market, this study provides an important view insight on the international debate on the effects of board composition on corporate decisions.
TL;DR: In this article, the authors describe new meaningful effects in capital structure theory, discovered within modern theory of capital cost and capital structure, created by Brusov, Filatova and Orekhova (BFO theory).
Abstract: Paper is devoted to describe the new meaningful effects in capital structure theory, discovered within modern theory of capital cost and capital structure, created by Brusov, Filatova and Orekhova (BFO theory). These qualitatively new effects are present in general version of BFO theory and absent in its perpetuity limit (Modigliani – Miller theory). BFO theory has changed some main existing principles of financial management. Discovered effects modify our understanding of financial management and dictate some unusual managerial decisions.
TL;DR: The authors found that the most flexible price firms have a 19% higher long-term leverage ratio than the most sticky price firms, controlling for known determinants of capital structure, and the frequency with which firms adjust output prices helps explain persistent differences in capital structure across firms.
TL;DR: In this paper, the authors identify the critical factors influencing the capital structure of PPP projects from a sustainability perspective and analyze the relationships between the factors and the capital structures based on qualitative comparative analysis (QCA).
Abstract: Scientific capital structure is the key to guarantee sufficient funds and achievement of objectives of Public–Private Partnership (PPP) projects, while inappropriate capital structure has caused the failure of many projects. Meanwhile, sustainability is an important concept that should be concerned during the life cycle of PPP projects. Therefore, this study aimed to: (1) identify the critical factors influencing the capital structure of PPP projects from a sustainability perspective; and (2) analyze the relationships between the factors and the capital structure based on qualitative comparative analysis (QCA). This study identified seven critical factors influencing the capital structure of PPP projects. Moreover, the non-economic indicators should be concerned as well as the economic indicators. Thus, proper capital structure not only provides ample funds but also promotes the long-term healthy operation of projects and creates positive effects on the industry, region and society. Furthermore, the findings indicated that benefit, external situation, cost, ability of private sector and government support were the top critical factors. In addition, although risk did not show great importance, it had close relationship with other factors, which means risk should be concerned comprehensively. This study enriches the theoretical research about the capital structure of PPP projects and offers a new idea about the integration of sustainability and PPP projects. In addition, it supports the reasonable selection of capital structure in practice and promotes the practical application of sustainability on PPP projects.
TL;DR: In this article, the authors examine how corporate governance moderates the relationship between macroeconomic uncertainty and corporate capital structure, and find that good governance quality can act as a check and balance to ensure that firms use less leverage when they are facing volatility in the macroeconomic environment.
Abstract: The purpose of this paper is to examine how corporate governance moderates the relationship between macroeconomic uncertainty and corporate capital structure.,This paper employs the two-step system generalized method of moments regression, considering a sample of 907 listed non-financial firms from seven Asia Pacific countries during the period 2004-2014.,This study finds that macroeconomic uncertainty has a significant negative impact on the capital structure decisions of firms. The results also reveal that the overall effect of macroeconomic uncertainty on capital structure among firms with better governance quality is significantly negative. The evidence suggests that corporate governance acts as an effective mechanism to curb the usage of leverage during times of high volatility. Further analysis shows that board independence, the separation between the roles of CEO and chairman of the board and blockholders’ ownership are effective governance mechanisms, whereas similar observations do not hold for board size and institutional ownership.,The findings of this study may be useful to policy makers to formulate appropriate policies to mitigate the adverse effects caused by macroeconomic uncertainty. This is important because macroeconomic uncertainty may have potential destabilizing effects on a country’s or region’s development by jeopardizing the firms’ ability to formulate sound investment, production and financing decisions. Additionally, the results suggest that good governance quality can act as a check and balance to ensure that firms use less leverage when they are facing volatility in the macroeconomic environment. These findings could help to reinforce the importance of good governance among policy makers of a country as well as managers of firms.,The authors make the first attempt to examine the moderating effect of corporate governance on the relationship between macroeconomic uncertainty and corporate capital structure.
TL;DR: In this paper, the complementary effect of corporate governance on the demand for external debt and the substitutive effect of the degree of investor protection on such a demand was examined. And the authors found that debt as a control mechanism is less demanded in countries with a greater level of investorprotection, while it remains necessary in firms with more diverse boards that cannot effectively constrain managerial discretion and entrenchment.
Abstract: This research is developed under the hypothesis that corporate social responsibility (CSR) can be promoted as a self-defence strategy against managerial discretion costs, leading to the capital market demanding higher debt levels to solve agency frictions and monitor the management. In accordance with this idea, this study aims to examine the complementary or substitutive role of some additional control factors: (i) the strength of corporate governance related to board independence and diversity as a firm-level factor and (ii) the level of investor protection as a country-level factor. We use an international sample from 21 countries for the period 2003–2010. Supporting the market demand for external debt as a control mechanism that avoids managerial discretion and entrenchment risks, our findings support the following: first, the complementary effect of corporate governance on the demand for external debt; second, the substitutive effect of the degree of investor protection on such a demand. Accordingly, debt as a control mechanism is less demanded in countries with a greater level of investor protection, while it remains necessary in firms with more diverse boards that cannot effectively constrain managerial discretion and entrenchment. In addition, the greater predictive power of the investor protection factor on the use of debt acts as a monitoring aspect; that is, country-level factors dominate firm-level factors.
TL;DR: The authors showed that large dividend increases are followed by a significant increase in leverage, consistent with management increasing the dividend to use up excess debt capacity, but the leverage increase is not captured by a standard partial adjustment model of leverage.
TL;DR: In this article, a business cycle model with endogenous financial asset supply and ambiguity averse investors is presented, which parsimoniously accounts for the postwar comovement in investment, stock prices, leverage, and payout, at both business cycle and medium term cycle frequencies.
Abstract: This article estimates a business cycle model with endogenous financial asset supply and ambiguity averse investors. Firms’ shareholders choose not only production and investment, but also capital structure and payout policy subject to financial frictions. An increase in uncertainty about profits lowers stock prices and leads firms to substitute away from debt as well as reduce shareholder payout. This mechanism parsimoniously accounts for the postwar comovement in investment, stock prices, leverage, and payout, at both business cycle and medium term cycle frequencies. Ambiguity aversion permits a Markov-switching VAR representation of the model, while preserving the effect of uncertainty shocks on the time variation in the equity premium.
TL;DR: In this article, the authors investigated the relationship between capital structure, portfolio risk, and portfolio risk in the context of finance and finance, and found that the ability to effectively allocate capital and manage risks is the essence of their production and performance.
01 Mar 2018
TL;DR: In this article, the effect of capital structure (measures as short term debt ratio, long-term debt ratio and total debt ratio) on profitability (measured as Return on Assets and Return on equity) of commercial banks in Ghana was examined.
Abstract: The study examined the effect of capital structure (measures as short term debt ratio, long term debt ratio, and total debt ratio) on profitability (measured as Return on Assets and Return on equity) of commercial banks in Ghana The study sampled 23 banking over a six year period from 2010 to 2015 and extracted data from the annual of these banks Data was analysed using descriptive statistics, correlation analysis as well as panel regression analysis The results showed that banks in Ghana are highly leveraged with debt financing constituting 84% of total capital out of which 77% is short term debt despite the increase in minimum equity capital of these banks The regression analysis revealed that short term debt ratio and long term debt ratio are negatively related with profitability of banks in Ghana However, total debt ratio was positively associated with profitability of Banks in Ghana On the control variables, firm size, foreign ownership and age of the bank were positively associated with banks profitability whiles growth in customers? deposits was negatively associated with banks? profitability The results show that commercial banks in Ghana reliance on short term financing (deposits) reduces banks profitability and as such banks should shift their financing focus from deposits to other sources The results call for firms to choose the right mix of short term and long term debt that will maximize profitability of bank
08 Jun 2018
TL;DR: In this paper, the authors used purposive sampling method and multiple regression analysis with total sample 108 from 2013-2016 to determine the factors that affect the firm value in the LQ-45 Index companies in Indonesia.
Abstract: This study aims to determine the factors that affect the firm value in the LQ-45 Index companies in Indonesia. Independent variables in this study are company size, company age, capital structure, financial performance, and company profit. This research uses purposive sampling method and multiple regression analysis with total sample 108 from 2013-2016. The result of the research shows that company size will negatively affect firm value will have an adverse effect on the company's growth so that investor interest will tend to decrease. Company age influences firm value so that it can increase trust for an investor to invest. Capital structure influences firm value so it can reduce the impact on company expense and the level of debt. The financial performance affects the firm value will have an impact on the increase of investors in the company, corporate profits negatively affect the firm value so it should be able to increase further the company sales in generating profits to be distributed to shareholders. JEL Classification: G32 DOI: https://doi.org/10.26905/jkdp.v22i2.1529
TL;DR: In this paper, the impact of global crisis on the relationship between firm-related factors (size, tangible and intangible assets, growth, and profitability) and the capital structure of French micro-enterprises is analyzed.
Abstract: This article analyses the impact of the global crisis on the relationship between firm-related factors (size, tangible and intangible assets, growth, and profitability) and the capital structure of French micro-enterprises. A panel of 4945 firms are studied comparatively over two periods: before (2003–2007) and during (2008–2013) the global crisis. During the global crisis, micro-enterprises survive by relying mostly on internal sources of financing. External leverage is reduced, as the increased information asymmetry and default risk raise the cost of debt. When necessary, micro-enterprises sell the underused or unnecessary tangible assets, as they focus on their main competence and develop their intangible assets: human skills, advertising, networking, brand name, and awareness. In addition, we show that the pecking order is the most relevant theory for predicting the financial decisions and situation of French MEs. These results provide interesting insights into the financial strategy of French micro-enterprises, facilitating understanding and action at academic and policy levels.
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TL;DR: In this article, the authors model dynamic bank capital structure under three optimally designed regulatory regimes dealing with potential default { bailout, where government provides capital; bail-in, using private-sector funds; and no regulatory intervention, allowing failure}.
Abstract: We model dynamic bank capital structure under three optimally-designed regulatory regimes dealing with potential default { bailout, where government provides capital; bail-in, using private-sector funds; and no regulatory intervention, allowing failure. Only under optimally designed bail-in do banks recapitalize during distress. Their pre-commitment to recapitalize reduces debt costs and increases debt capacity. No regulatory intervention is suboptimal for all agents. Optimal bailouts and bail-ins generate no asset substitution-moral hazard behavior because regulators intervene at early stages of distress with sufficient capital remaining. Empirical tests of changes in capital behavior from the pre-crisis bailout period to the post-crisis bail-in period corroborate model predictions.