Descriptive Statistics

Table 1 presents major prior empirical findings in connection to the relationship between

major capital structure theories and the factor variables for both measures of leverage (i.e.

Book & Market leverage). A detail discussion on the directional relationship of these

variables is reserved for the empirical results section, where an integrative analysis

provides focus on the fluidity and sometimes conflicting predictions among capital

structure theories and the factor variables. Figure 1 graphically presents the over-arching

concept of both optimal leverage and the adjustment process to target leverage. Within

the trade-off scheme, managers weigh the costs and benefits of debt financing, mainly

driven by tax advantages and probability of bankruptcy. Well noted in corporate finance

is that, debt is relatively cheaper than equity14, thus in a broader scheme of financing costs, debt potentially minimizes the weighted average cost of capital (WACC). However,

debt has a diminishing return to scale after reaching a certain threshold. That is, debt

14_{One of the reasons has been the relatively lower informational asymmetry}

16 could become a burden as the possibility of an involuntary bankruptcy rises15. The

attributes in figure 1 are among the theoretical factors that influences optimal leverage

determination. For instance, tangibility minimizes bankruptcy costs, because fixed assets

can be sold in the process of bankruptcy and therefore enables capital recovery by

creditors. Thus, collaterability is expected to be positively related to debt. In another

instance, the pecking order theory predicts negative relationship between ROA (i.e.

profitability) and leverage, because profitable firms can use the excess cash to finance

investment projects instead of issuing debt or equity. Similarly, in the adjustment

process, firms weigh the costs of deviation from target and the costs of adjustment to

target. Some elements of adjustment process are out of management‟s control and others

depend on firm-level characteristics. Prior evidence suggests that, the two main deciding

factors of adjustment to target are financial flexibility and external financing costs. As

these factors or elements vary across firms; speed of adjustment is expected to differ

across firms as well. Although, it appears that certain mitigating factors help minimize

external financing costs, these factors also vary cross firms, implying varying capital structure adjustment speed among firms‟. Table 2, reports the summary statistics of

leverage and factor variables for the pooled sample, MNCs and DCs. As prior researches

on capital structure of MNCs have shown, MNCs on average have lower debt to equity,

lower target leverage, and lower leverage ratio than DCs (also see table (4) panel B, and

figure 2a and 2b).16 Both book and market leverage (i.e. bolded in table 2) are higher for DCs than MNCs. Book leverage and market leverage for DCs are approximately the

same, whilst book leverage is higher than market leverage for MNCs. Cross-sectional

15_{Certain indicators of financial distress such as operational risks,}

financial risks and debt-induced overall higher costs of financing may trigger involuntary bankruptcy.

16 _{Fatemi, Ali 1984, 1988; Burgman, T.1996; Lee & Kwok 1988; Michel &}

Shaked 1986; Doukas & Pantzalis, 2003; Shapiro, 1978. These authors’ have attributed the relatively lower level of leverage of MNCs to various factors including agency costs.

17 dispersion for DCs is roughly 17% for book leverage and 21% for market leverage. On

the other hand, dispersion for MNCs is 13% for book leverage and 16% for market

leverage. The relatively higher dispersion for market leverage likely reflects the volatility

of equity prices. Tobin‟s Q and non-debt tax shield are almost identical for MNCs and

DCs, which is likely due to the lower asset base of DCs. As expected, MNCs are on

average larger than DCs based on log total assets. Financial distress costs (FDC) is

significantly higher for DCs (27.62) relative to MNCs (2.68). MNCs on average have

higher cash flows than DCs, as well as higher return on assets. However, DCs on average

have higher capital expenditure than MNCs for the same sample period. The average

panel length is approximately 11 years, with 5 years of minimum observations and

maximum observation of 19 years. Table 3A to 3D provides the correlation matrix of the

factors and leverage. The relationship between the factors and both measures of leverage

shows the expected correlations. However, the strength of the correlation of factors with

the two measures of leverage is not stable.

Besides Tobin‟s Q, Cash Flows and Investment, the correlation is more pronounced for

the book leverage. As expected, the two highest correlations for both book and market

leverage was between size and financial distress cost (-.6411) and between tangibility and

investment (.5970). In table 4 panel A, I compute the number and percentage of positive

equity returns by year and by group (i.e. DC, MNC, and MNC10). On a yearly basis for

the sample period, higher number of MNC firms experienced higher equity returns than

their domestic counterparts. Similarly, both leverage percentage returns (i.e. % of firms

with positive returns out of the group subsample – 65% vs. 56%) and the overall median

returns are higher for MNCs than DCs (i.e. 12% vs. 8%). These statistics supports the

market-timing theory of inertia or slower relative adjustment speed for MNCs. Hence

18 cumulative effect of past market equity prices where managers issue equity when market

prices are favourable, the likely resulting effect is lower market leverage, and further

deviation from the target, thus, an inertia or a much slower adjustment speed back to

target leverage (Baker & Wurgler,2002; Welch, 2004). In table 5, I obtain by group, the

number and the percentage of firms‟ with debt capacity more than unity (i.e. ppe/debt>1).

The pecking order theory suggests that firms‟ that are under-leveraged adjust relatively

faster to target leverage than over-levered firms‟. In table 5, average percentage of over- levered firms‟ for DCs are 28% (i.e. 72% under-levered), 36% for MNC (i.e. 64% under-

levered), and 38% for MNC10 (i.e. 62% under-levered). Clearly, DC firms‟ are on

average more under-levered than MNCs, suggesting overall relative faster adjustment for

DCs. Finally, in table 6, I compute average percentage of firms‟ above-target leverage by group. The DC group on average have higher percentage of firms‟ above their target

leverage than the MNC and MNC10 group, thus supporting the trade-off theory that

above-target firms‟ adjust faster to target leverage than firms‟ below their target leverage.

The combination of relatively lower equity returns, higher percentage of under-leverage,

higher percentage of above-target leverage for DCs, and the relative lower debt-equity

ratio lower leverage ratio for MNCs provides a strong recipe for overall relative faster

adjustment for DCs.