This paperwork investigates the relative importance of five factors upon the capitalstructure decisions of Romanian firms listed at the Bucharest Stock Exchange and operating in the construction sector of the industry. The analysis is based on panel data estimations on a sample of 20 companies, observed during three years (2009-2011). Traditional explanatory variables are adopted in the study, including profitability, company size, tangibility of assets, liquidity and asset turnover. By employing the ordinary least squares method and the fixed effects model, simple and multiple linear regressions are obtained. These are further selected and interpreted in order to determine the influence of the independent variables upon the leverage of a company. The results show that profitability and liquidity ratios are negatively affecting the total debt ratio of Romanian companies. The tangibility of assets is also having a negative impact on leverage, strengthening the findings of previous empirical studies which claim that this indicator moves in opposite direction with the debt ratio of companies located in developing countries. On the other hand, the size of a company and its asset turnover have a positive correlation with leverage. The explanatory variable which has the highest impact on the capitalstructure choices is profitability.
In MM, equity returns are represented by the average cost of capital in a one year period and estimations are conducted in a cross-section of a particular risk class. We represent equity returns as cumulative abnormal returns for a holding period of one year, which representation is easier for an investor to interpret. We use panel data that contains information for a 25-year period and combines the cross-section with the time series. In MM, the only independent variable is the leverage ratio and it’s square to test the linearity of the relationship. In our study, in addition to the leverage ratio and its square, we use five additional variables that reflect idiosyncratic risk, including the risk factors described by Fama and French (1992) and the particular environment’s cost of borrowing in order to account for changes in the cost of capital in the time series that explain abnormal returns. MM conduct their tests within two industries, each representing a coherent risk class, namely the oil and utilities sectors. We, however, do not limit our research simply
The key descriptive statistics of the regression variables are reported Table 1. As per this Table, the mean total debt ratio is 52 per cent which indicates that most of the Sri Lankan companies are highly levered. However, most of these debts are short-term debts (mean of 31 per cent) as against the loan-term debts indicating lack of developed debts market and heavy dependence on internal finance in Sri Lanka. Furthermore, the leverage of firms is varied substantially across firms as shown in the standard deviation coupled with minimum and maximum values. The maximum value of total debt to total assets ratio is 4.44, reflecting total equity capital of some companies had been completely eroded and converted into a large negative value by their accumulated losses and that had made them to hold larger debt capital than the total assets. Traditionally, Sri Lankan companies are dependent on the banking sector for their debt capital. Since the raising of debt capital through share market started only after 1996, it is still not widely used by Sri Lankan firms. Consequently, the market for long-term debts remains small.
Given that firm-specific variables have the most wide-ranging implications on financial leverage, financial managers must focus primarily on such variables when making financing-related decisions. Most studies examine the influence of the following variables: a) asset tangibility; b) profitability; c) firm size; d) growth opportunities; e) external finance weighted average market-to-book (EFWA); f) the probability of bankruptcy; g) capital intensity; h) non-debt tax shields.
The agency cost theory is based on another problem due to information asymmetry that is the principal-agent conflict. The conflict arises when there is moral hazard inside the firm, which is called the agency costs of equity. Managers may pursue their own interests which may conflict with shareholders’ benefits. This agency problem can be solved by increasing management ownership because high management ownership aligns the interests of management and shareholders. Other possibilities include monitoring of management by large shareholders and the use of debt financing to discipline managers (Stulz, 1990). However, debt financing creates other agency costs. Jenesen and Meckling (1976) argue that managers on behalf of the existing shareholders are likely to appropriate wealth from their debt-holders by conducting asset-substitution behaviour. That is, they may invest in risky projects because if the project is unsuccessful, the costs will be shared. But, if it is successful, the existing shareholders will capture the gain. On the other hand Myers (1977) argues that firms with heavy debt may have to pass up their value-increasing projects merely because they cannot afford to pay their current debt. Therefore, in choosing their debt equity level, firms should trade off between the agency costs of debt and the agency cost of equity.
2009). It has been found that in developed world most of empirical researches were conducted on capitalstructure (Mazur, 2007). Margaritis and Psillaki (2007) examined 12,240 firms in New Zealand and discovered that capitalstructure of these firms consistent with agency cost theory. Financing choice of Polish’s firms is followed by TOT (Mazur, 2007). A survey research was conduct in UK on listed firm evidences showing that most of firm supportive with the predictions of Pecking order theory and Tradeoff theory (Beattie et al, 2006). Drobetz and Fix (2005) stated that Switzerland firms also supportive with capitalstructure theory POT and TOT. A survey was conducted on capitalstructure of 16 European countries and result supported the prediction of TOT (Bancel & Mitto, 2004). Evidences have shown that Spanish firm’s financial choice is supportive with the TOT, POT, and free cash theories (Miguel & Pindado, 2001). Another study was conducted on Japanese firms by Pushner (1995); he investigated capitalstructure and found consistency of firm’s capitalstructure with Agency cost theory. Japanese firm’s financial decisions are consistent with pecking order theory (Allen & Mizuno, 1989).
Many studies are conducted to know the impact of capitalstructure on the performance of the firm. In this regard, Miller and Modigliani theories gained very importance. These are MM irrelevance theory, MM trade off theory and MM pecking order theory. MM irrelevance theory assumes that in a perfect market there are no taxes, no transaction and bankruptcy costs, the symmetrical flow of information and equal borrowing cost. In such a case they said that capitalstructure is irrelevant to the firm value. In pecking order theory they said that internal financing is the best form of financing. Whether a company is financing through retained earnings or selling fixed assets, it sends a good signal to the public that the company is strong enough and self-sufficient. The third theory which is the tradeoff theory assumes that capitalstructure is not irrelevant to the firm’s market value. The interest paid on debt is tax deductible; therefore; there are benefits to leveraging a firm until the optimal capitalstructure is reached.
Licensed under Creative Common Page 417 terms of profits. From the foregoing, it is therefore important to understand how firm’s financing choice affects their performance. It is evidently clear that both internal (firm specific) factors and external (macroeconomic) factors could be very important in explaining the performance of firms in an economy. Thus, the central point of this study is to assess the impact of capitalstructure on firm’s performance in Nigeria. A theoretical and empiricalanalysis of the lowly and highly geared companies in Nigeria will be critically assessed. Furthermore, macroeconomic factors alongside firm’s specific factors that could drive the performance of Nigeria firms will be closely considered. The main objective of this study is to examine the impact of leverage on the value of the selected firms. It intends making a comparison between the firms whether an optimal capitalstructure exists. This study will also take a look at the effect of macroeconomic variables like gross domestic product, interest rate and inflation on the financing decisions of firms and consequently their values.
on variables used in earlier cross-sectional studies. The predicted debt ratio from the regression is used as a proxy for the firm's target ratio. Opler and Titman (1997) find that firms move towards a target ratio when they change their capitalstructure. Bayless and Chaplinsky (1991) and Jung, Kim and Stulz (1996) carry out logistic regressions to examine the security issue decision. Bayless and Chaplinsky (1991) find that slack and a large relative issue size induce debt and that an abnormal positive stock price performance induces equity. These facts can all be considered as evidence for the adverse selection model. Jung, Kim and Stulz (1996) find that growth opportunities and an abnormal positive stock price performance induce equity and that a relative large issue size induces debt. This can also be considered as evidence for the adverse selection model. Besides that, Jung, Kim and Stulz (1996) find that companies that issue equity against type have poor investment opportunities. This can be considered as evidence for the moral hazard model. Berger, Ofek and Yermack (1997) study the relationship between leverage changes and managerial entrenchment reducing shocks. Leverage changes are based on the annual flow of funds data from Compustat. They find that leverage increases after managerial entrenchment reducing shocks. These shocks consist of unsuccessful tender offers, involuntary CEO replacements and the addition to the board of major stockholders. This result of Berger, Ofek and Yermack (1997) is consistent with entrenched managers seeking to avoid debt.
Figure 1 provides further information on the age structure of all firms in the sample. Moreover, it contains information on the relationship between total debt ratios and firm age. Specifically, we plot the average total debt ratios against firm age in 10-year age cohorts. The entries in the figure indi- cate the mean debt ratios of each age cohort, and the whiskers illustrate the corresponding standard deviations. From the figure, we can draw three im- portant conclusions regarding the subsequent empiricalanalysis. First, most of the total debt ratios are lying within a range of 50 to 70 percent, which is consistent with Table 1. This warrants the use of a linear specification (rather than a logistic one) when estimating the impact of firm age and taxation on debt. Second, up to a firm age of about 300 years we observe considerable variation in total debt ratios, which seems to be constant over the age co- horts. Eight firms are older than 300 years, indicating potentially influential outliers (the oldest firm is 1,018 years old; interestingly, there is one firm in the sample with zero leverage and firm age of 526 years; overall we have 5,577 firms with zero debt or about 1 percent of the sample). 7 Third, and perhaps most importantly, the sheer graphical inspection of Figure 1 clearly indicates a u-shaped relationship between debt and firm age, not only in a sample with firms younger than 300 years but also in the whole sample (see the regression lines in the figure). This motivates the inclusion of a quadratic term for firm age in our regressions.
The sample of non-…nancial listed European …rms is constructed from AMADEUS, a pan-European …nancial database that provides detailed balance sheet and income statement data for companies in Europe and standardized balance sheet information with the stated objective of achieving uniformity and en- abling cross-border analysis. We select all consolidated listed …rms of the EU15 for the period 1996-2006 . This sample of …rms is merged with market data from Datastream, we use the ISIN code of the …rm as identi…er. To reduce the impact of outliers we winsorize the sample at the 1st and 99th percentile. We delete all observations for which one of the variables is missing. Appen- dix A presents an overview of the …rm-speci…c variables used in our empiricalanalysis. The construction of the variables is standard in the literature (see, e.g., Flannery and Rangan (2006) for the determinants of corporate leverage and Ferreira and Matos (2008) for the determinants of …nancial institution ownership).
Apart from the review studies above that were carried out largely in the developed economies, several studies have also investigated the firm specific and country factors as determinants of capitalstructure of firms. One of the pioneer studies that consider firm specific and country factors as determinants of capitalstructure of firms in developing countries was conducted by Wiwattanakantang (1999) on the determinants of Thailand firms’ capitalstructure based on the common optimal capitalstructure theories namely the tax based theory,the signaling theory and the agency theory. Specifically,the study tested the signaling and the agency effects of financing decisions of Thailand firms. The sample used by the study consisted of 270 listed firms on the Thailand stock exhange in 1996. The results of the tax and signaling effect revealed that the coefficients of non debt tax (NDT), return on asset (ROA), market to book ratio and size were consistently significant and have the predicted signs. Specifically, NDT, ROA and market to book ratio showed negative relationship with leverage. Size was posively related to leverage. Fixed asset used as proxy for tangibility was observed to be positively related to leverage and significant when market leverage was used as a dependent variable. The estimated coefficient of risk proxy by variation in firms’ was reported by the study to be positively related to leverage when leverage was measured based on book values. When the market values was employed as measure of leverage a negative relationship was recorded between risk and leverage. This result was observed to be insignificant across all the regression. They also noted that the result also ran contrary to the prediction of the traditional capitalstructure literature by Myers (1984) that posited a negative relationship between debt ratio and the choice of bankruptcy.
As mentioned above, MM’s theory pays no attention to the real world complexities. Factors such as bankruptcy costs and financial distress are ignored (Myers, 1977). These elements could crucially outweigh the tax advantage from borrowing and therefore a balance point would exist, where the value of firms is maximized. This point is usually referred to as the optimal point of capitalstructure. According to the trade-off theory, when a firm’s borrowings exceed a specific point, then the firm will come up against the risk of financial distress (Myers, 1984). In other words, when a firm increases its borrowings, the cost of debt will increase while advantages from borrowing will decrease. Financial distress is a situation in which firms are not able to meet their responsibilities to creditors. According to Brealey et al. (2011), when firms have high fixed costs, illiquid assets or revenues that can be vulnerable to business recessions, then there is a higher risk for a financial distress to occur. As a result, firms seek for a sensible gearing ratio (Myers, 2001). Trade-off theory claims that firms’ proportions of debt and equity are based on the trade-off between costs of financial distress and benefit from tax savings of debt, in a way that an ultimate amount of debt is attained when the advantages and disadvantages of borrowing funds are completely balanced (Ross et al. 2008). Therefore, as Myers (1984, 2001) stated, owing to a risk of further financial distress costs, risky and low profitability firms appear to have lower debt level than wealthy and high profitability companies.
This research has aimed to analyze the determinants of capitalstructure among insurance companies in Kosovo, based on a data retrieved from 11 insurance companies during the period 2009-2012. For this purpose, the debt ratio is taken as a dependant variable whereas company size, growth, life, fixed assets and liquidity ratio were taken as independent variables. The result of RE model shows that these variables are in positive relationship with the debt ratio. On the other hand, the company size, the fixed assets ratio, liquidity ratio, company life and growth had considerable effects on debt equation. Based on the research results, the insurance companies should have a high consideration for asset increase because the size of company is an important factor that has a positive effect on debt/equity ratio.
Capital trading was modeled explicitly in this study. 7 Such trading enables firms to add or delete produc- tion facilities, and thus can be regarded as a partial merger or acquisition. Mergers and acquisitions (M&As) constitute a major method of industrial restructuring (UNCTAD, 2000) and are the quickest and least costly way to respond to external shocks such as trade liberalization. Waves of mergers have been documented as a consequence of trade liberalization and other such shocks (Mitchell and Mulherin, 1996). Breinlich (2008) found that the Canada-United States Free Trade Agreement of 1989 increased domestic Canadian M&A activity by over 70%. Using data on Swedish firms for the period 1980-1996, Greenaway, Gullstrand and Kneller (2008) have shown that intensified international competition induced M&As. Maksimovic and Phillips (2001) contended that “industry shocks alter the value of the assets and create incentives for trans- fers to more productive uses”, and they showed that productive assets tend to move from less efficient to more efficient firms when an industry undergoes a positive demand shock. Our analysis has now provided a theoretical explanation for these empirical findings.
Based on the theory of capitalstructure, the paper combines specification analysis with empiricalanalysis to discuss the factors which affecting the capitalstructure of the pharmaceutical industry and its influence. The essay constructs a panel data model to study the selected financial data of 119pharmaceuticallisted companies from 2010 to 2013. The results show that the size of enterprises and collateral value are positively related to capitalstructure; profitability, debt paying ability and ownership concentration are negatively correlated to the capitalstructure; development ability, tax shield effect of debt and operational ability are not significantly related to the capitalstructure. Finally, according to the current situation of the pharmaceutical regulation and the characteristics of pharmaceutical, this paper proposes some suggestions on how to optimize the enterprise’s capitalstructure.
The Purpose of this research is to test the effect of determinantcapitalstructure (tangibility, profitability, growth opportunity, size and cash holding) on formatting capitalstructure in Indonesian Firms. This research use financial statement of 125 non- financial firms listed in Indonesian Stock Exchange (IDX) period 2000 – 2010 and use multiple regression as an analysis method. The result showed that during the period 2000 – 2010, there were four variables (tangibility, profitability, size and cash holding) had significant effect on formatting capitalstructure, while growth opportunity had no significant effect . In Overall, all of the independent variables had significant effect on formatting capitalstructure in Indonesian firms.
trade liberalization (Bernard, Redding and Schott, 2009; Eckel and Neary, 2009; Mayer, Melitz and Otta- viano, 2009). The conclusion of this analysis is different: high efficiency firms may expand their scope. Previous models considered products as heterogeneous within a firm, and the impact of trade liberalization worked through either the factor market or the product market, but not both. The export opportunity bids up labor price or raises product market competition, forcing each firm to drop its marginal products, just as trade liberalization forces marginal firms to exit in single product models. This study assumes products are homogeneous within a firm and the optimal scope is proportional to each plant’s profit. Trade liberalization changes a firm’s product/factor tradeoff differently depending on the firm’s efficiency, leading to different responses in terms of scope. Efficient firms can make better use of exporting opportunities. Their profits may increase, leading to scope expansion. This points to the possibility that high efficiency firms may ex- pand their scope after trade liberalization. Furthermore, they are more likely to do so when products are less valuable (small α) or more differentiated (small β), the market size is small (small L), or managing varieties is more costly (large m). It is therefore an empirical question as to whether or not high efficiency firms expand their scope after trade liberalization and, if so, under what conditions.
This study examines the determinants of capitalstructure in the case of property companies listed in Main Market of Bursa Malaysia. There are 72 companies included in this study which the data has been collected from Bloomberg starting 2009 until 2014. Based on descriptive analysis, the liquidity of firm achieved the highest value of minimum, maximum and standard deviation. In the regression output it has been highlighted that there is a negative relationship between profitability, tangibility, liquidity and non-debt tax shield. However, positive relationship has been highlighted in the case of size of firm. The finding also reveals that size of the firm is the most influential factor as the coefficient value is the highest among other variables in line with few previous researches.
of the …rm are negatively correlated with leverage since growing …rms are assumed to lose more of their value when they go into distress. Furthermore agency costs, which can arise due to underinvestment, asset substitution or free cash ‡ow are mitigated to a large extent in growth …rms. Finally, the negative correlation found for …rm pro…tability is usually ascribed to lower expected bankruptcy costs and more valuable interest tax shields. Firms that generate higher pro…ts relative to investments also bene…t form the discipline that debt provides in mitigating the free cash ‡ow problem (agency cost). In our empirical setup, we include all these ’stylized’demand factors (Rajan and Zingales (1995), Fama and French (2002), Flannery and Rangan (2006)) next to the supply e¤ect of bank market concentration to explain the variation in corporate leverage.