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Showing papers on "Leverage (finance) published in 1999"


Journal ArticleDOI
John K. Wald1
TL;DR: In this article, the authors examine the factors correlated with capital structure in France, Germany, Japan, United Kingdom, and the United States and suggest links between varying choices in capital structure across countries and legal and institutional differences.
Abstract: In this empirical study I examine the factors correlated with capital structure in France, Germany, Japan, the United Kingdom, and the United States. Although mean leverage and many firm factors appear to be similar across countries, some significant differences remain. Specifically, differences appear in the correlation between long-term debt/asset ratios and the firms' riskiness, profitability, size, and growth. These correlations may be explained by differences in tax policies and agency problems, including differences in bankruptcy costs, information asymmetries, and shareholder/creditor conflicts. The findings of this study suggest links between varying choices in capital structure across countries and legal and institutional differences.

889 citations


Posted Content
TL;DR: In this paper, the authors show that as the average bank tilts its product mix toward fee-based activities and away from traditional lending activities, the bank's revenue volatility, its degree of total leverage, and the level of its earnings all increase.
Abstract: Commercial banks’ lending and deposit-taking business has declined in recent years. Deregulation and new technology have eroded banks’ comparative advantages and made it easier for nonbank competitors to enter these markets. In response, banks have shifted their sales mix toward noninterest income — by selling ‘nonbank’ fee-based financial services such as mutual funds; by charging explicit fees for services that used to be ‘bundled’ together with deposit or loan products; and by adopting securitized lending practices which generate loan origination and servicing fees and reduce the need for deposit financing by moving loans off the books. The conventional wisdom in the banking industry is that earnings from fee-based products are more stable than loan-based earnings, and that fee-based activities reduce bank risk via diversification. However, there are reasons to doubt this conventional wisdom a priori. Compared to fees from nontraditional banking products (e.g., mutual fund sales, data processing services, mortgage servicing), revenue from traditional relationship lending activities may be relatively stable, because switching costs and information costs reduce the likelihood that either the borrower or the lender will terminate the relationship. Furthermore, traditional lending business may employ relatively low amounts of operating and/or financial leverage, which will dampen the impact of fluctuations in loan-based revenue on bank earnings. We test this conventional wisdom using data from 472 U.S. commercial banks between 1988 and 1995, and a new ‘degree of total leverage’ framework which conceptually links a bank’s earnings volatility to fluctuations in its revenues, to the fixity of its expenses, and to its product mix. Unlike previous studies that compare earnings streams of unrelated financial firms, we observe various mixes of financial services produced and marketed jointly within commercial banks. Thus, the evidence that we present reflects the impact of production synergies (economies of scope) and marketing synergies (cross-selling) not captured in previous studies. To implement this framework, we modify standard degree of leverage estimation methods to conform with the characteristics of commercial banks. Our results do not support the conventional wisdom. As the average bank tilts its product mix toward fee-based activities and away from traditional lending activities, we find that the bank’s revenue volatility; its degree of total leverage, and the level of its earnings all increase. The first two results imply increased earnings volatility (because earnings volatility is the product of revenue volatility and the degree of total leverage) and the third result implies a possible risk premium. These results have implications for bank regulators, who must set capital requirements at levels that balance the volatility of bank earnings against the probability of bank insolvency. These results also suggest another explanation for the shift toward fee-intensive product mixes: a belief by bank managers that increased earnings volatility will enhance shareholder value (or at least will increase the value of the managers’ call options on their banks’ stock). Our results have no direct implications for the expanded bank powers debate we examine only currently permissible fee-based activities, and these activities may have demand and production characteristics different from insurance underwriting, investment banking, or real estate brokerage.

697 citations


Journal ArticleDOI
TL;DR: In this article, the authors present empirical evidence on the determinants of the capital structure of non-financial firms in 1996, and they imply that the tax effect, the signaling effect, and the agency costs play a role in financing decisions.
Abstract: This study presents empirical evidence on the determinants of the capital structure of non-financial firms in 1996. Empirical results imply that the tax effect, the signaling effect, and the agency costs play a role in financing decisions. Ownership structure also effects financial policy. Single-family owned firms have significantly higher debt level. Only in single-family owned firms does managerial shareholdings have consistently positive influence on firm leverage. Finally large shareholders affect the debt ratio negatively, implying that they may monitor the management.

430 citations


Journal ArticleDOI
TL;DR: This article found that firms protected by "second generation" state antitakeover laws substantially reduce their use of debt, and that unprotected firms do the reverse This result supports recent models in which the threat of hostile takeover motivates managers to take on debt they would otherwise avoid An implication is that legal barriers to takeovers may increase corporate slack CORPORATE MANAGERS have difficulty over capital structure choices, as the firm's founding shareholders cannot write a comprehensive ex ante contract specifying all future financing decisions.
Abstract: We find that firms protected by "second generation" state antitakeover laws substantially reduce their use of debt, and that unprotected firms do the reverse This result supports recent models in which the threat of hostile takeover motivates managers to take on debt they would otherwise avoid An implication is that legal barriers to takeovers may increase corporate slack CORPORATE MANAGERS HAVE DISCRETION over capital structure choices, as the firm's founding shareholders cannot write a comprehensive ex ante contract specifying all future financing decisions Most capital structure models make the simplifying assumption that managers choose capital structure in the interests of shareholders Examples of this approach range from the classic static trade-off between tax benefits and expected costs of financial distress to Leland and Toft's (1996) dynamic analysis that allows for agency problems between debtholders and shareholders Increasingly, however, research into capital structure has explicitly recognized that managers' self-interest can lead to financial policies that do not maximize shareholder wealth An early example is Donaldson's (1969) field study of financing choices, which emphasizes goals such as organizational survival and growth Recently, Jung, Kim, and Stulz (1996) identify security issue decisions that seem inconsistent with shareholder wealth maximization, and Jensen (1993) summarizes evidence of investment decisions that reduce shareholder wealth We focus on the approach of Grossman and Hart (1982), Stulz (1990), and Hart and Moore (1995) in which debt constrains managers who, in turn, would prefer to issue less debt than shareholders desire Zwiebel (1996) and Novaes and Zingales (1995) construct models in which managers use debt not because it

408 citations


Journal ArticleDOI
TL;DR: This paper examined the causes of bankruptcy for a sample of 949 UK listed companies between 1987 and 1994 and found that the most important determinants of bankruptcy are profitability, leverage, cashflow, company size, industry sector and the economic cycle.

402 citations


Journal ArticleDOI
TL;DR: In this article, the authors investigate the behavior of firms that successfully resist takeover attempts to understand the economic effects of corporate control activity and find that, on average, targets that terminate takeover offers significantly increase their leverage ratios.
Abstract: This paper finds that, on average, targets that terminate takeover offers significantly increase their leverage ratios. Targets that increase their leverage ratios the most reduce capital expenditures, sell assets, reduce employment, increase focus, and realize cash flows and share prices that outperform their benchmarks in the five years following the failed takeover. Our evidence suggests that leverageincreasing targets act in the interests of shareholders when they terminate takeover offers and that higher leverage helps firms remain independent not because it entrenches managers, but because it commits managers to making the improvements that would be made by potential raiders. THE MARKET FOR CORPORATE CONTROL was quite active and controversial in the 1980s. Although there were many successful takeovers, there were also many takeover attempts that failed. Consequently, an analysis of the behavior of firms that successfully resist takeover attempts is needed to fully understand the economic effects of corporate control activity. In this paper, we investigate this issue by examining a sample of 573 unsuccessful takeover attempts during the 1982 to 1991 period. In many of the failed takeovers, the target's management expressed the opinion that the acquirer's offer was insufficient and that the firm would be worth more if it remained independent. For example, 47 targets in our sample explicitly announced that they were rejecting offers because "the price is too low or inadequate." In response to these 47 announcements, target stock prices declined 3.42 percent on average. Whatever the stated reason, it is clear that investors are generally skeptical when target managers terminate a takeover attempt. In our entire sample, target stock prices decline 5.14 percent, on average, around the date of the termination announcement.

228 citations


Journal ArticleDOI
TL;DR: In this paper, the authors attempt to explain the overreaction of asset prices to movements in short-term interest rates, dividends, and asset supplies using a margin constraint that traders face which limits their leverage to a fraction of the value of their assets.

211 citations


Journal ArticleDOI
TL;DR: This article analyzed the relationship between homeowners' borrowing patterns and house-price dynamics and found that in cities where a greater fraction of homeowners are highly leveraged, house prices react more sensitively to city-specific shocks, such as changes in per-capita income.
Abstract: We use city-level data to analyze the relationship between homeowner borrowing patterns and house-price dynamics. Our principal finding is that in cities where a greater fraction of homeowners are highly leveraged--i.e., have high loan-to-value ratios--house prices react more sensitively to city-specific shocks, such as changes in per-capita income. This finding is consistent with recent theories which emphasize the role of borrowing in shaping the behavior of asset prices.

186 citations


Journal ArticleDOI
TL;DR: In this article, the effects of transaction costs on asset prices were studied in an overlapping generations economy with two riskless assets. And they showed that agents buy the liquid asset for short-term investment and the illiquid asset for longterm investment.
Abstract: In this article we study the effects of transaction costs on asset prices. We assume an overlapping generations economy with two riskless assets. The first asset is liquid while the second asset carries proportional transaction costs. We show that agents buy the liquid asset for short-term investment and the illiquid asset for long-term investment. When transaction costs increase, the price of the liquid asset increases. The price of the illiquid asset decreases if the asset is in small supply, but may increase if the supply is large. These results have implications for the effects of transaction taxes and commission deregulation.

176 citations


Journal ArticleDOI
TL;DR: In this paper, the optimal financing of investment projects when managers must exert unobservable effort and can also switch to less profitable riskier ventures is analyzed, and the optimal financial contracts can be implemented by a combination of debt and equity when the risk-shifting problem is the most severe while stock options are also needed when the effort problem is also needed.
Abstract: We analyze the optimal financing of investment projects when managers must exert unobservable effort and can also switch to less profitable riskier ventures. Optimal financial contracts can be implemented by a combination of debt and equity when the risk-shifting problem is the most severe while stock options are also needed when the effort problem is the most severe. Worsening of the moral hazard problems leads to decreases in investment and output at the macroeconomic level. Moreover, aggregate leverage decreases with the risk-shifting problem and increases with the effort problem.

157 citations


Journal ArticleDOI
TL;DR: This article investigated the simultaneity of four financial variables that are hypothesized to control agency costs and found that leverage, dividends, insider ownership, and institutional ownership are determined simultaneously as each of the variables is hypothesized to affect agency costs.

ReportDOI
TL;DR: This article analyzed the relationship between homeowners' borrowing patterns and house-price dynamics and found that in cities where a greater fraction of homeowners are highly leveraged, house prices react more sensitively to city-specific shocks, such as changes in percapita income.
Abstract: We use city-level data to analyze the relationship between homeowner borrowing patterns and house-price dynamics. Our principal finding is that in cities where a greater fraction of homeowners are highly leveraged—i.e., have high loan-to-value ratios— house prices react more sensitively to city-specific shocks, such as changes in percapita income. This finding is consistent with recent theories that emphasize the role of borrowing in shaping the behavior of asset prices.

Posted Content
TL;DR: The use of the Internet for financial reporting purposes by 109 Irish companies in 1998 is examined in this paper, where the relationship between Internet disclosure and size, leverage, demand for corporate information and industry is analyzed.
Abstract: The use of the Internet for financial reporting purposes by 109 Irish companies in 1998 is examined. The relationship between Internet disclosure and size, leverage, demand for corporate information and industry is analysed. Results show that 35 (37 per cent) listed and 15 (100 per cent) semi-state companies had a Web site. Larger companies, with larger annual report print runs, were significantly more likely to have a Web site. There was no association between presence of an Internet site and leverage or number of shareholders. Companies in the services and financial industries were significantly more likely to have a Web site.

Journal ArticleDOI
TL;DR: In this article, the authors evaluate the costs of suboptimal equity participation both analytically and using simulation, and also estimate the cost of sub-optimal diversification using simulation.
Abstract: This article analyses and quantifies the costs of suboptimal decision making for an investor with a multi-period horizon. In light of the empirical evidence that investors are too conservative and hold portfolios that are insufficiently diversified, we evaluate the costs of suboptimal equity participation both analytically and using simulation, and also estimate the costs of suboptimal diversification using simulation. We find that suboptimal leverage imposes only modest costs on the investor for reasonable parameter values. While the costs of inadequate diversification can be very high, we find that, because of the higher returns on small firms, an equally weighted portfolio of as few as five randomly chosen firms can provide the same level of expected utility as the value weighted market portfolio. (J.E.L.: G11, G18, G23).

Journal ArticleDOI
TL;DR: In this paper, the authors provide a micro-level approach to understand the Asian financial crisis that focuses on understanding the development of capital markets throughout the region as well as deciphering the performance of Asian corporations.
Abstract: Local Asian and international capital markets have been branded as culprits in the recent Asian financial crisis. Unfortunately, much of our understanding of the crisis stems from macro level analysis. We provide a micro level approach to understanding the Asian financial crisis that focuses on understanding the development of capital markets throughout the region as well as deciphering the performance of Asian corporations. We find that Asian capital markets were successful at fostering new capital mobilization as well as offering a high degree of liquidity to investors. Asian capital markets also pursued gradual liberalization and privatization programs during the 1990s. Despite these successes, Asian equity markets were characterized by a high degree of asset and industry based concentration. Both forms of concentration help to explain the high correlation among individual stock returns in Asia. Stock market investment performance in Asian failed to achieve returns comparable to less risky investments made in the US and the rest of the world. The only exception to this poor investment performance resulted from dynamic trading strategies designed to capture the price appreciation associated with capital market integration. We argue that corporate managers "bet" their companies by taking greatly increased leverage in the face of declining profitability. In addition, much of the debt was foreign denominated. This added an extra dimension to the gamble. Asian managers were betting that the exchange rate would remain stable. We argue that the crisis was heightened by the extra risk exposure that Asian managers induced by their leverage policies. This all points to a failure in corporate governance with respect to risk management and control.

Journal ArticleDOI
TL;DR: In this article, the authors extend the stock-for-debt research by investigating whether stock value is influenced by how a firm changes its leverage ratio in relationship to its industry leverage ratio norm.
Abstract: In this paper, I extend the stock-for-debt research by investigating whether stock value is influenced by how a firm changes its leverage ratio in relationship to its industry leverage ratio norm. I find that announcement-period stock returns for firms moving "away from" industry debt-to-equity norms are significantly more negative than returns for firms moving "closer to" these norms. This finding is consistent with optimal capital structure theory if industry debt-to-equity norms are reasonable approximations of wealth maximizing leverage ratios.

Journal ArticleDOI
TL;DR: In this article, the demand for general insurance of non-financial corporations by using data on Japanese corporations was investigated, and it was shown that size, leverage, and regiulation are important factors in determining insurance purchases by large Japanese firms, whereas ownership structure and tax consideration are not.
Abstract: Although numerous theoretical articles investigate factors affecting corporate demand for insurance, empirical tests of the theories are very limited. This article is one of the first attempts to empirically investigate the demand for general insurance of non-financial corporations by using data on Japanese corporations. Regarding insurance demand of Japanese corporations, size, leverage, and regiulation are important factors in determining insurance purchases by large Japanese firms, whereas ownership structure and tax consideration are not.

Posted Content
TL;DR: In this article, the authors argue for an alternate approach that allows us to estimate a beta that reflects the current business mix and financial leverage of a firm, especially for companies in emerging markets.
Abstract: Over the last three decades, the capital asset pricing model has occupied a central and often controversial place in most corporate finance analysts’ tool chests. The model requires three inputs to compute expected returns – a riskfree rate, a beta for an asset and an expected risk premium for the market portfolio (over and above the riskfree rate). Betas are estimated, by most practitioners, by regressing returns on an asset against a stock index, with the slope of the regression being the beta of the asset. In this paper, we attempt to show the flaws in regression betas, especially for companies in emerging markets. We argue for an alternate approach that allows us to estimate a beta that reflect the current business mix and financial leverage of a firm.

Journal ArticleDOI
TL;DR: In this article, a discounted residual-income valuation model is used to compute an ex-ante cost of capital for a large sample of U.S. stocks that are covered by I/B/E/S analysts.
Abstract: We use a discounted residual-income valuation model to compute an ex-ante cost-of-capital for a large sample of U.S. stocks that are covered by I/B/E/S analysts. We show that the ex ante cost-of-capital computed in this manner is correlated with a firm's degree of leverage, market liquidity, information environment, and earnings variability. Specifically, the market demands a higher risk premia for stocks with high book leverage and market leverage, low dollar trading volume or market capitalization, low analyst coverage, and more volatile (less predictable) earnings. The market also demands a higher risk premia for stocks with high book-to-market ratios and low price momentum. Traditional market risk proxies such as beta and return volatility are not significantly correlated with the ex ante cost-of-capital.

Journal ArticleDOI
TL;DR: In this article, the authors show that Harrington's results are not necessarily robust in a more general model where asymmetric information and uncertainty are present, and they also show that their results are highly dependent on the assumptions that all firms are identical and their compliance costs are known.

Journal ArticleDOI
TL;DR: In this paper, the authors investigated the funding environment facing product innovating small manufacturing firms and found that, whilst innovators were no more nor less likely to have sought external funds, they were significantly less likely than others to have successfully accessed bank finance.

DOI
01 Oct 1999
TL;DR: In this article, the authors show that contagion can be explained with basic portfolio theory without recourse to market imperfections, and that portfolio diversification and leverage may be sufficient to explain why investors would find it optimal to sell many higher-risk assets when a shock to one asset occurs.
Abstract: Models of “contagion” rely on market imperfections to explain why adverse shocks in one asset market might be associated with asset sales in many unrelated markets. This paper demonstrates that contagion can be explained with basic portfolio theory without recourse to market imperfections. It also demonstrates that “Value-at-Risk” portfolio management rules do not have significantly different consequences for portfolio rebalancing and contagion than other rules. The paper’s main conclusion is that portfolio diversification and leverage may be sufficient to explain why investors would find it optimal to sell many higher-risk assets when a shock to one asset occurs.

Journal ArticleDOI
TL;DR: In this article, the authors examined firms that have adopted ESOPs and found that firms raise the level of capital expenditures, research and development expenditures, and dividends, and they use leverage as part of an overall antitakeover strategy.
Abstract: ESOPs have the potential to align the interests of employees and owners and may increase firm value. However, employee ownership may also strengthen the position of entrenched management. The literature predicts that firms newly protected from takeover threat will tend to (1) increase long-term investment and (2) require additional external monitoring, and/or (3) may use leverage as part of an overall antitakeover strategy. We examined firms that have adopted ESOPs and find that firms raise the level of capital expenditures, research and development expenditures, and dividends. (JEF G320)

Journal ArticleDOI
TL;DR: In this paper, the authors examined explanations for the association between Korean Chaebol, which are giant conglomerates supported by various government initiatives, and corporate debt and dividend policies, and found that companies with more growth options have lower leverage and dividends.
Abstract: This paper examines explanations for the association between Korean Chaebol, which are giant conglomerates supported by various government initiatives, and corporate debt and dividend policies. Unlike in the US, the Korean corporate sector is dominated by the Chaebol which are characterized by concentrated family ownership, political affiliation and bank ownership. These institutional arrangements are likely to encourage more debt financing. In addition, the study also investigates whether firms with more growth options measured in terms of the investment opportunity set (IOS) have lower leverage and dividends. Results using observations from 411 Korean firms showed that for a fixed level of growth opportunities, Chaebol carry higher levels of debt. Results also show that growth options were negatively associated with leverage and dividends. No association, however, was found between Chaebol and dividends.

Journal ArticleDOI
TL;DR: In this paper, the authors examined 1,041 ongoing firms over the time period 1982-92 and found that firms with a distinctive pattern of increasing financial distress over time, the average annual losses as a percentage of market value is −10.3%.
Abstract: In this paper we examine 1,041 ongoing firms over the time period 1982–92. Using quarterly data for the detection and measurement of the magnitude of the indirect costs of financial distress, we find three important explanatory factors: (a) the distinctiveness of the pattern of increasing financial distress over time, (b) the degree of leverage in the capital structure and (c) the size of the firm. For those firms with a distinctive pattern of increasing financial distress over time, the average annual losses as a percentage of market value is −10.3%. The maximum loss is −76%. Even if the firm never fails, its market value can be severely impacted by the presence of the indirect costs of bankruptcy over time. This study finds a significantly positive relationship between Altman's Z-score and the firm capital investment growth rate. This relation holds after controlling for other variables such as leverage, firm size and market/book ratio. This implies that lost investment opportunities may be also an important part of the total indirect costs of financial distress, which appear now to be much larger than previously recorded.

Posted Content
TL;DR: In this article, the authors investigate whether and to what extent the main capital structure theories can explain capital structure choice of Dutch firms, and find evidence suggesting the relevance of the pecking order hypothesis in explaining the financing choice.
Abstract: This paper studies the determinants of capital structure choice of Dutch firms. Our main objective is to investigate whether and to what extent the main capital structure theories can explain capital structure choice of Dutch firms. A better understanding of the capital structure determinants in a rela-tively small yet open industrialized economy is essential not only for enrich-ing empirical studies in this field, but also for the purpose of cross country asset evaluation. By estimating a panel data model explaining both the ab-solute level of leverage with respect to various factors and the year-to-year changes in leverage with respect to the changes of various factors, we find evidence suggesting the relevance of the pecking order hypothesis in ex-plaining the financing choice of Dutch firms, which implies the importance of asymmetric information models in explaining capital structure choice of Dutch firms. We argue that factors based on agency costs and corporate con-trol considerations are relatively unimportant for the Dutch case.

Journal ArticleDOI
TL;DR: In this article, the authors present a typical setting where project finance is likely to create value, that of a large-scale investment in Greenfield assets (in this case, wells, pipelines, and upgrader) that can function as a stand-alone economic entity and support a high leverage ratio.
Abstract: Companies are increasingly using project finance to fund large-scale capital expenditures. In fact, private companies invested $96 billion in project finance deals in 1998, down from $119 billion in 1997 largely due to the Asian crisis, but up more than threefold since 1994. The decision to use project finance involves an explicit choice of organizational form as well as financial structure. With project finance, sponsoring firms create legally distinct entities to develop, manage, and finance the project. These entities borrow on a limited or non-recourse basis, which means that loan repayment depends on the project's cash flows rather than on the assets or general credit of the sponsoring organizations. Despite the non-recourse nature of project borrowing, projects are highly leveraged entities, with debt to total capitalization ratios averaging 60–70%. Petrozuata, a $2.4 billion oil field development project in Venezuela, is a recent example of the effective use of project finance for several reasons. First, the analysis shows a typical setting where project finance is likely to create value, that of a large-scale investment in Greenfield assets (in this case, wells, pipelines, and upgrader) that can function as a stand-alone economic entity and support a high leverage ratio. Given the nature of this investment, one can think of project finance as venture capital for fixed assets, except that the investments are 100 to 1000 times larger and financed primarily with debt rather than equity. Besides highlighting the types of assets appropriate for project finance, this article illustrates the sizeable transactions costs associated with structuring a deal as well as the full range of benefits accruing to project sponsors. The structure allows sponsors to capture tax benefits not otherwise available, reduces information costs for creditors and other investors, and lowers the overall cost of financial distress. The combination of high leverage, concentrated equity ownership, and direct control in project finance also addresses a wide range of incentive problems that destroy value in diversified companies. Analysis of the explicit contractual terms of the deal reveals a careful allocation of project risks in an attempt to elicit optimal behavior by each of the participants. As illustrated in the Petrozuata case, limiting completion and operating risks are important undertakings. But project finance is most valuable as an instrument for managing sovereign risks. Indeed, the ability of project finance to limit sovereign risk is the one feature that cannot be replicated under conventional corporate financing schemes.

Journal ArticleDOI
TL;DR: In this article, the authors argue that the distribution of equity ownership among corporate managers and external blockholders has a significant relationship with leverage, and they test four hypotheses that explore various aspects of this relationship.
Abstract: Agency theory embeds the influential relationship that exist between managers and shareholders of firms. This relationship has the potential to influence decision-making in the firm which in turn has potential impacts on firm characteristics such as firm value. Prior evidence has demonstrated an association between ownership structure and firm value. This paper extends the literature by proposing a further link between ownership structure and capital structure. Using an agency framework we argue that the distribution of equity ownership among corporate managers and external blockholders has a significant relationship with leverage. The paper tests four hypotheses that explore various aspects of this relationship. The empirical results provide support for a positive relationship between external blockholders and leverage, a curvilinear relationship between the level of managerial share ownership and leverage and finally, the results suggest that the relationship between external block ownership and leverage varies across the level of managerial share ownership. These results parallel and are consistent with the active monitoring hypothesis, convergence-of-interests and the entrenchment hypotheses which have been proposed in a different context.

Journal ArticleDOI
TL;DR: Delbreil et al. as mentioned in this paper presented a joint study of Net Equity and Corporate Financing in Europe, which was especially devoted to intermediate economies in which the capital markets played a much smaller role than in Anglo-Saxon countries.
Abstract: The present study is the outcome of a joint research project by staff members of the Banque de France and the Deutsche Bundesbank. The study is based on preliminary work by the European Committee of Central Balance Sheet Data Offices, which was set up in 1985 to improve the analysis of corporate accounts data through the exchange of information, the comparison of analytical methods, and the carrying-out of joint studies. As part of the work of the European Committee of Central Balance Sheet Offices, Germany, Austria, Spain, France, Italy and the DG II set up a working group in 1994 with the task of comparing the financial situation of European enterprises. In 1997 the working group presented an initial study entitled Net Equity and Corporate Financing in Europe, (Delbreil et al., 1997, available on SSRN) which was especially devoted to intermediate economies in which the capital markets play a much smaller role than in Anglo-Saxon countries. The empirical basis of the present study was provided by individual data from the raw material of the national corporate balance sheet statistics. Considerable efforts were made to ensure the comparability of the data and, in particular, to neutralize the differences in accounting practice as far as possible. The time period under review in the study is concentrated on the period 1987 to 1995 and 1996, respectively (only the Banque de France provides figures for 1996), in order to completely cover the last business cycle, which occurred relatively synchronously in both countries. Corporate finance is analysed from the point of view of organizational theory and the theory of conventions, an approach which is not very well known in Germany but quite popular in France, and which puts special emphasis on the institutional determinants of corporate finance. The differences in the systems of corporate finance in France and Germany can be traced to a large extent to the institutional context in the two countries. This defines particular rules and conditions under which enterprises decide on their strategy to solve the capital structure puzzle and which tend to differ greatly and systematically in the two countries. A very prominent factor is to be seen, for example, in the relationship between banks and companies. The results of the descriptive approach clearly show that the capital structures of firms largely diverge, as the different sources of corporate finance tend to play very distinct roles in the industrial sectors of the two countries, thus indicating that the respective systems of corporate finance seem to differ distinctly and systematically. Underlying the full samples, panel econometric analysis shows that French and German firms exhibit in some way a surprisingly parallel behaviour. In the baseline model assuming exogeneity of the right-hand-side variables long-term growth and collateral are positively correlated to debt supporting the theory of signalling. The negative relationship of profit and leverage stands for the pecking order approach and finally the impact of the cost of finance on enterprisess credit demand is negative, too. Nevertheless clear differences in borrowing behaviour can be found with respect to the determinants size and time. Time proxying macroeconomic factors are very important for France, but not for Germany. On the other hand the variable size plays a major role for total creditors in Germany only, where small firms depend much more on external funds than large enterprises. Such a divergent lending outcome between French and German firms may be based on the country-specific institutional settings. However, dependency of some results on the econometric specification and the variables definition underlines the difficulty to present final answers. Additionally, it can be shown that the borrowing behaviour of firms of different size classes is not equivalent. This result, which holds for both France and Germany, strengthens the fact that a representative firm and a unique debt equation does not exist.

Posted Content
TL;DR: This paper investigated whether the effects of monetary policy on firm investment can be transmitted through leverage and found that monetary contractions reduce the growth of investment more for highly leveraged firms than for less leveraged ones.
Abstract: In this paper, I investigate whether the effects of monetary policy on firm investment can be transmitted through leverage. I find that monetary contractions reduce the growth of investment more for highly leveraged firms than for less leveraged firms. The results suggest that the board credit channel for monetary policy exists, and that it can operate through leverage, as adverse monetary shocks aggravate real debt burdens and raise the effective costs of investment.