Capital Structure Behavior Research Articles

Capital Structure Behavior of Domestic and Cross-Listed Firms: Evidence from the Sarbanes-Oxley Act of 2002

The Sarbanes-Oxley Act (SOX) is an exogenous shock to the information environment of firms listed in the U.S. Thus, firms might adjust their capital structures to reflect the new information environment. I examine SOX’s effect on capital structure. Since SOX applies only to firms listed in the U.S, the control group consists of Canadian firms listed in Canada. The test groups in this study are U.S. firms listed in the U.S. and Canadian firms cross-listed in the U.S. Relative to the control firms, SOX is associated with higher long-term debt ratios for U.S. firms listed in the U.S. but not for Canadian firms cross-listed in the U.S. Also, firms that heavily (modestly) manage pre-SOX earnings decrease (increase) their long-term debt ratios post-SOX.

SME Capital Structure: The Dominance of Demand Factors

SME capital structure behaviour is found typically to follow pecking order behaviour. However, the theoretical underpinnings of the pecking order theory are doubted in the case of SMEs as SME managers highly value financial freedom, independence, and control while the pecking order theory assumes firms desire financial wealth and suffer from severe adverse selection costs in accessing external finance. Alternatively, the contentment hypothesis of Vos, et al (2007) contends the reason SMEs exhibit pecking order behaviour is the aversion to loss of control to outside financiers and the preference for financial freedom. This paper develops the capital structure predictions of the contentment hypothesis, reviews the predictions of the tradeoff and pecking order theories for relevant variables, reviews the findings of existing SME capital structure studies, and provides original empirical support for the contentment hypothesis using a survey of over 2,000 firms from Germany, Greece, Ireland, South Korea, Portugal, Spain, and Vietnam.

The Happy Story Told by Small Business Capital Structure

We show that SME capital structure behavior demonstrates [substantial] financial contentment (Vos, et al, 2007), rather than evidence of a finance gap (Ang (1992), Storey (1994)) in a ‘growth cycle’ model (Berger and Udall, 1998). On a three-year sample of 626 New Zealand SMEs, while we find consistency with the pecking order theory - profitability being negatively related to debt levels; older and profitable firms lowering debt levels as they accumulate sufficient funds and have more financial choice; high growth firms adding debt when needed; and smaller, not larger, firms adding debt as needed - we also show how the same results support the contentment hypothesis in that, given more financial choices, SMEs reduce debt levels; there is no relationship between growth and debt levels for SMEs with more choices - except for the high-growth firms who do indeed fund growth with increased levels of debt; and age has a negative relationship to debt levels. These findings describe a capital structure theory which is not a by-product of the ‘wealth maximization’ imperative, but rather a ‘window’ (or ‘reflection’) of peace-seeking [financial] behavior.

A rational justification of the pecking order hypothesis to the choice of sources of financing

Developed by Stewart Myers (1984), the pecking order theory has turned out to be a spotlight in the recent trend of shifting from the traditional static trade‐off optimal model to other theories as an effort to look for an explanation of corporate capital structure behaviour. This article proposes a rational justification to the pecking order hypothesis through the establishment of its relationship to the paradox Modigliana‐Miller proposition I. In the process of reasoning to support our justification, we have resorted to various existing theoretical hypothesis including tax‐shelter theory, bankruptcy costs theory, agency theory, signalling theory, and managerial risk aversion theory. Some implications of this rational justification to the pecking order hypothesis are also briefly discussed.

Dividend reinvestment plans and Pecking Order capital structure behavior: An empirical investigation

Due to the asymmetric information effect, corporations have been reluctant to use external sources of equity capital. The adoption of dividend reinvestment plans (DRP) by large numbers of firms may indicate an alternative way to raise external equity funds. It has been shown that many factors may explain a firm’s decision concerning the source of the shares made available to DRP participants. The hypothesis to be tested is that the nature of the DRP actually selected may be predicted by financial characteristics such as cash flow generation, investment needs, historical dividend policy, firm ownership structure and firm capital structure. Using logistic regression analysis, results of joint tests of financial variables suggested by the Pecking Order Theory of capital structure indicate significant support for the hypothesis. Specifically, ownership structure, historical dividend policy and debt ratio are found to be key determinants of the type of DRP utilized.

The Structure of Corporate Ownership: Causes and Consequences

This paper argues that the structure of corporate ownership varies systematically in ways that are consistent with value maximization. Among the variables that are empirically significant in explaining the variation in ownership structure for 511 U.S. corporations are firm size, instability of profit rate, whether or not the firm is a regulated utility or financial institution, and whether or not the firm is in the mass media or sports industry. Doubt is cast on the Berle-Means thesis, as no significant relationship is found between ownership concentration and accounting profit rates for this set of firms.