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Two Steps Backward and One Step Forward: The IASB's Response to Off-Balance Sheet Financing Through Investments in Other Entities
This study investigates how the recent global financial crisis (GFC) has changed
the relationship between equity market liquidity and the capital structure of firms
listed on the Australian Securities Exchange (ASX). The study takes into account
the recent GFC by splitting the sample period into pre-GFC, GFC and post-GFC
periods. It has been suggested that firms whose stocks are liquid incur lower
costs of issuing equity in comparison to those with less liquid stocks prefer equity
to debt. This study employs least square panel regression analysis using a sample
of 792 companies listed on the ASX during the period from 2003 to 2011. The
study reveals that stock liquidity has a negative effect on leverage. However, this
impact was negligible immediately after the crisis. The other important finding is
the alteration of the roles of profitability and earning volatility. While profitability
was negatively related to leverage before the GFC, it has become irrelevant in the
post-GFC period. On the contrary, earnings volatility was not important during
the pre-GFC period, but it has become negatively correlated with leverage in
the post-GFC period. Overall, the study has found that the relationship between
leverage and the determinants of capital structure has been significantly changed
by the GFC.
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