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The Cost of Capital, Corporate Finance, and the Theory of Investment
... The relevant school of thought dominated by Prof. Durand (1952), has contended that use of debt with an equity influences cost of capital, thereby there exists an optimum capital structure. Contrary to this, the irrelevant school of thought dominated by Modigliani & Miller (1958) The capital structure decision is critical decision for any organization. The decision is important not only because of the need to maximize returns to its stockholders, but also because of the impact such a decision has on an organization's survival & growth in today's competitive environment [ Dare Funso David et al (2010)]. ...
... Of the various theories of Capital Structure, "The Traditional Relevance Theory" of Prof. Durand (1952) and the "Modern Irrelevance Theory" of Modigliani & Miller (1958) Durand (1952)], besides an intermediate approach known as the traditional. As per Net income approach, the Weighted Average Cost of Capital (WACC) decreases by including debt funds in the Capital Structure & thus the value of firm increases. ...
This paper empirically examined the effect of financial leverage on payoffs to shareholders, a study of listed Pharmaceutical firms in India. Using annual panel data for a period of 13 years,ranges from 2007-08 to 2019-20 with the application of econometric techniques. The empirical results show that Long Term Debt to Total Assets (LTD/TA) have positive relationship, while Total Debt to Total Assets (TD/TA) has negative relation with Return on Assets (ROE). Thereby evidenced that financial leverage has significant effect on firm performance specifically in terms of payoffs to shareholders particularly during Normal/Bullish phase of Economy when measured through EPS & ROE in sample Pharmaceutical Companies in India.
... The relationship between financial leverage and firms' profitability has been an issue of debateby researchers since the seminal work of (Modigliani and Miller 1958). Several approaches and measures have been used to explain the optimal debt/equity mix for firms. ...
... Consequently, the trade-off theory predicts positive relationship between firms' leverage ratios and their profitability. The trade-off theory could be traced to Modigliani and Miller (1958) irrelevance hypothesis, which posits that the choice between debt and equity is irrelevantin a perfect capital market situation. Modigliani and Miller (1963) argued that, when corporate tax is introduced to their proposition, the tax advantage of debt financingshould lead to firms being 100% debt financed. ...
The study examined the effect of Capital formation on economic development in Nigeria within the period 1981-2017. Anchored on the Endogenous Growth Theory of Lucas, it assessed how capital formation in the country accelerates economic development measured by the misery index. The study employed secondary data on Inflation and Unemployment as proxies for Misery Index, as well as Gross Fixed Capital Formation, Human Expenditure on Health and Education as proxy for economic development. The Ordinary Least Square Estimation Technique was utilized to analyze the data. While the result revealed an inverse and significant relationship between Gross Fixed Capital Formation and the Misery Index, it showed a positive but insignificant relationship between Human Capital Investment and the Misery index in Nigeria. The result also revealed that Physical and Human Capital accounted for 24.95% of the variation in Misery Index in Nigeria. The study submits that Capital Formation significantly reduced the misery index in Nigeria during the period of study. The study hence recommends inter-alia increased investments in both physical and human capital which has potentials to boost general welfare maximization and national development.
... Depuis la publication de Modigliani et Miller (1958) ...
... La théorie du compromis repose sur l'hypothèse que les entreprises poursuivent une combinaison financière cible optimale qui compense les avantages marginaux et les coûts marginaux de l'effet de levier (Dhaene J. et al, 2015). Dhaene J. et al (2015) considèrent que le point de départ de la théorie du compromis est la logique de Miller et Modigliani (1958) Dans ce sens, Ross, S. (1977) suppose que les dirigeants connaissent la valeur exacte de l'entreprise à la différence des investisseurs qui, selon lui, interprètent des niveaux d'endentement élevé comme un signal de meilleure qualité de la firme. ...
This research seeks to answer the following question: what are the determinants of the capital structure of Moroccan insurance companies? To do so, we conducted an empirical study using original econometric techniques, notably the generalized moments estimator and statistical tests applied under the assumptions of homogeneity and stationarity of the variables used on a population composed of 17 Moroccan insurance companies, over the period 2011-2019. The results of our empirical model revealed that the rate of return has a significantly negative impact on the capital structure of Moroccan insurance companies. In contrast to profitability, the impact of tangibility is significantly positive. Based on the GMM results, the study showed an insignificant negative effect of growth on the capital structure of Moroccan insurers. As for size, liquidity and risk, these have a significantly positive impact on the leverage ratio, while the study found that the technical provisions variable has a positive but statistically insignificant effect on the capital structure of Moroccan insurance companies. This study concludes that profitability, size, tangibility, liquidity and risk are determinants of the capital structure of Moroccan insurance companies.
... Financial markets have been long ignored by most environmental and energy economists. This is a certain extent justified by Modigliani & Miller's (1958) capitalstructure irrelevance proposition that made them win the Nobel Prize in 1985. The assumptions in Modigliani & Miller theorem include frictionless and competitive markets, same information for all agents, same borrowing rates for individuals and firms, no taxes, irrelevance of the financial policy of the firms on its cash flows (Modigliani & Miller, 1958). ...
... This is a certain extent justified by Modigliani & Miller's (1958) capitalstructure irrelevance proposition that made them win the Nobel Prize in 1985. The assumptions in Modigliani & Miller theorem include frictionless and competitive markets, same information for all agents, same borrowing rates for individuals and firms, no taxes, irrelevance of the financial policy of the firms on its cash flows (Modigliani & Miller, 1958). Under these assumptions, capital structure is irrelevant because whether to increase financing for the firm with shares or with loans does not matter with regard to the firm's total value (Brázdik & Marsal, 2011). ...
Climate change is one of the key global challenges of the human society. Sustainable climate finance is essential for the transition to a lower-carbon economy. We show in this report that although many investment imperfections in the sustainable climate finance landscape are known among practitioners, most model-based climate policy economic impact assessments do not consider these imperfections. We suggest that models capturing finance and investment imperfections could be able to generate more insights on economic impact assessment of climate policies. To facilitate the discussion and future research of assessment and design of climate policies, this report develops a research framework for analysing policy implications of investment imperfections in sustainable climate finance.
... Conversely, acknowledging information asymmetry gives rise to both the signalling hypothesis and the pecking order theory, which do not consider the notion of an optimal level of leverage. Modigliani and Miller (1958) introduced the initial proposition in their study. It stands as one of the pioneering efforts to explore the correlation between capital structure and a company's value. ...
... Specifically, they contend that alterations in the existing debt and equity ratios have no bearing on a firm's value. This implies that no superior or inferior capital structure exists, and varying degrees of leverage do not impact firm values (Modigliani and Miller, 1958). ...
This study aimed to examine the impact of capital structure on bank performance using data from nine listed banks on the Ghana Stock Exchange. The study utilised secondary panel data extracted from the published financial statements of these banks. Bank performance was measured using return on assets and return on equity as proxies, while the ratio of total debt to total assets served as the independent variable. Additionally, firms' age, size, and liquidity were control variables. The random effect technique was used for analysis, employing Ordinary Least Squares (OLS) and Autoregressive methods. The results indicated a positive and significant relationship between total debt to total assets, return on assets and equity. Furthermore, firms' age positively and significantly impacted the return on assets and return on equity in both models. Interestingly, the study found a negative effect of firms' liquidity on return on assets in model one, while the size of the firms had no impact on bank performance. Policymakers can encourage financial institutions to provide accessible and affordable lending options to businesses, enabling them to leverage debt effectively. This can be particularly beneficial for small and medium-sized enterprises (SMEs) that often face challenges accessing capital.
... Capital structure decision is one of the most fundamental strategic financial decisions. It has been receiving appropriate consideration and exploration since the seminal work of Modigliani and Miller (1958). The capital structure, or the mix of debt and equity, is critical because it influences the cost of capital and the financial risk associated with it. ...
تبحث هذه الورقة في العلاقة بين هيكل رأس المال وأداء البنوك الإسلامية العاملة في منطقة دول مجلس التعاون الخليجي. يوفر الهدف من هذه الدراسة رؤى نقدية لمديري البنوك فيما يتعلق بقرارات هيكل رأس المال الخاصة بهم. تبحث الورقة في تأثير هيكل رأس المال للبنوك الإسلامية الخليجية على أدائها، وأهمية محددات هيكل رأس المال المختلفة التي قد تحدد مستوى رأس المال الذي تحتفظ به البنوك الإسلامية في دول مجلس التعاون الخليجي. باستخدام نهج قوي من مرحلتين، تحلل الدراسة البيانات من عينة من 20 مصرفا إسلاميا في جميع أنحاء منطقة دول مجلس التعاون الخليجي للفترة من 2010 إلى 2020. وتستخدم طريقة المربعات الصغرى ذات المرحلتين (2 ثانية) لمعالجة المسألة المحتملة للسببية العكسية، حيث قد يؤثر الأداء على قرارات هيكل رأس المال. بالإضافة إلى ذلك، يتم استخدام المربعات الصغرى العادية لدراسة العوامل التي تشكل هيكل رأس المال لهذه البنوك الإسلامية. مع بيئة الاقتصاد الكلي الأوسع في السياق، تكشف النتائج عن وجود علاقة إيجابية بين أداء البنك الإسلامي ورأس المال الاسهم. على أثر السببية العكسية للأداء على هيكل رأس المال، وجد أن البنوك الإسلامية ذات الربحية الأعلى تميل إلى استخدام رافعة مالية أعلى. وفي الختام، خلصت الدراسة إلى أن هيكل رأس المال مهم للبنوك الإسلامية في دول مجلس التعاون الخليجي، وتؤكد على أهمية تحديد التوازن الصحيح بين الدين والأسهم لتحقيق الأداء الأمثل والنمو المستدام.
... Despite the fact that numerous hypotheses have attempted to explain the optimal financing combination, researchers in finance have never discovered a model to determine it (Kafle & Ghimire, 2020). Modigliani and Miller (1958) theorised that the combination of equity and debt financing has no effect on the firm's value, assuming no tax, no bankruptcy cost, and no transaction cost, as well as equal borrowing costs, flawless market information, and no arbitrage. Later, these assumptions were modified to exclude all tax conditions. ...
Financial management requires careful evaluation of the fund sources that will give the organization the best returns. Short-term debt, long-term debt, preferred stock, and common stock are always available to the firm. Financial managers have always struggled to choose the best fund source mix to minimize risk and costs and maximize shareholder wealth. Financing mix involves managing the best capital structure to balance company risks and profits. Many scholars have investigated what funding mix will achieve optimal capital structure. Despite their attempts, finance academics have not found a "sure" model that maximizes returns at minimum expense. This study examines the influence of financing mix on listed Consumer and Industrial Goods Companies in Nigeria to expand on prior contributions. The study spanned 2012-2021. The study used non-experimental ex-post facto design. Financial statements and corporate websites provided secondary data. The study's population is all 24 Stock Exchange-listed Consumer and Industrial Goods firms. The census sample strategy eliminated enterprises with incomplete data and prevented pollution data from skewing results. Return on Assets measures financial performance. The study's independent variable is a financing mix, proxied by debt-to-equity ratios. Debt to equity, a comprehensive measure of a firm's capital structure, is the key variable. Data analysis using OLS regression. The study indicated that short-term loan to equity decreases return on asset. Short-term debt to equity also affected Nigerian consumer goods companies' financial performance. The study found that long-term debt to equity had no impact on financial performance of listed consumer goods companies in Nigeria, contrary to predictions. The study found that listed consumer goods companies in Nigeria's financial performance decreases with long-term debt to equity. Keywords: Financing mix, Debt to Equity (short-term debt to equity and long-term debt to equity), Firm performance and Firm Size
... It was supported by Cole et al. (2015) analysis; there is no association between capital structure and companies' stock price. Debt finance gives tax advantage to firms notified by Modigliani and Miller in their new research paper (Modigliani & Miller, 1963). The study further proceeds to estimate capital structure and argue against their given theorem. ...
... According to Keynes (1936), one key advantage of cash holding is that it enables enterprises to pursue more valuable investments, and the importance of maintaining cash is in uenced by rms' ability to access external capital markets. From an optimal perspective, rms might not need to hold cash under the assumption of a perfect capital market, as they could obtain any required amount of cash at any moment (Modigliani and Miller, 1958). However, in reality, perfect capital markets do not exist, necessitating rms to hold substantial amounts of cash. ...
Purpose–
This study aims to investigate the influence of tax avoidance on investment efficiency, while also examining the mediating role of cash holding in this relationship.
Design/methodology/approach–
Utilizing a sample comprising 321 firm-year observations from Egypt, we employ Ordinary Least Squares (OLS) regression to examine both the direct and indirect associations between tax avoidance and investment efficiency.
Findings–
The results revealed a significant positive effect of tax avoidance on cash holding and excess cash. Moreover, there is contrasting findings on the effect of cash holding on investment efficiency. Additionally, the study revealed a significant negative effect of tax avoidance on investment efficiency, with a positive effect on overinvestment and a negative effect on underinvestment. Furthermore, cash holding played a mediating role in the relationship between tax avoidance and investment efficiency.
Practical implications–
The insights gleaned from this study hold significant implications for various stakeholders in Egypt, including tax authorities, investors, and listed firms. Given the current economic instability in Egypt, where many firms resort to cash hoarding to mitigate potential future financial constraints, these findings offer valuable guidance for regulatory agencies, investors, and firms navigating uncertain economic conditions.
Originality–
This paper explores how tax avoidance influences cash holdings and investment efficiency in Egyptian firms, filling a gap in existing literature. It introduces a novel perspective by examining the mediating role of cash holdings between tax avoidance strategies and investment outcomes. By focusing on the specific context of Egyptian firms, it offers unique insights into the complex interplay between tax-related decisions, financial management, and firm performance. Overall, the study provides valuable contributions to understanding the dynamics of tax planning and its implications for corporate finance in emerging market economies.
... The association between financial leverage and cost of capital was found, as expected to be positive, regardless of the type of capital or firms' systematic risk. This result confirms one of the fundamental relationships in finance, i.e., that more indebted business face higher financial risks, which are reflected into the costs they pay to access funds (Modigliani & Miller, 1968;Brigham & Gordon, 1968), widely confirmed by empirical studies conducted on firms from different regions, industries and going through multiple stages of economic cycles-see, for example, the comprehensive reviews of Jagannathan et al. (2017). ...
This paper investigates the financial impact of corporate sustainability greenwashing in the global Technology sector. Using environmental, social and governance (ESG) controversy data spanning between 2014 and 2021, we examine how media-reported conflicts linking companies to dubious sustainability claims influence financing costs. Models estimate effects on weighted average cost of capital, cost of equity, and cost of debt, contrasting overall controversies around issues against strictly environmental cases. Further analysis discriminates between high and low systematic risk technology firms. Results reveal increased overall sustainability controversies are associated with lower equity financing expenses, indicating investors continue value growth prospects despite ethical concerns. However, strict environmental controversies increase all financing costs. Findings suggest visibility of environmental externalities is sufficiently tangible that greenwashing them backfires financially, unlike shadowy social conduct. Additionally, lower systematic risk firms suffer harsher greenwashing penalties, implying resilience to disruption reduces misleading incentives. Transparency is currently inadequate immunisation against greenwashing in the Technology sector, necessitating oversight reforms. Stricter auditing and disclosure requirements would enable investors to accurately price sustainability risk and channel funds toward authentic sustainability transformation. Moreover, Technology companies must credibly convey environmental progress to avoid value destruction from questionable claims. Accordingly, managers should proactively invest in sustainability to mitigate reputation risks and access financing at lower costs. Ultimately, multifaceted transparency and coordinated policy responses are essential to realize genuine sustainability in disruptive, high-impact technologies.
... A estrutura de capital é uma mistura de dívida e patrimônio líquido detido por uma empresa. A determinação da estrutura de capital foi uma das pesquisas mais importantes em finanças e foram publicadas após a teoria da irrelevância na estrutura de capital (Modigliani & Miller, 1958). Na verdade, o teorema de M&M afirma que, em certas circunstâncias (sem tributação, sem custos de transação, sem custos de falência e mercado eficiente), o valor da empresa é independente de suas decisões de financiamento. ...
O objetivo deste artigo é examinar o efeito da estrutura de capital no desenvolvimento financeiro de bancos islâmicos. Para medir o desenvolvimento financeiro islâmico, foi usado o Refinitiv Islamic Finance Development Indicator® (IFDI) em nível de país durante os anos de 2014 a 2019. Usando uma amostra de 105 bancos, cobrindo sistemas bancários em 19 países de maioria muçulmana, o estudo usou uma regressão do tipo Two-Stage least squares (2SLS) para controlar a causalidade reversa do IFDI à estrutura de capital. A relação não monotônica encontrada entre o desenvolvimento financeiro sobre o patrimônio líquido e os índices de capital dos bancos sugere que as emissões de ações com baixos índices de capital (inferiores a 48,42%) são caras e têm um efeito negativo em seu indicador de desenvolvimento. O resultado é consistente com a Teoria de Sinalização, que prevê que os bancos com melhor desempenho transmitam essas informações de forma confiável por meio de capital mais alto. O artigo justifica-se pela relevância internacional do tema e pelo início das discussões da criação do marco legal das Finanças Islâmicas no Brasil, em abril de 2021, pela Comissão de Assuntos Econômicos do Senado Federal.
... The review is then continued with the newer capital structure theories based on the irrelevance theory to imperfectly competitive markets through trade-off theory, agency theory and information asymmetry. The emergence of many of the above theories was essentially triggered by the famous work of Modigliani & Miller (1958) which sparked a debate on the capital structure decision of firms. Based on the assumption of perfect capital market, they theoretically showed that the financing mix of a firm seems irrelevant and therefore can be ignored. ...
Capital structure refers to the way a company finances its operations through a mix of equity and debt. The choice of capital structure has important implications for the risk and return of a firm, as well as its ability to raise funds and invest in future growth. In this theoretical review, we will examine the endogenous and exogenous factors that affect a firm's capital structure decisions. In conclusion, a firm's capital structure decisions are influenced by a complex set of endogenous and exogenous factors. By understanding these factors, firms can make informed decisions about their capital structure, balancing the trade-offs between risk, return, and growth potential.
... This theory maintains that businesses adhere to a hierarchy of financing sources and prefer internal financing when available, and debt is preferred over equity if external financing is required Trade off Theory Trade off theory was propounded by Kraus and litzenberger (1973) and later popularized by Myers(1984) and Frank & Goyal (2005). The theory refined the Modigliani & Miller (1958) theory by disputing some of their assumption of no tax, no transaction cost. The theory argues that companies should determine optimal mix of debt and equity financing that balances the benefits and cost of each source taken into account the companies risk, return and tax implication of sources of financing that maximize companies' value. ...
This study aimed to assess Capital Structure Decision among listed Deposit Money Banks (DMBs) in Nigeria by assessing the effects of total equity and debts on capital structures of DBMs in Nigeria. The study alsocorrelated asset tangibility to firm size and examined the effect on the capital structure of the Banks. The study used secondary data collected from the annual accounts and reports of the selected ten (10) banks purposively selected for twelve (12) years covering 2011- 2022. The study’s population is made up of twenty-four existing listed deposit money banks on the list on the Nigerian Exchange Group plc based on the availability of data. The study employed explanatory variables of total equity, total debt, asset tangibility, and firm size to capture financial statement components. Data was analyzed using descriptive analysis and panel regression models. Findings revealed that equity, debts, and assets tangibility have positive and significant effects on the capital structure decision of the selected banks, while the firm’ size does not. The study concluded that equity capital, debt capital, and long-term assets are relevant in capital structure decision of listed deposit money banks in Nigeria. It is recommended that management should carefully assess the appropriate mix of equity and debt that maximizes income potentials and continuity of the firm in the context of substantial tangibility of the assets.
... Frente a esta tesis tradicional, la tesis de irrelevancia de Modigliani y Miller (1958) niega la existencia de una combinación óptima de recursos propios y ajenos. Modigliani y Miller afirman que la elección entre deuda y capital propio es irrelevante puesto que los fondos externos e internos son sustitutivos perfectos. ...
El objetivo de este trabajo es identificar los factores determinantes de la composición de la estructura de capital de las empresas, utilizando datos de una muestra de empresas españolas de la base de datos SABI. A tal fin se ha utilizado un modelo en el que se considera que el nivel de endeudamiento se determina por las características económico- financieras de las empresas. Los resultados obtenidos permiten concluir que las decisiones de las empresas, respecto a su estructura de capital, no se explican por una única teoría. Por su parte, el endeudamiento aumenta con el tamaño de las empresas y se reduce con el coste de la deuda. Asimismo, las empresas más endeudadas serán aquellas con mayor crecimiento, con menor proporción de activos fijos en el balance y con menor nivel de calificación crediticia. Finalmente, las empresas con reducida calificación crediticia presentan un comportamiento financiero diferente a las empresas con mayor calidad crediticia.
... Many phenomena that are not consistent with theories are labelled as "imperfect." For example, from Modigliani and Miller (1958), in a perfect market, capital structure is irrelevant. Since capital structure is relevant in real markets, the real market is imperfect. ...
We present an economic theory of production developed from biophysical principles and consistent with the production decisions facing businesses and other economic actors, including households and governments. The theory is a compact analytical model, derived from thermodynamics and closely related to the Black–Scholes formula for options pricing, which provides, in our view, a simplified and realistic understanding, when compared with the neoclassical production theory. The theory also explains closely related biological and social phenomena, since the underlying processes are, essentially, the same. Specific examples are provided, to illustrate some applications of this approach.
... Diketahui bahwa Hutang merupakan instrumen yang sangat sensitif terhadap perubahan nilai perusahaan yang ditentukan oleh struktur modal (Modigliani & Miller, 1958). Semakin tinggi proporsi hutang maka semakin tinggi harga saham, namun pada titik tertentu peningkatan hutang akan menurunkan nilai perusahaan karena manfaat yang diperoleh dari penggunaan hutang lebih kecil daripada biaya yang ditimbulkannya. ...
The objective of this research is to determine the significance of the effectof growth companies on capital structure and firm value, the effect of ownershipstructure on capital structure and firm value and the effect of capital structure onfirm value.This study population is a property company in Indonesia Stock Exchange in theperiod 2007 to 2009. The data used in this study is secondary data that the annualfinancial statements of 36 property companies on the Stock Exchange. Determinationof the sample in this study is based on random sampling technique of purposivesampling criteria are property companies with complete financial data in accordancewith the studied variables.The Model of this study using path analysis, the application of the tools of SPSSversion 13.0. The results of this study are at a significance level of 5% are found tosignificantly influence the growth of the company on capital structure. The growthof the company to the value of the company there is no significant effect. Further tothe ownership structure on capital structure there is no significant effect then thesame result is obtained, which is the ownership structure has no significant effecton firm value. The effect of capital structure on firm value where there is a negativesignificant effect.For the corporate, the best point of capital structure in many level, for the fund,can rise down the firm value. Furthermore it is recommended for further research toexamine other variables that effect the capital structure and the company’s growthbeyond the company’s ownership structure in addition to the property.
... In Modigliani and Miller's paradigm [41], investment opportunities are the sole driver of a firm's growth. Improving investment efficiency is likely to be the channel through which a firm with better corporate social and environmental responsibility may consider meeting the expectations of the stakeholders and enhancing its financial performance. ...
This study examines whether and how corporate environmental, social, and governance (ESG) performance is associated with firms’ investment efficiency while considering the role of firms’ marketing capability. Using a sample of U.S. firms from 1991 to 2019, we find robust evidence that firms with better marketing capabilities (MC) are more likely to engage in ESG activities and receive higher ESG scores. In addition, ESG engagement by firms with better marketing capabilities reduces investment inefficiency. Moreover, we find that the effect of MC-fitted ESG is more prominent when economic policy uncertainty is low or agency costs are low. The results are also driven by social or environmental dimensions. Our empirical evidence extends the understanding of firms’ decisions cross-functionally.
... BETA is estimated by the market model using a minimum of thirty monthly return observations over five years with a value-weighted S&P 500 market index return. Modigliani and Miller (1958) state that financial leverage defined as the ratio of total debt to market value of outstanding equity is used as a proxy for a firm's riskiness. The higher a company's relative debt position, the more likely it is to experience financial distress from defaulting on interest and principal payments. ...
... Capital structure determinants are often used in studies to analyse how finance decisions impact a firm's performance and profitability. According to Modigliani and Miller (1958), capital structure is irrelevant in perfect markets and does not influence firm value. However, in 1963, Modigliani and Miller revised the irrelevance theory, stating that since interest expenses are tax deductible firms with higher debt ratios have a higher value. ...
This research aims to investigate the impact of leverage on the performance of small and large publicly listed firms in New Zealand. Further, it explored the moderating effect of agency costs on the association between leverage and firm performance. The research sample includes quarterly data from New Zealand firms from 2010 to 2021. To test the hypotheses, univariate and multivariate methods were used, such as correlation and panel data regression. The empirical results show that leverage has a significant positive impact on the performance of small firms, but a negative impact on their market value. In large firms, the opposite trend occurs, with firms having a higher market value when they have a higher level of debt in their capital structure. Additionally, the findings show that agency costs have a considerable impact on the relationship between leverage and firm performance. Regardless of the size of the firm, the market value and performance of firms improve when agency cost is introduced as a moderating variable. This study supports the theory that agency costs contribute to enhancing firms' market value by allowing managers to allocate their discretionary spending to more profitable, value-enhancing projects, leading to fewer agency conflicts. The insights can be instrumental in improving the overall performance of firms by achieving an optimal debt structure and utilising debt effectively.
This study investigates the relation between the corporate bond market and the main debt financing alternatives available to firms in Brazil from 2004 to 2014. In this period, three main sources of debt financing were available: loans from commercial banks, loans from the National Development Bank, and the issuance of international bonds. We analyze the characteristics of each alternative, as well as their advantages and disadvantages in relation to corporate bond issuance, considering three main aspects: i) total cost, which includes the interest rate, taxes and fixed costs; ii) maturity; and iii) contracting speed. The results corroborate the initial hypothesis that, although the alternative debt sources competed with corporate bonds, there was also a complementary relation among them.
The study investigated the impact of debt financing on performance of listed manufacturing firms. Performance of firms was proxy by debt financing while the dependent variable was proxy by ROA (return on assets). Using quantitative research design; data for the study were sourced from the annual report of five quoted manufacturing firms covering six years from 2016 to 2021. Panel least square regression and Analysis of Variance (ANOVA) were Findings revealed that debt financing had a positive and significant effect on performance of firms in non-financial sector in Nigeria. The study thereby recommended that the management of listed manufacturing firms in Nigeria should take the issue on capital structure with great concern, in particular special attention should be given to short term debt for meeting working capital deficit as well as long term loans for capital projects to avert finance mismatch. Doing so would improve profit margin and achieve a better performance and resultant wealth maximisation.
The dividend payout policy of the firm represents the stability and operational efficiency of its successful operations of business. It enhances the value of firm subsequently. Any deviation in dividend payout ratios have a significant impact on firm value and also influence on share prices of the firm. The dividend theories are classified into irrelevance and relevance theories of dividends. According to Modigliani and Miller dividend policy will have no impact on firm value he supports theory of irrelevance. Whereas theories of dividend relevancy support the assumption of paying dividends leads to increased firm value and low dividend payout leads to decreased firm value. The payout of dividends is influenced by factors like availability of profits, required rate of return and investment opportunities available to the firm. The results of empirical analysis suggest that an appropriate dividend policy will enhance the value of firm. In the present study researcher used inclusion and exclusion criteria to select the samples. The present considers steel firms listed in NSE Sectoral indices. the objective of present study is to examine the factors influencing dividend policy of firm's and to examine the impact of dividend decisions on firm value of select firms listed in NSE sectoral index.
The behavior of the dividend policy is the most deliberated issue in corporate finance. Many
researchers attempt to expose the issue connected to the behavior of determinants of dividend
policy, and dividend, no acceptable explanation was found. Therefore, the present research
focused on analyzing the factors influence on dividend policy of Sri Lankan listed companies. This
study was accomplished employing panel data measures for a sample of 120 companies listed in
the Colombo Stock Exchange during 2015 – 2019. Secondary data collected from annual reports
published by the Colombo Stock Exchange were regressed to find the influence on dividend
policy. From the results, it was identified that the current earnings, free cash flows, and past
dividend patterns have a significant positive influence on the dividend policy of companies listed
at the Colombo stock exchange in Sri Lanka. Operating cash flows have a significant negative
influence on the dividend policy of companies listed at the Colombo stock exchange in Sri Lanka.
Findings will be benefited to the directors, top-level managers, shareholders, and potential
investors for their decision-making.
Keywords: Cash Flows, Current earnings, Dividend policy, Listed companies, Sri Lanka
With the acceleration of global warming, climate change and environmental issues have become a hotspot of global concern. At present, it has become a global consensus to vigorously develop a green economy and achieve "carbon neutrality and carbon peak". In this context, as an important part of the national economy, listed companies should pay more attention to carbon emission and information disclosure to help achieve the goals of "carbon peak" and "carbon neutral". In this paper, we use a multiple linear regression model to explore the specific mechanism of the impact of carbon emission disclosure on enterprise market value. In constructing the model, we consider that factors such as asset size, operating profit margin, and cash flow ratio may affect the market value of enterprises, so we add control variables in the model and use t-test, F-test, and analysis of covariance to verify whether there is a significant difference between different groups. Descriptive statistics and Pearson's correlation coefficient were also carried out during data processing in order to observe whether there is a correlation between carbon emissions and company market value. By analysing the results of regression fitting, we find that under the background of "dual-carbon", the active disclosure of carbon emissions by enterprises can help enterprises to improve their transparency, thus enhancing the trust and recognition of consumers and investors, and thus positively affecting the market value of the enterprises, and the impact of the active disclosure of carbon emissions by enterprises with high carbon emissions is even more significant on their market value. market value is even more significant. This implies that companies should actively participate in emission reduction actions and demonstrate their action on environmental protection by proactively disclosing carbon emission information in their annual reports or CSR reports.
Using contingent-claims valuation, we introduce novel hedge ratios for credit exposures using put options. Option hedge ratios are generally in line with the empirical sensitivities of credit spread changes to put option returns and, relative to stock hedge ratios, produce further reductions in volatility for a portfolio of North American firms. We show that option hedge ratios capture option-specific credit exposure related to the VIX index and the default spread, which is unaccounted for by Merton’s (1974) equity hedge ratios alone. Combining stocks and put options for credit risk hedging can be done effectively using the volatility smirk. (JEL E43, E44, G10)
Bài viết nghiên cứu ảnh hưởng của cấu trúc vốn đến khả năng sinh lời của các công ty bảo hiểm ở Việt Nam trong giai đoạn 2006-2022 bằng cách sử dụng phương pháp hồi quy bình phương nhỏ nhất tổng quát (GLS). Kết quả nghiên cứu cho thấy có sự tác động có ý nghĩa của cấu trúc vốn đến khả năng sinh lời của các công ty bảo hiểm ở Việt Nam, cụ thể tỷ lệ nợ có tác động ngược chiều đến khả năng sinh lời của các công ty bảo hiểm; Tốc độ tăng trưởng, vòng quay tài sản và quy mô tài sản có tác động tích cực đến khả năng sinh lời của các công ty bảo hiểm.Từ đó, bài viết đề xuất một số hàm ý chính sách góp phần gia tăng khả năng sinh lời của các công ty bảo hiểm Việt Nam.
Este libro es el resultado del trabajo en equipo de profesores e investigadores colombianos y brasileños, quienes, del 2020 al 2022, realizaron encuentros de discusión sobre la importancia de la planificación y gestión estratégica en las empresas. Considerando el escenario de la pandemia, los investigadores llevaron a cabo investigaciones concomitantes entre empresas brasileñas y colombianas.
El libro consta de tres capítulos. En la primera sección se presentan los resultados comparativos
de una encuesta hecha entre pequeñas y medianas empresas (pymes) de Brasil y Colombia. El estudio presenta las principales estrategias de innovación utilizadas por las pymes de estos países, ante la pandemia del covid-19. La muestra incluyó 51 pymes brasileñas y 31 colombianas. La investigación señaló las dificultades económico-financieras y de gestión de personas de estas empresas, así como las acciones e iniciativas en el contexto de la pandemia. Las estrategias de innovación más utilizadas fueron las relacionadas con el marketing y la comunicación y las estrategias de innovación de procesos. Además, se identificaron muchas similitudes en el manejo de las estrategias organizacionales entre las pymes en las muestras de Brasil y Colombia.
El segundo capítulo incluye el análisis de una encuesta realizada solo con hoteles en Santa Catarina (Brasil), con el objetivo de identificar los impactos de la pandemia en el ambiente hotelero, dado que el sector fue uno de los principales afectados por las restricciones gubernamentales. Con una muestra específica de 37 empresas del sector hotelero. La investigación destaca la importancia de la información y la gestión estratégica ante escenarios de contingencia.
El tercer capítulo presenta al sector de la hostelería en Brasil que tiene una gran importancia
en la economía nacional, ya que afecta directamente a otros sectores como la alimentación, las ventas, el turismo entre otros.
We explore equilibrium allocation and efficiency when private firms are listed by merging with a Special Purpose Acquisition Company (SPAC), compared with when they are listed through a traditional initial public offering (IPO). We show that a traditional IPO is more informationally efficient than a SPAC, except if the traditional IPO process is significantly long and costly. We also suggest that if the average quality of firms willing to go public decreases, SPAC acquisitions are more likely to occur than traditional IPOs. Our results hold, regardless of whether the measures of underwriters and sponsors are exogenously or endogenously determined.
Theme: Corporate Finance Abstract This study attempts to investigate the effect of capital structure and firms' size on profitability by using a panel data model for a group of nine energy sector companies listed on the National Stock Exchange of India under the thematic index. The study period ranges between 2006-2016 i.e., a period of eleven years. The FGLS panel data analysis reveals that the Long-term debt, equity and firms' size in sales have a significant positive effect on return on assets whereas firms' size in assets has a significant negative effect on return on assets (ROA). In the case of return on equity (ROE), the second dependent variable, used as a measure of profitability only two independent variables i.e., short-term debt and firms' size in assets, out of five independent variables have a significant negative effect on return on equity (ROE). This study implies that these energy sector companies should finance their projects through long-term debt and equity funds ensuring a sufficient level of cash inflows so that the dependence on the short-term debt may be avoided. The two profitability measures, return on assets (ROA) and return on equity (ROE), tend to decrease as the asset size of these companies increases.
The primary objective of an organization is to maximize wealth for its shareholders, and for this purpose, the finance manager makes several financial decisions. Financing for its assets is one of the significant financial decisions that concentrates financing with owners' equity or debt from external parties. Several factors influence the financing decision, even though determinant factors of debt financing decisions may differ from time to time due to the changing internal environment of organizations. Therefore, the study aims to identify the internal factors determining the debt financing decisions in Sri Lankan listed companies. Colombo Stock Exchange (CSE) consisted of 294 listed companies in 2022, and data were collected from selected 100 non-financial companies from 2008/09 to 2020/21. The dependent variables are a total debt to total assets (Debt ratio), and long-term debt to total assets, and the independent variables are profitability, non-debt tax shield (NDTS), tangibility, growth, size, reputation, liquidity, and risk. Descriptive statistics, correlation, pooled, fixed, and random effect models were used to prove the objective. The results reveal that NDTS and growth are positive, and profitability, tangibility, size, reputation, liquidity, and risk negatively influence total debt decisions. The size of the firm negatively influences the long-term debt decision. Therefore, the study concludes that internal factors are essential to determining the debt decision, and the study will benefit the finance managers for the financing decision and to select the optimum capital structure.
This paper presents a novel approach to calculate the weighted average cost of capital (WACC) but considering additional relevant variables to be applied to a specific cash flow, free cash flow to firm (FCFF), or capital cash flow (CCF), in order to value an asset. The analytical expressions deduced for this approach, one for each case, are based not only on the ratio debt to the value of the asset and the cost of debt and equity, as in the usual expression, but also includes the debt and firm's cash flow durations. The proposed novel approach to cost of capital has key advantages in comparison to the usual expression for WACC: It is an analytical expression that could be applied to whatever kind of debt or capital structure, not only perpetual debt or permanent capital structure.
It is a single discount rate, and for its calculation, it is not necessary to recalculate financial factors involved, which makes easier its application.
The additional financial variables involved, debt and firm's cash flow duration, allow to obtain better results for the right discount rate and for the value of an asset in the sense that the discount rate for the asset effectively will permit to reach the required level for the profitability for the investor and to cover the cost of debt.
Small and medium-sized banks (SMBs) enjoy advantages in providing information services to small and medium-sized enterprises (SMEs), which elaborates the relations between credit loans for SMEs and bank scale and structure. On the one hand, SMBs are too frequently unable to run large loan projects due to their limited scale, so they have no choice but to serve principally SMEs. On the other hand, SMBs, like SMEs, are so located to understand well the credit and operation status of SMEs, thus effectively reducing the impact of information asymmetry and greatly mitigating loan risks. Therefore, SMBs are more willing to provide financing services to SMEs than large banks are. Many SMBs, including the Bank of Taizhou, Zhejiang Tailong Commercial Bank, and Luqiao Rural Cooperative Bank, focus on micro and small enterprises (MSEs) in Luqiao District, Taizhou City, and have become models of efficient microfinance development.
Este libro es el resultado del trabajo en equipo de profesores e investigadores colombianos y brasileños, quienes, del 2020 al 2022, realizaron encuentros de discusión sobre la importancia de la planificación y gestión estratégica en las empresas. Considerando el escenario de la pandemia, los investigadores llevaron a cabo investigaciones concomitantes entre empresas brasileñas y colombianas.
This study empirically investigated the effect of corporate debt on the financial performance of Healthcare manufacturing companies in Nigeria. A random sample of three (3) Healthcare firms quoted in the Nigeria Stock Exchange as at May, 2019, were selected and studied for the period of ten years (2009-2018). Theresponse variable used for the study was Return on Asset (ROA) while explanatory variables were Short-Term Debt (STD) and Long-Term Debt (LTD). Annual time series secondary data extracted from the annual report and financial statements of the selected firms were used while the ex-post facto research design was adopted. Statistical analysis techniques employed were descriptive statistics and random effect panel least squares multiple regression mechanism. Necessary diagnostic and robustness tests such as Levin, Lin & Chu t* panel unit root and correlation analysis were performed. Findings revealed that corporate debt exert significant negative effect on the financial performance of pharmaceutical firms in Nigeria. Particularly, the empirical evidence provided that in disaggregated form,the effect of STD and LTD on ROA were individually negative and insignificant. The implication of this result is that debt of any sort is not favourable to pharmaceutical firms in Nigeria. Based on these findings, it was recommended among others that firms in Nigeria should strive to reduce their debt ratio as it draws back their profit levels in the company.
This study examined the relationship between macroeconomic factors and financing decision of industrial goods manufacturing firms in Nigeria. The study modelled debt to equity ratio as the function of inflation rate, nominal interest rate and real interest rate. Panel data were sourced from central bank of Nigeria statistical bulletin and financial statement and annual reports of the industrial goods firms from 2012-2021. Panel regression models were formulated to analyze the relationship between inflation and capital structure. The study found from the fixed effect model that 45 percent variation on debt equity ratio of Nigeria quoted industrial goods manufacturing firms can be explain by variation on macroeconomic factor. The regression coefficient indicated that there is no statistically significant relationship between inflation rates and debt equity ratios of the listed companies in Nigeria; there is no statistical evidence that there is an effect of the consumer price index on the debt equity ratio, and also no statistical evidence that there is a significant effect on the debt equity ratio from the nominal interest rate. However, the debt equity ratio increases with the changes in the nominal interest rate when the industry performance improves. The study concludes that it is advantageous for a company to reduce its debt portfolio and increase its equity holdings to improve its financial condition and its long-term growth when the economy is doing well. For this to happen, however, the company's management must recognize that there are risks when it decides to go the equity route, and therefore it requires them to take a disciplined approach to managing its balance sheet. We recommend that company with high debt levels should consider reducing its debt in order to reduce its borrowing costs and improve its financial strength and it is in the best interest of a company to increase its level of ARF INDIA 88 | Marshal IWEDI equity financing in order to take advantage of the higher returns that an adequately funded balance sheet can offer.
This study examined the relationship between inflation and capital structure of industrial goods manufacturing firms in Nigeria. The study modelled debt to equity ratio as the function of inflation rate, nominal interest rate and real interest rate. Panel data were sourced from central bank of Nigeria statistical bulletin and financial statement and annual reports of the industrial goods firms from 2012-2021. Panel regression models were formulated to analyze the relationship between inflation and capital structure. The study found from the fixed effect model that 45 percent variation on debt equity ratio of Nigeria quoted industrial goods manufacturing firms can be explaining by variation on real interest rate. The regression coefficient indicated that there is no statistically significant relationship between inflation rates and debt equity ratios of the listed companies in Nigeria; there is no statistical evidence that there is an effect of the consumer price index on the debt equity ratio, and also no statistical evidence that there is a significant effect on the debt equity ratio from the nominal interest rate. However, the debt equity ratio increases with the changes in the nominal interest rate when the industry performance improves. The study concludes that it is advantageous for a company to reduce its debt portfolio and increase its equity holdings to improve its financial condition and its long-term growth when the economy is doing well. For this to happen, however, the company's management must recognize that there are risks when it decides to go the equity route, and therefore it requires them to take a disciplined approach to managing its balance sheet. We recommend that company with high debt levels should consider reducing its debt in order to reduce its borrowing costs and improve its financial strength and it is in the best interest of a company to increase its level of equity financing in order to take advantage of the higher returns that an adequately funded balance sheet can offer.
Purpose: This paper examines the effects of Enterprise Risk Management (ERM), as measured by the Abnormal Enterprise Risk Management Index (ABERMI), on the performance and risk of Vietnamese listed firms. Design/methodology/approach: The paper employs a combination of three regression methods (Pooled Ordinary Least Squares, Fixed Effect Model and Random Effect Model) to test the effects of Enterprise Risk Managment on the performance and risk of Vietnamese listed firms in the period of 2010-2020. In addition, a two-stage re-gression model is used to calculate the ABERMI. Findings: The findings show that firms with effective enterprise risk management (ERM), as evidenced by their low abnormal enterprise risk management index, can enhance their business performance measured by Tobin's Q. Furthermore, good ERM helps firms reduce the risk of bankruptcy. However, the research proves that ERM is not associated with return on total assets and systematic risk. Research limitations/implications: Firm can employ Enterprise Risk Management (ERM) to efficiently and effec-tively manage risk. Additionally, applying a standard might further enhance the quality of risk management efforts by managers. Authorities can encourage the implementation of ERM to safeguard investor's wealth and indirectly protect the Vietnamese economy. Originality/value: Through a comprehensive analysis of various methodologies, this paper aims to uncover positive outcomes in exploring the impact of Enterprise Risk Management (ERM) on both risk and performance within the setting of Vietnamese listed firm.
Objetivo: Este artigo analisou a percepção dos servidores federais da auditoria interna do SUS quanto à estrutura de governança e Tom do Topo (TdT) do Ministério da Saúde (MS). Método: Para isso, adotou a estratégia de levantamento ou survey. Os dados foram coletados com a aplicação de um questionário aos servidores que atuam na unidade de auditoria interna vinculada ao MS, AudSUS (antigo Denasus) e tem duas dimensões: o ambiente de controle e a auditoria e o TdT, ambas na esfera federal. A coleta de dados resultou em 233 respostas completas, 54% dos convites enviados. As dimensões foram mensuradas por meio de escalas de atitudes com cinco níveis e a análise dos dados contou com técnicas quantitativas, entre elas, as frequências, percentuais, médias e desvios (quando variáveis contínuas) e alpha de Cronbach. Resultados: A partir da percepção dos respondentes, observou-se fragilidades na condução dos papeis dos atores de governança, assim como no ambiente de controle organizacional e na independência e autonomia da auditoria interna. Destaca-se também baixo amadurecimento da integração da unidade de auditoria interna com os atores da governança. Esses resultados demonstram desalinhamento e entre o topo e a auditoria interna que prejudica a comunicação, impacta na autonomia e efetividade dos trabalhos da auditoria interna. Contribuições: O estudo contribui para o aprimoramento da governança e da auditoria interna do setor público, em especial do MS.
Objetivo: A pesquisa busca compreender como as organizações contábeis, no Estado de Sergipe, estão utilizando os elementos tecnológicos da indústria 4.0. Método: De natureza qualitativa, tipo exploratória e descritiva, foi utilizada a estratégia de estudo de casos múltiplos em três organizações contábeis. As evidências foram entrevistas semiestruturadas e análise de documentos. Utilizou-se da análise de conteúdo de Bardin (1977). Resultados: Foi identificado que nem todos os elementos da Indústria 4.0 são utilizados na Contabilidade 4.0, e que existe uma distinção entre a classificação desses elementos em relação ao que foi percebido nas organizações contábeis. Os elementos identificados aplicam os mesmos princípios da Indústria 4.0 e buscam pelos mesmos resultados, muito embora, não tenham encontrado o êxodo na Integração ponta a ponta, que é o principal resultado desejado. Foram identificados os principais desafios enfrentados para implantar uma contabilidade 4.0 sendo o maior deles a resistência a mudanças pelos seus clientes. Contribuições: Essa pesquisa contribui com o Conselho Regional de Contabilidade de Sergipe (CRC/SE) na elaboração das estratégias para melhorar a capacitação dos profissionais da contabilidade. Para empresas de software, apresenta as necessidades das organizações contábeis de Sergipe na busca por maior eficiência na produção. Para as organizações contábeis, auxiliará no processo de implantação de uma Contabilidade 4.0 apresentando os desafios que precisarão ser enfrentados.
Objective: We analyze the effects of capital structure influence on corporate social responsibility (CSR) performance, represented by the ESG score. Prior studies have investigated distinct factors to settle CSR adoption. Nonetheless, corporate social responsibility literature has not yet achieved common consent. Method: This study uses a quantitative research approach. We used a sample of listed companies from the United States of America, China, Japan, Germany, India, the United Kingdom, France, Italy, Brazil, and Canada. Three estimators were applied in the regression model, OLS pooled, IV 2SLS, and GMM 2SLS. Results: Our findings indicate a positive and significant relationship between Capital Structure and CSR. Furthermore, we understand that the positive and statistically significant findings in the relationship between market value and corporate social responsibility index are because corporate social responsibility has an intangible asset in its constitution: the corporate reputation. Therefore, these results converge into accepting these practices, which generate a firm’s value, justifying the positive and significant association. Finally, it is essential to highlight that the variations found between countries, especially companies from nations with higher GDP, need a more substantial capital structure than smaller ones to obtain a positive CSR index. Contributions: The paper argues that the capital structure can be introduced related to adopting corporate social responsibility. It is worth noting that this research aims not to provide an optimal set of factors that affect corporate social responsibility practices but to highlight the intangible effect of corporate reputation generated by the capital structure that other studies can investigate.
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