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Capital structure decisions have been the most significant decisions to be taken by the finance experts in a corporate sector organization. The study intends to analyze the effect of profitability, tangibility, size and liquidity on capital structure decisions of the listed companies in oil and gas sector of Pakistan. The study attempts to provide information that may help in taking capital structure decisions in listed companies of oil and gas sector of Pakistan, which will ultimately support in maximization of the value of firms on the one side and the minimization of cost of capital on the other side. The results indicated that profitability is the only variable that showed negative relationship against the dependent variable leverage, whereas the other three variables, liquidity, size and tangibility have positive relationship with leverage. The study concludes that capital structure decisions in listed oil and gas sector companies are mostly determined by the factors studies. The study substantiates the findings of most of the researches conducted on capital structure, concluding that there is an optimal capital structure that is affected by a variety of internal and external factors.
Existing empirical research on the determinants of capital structure has been largely restricted to the advanced countries like United States, Japan, France, U. K., Germany etc. The present paper makes an empirical attempt to study the determinants of capital structure of developing countries through a case of the Indian corporate sector by using a panel data approach. The present study, although an exploratory effort, is limited to 298 out of top 500 manufacturing firms selected on the basis of the turnover for the year 2004-2005 which covers the time span of eleven years commencing from 1995-96 to 2005-06. The results of the study demonstrate that that uniqueness and liquidity are the important determinants of capital structure of the Indian corporate sector during the period under study. It is also found that earning rate, cash flow coverage ratio, size (total assets), growth of assets, non-debt tax shield, dividend payout ratio and operating leverage are having a little influence on the capital structure of the Indian corporate sector during the period under study.
The present study is aimed at to examine the reason of existence of the inter-firm and inter-industry differences in the capital structure of Indian firms and to identify the possible sources of such variation in capital structure. We propose to analyze the financing pattern of 300 Indian private sector companies, comprising of 20 different sectors for the period 1999-2000 to 2007-2008. We have taken the data of top 15 companies of each sector selected on the basis of their total assets value as on 31st March 2008. By using the techniques of funds flow, ratio analysis and correlation analysis, we have tried to find out the ways in which different companies at different times and in different institutional environments have financed their operations; and to identify possible implications of these financing patterns. The central issue we will address is to examine empirically the existence of inter-firm and inter-industry differences in the capital structure of Indian firms and identify the possible sources of such variation in capital structure. We will also try to find out the factors that determine the financing pattern of capital structure of Indian companies, particularly in the private sector.
The current study aims to examine the relationship between various identified determinants (Profitability, Tangibility, Growth Rate, Business Risk, Size and Non Debt tax shield) and its impact on financial leverage (CS) decisions of Capital goods, FMCG, Infrastructure and IT sector in Indian Stock market. In order to realise the stated objectives of the study the researchers have collected data from the published financial statements of quoted firms in the Indian stock market from the above mentioned sectors for a period of ten years (2006-2015). In the very first step,we tested the data by using multico1tinearity test and then we use linear multiple regression model to investigate the impact of chosen independent variables on CS (leverage) decisions in Indian capital market. Later, residual diagnostic CS, such as Serial correlation test, Heteroskedasticity Test, Normality and CUSUM test have been run to assess the strength of the constructed regression model. The results show that ER (Earnings), TA (Tangibility) and GR (Growth) were the major determinants in case of capital goods sector and ER (Earnings), TA (Tangibility), GR (Growth), Size and NDTS were the major factors for the FMCG sector. GR (Growth), BR (Business Risk) and Size for the Infrastructure sectors and ER (Earnings), BR (Business Risk) and Size were the major factors for the IT sector. The study revealed inconsistency in independent variables influencing the financial leverage component, though there is statistical support for the proposed determinants with respect to earnings and growth rate influencing the financial leverage.
The Banking sector of Bangladesh is trapped in a gridlock of non-performing loans (NPLs) so much so that NPL accounts for 11.60 percent of the total volume of classified loans. This problem has started to be widening with an evil trend of loan embezzlement among the industrial borrowers in our country. Frequent scam series in banking industry is surely a red light and unfortunately the commercial banks are highly surrounded by it. The goal of the study is to analyze the impact of non-performing loan (NPL) on profitability where in this study considered net interest margin (NIM). This paper attempts to find out the time series scenario of non-performing loans (NPLs), its growth, provisions and relation with banks profitability by using some ratios and a linear regression model of econometric technique. The empirical results represent that non-performing loan (NPL) as percentage of total loans on listed banks in Dhaka Stock Exchange (DSE) is very high and they holds more than 50 % of total non-performing loans (NPLs) of the listed 30 banks in Dhaka Stock Exchange (DSE) for year 2008 to 2013. Moreover it is one of the major factors of influencing banks profitability and it has statistically significant negative impact on net profit margin (NPM) of listed banks for the study periods.
Vidyasagar University Journal of Commerce, 2014
http://inet.vidyasagar.ac.in:8080/jspui/handle/123456789/1022
The paper examines the impact of eight firm - specific determinants of capital structure, viz., firm size, tangibility, growth opportunities,profitability, non-debt tax shields, operating risk, liquidity and firm age, over the entire conditional distribution of leverage through the application of quantile regression methodology on a balanced panel data related to a selected sample of 22 Indian cement companies listed on NSE over a period of 5 years from 2007-08 to 2011-12.
The main objective of this paper is to analyze the factors determining the capital structure of Indian companies. This analysis is grounded on agency theory and pecking order theory. The paper takes into consideration dependent variable being debt equity ratio and independent variables viz. size, growth, profitability, liquidity and tangibility. The data for a sample of 30 companies constituting Bombay Stock Exchange's SENSEX (sensitivity index) was considered for a period comprising 2008-2010. Present paper has identified determinants of capital structure with the help of correlation and regression analysis. Two major determinants of capital structure are found to be growth and liquidity according to the results of the study.
Competence in communicating across cultures is a prerequisite for success in today's fast-changing global community. In Intercultural Communication, the authors draw on their deep intercultural experience to show us how to build successful communication bridges across diverse cultures. The book explores various theoretical positions on global communication ethics and norms by providing an overview of the contemporary socio-cultural situation and seeking ways in which common ground may be found between these different positions. The authors raise points of critical reflection on intercultural events and issues in various areas of communication including health, work, environment and education. The book also covers a range of issues, from the interactions of various cultures to the expansion of social organizations and the growing global infrastructure. By integrating ‘glocal’ perspectives in intercultural communication, the book addresses the long-term strategy of developing a global community without sacrificing indigenous local values. © Fay Patel, Mingsheng Li and Prahalad Sooknanan, 2011. All rights reserved.
Within the discourse analysis, semiotics identifies how signs are used to represent something. In the discourse of advertising it can be a wish, a need, a desire or a worry to be solved, for instance. In this sense, the paper deals with the switch from denotative to connotative meanings of contemporary ads. The approach is based on the assumption that communication is achieved via decoding and encoding messages. The connotative meaning represents the overall message about the meaning of the product which the ad is creating by the use of the image (e.g. the photographed model). The ad functions by showing us a sign with easily readable mythic meaning (e.g. the photographed model is a sign for feminine beauty) as well as by placing this sign next to another, potentially ambiguous, sign (e.g. the name of the perfume) (Barthes 1972).
In this study we tried to detect the determinants of non-performing loans for a sample of 85 banks in three countries (Italy, Greece and Spain) for the period of 2004-2008. These countries have faced financial problems after the subprime crisis on 2008. The variables used are macroeconomic variables and specific variables to the bank. The macroeconomic variables are included the rate of growth of GDP, unemployment rate and real interest rate with respect to specific variables opted for the return on assets, the change in loans and the loan loss reserves to total loans ratio (LLR/TL). After the application of the method of panel data, we found the problem loans vary negatively with the growth rate of GDP, the profitability of banks’ assets and positively with the unemployment rate, the loan loss reserves to total loans and the real interest rate.
In the summer of 1986 the first International Conference on Marketing and Semiotics was held at Northwestern University. It was sponsored jointly by J. L. Kellogg Graduate School of Management at Northwestern and the Research Center for Language and Semiotic Studies at Indiana University. The three-day conference underscored the fact that although the vocabulary for the two disciplines might be different, there was much commonality between Semiotics and Marketing.
This paper investigates capital structure determinants of New Zealand-listed firms. This study is an extension from previous studies conducted by Boyle and Eckhold (1997) and, Wellalage & Locke (2012). Boyle and Eckhold and, Wellalage and Locke examine capital structure choices in New Zealand, especially the debt choices of NZ’s corporate firms. Using a balanced-panel of 79 New Zealand-listed firms, this study employs a balanced panel method, using dynamic-panel Instrumental Variable-Generalised Methods of Moments (IV-GMM) as it corrects heteroskedasticity and endogeneity problems which might result in an unbiased and inconsistent estimation. All variables, apart from non-debt tax shields and profitability exhibit a significant impact on total debt. Overall, these variables confirm the trade-off theory, even though the coefficient for non-debt tax shield confirms the pecking-order theory. The empirical evidence is less conclusive than that of previous studies in other countries, particularly Australia where capital structure confirms the pecking-order theory. Overall, the trade-off theory is more appropriate in explaining New Zealand listed firms’ capital structure. In addition, it appears that the capital structure theories applied to each study are contradictory, even though the result is in line with Boyle and Eckhold and, Wellalage and Locke which find that those firms’ specific characteristics play a significant role in determining the firm’s debt level. However, the contradictory results may be due to the different methods, time frames and scope of the samples used.
Capital structure decisions have important implications on the value of the firm, as the components of
the capital determine the cost of capital. The guiding principle is to choose the capital structure that
maximizes the value of the firm.
The objective of this study is to find out the determinants of capital structure of Oman corporate. This
study is based on the financial data collected from the balance sheets and income statements of all
companies listed in the Muscat Securities Market excluding banks, financial institutions and insurance
companies. The sample includes 82 firms. The period of study is six years from 2006 to 2011.
This study implies that in the context of lower profitability of firms, the firms tend to use more
leverage as a means of sourcing finance. The study also finds that the decision to increase leverage is a
function of efficiency of utilization of assets. Higher the efficiency in asset turnovers more is the
tendency to use leverage. Another implication of the study is that leverage is a function of size.
Companies which increase their revenues tend to be become debt intensive.
This paper investigates the determinants of capital structure of financial service firms in China. Using a relative regression of accounting data for 36 A-share financial listed companies over the years 2005-2009, an empirical study on determinants of capital structure in financial industry is conducted. The results show that profitability, firm size, non-debt tax shields, earnings volatility and non-circulating shares are significant influence factors in financial sector. Moreover, firm size is positively related to the corporate leverage ratio. It is also found that Chinese institutional characteristic affects the capital choice decision. While it confirmed that capital structure determinant of financial firms are similar to other industry, the largely state ownerships do affect capital structure choices.
SUMMARY Firms need to rely on different financing sources, but the question is how capital structure is determined for a particular industry. Our aim is to undertake an investigation into the factors which determine capital structure in the UK retail industry. Our initial sample consists of 163 (final sample: 100) UK retail companies, using data from 2000 in order to analyse capital structure from 2002 to 2006. Nonlinear models tend to be unduly neglected in capital structure research, and so we apply generalized regression neural networks (GRNNs), which are compared with conventional multiple regressions. We utilize a hold-out sample for the multiple regressions to make them comparable with the GRNNs. Stability of the data is also confirmed. Our main findings are: net profitability and the depreciation-to-sales ratio are key determinants of capital structure based on GRNNs, while two more variables are added in the multiple regressions, namely size and quick ratio; there is strong support for the pecking-order theory; both root-mean-square errors and mean absolute errors are much lower for the GRNNs than those for the multiple regressions for overall, training and testing datasets. The potential benefit of this research to financial managers and investors in the UK retail sector is the identification of the overriding role of net profitability in reducing the financial risk from high levels of gearing. Copyright © 2012 John Wiley & Sons, Ltd.
Purpose – The aim of this study is to find out the factors that affect the capital structure of hotels and restaurant companies and to investigate whether the capital structure models derived from Western settings provide convincing explanations for capital structure decisions of the Sri Lankan companies.
Methodology – Different conditional theories of capital structure are reviewed (the trade-off theory, pecking order theory and agency theory) in order to formulate working hypotheses concerning the determinants of capital structure of the hotels and restaurant companies. The investigation is performed for a sample of 15 companies listed on the Colombo Stock Exchange during 2008-2012.
Findings – The results suggest that only profitability is negatively related to the debt ratios (long term; short term and total debt) whereas tangibility (asset structure), size and growth do not appear to be significantly related to the debt ratios. Through the findings we can come to conclusion that Pecking order theory is more relevant to Sri Lankan context.
Practical implications – This study has laid some groundwork to investigate the determinants of capital structure of Sri Lankan companies upon which a more detailed evaluation could be based. Furthermore, findings should help corporate managers and decision makers to make optimal capital structure decisions.
Originality/value – To the authors' knowledge, this is the first study that investigates the determinants of capital structure of hotels and restaurant companies in Sri Lanka. Furthermore, this study somehow goes to confirm that same factors affect the capital structure decisions of firms in developing countries as identified for firms in developed economies.
Purpose-Purpose of this study is to investigate the determinants of optimal capital structuring that affect growth and financing behavior of textile sector firms in Pakistan keeping in view the important role capital structuring plays in any firm's financial management decisions and the positive contribution it makes to the creation of firms' value and profitability. Methodology/sample-Size of the firm (capital), profitability, fixed assets structure and taxes were used as control variables to investigate the determinants of optimal capital structuring of textiles companies. A sample size of 90 textile companies across the country were selected and their data for the 2005 -2010 period was used. The determinants of optimal capital structure were examined using correlation and regression analyses. F-value was calculated to test the fitness of overall model. Findings-Results of the study showed a negative relationship between dependent variable financial leverage and independent variables. The statistical analysis of spinning and composite unit also showed consistency of results with the overall textile sector but outcome of weaving unit showed a significantly positive relationship between dependent and independent variables. Practical Implications-The findings enhance the knowledge base of determinants optimal capital structure and are likely to help companies take effective decision related to capital structure needs. Furthermore, the study is likely to help the decision makers better adjust themselves towards adopting and considering proficient ways of managing capital structure of a firm.
The issue of capital structure of companies is one of the most debated problems of financial management. According to economic theory, capital structure determines the stock market value of firms and therefore their viability, while one of the most negative result of the crash of 2008 and the persisting crisis (excess supply in markets of labor and money) is their ongoing steep decline of lending by credit institutions and other sources. In this paper, considering the importance of the issue and motivated by the conflicting results of previous empirical studies, we attempt the analysis of capital structure of the European Maritime Enterprises (oceanic shipping).We focus on shipping companies, because of the large volume of funding that demands their main operation, due to the intensity of the assets held. The objectives of this research are firstly the identification of factors that affect the capital structure of European oceanic shipping and secondly to search for the existence of an ideal - target capital structure ratio. The determinants of capital structure are examined through static (fixed effect method and FGLS) and dynamic (GMM Methods) econometric models, using data from the financial statements of 32 listed European shipping companies for the period 2005-2010. The results suggest the prevalence of pecking order theory in our case, while a positive relationship arises between tangible assets and tax benefits (arising from sources other than borrowing) against leverage. Moreover, we observe a negative relationship between size or profitability and debt. Our findings contribute to a deeper understanding of the decisions taken by European shipping on their capital structure.
Capital structure is one of the most complex areas of financial decision making due to its interrelationship with other financial decisions variables. Capital structure is the composition of debt and equity capital that comprise a firm’s financing its assets and can be rewritten as the sum of net worth plus preferred stock plus long-term debts. In this study an attempt has been made to analyze the capital structure and its impact on profit earning capacity during 2003 to 2007 (05 years) financial year of listed manufacturing companies in Sri Lanka. The results shows that debt to equity ratio (D/E) ratio is positively and strongly associated to all profitability ratios [gross profit ratio (GPR); operating profit ratio(OPR); and net profit ratio(NPR)] except return on capital employed (ROCE) and return on investment (ROI). Debt to assets (D/A) ratio is positively and strongly associated to OPR, NPR and ROCE. Similarly capital gearing (CG) ratio is also positively correlated to GPR and NPR. Further, interest coverage (IC) ratio is significantly correlates to ROCE and NPR. Further capital structure has a great impact on all profitability ratios except ROCE and ROI. The outcomes of the study may guide entrepreneurs, loan- creditors and policy planners to formulate better policy decisions in respect of the mix of debt and equity capital and to exercise control over capital structure planning and thereby to control and reduce bankruptcy costs.
This paper re-examines the issue of the existence of threshold effects in the relationship between inflation and growth, using new econometric techniques that provide appropriate procedures for estimation and inference. The threshold level of inflation above which inflation significantly slows growth is estimated at 1-3 percent for industrial countries and 11-12 percent for developing countries. The negative and significant relationship between inflation and growth, for inflation rates above the threshold level, is quite robust with respect to the estimation method, perturbations in the location of the threshold level, the exclusion of high-inflation observations, data frequency, and alternative specifications.
This paper contributes to the capital structure literature by investigating the determinants of capital structure of Australian Real Estate Investment Trusts (A-REITs) over the period 2006-2009. By using a panel approach and a Global Financial Crisis (GFC) dummy variable, our analysis incorporates the Global Financial Crisis (GFC) shock which appears to have affected the market after December 2007. We find that A-REIT size, profitability, tangibility, operating risk and number of growth opportunities impact similarly to many previous studies of international entities upon the degree of leverage. We also find mixed support for prevailing capital structure theories of Pecking Order, Trade-off and Agency Theory, but find that Market Timing Theory can be rejected over our sample period. With specific focus after onset of the GFC, we find that the relationship between capital structure and our independent variables is somewhat distorted. Consequently, the postulations of theory also become distorted whereby changes to capital structure come about because of the primary goal to survive, rather than managerial opportunism.
This paper is aimed at the approach of social and economic dimension of rural development at the level of the North-Eastern Romanian Region, in order to identify the main problems and perspectives of the region, offering suitable solutions for the implementation and improvement of the actual development strategy of the region. The methodology used SWOT analysis, in order to highlight the actual dimension and perspective of sustainable development for this region. Besides calculating the conventional GNP and income as the primary indicators of economic progress, the methodology used an adapted regional Index of Sustainable Economic Welfare (ISEW) developed by economist Herman Daly and theologian John Cobb (1994), and a new version made by the United Nations Development Programme (2010). The methodology also used the results of a research project developed in all the six counties of the region, which provided this paper scientific support. The research results indicated development of agro-tourism and non-agricultural activities as the main solutions for socio-economical problems of the region. One of the identified developing solutions was the infrastructure improvement of the region, with direct effect on increasing investments in the rural areas and the development of economical activities, based on rich cultural heritage of the region.
Capital structure/leverage level of the firm determined by several factors. Proper capital structure leads the firm to achieve the better performance and ensures the sustainability in its operation. Even though there are several factors contribute to the institutional performance, determinants of the capital structure play an important role. Therefore it is necessary to identify that what are factors contribute to the firms' capital structure composition in its operation. Hence the present study was undertaken with the objective of finding out the relationship between capital structure determinants and leverage level of the listed companies in SriLanka. Using a multiple regression analysis, the leverage behavior of the listed manufacturing companies in Colombo stock exchange market in SriLanka was examined for the period of 2003-2007. The final sample consists of 19 manufacturing companies. In this study, dependent variable that is, leverage level of the companies, is measured by long-term debt ratio, short-term debt ratio and total debt ratio. Capital structure determinants (independent variables) are measured by capital intensity, tangibility, profitability, firm size and non-debt tax shield. Findings showed that the direction of the explanatory variables such as, tangibility, profitability, firm size and non-debt tax shields with total debt largely consistent with the explanations of trade -off theory and prove past empirical findings also.
In this paper, an attempt has been made to examine the determinants of capital structure -size, business risk, growth rate, earning rate, dividend payout, debt service capacity, and degree of operating leverage-of the companies listed to Nepal Stock Exchange Ltd. as of July 16, 2003. Eight variables multiple regression model has been used to assess the influence of defined explanatory variables on capital structure. In the preliminary analysis, manufacturing companies, commercial banks, insurance companies, and finance companies were included. However, due to the unusual sign problem in the constant term of the model, manufacturing companies were excluded in final analysis. This study shows that size, growth rate and earning rate are statistically significant determinants of capital structure of the listed companies. Journal of Nepalese Business Studies Vol.1(1) 2004 pp. 1-13
There are three major theories in the Corporate Finance literature, namely, Trade-off theory, Agency Cost theory and Pecking-Order theory that highlight different determinants of corporate capital structure. In an attempt to study the determinants of capital structure in Indian scenario and to verify whether any of the above mentioned theories can characterize the Indian corporate financing, this paper makes an empirical study of the capital financing pattern of 76 Indian firms for the period 2003-2007, the period of unprecedented growth of Indian economy. The study makes fixed effect panel data (LSDV) regression and finds out that financing with internal funds, as suggested by pecking-order theory has emerged as a major feature of corporate capital structure. Some other determinants, however, have patterns of influences that match with the postulates of other two theories. The analysis finds out that the capital structure pattern on an average portends well for long term development of Indian corporate sector.
This study uses a new data set to assess whether capital structure theory is portable across countries with different institutional structures. We analyze capital structure choices of firms in 10 developing countries, and provide evidence that these decisions are affected by the same variables as in developed countries. However, there are persistent differences across countries, indicating that specific country factors are at work. Our findings suggest that although some of the insights from modern finance theory are portable across countries, much remains to be done to understand the impact of different institutional features on capital structure choices.
In the last several years, there has been increased theoretical emphasis on the agent-principal problem as it applies to corporate finance. This paper is an attempt to empirically test for the presence of the agency costs and their relation to the debt policy of corporations. We find that firms with higher insider ownership have greater debt ratios than firms with lower insider ownership, which may be explained by the agency costs of debt and/or the agency costs of equity. Other regression results tend to confirm the theoretically optimal relationships put forth by Myers. We find that high-growth firms use less debt rather than more debt, high-operating-risk firms use more debt rather than less debt, and firm size appears to be uncorrelated to the level of debt.
In this empirical study I examine the factors correlated with capital structure in the United States, Japan, United Kingdom, France, and Germany. Although both mean leverage and many firm factors appear to be similar across countries, some significant differences remain. Specifically, differences appear in the correlation between long-term debt/asset ratios and the firms' riskiness, profitability, size, and growth. These correlations may be explained by differences in tax policies and agency problems, including differences in bankruptcy costs, information asymmetries, and shareholder/creditor conflicts. The findings of this study suggest links between varying choices in capital structure across countries and legal and institutional differences.
This paper provides an empirical examination of the determinants of corporate debt maturity structure. A partial adjustment model is estimated by GMM estimation procedure using data for an unbalanced panel of UK firms over the period 1983-1996. The evidence is consistent with the hypothesis that firms with more growth opportunities in their investment sets tend to have more shorter-term debt. There is also strong evidence for a positive impact of size on debt maturity structure. The results also provide strong support for the maturity-matching hypothesis that firms match the maturity structure of their debt to that of their assets. The findings are inconsistent with the signalling hypothesis that firms use their debt maturity structure to signal information to the market. We find no evidence that taxes affect debt maturity structure. Our results suggest that firms have long-term target ratios and they adjust to the target ratio relatively fast, which might suggest that the costs of being away from their target debt maturity ratios are significant.
Despite the benefits of leverage, many firms exist that at some point in their corporate history had no debt. This study provides evidence that the balancing theory of capital structure can predict the behavior of such firms. All-equity firms allow a more precise measurement of firm market value and risk, and provide a less ambiguous relationship between independent variables and dependent variables than the firms used in previous studies. Using a logit function to avoid spurious correlation between the dependent and independent variables, we find that for most years during 1964–88 all-equity firms listed in the Compustat industrial file exhibited a consistently significant negative relationship between the Myers growth option variable and the probability of borrowing. Positively significant but less consistent relationships exist between the risk measures and the nondebt tax shields, and the probability of borrowing. These results do not qualitatively change when the data are aggregated over twenty years or over five-year subperiods. The tests are also conducted by industry according to the one-digit Standard Industrial Classification (SIC) code. Significant relationships are found in the 2000 and 3000 SIC code manufacturing industries.
This article tests a hypothesis that the causes of the Asian financial crisis are weaknesses in the balance sheet of financial institutions, high international interest rates, high short-term external debts, excessive loans, and continuing large current account deficits. It also tests a hypothesis regarding the determination of nonperforming bank loans. Empirical tests are carried out with panel data on seven countries in Asia—Indonesia, Korea, Malaysia, Philippines, Singapore, Taiwan, and Thailand—for the 1995 through 1997 period. The 3-month LIBOR interest rate and nonperforming loan rates of banks are found to be the major determinants of the Asian financial crisis. The nonperforming bank loan ratios are explained by the corporate leverage ratio. In addition, both the corporate high leverage ratio and LIBOR interest rates are found to significantly affect the outcome of the Asian crisis. Lowering world interest rates and taking the measures of individual Asian countries to reduce nonperforming assets and debt-to-equity ratios would be very effective in preventing reoccurrence of the crisis.
This study reviews the performance of banks in twelve countries or territories in Europe, North America and Australia and examines the internal and external determination of profitability. To circumvent some of the difficulties in making comparisons between banks in different countries, the concept of ‘value added’ is introduced. Results parallel those in domestic U.S. studies and provide some support for the Edwards-Heggestad-Mingo hypothesis of risk avoidance by banks with a high degree of market power.
We test the pecking order model of capital structure by examining the financing of firms that went public in 1983. We estimate a logit to predict external financing, and a multinomial logit to predict the type of financing using data on the IPO firms' security offerings during 1984–1992. Our results indicate that the probability of obtaining external funds is unrelated to the shortfall in internally generated funds, although firms with cash surpluses avoid external financing. Firms that access the capital markets do not follow the pecking order when choosing the type of security to offer.
This paper develops a preliminary study to explore the determinants of capital structure of Chinese-listed companies using firm-level panel data. The findings reflect the transitional nature of the Chinese corporate environment. They suggest that some of the insights from modern finance theory of capital structure are portable to China in that certain firm-specific factors that are relevant for explaining capital structure in developed economies are also relevant in China. However, neither the trade-off model nor the Pecking order hypothesis derived from the Western settings provides convincing explanations for the capital choices of the Chinese firms. The capital choice decision of Chinese firms seems to follow a “new Pecking order”—retained profit, equity, and long-term debt. This is because the fundamental institutional assumptions underpinning the Western models are not valid in China. These significant institutional differences and financial constraints in the banking sector in China are the factors influencing firms' leverage decision and they are at least as important as the firm-specific factors. The study has laid some groundwork upon which a more detailed evaluation of Chinese firms' capital structure could be based.
Two separate strands of the literature on capital structure under asymmetric information consider the relationship between a firm's financial leverage and cash flow. Signalling theory suggests a positive relationship, while pecking order behavior implies a negative relationship. These contrasting theoretical implications appear contradictory. However, both are supported in different bodies of empirical literature. Leverage-changing event studies tend to support a positive relationship while cross-sectional studies typically reveal a negative relationship. This paper proposes that the appropriate pecking order relationship is contemporaneous — between current leverage and current cash flow, while the relevant signalling relationship is intertemporal-between current leverage and future cash flow. A dynamic simultaneous equations model is built which allows the firm's leverage, cash flow, and risk to interact jointly in the same period, as well as across time. Empirical results reveal that, in the same time period, leverage and cash flow tend to be negatively related, while across time leverage is positively related to future cash flow. Thus the apparent contradictions in the theoretical and empirical literature may be reconciled by considering both the contemporaneous and dynamic aspects of the firm's leverage/cash flow relationship.
This paper integrates elements from the theory of agency, the theory of property rights and the theory of finance to develop a theory of the ownership structure of the firm. We define the concept of agency costs, show its relationship to the ‘separation and control’ issue, investigate the nature of the agency costs generated by the existence of debt and outside equity, demonstrate who bears these costs and why, and investigate the Pareto optimality of their existence. We also provide a new definition of the firm, and show how our analysis of the factors influencing the creation and issuance of debt and equity claims is a special case of the supply side of the completeness of markets problem.The directors of such [joint-stock] companies, however, being the managers rather of other people's money than of their own, it cannot well be expected, that they should watch over it with the same anxious vigilance with which the partners in a private copartnery frequently watch over their own. Like the stewards of a rich man, they are apt to consider attention to small matters as not for their master's honour, and very easily give themselves a dispensation from having it. Negligence and profusion, therefore, must always prevail, more or less, in the management of the affairs of such a company.Adam Smith, The Wealth of Nations, 1776, Cannan Edition(Modern Library, New York, 1937) p. 700.
In this paper, a model of corporate leverage choice is formulated in which corporate and differential personal taxes exist and supply side adjustments by firms enter into the determination of equilibrium relative prices of debt and equity. The presence of corporate tax shield substitutes for debt such as accounting depreciation, depletion allowances, and investment tax credits is shown to imply a market equilibrium in which each firm has a unique interior optimum leverage decision (with or without leverage-related costs). The optimal leverage model yields a number of interesting predictions regarding cross-sectional and time-series properties of firms' capital structures. Extant evidence bearing on these predictions is examined.
We test the pecking order theory of corporate leverage on a broad cross-section of publicly traded American firms for 1971 to 1998. Contrary to the pecking order theory, net equity issues track the financing deficit more closely than do net debt issues. While large firms exhibit some aspects of pecking order behavior, the evidence is not robust to the inclusion of conventional leverage factors, nor to the analysis of evidence from the 1990s. Financing deficit is less important in explaining net debt issues over time for firms of all sizes.
The paper contributes to the capital structure literature by investigating the determinants of capital structure of firms operating in the Asia Pacific region, in four countries with different legal, financial and institutional environments, namely Thailand, Malaysia, Singapore and Australia. The results suggest that the capital structure decision of firms is influenced by the environment in which they operate, as well as firm-specific factors identified in the extant literature. The financial crisis of 1997 is also found to have had a significant but diverse impact on firm’s capital structure decision across the region.