Importance of Debt in Capital Structure

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A decomposition analysis of capital structure: evidence from Pakistan’s manufacturing sector

A decomposition analysis of capital structure: evidence from Pakistan’s manufacturing sector

Our analysis of these components of debt underscores the importance of considering both long- and short-term debt and their determinants as separate categories. Therefore, an analysis of the determinants of debt based on total liabilities does not clarify the significant differences between long- and short-term debt, as documented by Van der Wijst and Thurik (1993), Chittenden, Hall, and Hutchinson (1996), and Barclay and Smith (1999). Our results reveal that the determinants of the level of debt issued by nonfinancial KSE-listed firms vary significantly depending on which component of leverage is being analyzed. We find that firm size is positively related to long-term debt rather than short-term debt forms. The fact that small firms are found to borrow in the short term rather than in the long term may indicate that they are supply-restricted since they do not have access to long-term borrowing.
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Capital Structure and International Debt Shifting: A Comment

Capital Structure and International Debt Shifting: A Comment

This theoretical result is derived under two problematic assumptions. The first is that internal debt is not part of the firm’s financing structure. A main insight in the corporate finance literature is that internal debt and equity are equivalent except for tax purposes, and that it is optimal for a multinational firm (MNC) to use internal debt as part of a tax-efficient debt structure. The importance of this mechanisms is also documented in a series of empirical papers. 1 Their second assumption is that incentive related

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An International Comparison of Capital Structure and Debt Maturity Choices

An International Comparison of Capital Structure and Debt Maturity Choices

with a greater tax gain from leverage, which contrasts with Booth et al. (2001) who, in an earlier study of mostly developing economies, do not find a significant relation between debt ratios and tax policy. In addition, we find that the strength of a country’s legal system and public governance importantly affect firm capi- tal structure. Weaker laws and more government corruption are associated with higher corporate debt ratios and shorter debt maturity. 3 We also find that coun- tries with deposit insurance or explicit bankruptcy codes, like the Chapter 11 and Chapter 7 rules in the United States, have higher debt ratios and longer debt ma- turities. These findings reinforce the prior literature on the importance of the le- gal system, the enforcement of investor rights, and financial distress resolution (Claessens, Djankov, and Mody (2001), Djankov, Hart, McLiesh, and Shleifer (2008), and La Porta, Lopez-de-Silanes, Shleifer, and Vishny (1997), (1998)).
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Sources of Capital and Debt Structure in Small Firms

Sources of Capital and Debt Structure in Small Firms

This research is based on a survey of small businesses in the U.S. The paper analyzes differences in the ownership structure and corporate financial policies of small firms, both private and public. The survey results show that ownership and management are highly concentrated in small firms. On average, the CEOs of private firms own a much a larger percentage of equity ownership than the CEOs of public firms. However, the proportion of executives and directors who own common stock in public firms is far greater than in private firms. This suggests the importance of stock ownership in mitigating equity agency costs in public firms as opposed to private firms. Within private firms, the CEO’s equity ownership declines as the ownership structure moves from family-owned to widely-held. By and large, compared to public firms, private firms have a larger percentage of CEOs who are the largest shareholders. In 75.5% of private firms (compared to only 10% of public firms) insiders (officers and directors) own 50% or more of the firm’s common stock. In regard to the different sources of capital, both private and public firms are alike in the use of top two sources of capital – (1) loans/lines of credit from banks and (2) equity capital from current stockholders. Trade credit is the third most important source of capital for private firms and it is equity from outside investors for public firms. Venture capital and SBA financing rank at the very bottom for both groups. These differences are apparently due to the factors such as informational asymmetry, illiquidity, and agency costs that differ by the ownership structure.
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Capital Structure and Debt Structure

Capital Structure and Debt Structure

The spreading of the capital structure as credit quality deteriorates is broadly consistent with models such as Park (2000) that view the existence of priority structure as the optimal solution to manager-creditor incentive problems. However, to our knowledge, the existing models do not exactly deliver the dynamics that we find. For example, they do not derive differential priority structures as a function of a continuum of either moral hazard severity or creditor quality types. Further, these models do not explain why non-bank issues after a firm is downgraded must be subordinated to existing non-bank debt or convertible to equity. Theoretical research suggests that the use of convertibles can mitigate risk shifting by making the security’s value less sensitive to the volatility of cash flows (Brennan and Schwartz (1988)) or by overcoming the asymmetric information problem in equity issuance (Stein (1992)). Future research could aim to integrate these ideas about convertible debt into a conceptual framework that links debt structure and capital structure.
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The Impact of Capital Structure Choice on Firms’ Financial Performance: Evidence from Manufacturing PLCs in Tigrai Region, Ethiopia

The Impact of Capital Structure Choice on Firms’ Financial Performance: Evidence from Manufacturing PLCs in Tigrai Region, Ethiopia

Capital structure is defined as the mix of debt and equity that the firm uses in its operation (Akhtar&Javed, 2012). In other words, it is the mix of company’s long term debt, short term debt, and equity maintained by a firm. In today’s highly dynamic, competitive and vibrant business environment, capital structure decision is crucial for any business organization. The decision is important because the organization need to maximize return to various stakeholders and also have an effect on the value of the firm and because of the impact such a decision has on a firm’s ability to deal with its competitive environment. Besides, how an organization is financed is important to the managers of the firm because if inappropriate mix of finance is employed, the performance and the continued existence of the business firm may be severely affected (Abor, 2005).Ahmad, Hasan, &Roslan (2012) further explained that, capital structure decisions represent another important financial decision of a business firm apart from investment decision. It is important since it involves large amount of money and has long- term implications on the firms’ goals and objectives.
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The Effect of the Capital Structure and the Efficiency of the Use of Assets on the Persisting Earnings in the Jordanian Industrial Companies listed in the Amman Stock Exchange: An Empirical Study

The Effect of the Capital Structure and the Efficiency of the Use of Assets on the Persisting Earnings in the Jordanian Industrial Companies listed in the Amman Stock Exchange: An Empirical Study

in the efficient use of capital, or it may due to distortions in the accounting measurement, while the persistence of low earnings that accompanied with high accruals indicates the existence of a problem accounting measurement. Zhang (2007), stated that if earnings are often made up of accruals, then it is less stable than when it is composed of cash flows. This shows that accruals do not improve the quality of revenues, but only affect the persistence of earnings. Many studies used earnings persistence as a proxy to the quality of earnings, so that current earnings are used to estimate future earnings because an association exists between quality persistence and earnings stability (Altamuro and Beatty, 2006). Abu Ali, et al (2011), defined earnings persistence as the extent to which current accounting earnings are related to future earnings. Several studies also used earnings persistence as an indicator of their quality, so they link current with future earnings, such as Schipper and Vincent (2003). Sloan (1996), and France et al (2004), showed that the cash flows persistence is more important than the persistence of accruals, which reflects the quality of earnings. Richardson et al (2005), developed a model for measuring future earnings persistence by dividing earnings into their core components, which include cash flows and accruals. Dechow et al (2010), discussed the reasons that are standing behind the existence of differences in earnings quality measures and their results. Indicators of earnings quality are categorized into three main categories: earnings properties, investor responsiveness to earnings, and external indicators of earnings misstatements. The study did not demonstrate a clear conclusion regarding the parameters of earnings quality, because earnings quality depends on the context in which it is judged. Moreover, the study indicates that earnings quality is a function of the firms’ core performance indicators.
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IJMSS Vol.05 Issue-06, (June, 2017) ISSN: 2321-1784 International Journal in Management and Social Science (Impact Factor- 6.178)

IJMSS Vol.05 Issue-06, (June, 2017) ISSN: 2321-1784 International Journal in Management and Social Science (Impact Factor- 6.178)

We have utilized new empirical testing on target adjustment model on traditional trade-off theory. The study is based on the sample data drawn from the health care sector for the five year period 2011-12 to 2015-16. The study examines the optimal capital structure of selected companies in the health sector listed firms in BSE. For examining the target capital structure of health sector companies in the present study consider, amount of debt issued as a dependent variable and change in debt and target debt as the independent variables are included, all of which relate to the traditional trade-off theory. Our empirical evidence provides strong hold for the trade-off theory.
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The relationship between capital structure, performance and replacement of CEO in firms listed on the Nairobi Securities Exchange

The relationship between capital structure, performance and replacement of CEO in firms listed on the Nairobi Securities Exchange

Under pecking order theory, firms prefer internal to external financing and debt to equity if it issues securities (Myers & Majluf, 1984). Therefore, under the pecking order theory, firms have no definite target debt-to-value ratio suggested by the static tradeoff theory. The pecking order theory is explained in terms of information asymmetry that is because outsiders (investors) know little about firms, the outsiders undervalue firms stock, and this could explain the heavy reliance on internal finance and debt as the source of new capital. Therefore, financing decisions are concerned primarily with signaling effects of such decisions; that is, adding more debt to the firm's capital structure can serve as a credible signal of high future cash flows. From a practical perspective, the specific prediction of pecking order theory is that firms with few worthwhile projects and substantial cash flows will have low debt ratios; and that firms with positive net present value projects and lower operating cash flows will have high debt ratios. Pecking order can also be triggered by agency costs between the firm owners/managers and the outside investors (Frank & Goyal, 2007). Equity capital as a source of finance is a last option (Bistrova, 2011; Huang & Ritter, 2009). This is another testable proposition; specifically firms which information asymmetry is large and have no retained earnings should issue debt to avoid selling under -priced stocks (shares) (Myers, 1983).
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Factors that influence debt financing of municipal owned entities: a case study of the city of Johannesburg

Factors that influence debt financing of municipal owned entities: a case study of the city of Johannesburg

The applicable legislation in line with borrowing choices is set in Act 56 of the Local Government Municipal Finance Management of 2003. It is noteworthy that the lack of a flexible process in accessing debt financing can be viewed as being one of the most significant impediments for municipal entities. This is a serious constraint which show different effects and responses to credit availability for municipal entities, because the impact on debt financing is directly associated with the parent Municipality. This motivated the undertaking of the present study. Although researchers, like Sibindi (2017) and Malaza (2017) have already investigated the concept of debt financing in South Africa, their area of focus has been on private entities. On the other hand, Nyamita (2014) conducted a similar study on debt financing but based it on state-owned corporations in Kenya. In the South African context, Sebapadi (2016) paid particular attention to the parent municipalities in South Africa instead of focusing on the entities owned by these parent municipalities. Given the above findings and arguments, the study ought to find out whether the outcomes of such past studies present a similar view for municipal entities and as well as closing the gap using data from the City of Johannesburg.
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The Impact of Intellectual Capital on Earning Quality: Evidence from Malaysian Firms

The Impact of Intellectual Capital on Earning Quality: Evidence from Malaysian Firms

Abstract: The role of intellectual capital as an intangible asset is the most controversial accounting subjects in modern era. The objective of this paper is to explain the impact of Intellectual capital and earning quality in 100 Malaysian firms during the years 2000 and 2011, the specific purpose of this research is verifying the distinct effect of intellectual capitals ingredients (human capital, structural capital and relational capital) on earning quality. Two moderating variables have used in this model (firm size and debt to equity ratio). Multiple regressions and panel data analysis have been used to predict this relation. Our findings from the empirical analysis demonstrate that intellectual capital has a positive and significant impact on earning quality, furthermore the effect of firm size on earning quality was positive, but the relation between debt to equity ratio and earning quality was negative.
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Best Practices for Sourcing Venture Debt: How to Create Parity and Foster Competition for your Deal

Best Practices for Sourcing Venture Debt: How to Create Parity and Foster Competition for your Deal

Note: Capital Advisors Group is a Boston-based institutional investment advisor that has been helping clients invest their cash assets for more than 20 years. Debt Advisors Group, the venture debt consulting arm of Capital Advisors Group, helps our clients determine their optimum capital structure, identify appropriate lenders, source term sheets and negotiate deals.

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CAPITAL STRUCTURE AND FIRM VALUE IN NIGERIA (EVIDENCE FROM SELECTED QUOTED FIRMS)

CAPITAL STRUCTURE AND FIRM VALUE IN NIGERIA (EVIDENCE FROM SELECTED QUOTED FIRMS)

A company’s long term debt combines with preferred and common stock equity make up its capital structure (Ogbulu, and Emeni, 2012).Generally, debt is money that has been borrowed from another party and must be repaid at an agreed date. The cost of using this money, which also must be paid, is interest. The person or firm making the loan is called the creditor or lender and the person or firm borrowing the money is called the debtor or borrower. Business debt may be in the form of commercial loans, terms loans, or bonds. In addition to the requirement to pay interest, debt may also carry restrictive covenants that the borrower must satisfy to prevent default (Antwi; Mills, & Zhao, 2012)).In contrast to equity, debt is not an ownership interest in the firm. Creditors generally do not have voting power. The firm’s payment of interest is a fully tax–deductible cost of doing business, unlike dividend payments which are not tax deductible. If it is not repaid, the creditor may legally seize the assets of the firm, which could result in equity liquidation or reorganisation. Thus, a major cost of issuing debt is the possibility of financial distress. (Jane Malonis and Cengage, 2000). Aggarwal and Kyaw (2006) also posit that, debt can have both positive and negative effects on the value of the firm so that the optimal debt structure is determined by balancing the agency costs and other costs of debts as a means of alleviating the under and over-investment problems. In addition to the requirement to pay interest, debt may also carry restrictive covenants that the borrower must satisfy to prevent default (Ogbulu, and Emeni, 2012).The use of debt as a funding source is relatively less expensive than equity funding for two principal reasons
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Essays in financial economics

Essays in financial economics

To conclude our analysis, we come back to the question of studying inter- ventions in times of crises. Asymmetric information is key in most arguments used by politicians and academics to justify emergency interventions. They roughly go as follows: although crises may depend on solvency and not on liquidity issues (e.g. Lehman was bust in September 2008; it did not suffer from a self fulfilling run), they originate panic in financial markets. Suddenly, investors run on many other institutions because they fear they would also go under. Why do they fear so? Be- cause they do not have accurate information about their portfolio holdings. Because subsequent runs are inefficient, namely they trigger defaults of solvent institutions that run out of liquid assets, governments ought to restore confidence and intervene. To capture this scenario - i.e. a purely informational crisis - one needs to be careful that, playing with the information structure, he does not affect the real resources in the economy. For instance, shifting the probability distribution over the type space Θ in the sense of first order stochastic dominance does not work, as we would fall back into an output crisis. In this section, we proceed as follows: (i) first, we introduce a parameter λ ∈ [0, 1] that captures the measure of entrepreneurs that cannot costlessly certify their type. 17 In other words, we segment the market into the fraction subject to hidden information, and the fraction fully transparent; (ii) we solve for the competitive equilibria and study whether increasing the λ we also increase the need for governments to intervene.
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Effect of Capital Structure, Company Size and Profitability on the Stock Price of Food and Beverage Companies Listed on the Indonesia Stock Exchange

Effect of Capital Structure, Company Size and Profitability on the Stock Price of Food and Beverage Companies Listed on the Indonesia Stock Exchange

Effect of size of the company to the stock price: Company size is a measure that indicates the size of a company, such as total sales, the average level of sales, and total assets. In general, large companies have total assets greater so as to attract investors to invest in the company and the stock eventually able to survive at a high price. Based on the results of multiple linear regressions, the variable size of the company that indicates the direction of a significant positive effect. This means that the variable size of the company's significant positive effect on the stock price on the company's Food and Beverage listed on the Indonesia Stock Exchange. This shows that the relationship between firm size and direction of the share price, in the sense that if the size of the company increases, the stock price will increase. These results indicate that the size of the company's size will affect the size of the stock price. This study is consistent with the results Widjaja (2009) which states that the firm size (the size of the company) as measured by total assets positive and significant impact on the prospects of the company's shares. Opinion was confirmed by Wiliandri (2011) that the greater the size of a company (size) which can be seen from the total assets of a company, the company's stock price higher, whereas if the size of the smaller companies, the share price will be even lower. It means that investors in the capital market will be more attracted to companies that have total assets of large because large companies more easily obtain loans due to the value of assets pledged as collateral is greater and the level of trust banks are also higher so that the market price of the company's shares in the Indonesian Stock Exchange will increase.
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CAPITAL STRUCTURE AND ITS EFFECTS ON FIRM VALUE WITH FINANCIAL PERFORMANCE AS INTERVENING VARIABLE IN 2014-2018 (CASE ON MANUFACTURING COMPANIES SPECIALIZING ON CHEMISTRY INDUSTRY)

CAPITAL STRUCTURE AND ITS EFFECTS ON FIRM VALUE WITH FINANCIAL PERFORMANCE AS INTERVENING VARIABLE IN 2014-2018 (CASE ON MANUFACTURING COMPANIES SPECIALIZING ON CHEMISTRY INDUSTRY)

In managing a business, we need company capital, which can be sourced from external parties or from our own equity. The strat- egy in determining capital structure is very important because if we use excessive debt but it is not proportional to the profit it will trouble the company later. Capital structure is the total proportion of capital that is permanent and long-term as indicated by debt to external parties and equity (Horne, 2013). External parties are banks, investors in the capital market, suppliers of raw materials, and individuals.
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Does Capital Structure Matter? The Influence of Capital Structure on Net Interest Margin: Evidence from Sri Lanka

Does Capital Structure Matter? The Influence of Capital Structure on Net Interest Margin: Evidence from Sri Lanka

Firm's capital structure can be defined as mix of debt and equity (Pandey, 2005).The capital structure choice has long been an issue of great interest in the corporate finance literature. Right form of the promotional stage up to end finances play an important role in firm’s life. Capital structure theories deal with what is the optimum capital structure and guide to the maximum value of the firm. The overall cost of capital can be minimized by carefully mix up the debt and equity capital as well as maximize the shareholders wealth. The proportion of debt to equity is a most important strategic choice of corporate managers. The firm’s capital structure is considered optimum when the market value of shares is maximized. If debt capital does not exists in the capital structure, the shareholders’ return is equivalent to the firm’s return. The financial leverage can be understood that the change in the shareholders’ return caused by the change in the profits.
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The Capital Structure Choice: Evidence of Debt Maturity Substitution By GCC Firms

The Capital Structure Choice: Evidence of Debt Maturity Substitution By GCC Firms

The aim of this paper is to explore the determinants of the financing decisions within GCC listed firms. Firms in the GCC countries operate in bank-dominated financial systems with limited access to external funding outside the banking sector. Businesses are mostly family owned, with ownership highly concentrated in the hands of a few family members. Private credit from banks averaged 30% to 60% of total GDP during 2000-2012, while market capitalization to GDP went from below 35% in 2000, to above 180% in 2005, and then down to around 60% in 2008. The bond market, as illustrated in Figure 1, is still underdeveloped and is mostly dominated by sovereign issues. The empirical evidence about the capital structure in the GCC countries is very limited, with a few exceptions (Al- Ajmi et al., 2009; Sbeiti, 2010; Belkhir et al., 2016). The current study contributes to the literature in two meaningful ways. First, it expands the body of knowledge that looks at the financing practices of firms operating in fast developing emerging markets and tests for the portability of the capital structure theories to these countries. In a recent review of the literature, Kumar et al. (2017) report a surge in interest at the turn of the century, with emerging markets enjoying the lion‟s share in coverage. The same study, however, highlights the dearth of studies about the Middle East and North Africa (MENA) region. Out of ninety studies surveyed, only four covered the region. Second, it presents a novel finding of firms performing debt maturity substitution while attempting to Asian Economic and Financial Review
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The relationship between capital structure and ownership structure

The relationship between capital structure and ownership structure

Results are also in the favour of the paper, as there is positive relationship of dividends with the standards and tools of organization for the capital structures and investments. To map out a standard for techniques and temporary issues, there is no substantial research conducted in Pakistan’s context that caused the insignificance of results in a clear way. Second key variable, which is discussed in this paper, is ‘profitability’, as it is evident amongst major issues in an organization that companies are facing major flaws in capital investment while managing trends for profitability. To ensure techniques and immediate results, tools are more significant in investment and industrial sectors, for the secondary and the primary techniques. Profitability is the major concern when we deem investors and creditors, as major focus in organizational scenario. Infrastructure intensive industries are deploying more as compared to the other industry players. The profitability ratio and factors are more crucial in nature whilst in relation to their long run comparison considered (Wei and Zhang, 2008). Karachi stock exchange is used as the main database in this study, which complies with the rules of relative testing and the database development with the rules and the regulations. Techniques in this perspective are left with organizations and the companies to mention their stakeholders, stockholders as the terms are not mentioned in the more comprehensive manner (Ağca and Mozumdar, 2008). Success and ideas in the financial market are more dependent on a chronological manner of trends than techniques. Assembling the entire working on sophistication of ideas and measures for new equity investment in organization are more feasible for technology based companies (Bürker, Franco, and Minerva, 2013). The dataset employed the traditional approach for banks and the companies to infer that the more is the significance of the tasks, the more there will be an enough measure for the issues and their correlation (Anwar and Sun, 2015).
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Capital structure and debt maturity choices of firms in developing countries

Capital structure and debt maturity choices of firms in developing countries

in analysing the quality and value of the firm’s investment opportunities. Insiders have more information about the prospects of the firm. One of the reasons for this information asymmetry is that small firms have fewer disclosure requirements; therefore, they generally have a close nature (Pettit and Singer, 1985). Additionally, the quality of information provided by small firms varies. Small firms are not required to provide audited financial statements to external investors (Berger and Udell, 1998). Even though investors may prefer audited financial statements, small firms may want to avoid these costs or the small firm’s managers or staff may not be able to come up with useful information (Ang, 1991). This information opacity is seen as the main reason for small firms’ inability to issue publicly traded securities (Berger and Udell, 1998). When compared to large firms, they have different problems, such as shorter expected life, presence of estate tax, intergenerational transfer problems, and prevalence of implicit contracts (Ang, 1992). As a result, small firms have a higher probability of insolvency than large firms. They are seen as risky (Berryman, 1982). Capital structure choices of SMEs are expected to demonstrate greater variability as compared to large firms (Hall et al., 2004). Therefore, the applicability of the theory to small firms can be different.
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