Capital Structure Behavior Research Articles

The Art of Timing: Unpacking the Market Timing's Long -Term Impact on Capital Structure : With Reference to Listed Companies in Colombo Stock Exchange

The market timing theory serves as the basis for this study, which aims to unravel the persistent reaction to capital structure decisions. The rationale for conducting this study stemmed from observing a gap in understanding the capital structure behaviour of firms surrounding their initial public offerings and the progression of debt and equity from that initial point. The study's sample, which covered the years 1992 to 2018, was created by using the IPO date of companies listed at the Colombo Stock Exchange) in Sri Lanka. To measure market timing, the study utilized a variable called external finance weighted average market-to-book ratio. This variable served as an indicator of the firms' timing decisions in relation to the capital structure. A panel regression model quantified the timing impact, showing an inverse association between variables. However, the strength of the correlation was found to be less significant than what market timing theory had predicted. Thus, it could not be proven that listed companies consistently increase their equity by issuing new shares when the current share price rises. These findings suggest that while market timing may have some influence on the determination of the debt and equity portions in capital structure decisions, other factors may also come into play. The study highlights the importance of considering additional variables and factors that can impact capital structure choices. It further emphasizes the significance of increasing equity on firm capital structures and costs, and suggests that management can potentially adjust the capital structure based on historical market-to-book ratios.

Corporate Governance and Capital Structure Behavior: A Study of Jordanian Non-Financial Firms

Corporate governance and finance are heavily influenced by capital structure, which greatly affects equity returns and the risks associated with the owner. Since CEOs are an important asset of a company and have a considerable role in decision-making and other functions, investigating the issue from their stance is decisive to yield valuable outcomes. Therefore, this study examines the impact of CEOs' personal, functional, and educational characteristics on the capital structure behavior of Jordanian non-financial firms listed on the Amman Stock Exchange (ASE) between 2010 and 2014.

CAPITAL STRUCTURE ANALYSIS – THEORIES AND DETERMINANTS VALIDATION BASED ON EVIDENCE FROM THE CZECH REPUBLIC

The optimal capital structure is a key precondition for business, even though the task of defining the optimal capital structure can be difficult. Previous studies present many different and mutually contradictory factors that should be considered with respect to managerial strategic financial decisions. The first part of the presented contribution summarises the effects of the most frequent capital structure determinants and reviews the world’s most important theories about the behaviour of enterprises when deciding on capital structure. The aim of our contribution is the analysis of capital structure behaviour in the Czech environment. Fundamental capital structure theory is revealed by statistical hypotheses testing. Moreover, we are mainly targeting significant determinants of capital structure. The results help us to create general recommendations for the financial management of Czech companies. In the scope of our study, there are approximately a thousand national financial statements of Czech companies from the most important sectors of economic activity for the period 2016–2019. The correlation analysis with partial correlation coefficient and multiple linear regression analysis was utilised to determine the effects and significance of the individual determinants. Data show that Czech companies do not prefer debt financing recommended by some capital structure theories. Their financial management behaviour corresponds to pecking order theory with insufficient utilisation of tax shield. Sectorwise analyses prove only one exception; motor vehicles wholesale, retail trade, repair and maintenance sector generally prefers financing by debt. Based on the literature review, we selected six significant determinants of capital structure: size, return on assets (ROA), return on equity (ROE), tangibility, asset growth and duration. Advanced statistical analyses show the power and influence of each determinant on capital structure and their mutual relations. Autocorrelations can negatively affect the results of regression analyses. We can conclude that the capital structure of Czech companies is mainly influenced by tangibility and ROA.

Capital structure formation in stock exchange listed companies of the Visegrad Group: a dynamic approach

Purpose: The article aims to analyze the impact of selected factors on the level of financial leverage in stock exchanges listed companies of the Visegrad Group, and to determine whether the direction of this impact is consistent with the assumptions of the trade-off theory or the pecking order theory. Design/methodology/approach: The analysis covered 259 non-financial companies listed in the years 1998-2020 on the stock exchanges in the Visegrad Group countries. The results of the dynamic panel econometric model estimates were verified via appropriate statistical tests. The calculations were carried out using the Gretl package. The subject of the analysis entailed the impact of profitability, liquidity, growth opportunities, company size and asset structure on the capital structure of the entities under examination. Findings: Taking the country-specific effect into account, it has been demonstrated that the company capital structure decisions are consistent with the pecking order theory. Considering the companies surveyed as separate panels, in distribution by each individual country, a negative, a statistically significant correlation has been confirmed between debt and profitability only. Relative to other factors, divergent results were obtained for individual Visegrad Group countries, which does not negate the validity of the statement that the capital structure decisions of the companies analyzed are consistent with the pecking order theory. The dynamic nature of capital structure was confirmed for all Visegrad Group companies, considered collectively and individually, except for Poland. Research limitations/implications: The research takes into account only quoted companies, so its results do not explain capital structure behavior of other companies. The research is a contribution to further analyses of the capital structure, which covers all types of enterprises. Practical implications: Knowing the characteristics describing the activities of a given company and the country in which the company operates, analysts can determine on the basis of estimated models what capital structure is typical for a given company. In addition, the analyst is able to identify the effect of the country, i.e. compare companies in terms of capital structure. Originality/value: The study takes into account the impact of ‘country factor’. It made possible to identify main internal factors characterizing capital structure of the enterprises operating in different economic conditions. Moreover, dynamic nature of capital structure was taken into account. The results can be generalized for all V4’s companies listed on the stock exchange. The conducted research may be addressed to analysts, investors and managers of companies as well as researchers conducting research in this area. Keywords: capital structure, pecking order theory, trade-off theory, panel modeling, Visegrad Group countries. Category of the paper: Research paper.

Corporate governance and the capital structure behavior: empirical evidence from France

PurposeThe purpose of this paper is to test the validity of dynamic tradeoff theory and argue that the speed of adjustment toward the target capital structure may vary depending primarily on some inherent firm characteristics.Design/methodology/approachThe objective of this article is to study the impact of the corporate governance arrangements on the capital structure behavior taken by listed French firms. The author measures the corporate governance arrangements in three different ways to capture its influences on the capital structure and analyze how it affects a firm's rebalancing behavior in the presence of relevant control variables. Assuming that costs related to deviations from the target leverage are positively correlated with the duration of the deviation, the author finds that firms with a strong governance system adjust at a faster rate because the longer the deviation lasts, the greater the loss in firm value. In addition, firms with more efficient governance structures face lower adjustment costs.FindingsThe author measures corporate governance quality in different ways by using several proxies. The results make a major contribution to the literature and show that the quality of the governance system is an important factor in helping the company achieve fatly its target leverage. The authors produces further support for the initial finding by showing that the two extreme leverage deviation groups are dominated by firms with weak governance. The author also shows that the rebalancing speed is faster for firms with strong governance systems.Originality/valueThe paper proposes that a firm characterized by a strong governance system will display a shorter-duration deviation from the target capital structure and a higher adjustment level than a firm with weak governance. In other words, the author argues that the deviation from the target capital structure and the adjustment level are related to the quality of corporate governance. The results indicate that firms with a stronger governance structure are characterized by shorter-term deviations from the target. The author also finds that firms belonging to the two subsamples where leverage deviation is at extremely high or low levels are characterized by a weak governance system. The results corroborate the hypothesis on the speed of adjustment toward the desired target leverage. Furthermore, the author empirically proves that the adjustment level of firms with stronger governance is higher in both extreme leverage situations. This paper extends the existing literature on capital structure adjustment by introducing the effect of corporate governance.

Capital structure behaviour among Indonesian property developers during different business cycles

PurposeThe issue of capital structure among property developers in Indonesia becomes interesting as the government speeds up housing development. Examining which theory prevails (trade-off versus pecking order) can be done by looking at several determinants of capital structure. This study aims to argue that examining determinants of capital structure in this context should also incorporate business cycles, as the activities of property developers are cyclical.Design/methodology/approachUsing a total of 183 observations of listed property developers from 2010 to 2019, this study uses the ordinary least squares regression technique. The focus is on determinants of capital structure, which are profitability, tangibility, firm size, ownership and potential growth. The observations are divided into different business cycles (expansion, peak, trough and decline) based on economic growth rates.FindingsThe results show that the natures of relationships between capital structure (leverage) and its determinants are different during distinct business cycles. For example, profitability has a significant and positive effect on leverage during peak, but the signs are negative during trough and decline. Trade-off theory provides a better explanation of property developers’ capital structure behaviour during peak while pecking order theory is more relevant during trough. It is more difficult to conclude which of these theories is superior in expansion and sideways.Originality/valueThere have been limited studies that focus on corporate finance issues of property developers in Indonesia, and no particular attention has been given to the role of business cycles.

The role of macroeconomic factors in the capital structure of European firms: How influential is bank debt?

Based on a partial target adjustment model and the trade-off theory, this paper investigates whether the influence of macroeconomic variables of monetary policy on corporate leverage is shaped by the nature of borrowing, and more specifically by the presence of bank debt. Given the importance of banking institutions as transmitters of monetary policy, we argue that this source of debt might play a critical role in capital structure behaviour. In addition, as banking relationships are more informative and flexible, bank debt is likely to soften the effects of the economic cycle. Using a sample of European countries from 2004 to 2015, our evidence reveals that bank debt modifies the impact which macroeconomic variables of monetary policy have on a firm’s leverage. By comparing crisis and non-crisis periods, our results also show a more stable influence of said variables over the business cycle on bank debt than on non-bank debt.

Corporate governance, ownership structure and capital structure: evidence from Chinese real estate listed companies

PurposeThis paper aims to contribute to the existing capital structure and board structure literature by examining the relationship among corporate governance, ownership structure and capital structure.Design/methodology/approachThe paper uses a panel data of 595 firm-year observations from a unique and comprehensive data set of 119 Chinese real estate listed firms from 2014 to 2018. It uses fixed effect and random effect regression analysis techniques to examine the hypotheses.FindingsThe results show that the board size, ownership concentration and firm size have positive influences on capital structure. State ownership and firm profitability have inverse influences on capital structure.Research limitations/implicationsThe findings suggest that better-governed companies in the real estate sector tend to have better capital structure. These findings highlight the unique Chinese context and also offer regulators a strong incentive to pursue corporate governance reforms formally and jointly with the ownership structure. Finally, the results suggest investors the chance to shape detailed expectations about capital structure behavior in China. Future research could investigate capital structure using different arrangement, conducting face-to-face meetings with the firm’s directors and shareholders.Practical implicationsThe findings offer support to corporate managers and investors in forming or/and expecting an optimal capital structure and to policymakers and regulators for ratifying laws and developing institutional support to improve the effectiveness of corporate governance mechanisms.Originality/valueThis paper extends, as well as contributes to the current capital structure and corporate governance literature, by proposing new evidence on the effect of board structure and ownership structure on capital structure. The results will help policymakers in different countries in estimating the sufficiency of the available corporate governance reforms to improve capital structure management.

Determinants of Capital Structure with Reference to Select Indian Companies: A Panel Data Regression Analysis

This article mainly focuses on the analysis of determinants of capital structure of 50 Bombay Stock Exchange (BSE)-listed sample companies, choosing 5 sample companies from each of 10 industries, namely cement, computer hardware, large heavy engineering, fertiliser, fast-moving consumer goods (FMCG), large electric equipment, mining/mineral, textile, large tyres and pharmaceutical over 15 years’ time period ranging from 1999–2000 to 2013–2014, applying panel data regression technique. Our study has first made industry-wise empirical analysis of capital structure with respect to eight firm-specific determinants, viz. profitability, size, growth, tangibility, non-debt tax shield, liquidity, uniqueness and income variation. Subsequently, we have made a comparative analysis of selected determinants of capital structure across selected industries to determine their capital structure behaviour in view of three prominent capital structure theories, namely Pecking Order Theory, Trade-Off Theory and Agency Cost Theory. The regression analysis concludes that the Pecking Order Theory and the Trade-Off Theory mostly describe the observed relationship of independent factors with capital structure of the selected Indian industries. Profitability emerges as a significant determinant in devising the capital structure of the selected industries and reveals that greater proportion of profits is likely to raise the internal fund for financing future investment projects and, therefore, less dependent on external borrowings.

Corporate Governance, Ownership Structure and Capital Structure: Evidence From Chinese Real Estate Listed Companies

Purpose – This paper seeks to contribute to the existing capital structure and board structure literature by examining the relationship among corporate governance, ownership structure and capital structure. Design/methodology/approach – The paper employs a panel data of 595 firm-year observations from a unique and comprehensive data set of 119 Chinese real estate listed firms from 2014 to 2018. It uses fixed effect and random effect regression analysis techniques to examine the hypotheses. Findings - The results show that the board size, ownership concentration and firm size have positive influences on capital structure. State ownership and firm profitability have inverse influences on capital structure. Research limitations/ implications – The findings suggest that better-governed companies in the real estate sector tend to have better capital structure. These findings highlight the unique Chinese context and also offer regulators a strong incentive to pursue corporate governance reforms formally and jointly with ownership structure. Lastly, the results suggest investors the chance to shape detailed expectations about capital structure behavior in China. Future research could investigate capital structure using different arrangement, conducting face-to-face meetings with the firm’s directors and shareholders. Practical implications– The findings offer support to corporate managers and investors in forming or /and expecting an optimal capital structure, and to policymakers and regulators for ratifying laws and developing institutional support to improve the effectiveness of corporate governance mechanisms. Originality / value – This paper extends, as well as contributes to the current capital structure and corporate governance literature, by proposing new evidence on the effect of board structure and ownership structure on capital structure. The results will help policymakers in different countries in estimating the sufficiency of the available corporate governance reforms to improve capital structure management.

Determinates of Capital Structure in Case of Private Commercial Banks in Ethiopia

This study was conducted on the title determinants of capital structure; evidence from private commercial banks in Ethiopia. To find out what determines capital structure, seven bank specific explanatory variables (Profitability, tangibility, growth, age, tax shield, size and liquidity) was selected and regressed beside the suitable capital structure measure (Debt to Equity Ratio). Fourteen private commercial banks, which had minimum of seven years life were selected for the study. Their audited financial statement from 2013 to 2019 was used as major source of data. Before the analysis of regression model test of CLRM assumptions such as normality, multicollinearity, heteroscedastcity and autocorrelation tests were conducted on the data. After these tests, Hauseman model specification test conducted and its result indicated that Fixed Effect Model was better to test hypotheses that emerge through the review of existing literature. Then inferential statistics regression was done by Fixed Effect Model (FEM). The regression result reveled that profitability, age, tax shield and size had significant effect on leverage. However, among the hypothesized capital structure determinants growth, asset tangibility and liquidity had insignificant effect on capital structure of Ethiopian private commercial bank. In addition, trade-off theory and the pecking order theory explained the capital structure behavior of banking industry in Ethiopia.

Determinants of Capital Structure for Malaysian Shariah-Compliant Firms: The Impact of Revised Screening Methodology

This study investigates two main objectives. Firstly, the determinants of capital structure were examined for each sector among Malaysian Shariah-compliant firms, and whether the inclusion of Islamic debt (leverage 1 and leverage 2) has led to different results due to changes in the screening methodology. Secondly, this paper analyzes the target Capital Structure and Speed of Adjustment for both before and after the Revised Screening Methodology. This study employs panel data analysis by using generalized method of moment (GMM). The sample consists of 192 Shariah-compliant companies in Malaysia during the period of 1999 to 2017. The results demonstrated that the firm has target capital structure and identified specific determinants that have affected the capital structure of Shariah-compliant firms in Malaysia. Moreover, the findings have also revealed certain implications toward large firms. Large firms tend to generate more income and profit, however at the same time, these firms require more debt to support investment activities. Hence, with regards to profitability, this study identified a negative relationship between profitability and leverage for Shariah-compliant firms for all sectors. Shariah-compliant firms with high profitability will use a lower leverage in their financial activities. Thus, the results strongly support the pecking order theory. Other than that, this study found that the lagged dependent variable (lagged leverage 1 and leverage 2) presented a positive significance, and concluded that the speed of adjustment takes approximately 2 years. This suggests that the Shariah-compliant firms close approximately by 30% to 70% of the gap between current and target capital structure within one and two years. Furthermore, the findings on the target leverage level imply that after the revised screening methodology was introduced in November 2013, the speed of adjustment became faster than before the implementation of the new screening methodology. Thus, it is important for management to maintain the target leverage during financial decision making, which in turn strengthens the firm’s Shariah-compliant financial stability and sustainability, and continue to remain listed as Shariah-compliant securities. This paper provides an overview of capital structure behaviour in Malaysia.

Capital structure dynamics with restricted equity issuance: Evidence from Chinese post-IPO firms

Chinese firms offer unique insight into capital structure dynamics because tradeoffs and constraints involved differ greatly from Western firms. Greater constraints on equity issuance combined with lesser tax benefits and bankruptcy cost should present fewer incentives for a target capital structure. Nevertheless, we find the capital structure behavior over time of Chinese firms is similar to US firms in gravitating toward a common mean and exhibiting at least as much persistence, and a similar speed of adjustment. Perhaps capital structure dynamics of both American and Chinese firms are based on managerial preferences that stem from tradition or observed practices rather than any of the extant theories.

Heterogeneity and Asymmetry in Speed of Leverage Adjustment: The Indian Experience

In this paper, we examine firms' capital structure adjustment behavior and estimate their “speed of adjustment” toward optimal leverage ratios by employing a dynamic, partial adjustment model. We find that sample firms on an average offset half of the deviation from their target leverage ratios in less than one and half (1.41) years. Such evidence suggests optimal capital structure behavior among sample firms. Further, we report cross sectional heterogeneity and asymmetry in speed of adjustment estimates, resulting from varied leverage adjustment costs across the sample firms. We find higher speed of adjustment estimates among larger sample firms suggesting higher leverage adjustment costs for smaller firms. Business group affiliation does not seem to influence the costs of sample firms' leverage adjustment. Over-levered firms report higher speed of adjustment estimates, suggesting that sample firms do not consider debt financing as a “disciplining mechanism” for managers. Further, we find lower speed of adjustment estimates for sample firms with higher cash flow, implying that Indian markets do not actively accommodate firms' cash flow needs. Thus, our findings reveal complex asymmetric information problems and consequent varied leverage adjustment costs among emerging market firms.

Review of capital structure theory using a bibliometric analysis

Author citation and co-citation analysis is a simple, yet powerful educational tool for detecting the most relevant papers from any research field. I demonstrate its use and graphically show a chronological development of capital structure theory, which highlights the most important contributions. I then systematically present the capital structure theory, starting with Modigliani & Miller's irrelevance theorem, and continue with four alternative explanations of firm capital structure behaviour. This paper is particularly useful for PhD students and junior researchers who need to familiarize with the literature of their own research field, and for those, interested in the up-to-date review on capital structure theory.

Dynamic Corporate Capital Structure Behavior: Empirical Assessment in the Light of Heterogeneity and Non Stationarity

Understanding the dynamics of the leverage ratio is at the heart of the empirical research about firms' capital structure, as they can be very different under alternative theoretical models. The pillars of almost all empirical applications are the maintained assumptions of poolability and stationarity, which are motivated by the need of model’s simplicity and treatability, rather than being based on an empirical ground. In this paper we provide robust evidence of non-stationarity for a significantly large share of US firms' debt ratios and of strong heterogeneity in the speeds at which firms adjust towards their targets. These results stimulate new directions of the empirical research on debt ratio dynamics by relying more on the concept of heterogeneous degree of leverage persistence.

Dynamic corporate capital structure behavior: empirical assessment in the light of heterogeneity and non stationarity

Understanding the dynamics of the leverage ratio is at the heart of the empirical research about firms' capital structure, as they can be very different under alternative theoretical models. The pillars of almost all empirical applications are the maintained assumptions of poolability and stationarity, which are motivated by the need of model’s simplicity and treatability, rather than being based on an empirical ground. In this paper we provide robust evidence of non-stationarity for a significantly large share of US firms' debt ratios and of strong heterogeneity in the speeds at which firms adjust towards their targets. These results stimulate new directions of the empirical research on debt ratio dynamics by relying more on the concept of heterogeneous degree of leverage persistence.

Testing the Trade Off and Pecking Order Models of Capital Structure

In this paper, we test two-models of capital structure by using Shyam-Sunder and Myers (1999) approach for finding the capital structure behaviour of U.K. firms, whether firms follow pecking order or trade off model. Sample size consists of 60 firms and 51 firms; observation period ranges from 1992 - 2012 and 1995 - 2012. By using panel data regression in the two-sample size and periods, empirical results show that neither model is appropriate for giving any conclusive result for the capital structure behaviour of U.K. firms. Keywords: capital structure, pecking order, trade off model, empirical, behaviour of U.K. firms.

SMEs’ capital structure behavior on cash holdings to Korean financial crisis: The evidence from emerging market

This paper explores the leverage impact on corporate cash holdings using SME data listed in the emerging Korean KOSPI market between 1980 and 2008. It is well known that SMEs are characterized by relatively high asymmetric information and agency cost. We focus on the relationship between cash holdings and leverage. We hypothesize that the impact of leverage on cash holdings is likely to be non-monotonic for listed Korean SMEs, as asserted by Guney et al. (2007). As firms’ leverage acts as a proxy for their ability to issue debt, we would expect to see a negative relation as a substitution effect between leverage and cash holdings. However, we might also expect firms to save larger cash levels as their leverage increases in order to minimize their risk of experiencing financial distress, costly bankruptcies, and the threat of default. Thus, we would expect to see a positive relation as a precautionary effect between leverage and cash holdings. We did not find this relationship during an analysis of a full period; we found only a substitution effect during the Korean financial crisis, whereas we found both the substitution and precautionary effects after the Korean financial crisis. Our findings provide robust support for the view that a significant non-monotonic relationship between leverage and cash holdings emerged only after the Korean financial crisis. It is clear, therefore, that SMEs tend to have a significant precautionary motivation for saving cash after suffering a financial shock. We make several discoveries by applying the Partial Adjustment Model (PAD) to market frictions such as adjustment and transaction costs. This application produces similar conclusions regarding the relationship between leverage and cash holdings. However, we can distinguish the results of the dynamic cash model from those of the static model as we analyze the relationship between cash holdings and size variable. This finding about SMEs suggests that, while large firms hold lower levels of cash, there may be other factors affecting the way in which the size of a firm exerted influence on the financial policy of its cash holding after the Korean financial crisis. Key words: Cash holdings, leverage, asymmetric information, agency cost, substitution effect, precautionary effect.

The Relevance of External Credit Ratings in the Capital Structure Decision-Making Process

This paper empirically examines the relevance of external credit ratings in the capital structure decision-making process with regard to an international firm sample. Using the rating outlook to measure the imminence of a rating change, allows us to test managers’ ex-ante capital structure behavior more concisely than prior studies have. The results show that companies near a rating change issue 1.8% less net debt relative to net equity as a percentage of total assets than firms not near a rating change. We find that the effect is economically larger for US firms and also if access to the commercial paper market is at risk.