Implied future policy promises and firm leverage

A firm’s default risk is closely related to its macrofinancial stability. As financial reform deepens, banking competition may ease firms’ credit constraints, encouraging them to increase their leverage and default risks. This study uses contingent claims analysis to examine firms’ asset–liability ratio and default distance. We find that companies have low leverage and low overall default risks. Moreover, a pro-cyclical effect exists between leverage and economic growth. As banking competition becomes more intense, the default risk decreases, but firms’ leverage ratio rises significantly. The impact is more prominent for highly leveraged firms. Our findings also indicate that utilizing the contingent claims analysis method to measure firms’ leverage and default risks provides more accurate results. Moreover, we provide empirical evidence of the impact of banking competition on firms’ leverage and credit risks. The results suggest that enhancing financial competition has a positive effect on easing credit constraints and reducing default risks.

It has been argued that taking on more leverage in firm’s capital structure will force managers to disclose more information in line with agency theory and theoretically, this is expected to increase in postIFRS periods. Whether, this theoretical assertion holds in the case of Nigeria is subject to academic debate. Thus, the paper examines the association between leverage and earnings manipulative practice of firms in Nigeria pre and postIFRS periods and attempt to test the assertion of agency theory that higher leverage will be beneficial to improved earnings quality dues to pressure on managers by bondholders. The study incorporated data for 87 listed firms on the floor of the Nigeria Stock Exchange for 10 years, 5 years preIFRS (2007 to 2011) and 5 years postI FRS (2012 to 2016) making 870 firm year observations. It disaggregated the periods into pre and postIFRS to enable the researcher test for the effect of adoption. The panel regressions estimate (Random effect model) was used to test the effect of the association between the independent and dependent variables. The results deviate from norms and show that although taking on leverage in the capital structure of firms could be beneficial to earnings quality in line with agency theory in preIFRS, this benefit had been eroded after Nigeria’s adoption of the global standards. In postIFRS, leverage has a positive association, indicating that more leverage resulted in increased manipulation. Performance of firms proved to be an important factor affecting earnings quality as the results showed that lower performance was likely associated with increased earnings management practice post IFRS. The study is original and deviate from norms, puncturing the beliefs that IFRS adoption would limit managers’ ability to manipulate earnings. It also found, against popular assertion, that increased leverage may not be associated with reduced earnings manipulative practices. Leverage is unlikely to prevent earnings management practices.

Since 2008, the Global Financial Crisis has had a huge impact on China’s export-oriented economy. The State Council in 2008 launched an economic stimulus plan known as Four-Trillion Investment” （70.50% of the total package, i.e. 2.82 trillion RMB, was financed by local governments）. Since then, the scale of local government debt has increased significantly, which has produced some unexpected economic consequences for the allocation of credit resources and even economic development. The revenue and cost of government borrowing are the core concerns of many countries. The impact of government borrowing on the investment and financing of firms has been studied in the existing literature. Due to the great differences in the development of legal system and financial market, the micro consequences of government borrowing are also inconsistent, i.e. there is a dispute between the crowding-out effect” and the crowding-in effect” in the economic theory. Therefore, does local government debt affect the debt of local firms? If so, how does the affection occur? These are real problems worth studying. Based on the data of 266 cities in China, this paper tests the impact of the local government debt scale on local firms’ debt level and debt cost in 2008−2017. The results show that: First, the scale of local government debt decreases firm leverage. Specifically, the scale of local government debt decreases firm leverage by reducing the short-term debt and operating debt scale. Compared with state-owned, non-infrastructure and public welfare industries, and profitable companies, the scale of local government debt has a stronger negative effect on the firm leverage of non-state-owned, infrastructure and public welfare industries, and loss-making companies. Second, the scale of local government debt increases the debt cost of non-state-owned companies. The results show that the expansion of the local government debt scale has a crowding-out effect on firm leverage through the demand competition mechanism, and increases firms’ debt cost through the price mechanism. This paper contributes to the literature as follows: First, it not only tests the effect of local government debt on firm leverage, but also analyzes the way of local government debt affecting firm leverage. The results are helpful to enrich the literature of the impact of local government fiscal policies on micro enterprises. Second, different from the measurement of using federal or central government general debt, we measure the scale of local government debt based on city-level data, which is not only helpful to analyze the effect of government debt on firm behavior under the same institutional background, but also helpful to reduce the dependence on the time series model, make the data structure more matching, and make the research conclusion more robust. Third, we test the effect of government debt on firm leverage and debt cost from the perspective of the demand competition mechanism and price mechanism, which helps to reveal the causes of difficult and costly in financing” reflected by firms, and provide some decision reference for the central government in controlling the scale of local government debt, optimizing the allocation of credit capital, improving the financing ability of firms, and promoting economic development.

PurposeThis paper investigates the impact of financial integration on the capital structure of the firms operating in mainland China, examining the firm-level and country-level integrating variables for 2,878 listed Chinese firms over the period of 1991–2016 in regard to the firms' capital structures. Finally, the study revisits the associations for the state-owned and multinational firms in the context of China.Design/methodology/approachA large sample of unbalanced data from firms were used to explore the relationship firm-level and country-level integrating variables has with firm leverage and maturity; this is accomplished using the fixed effect model. For robustness, a system-generalised method of moments was used.FindingsThe results indicate that internationalisation positively impacts the leverage and debt maturity of all listed Chinese firms and multinational firms and that state-owned firms are financed mainly by the state. For country-level integration, the authors find that credit and equity markets are negatively related to a firm's leverage. A negative relation with credit markets suggests that Chinese firms have much cheaper financing options than the benefits that arise from credit market integration. Moreover, the effect of equity market integration is more pronounced on Chinese firms' capital structure and debt maturity than credit market integration.Practical implicationsThe results provide valuable implications of financial integration for policymakers as well as capital structure decision-making for managers in China.Originality/valueFew studies have examined the impact of integration on firms' capital structures in developing countries. After controlling for unobserved heterogeneity and endogeneity, this study adds new multilevel integration evidence on the capital structure of Chinese firms.

Prior literature has explored the impact of the type of financial system, (bank versus stock market based), on the capital structure of firms. In this study, we examine the influence of the structure of the debt market, (arms-length versus relationship-based), on the capital structure, (debt maturity choices), of firms in a cross-country approach involving 36 countries. We assess the importance of the bond market in a given economy by examining cross-country differences in leverage and debt maturity ratios. We also examine the effect of legal systems on this relationship between the bond market and the firm’s capital (debt maturity) structure. Our results show a negative association between firm total leverage and bond market capitalization. However, the association turns positive in the case of long-term leverage. In the case of short-term debt, the banking system is found to have a significant and positive impact. We also find a significant impact of legal tradition on the association between bond markets and leverage. In general, the relation is positive in common law countries and negative in civil law countries for long-term debt. Firm size appears to be an important factor which determines the direction of association between bond markets and firm leverage. Irrespective of the legal tradition, the impact of bond markets is positive for large firms and negative for small firms.Furthermore, we find significant impact of bond markets on the debt maturity structure of firms as well. Supporting evidence is also found for the growth hypothesis: growth options are observed to bear a negative association with long-term leverage and debt maturity ratios only in those countries where bond markets are well developed.

Using the framework of trade-off model of capital structure, I incorporate implicit bailout claim in firm value process and show that high sovereign credit risk lowers firm's optimal leverage. Empirical results using firm data in 11 euro area countries show that optimal leverage of big firms is negatively correlated to sovereign credit risk while for small firms the correlation does not exist. This finding provides evidence on the model prediction that sovereign credit risk affects large firms' leverage choice through expectation of implicit government bailout. Robustness tests rule out alternative hypothesis such as market-timing, cost transfer and direct government ownership.

Firm leverage and employment dynamics

Present study examines the effect of option listing and subsequent trading on the innovation in the context of publicly listed Indian firms. Innovation is defined in terms of input and output as R & D expense to sales, and number of patents filed by firm, respectively. Multiple regression analysis is conducted to identify drivers of innovations. Measures of innovation are used as dependent variables, while dummy for option trading is taken as independent variable along with other firm level control variables. The study also examines the determinants of the option listing on individual stocks using binary-logistic regression. Firm age, financial leverage, dividend payout, and profitability affect internal R & D allocations for the sample firms. As far as firm’s research output is concerned, firm leverage, institutional holding, option trading, and ESOP are the major determinants. Firm leverage adversely affects R & D input and R & D output alike. Dividend paying, large firms having higher institutional holdings are likely to attract stock option listing, while firms with high firm specific return variations are likely to have very low probability of option listing.

Recent research on the subprime crisis and rollover risk suggests that debt market liquidity is a major factor affecting the risk of default. This implies that firms that rely heavily on short-term debt, such as commercial paper (CP), are at greater risk of default. Debt market illiquidity could reduce the value of the firm and thus impact the firm's leverage, which is a major factor in predicting default. We estimate the effect of debt market conditions on the probability of default with a discrete-time dynamic hazard model that takes into account measurement error in firm leverage. Our results indicate that rollover risk is a significant factor in causing default, but the risk was higher for nonfinancial firms around 2000–2001 and considerably less entering the subprime crisis.

Introduction/Main Objectives: This paper examines the relationship between financial leverage and board independence for firms listed on the Malaysian stock exchange. Research Methods: This research is conducted using sample of 265 non-financial firms listed on Bursa Malaysia from 2014 to 2018. Finding/Results: Our results show: first, board independence is essential in reducing firm leverage. However, board independence does not affect all firms equally. In particular, board independence has insignificant influences on the financial leverage of young or small firms. In contrast, the financial leverage of old or large firms is negatively associated with board independence. Second, the financial leverage of firms with low profitability is adversely affected by the presence of independent directors. However, the negative impact diminishes as the firms' profitability increases. Conclusion: These results indicate the importance of having independent directors for old, large, or low-profitability firms to reduce their financial leverage. These findings contribute to the stylised facts of the nexus between financial leverage and board independence.

This paper shows that buildups in firm leverage predict subsequent declines in aggregate regional employment. Using confidential establishment-level data from the U.S. Census Bureau, we exploit regional heterogeneity in leverage buildups by large U.S. publicly listed firms, which are widely spread across U.S. regions. For a given region, our results show that increases in firms’ borrowing are associated with “boom-bust” cycles: employment grows in the short run but declines in the medium run. Across regions, our results imply that regions with larger buildups in firm leverage exhibit stronger short-run growth, but also stronger medium-run declines, in aggregate regional employment. We obtain similar results if we condition on national recessions–regions with larger buildups in firm leverage prior to a recession experience larger employment losses during the recession. When comparing regional firm and household leverage growth, we find qualitatively similar patterns for both. Finally, we find that regions whose firm leverage growth comoves more strongly also exhibit stronger comovement in their regional business cycles.

There is a subsequent work from the previous studies on the relationship between firm-specific attributes and firm leverage. Then, during the last decade, international studies started to extend this field by scrutinizing how the firm leverage influences firm performance. However, much of the discussion from previous studies have not systematically investigated the simultaneously of the cause-effect framework on the impact of firm-specific attributes on firm financial performance through firm leverage which acts as a mediator variable. In short, it is reasonable to examine the mediating effects in which whether firm leverage may mediate or indirectly influence the relationship between firm-specific attributes and firm financial performance, particularly, from the perspective of Malaysian Shariah Compliant companies. The main motivation for this research is to contribute to corporate finance literature and how firms tend to choose their financing structure from the perspective of the capital structure theories. We obtained data of 398 Malaysian Shariah compliant companies from the Bursa Malaysia stock exchange with a total number of samples of 7414 for the sample data period from 2000 to 2018. We find that there are three relationships that categorize as competitive mediation which is the relationships between the asset tangibility (AT), growth opportunities (GRW), firm size (FS) and firm financial performance. While, non-debt tax shield (NDTS) is categorized as a complementary mediation. We use the PLS-SEM approach in SmartPLS software 3.0 M3 to develop a set of mediation model from the perspective of capital structure theory for the Malaysian Shariah compliant companies.

Corporate social responsibility and firm leverage: The impact of market competition

Corporate social responsibility, market rivalry and firm leverage: new evidence from a fixed-effect quantile regression approach

<p class="MsoNormal" style="margin-top: 12.0pt;"><span lang="EN-US" style="font-family: 'times new roman', times, serif; font-size: 14pt;">This study empirically examines the effect of corporate governance on the relation between CEO power and firm leverage. Results from OLS and industry fixed effects regressions show that CEO power is positively associated with firm leverage. However, this association is driven by the strength of corporate governance as powerful CEOs tend to choose higher levels of debt only when corporate governance is strong. When corporate governance is weak, CEO power does not seem to have any effect on firm leverage. Overall, results indicate that strong corporate governance mitigates the severity of manager-shareholder conflicts and induces powerful CEOs to choose higher leverage.</span></p>