Capital Structure Choice Of Firms Research Articles

Revenue concentration and capital structure

PurposeWe conducted this study to examine the relationship between revenue concentration and a firm's financial leverage. We aimed to analyze whether revenue concentration influences a firm's capital structure decisions and whether this relationship is driven by customer-specific investments or the direct effect of revenue concentration itself. Additionally, we investigated the role of asset redeployability in mediating or moderating the relationship between revenue concentration and financial leverage.Design/methodology/approachThe paper investigates the relationship between revenue concentration and a firm's financial leverage. The results indicate a negative association between revenue concentration and financial leverage. This finding holds across various regression models and is statistically significant. Furthermore, the paper explores the potential role of asset redeployability in explaining the relationship between revenue concentration and financial leverage. The results indicate that even after controlling for asset redeployability, the negative relationship between revenue concentration and leverage remains significant, suggesting that revenue concentration affects capital structure decisions independently of the risks associated with relationship-specific investments. Robustness tests are conducted using a three-stage least squares approach to account for the simultaneity between revenue concentration, asset redeployability and capital structure.FindingsOur findings demonstrate that revenue concentration is negatively associated with financial leverage, even after accounting for asset redeployability. This suggests that revenue concentration affects capital structure decisions independently of the risks associated with customer-specific investments. Furthermore, we performed robustness tests to address potential simultaneity issues between revenue concentration, asset redeployability and capital structure.Research limitations/implicationsThe study relies on available data sources, which may have inherent limitations in terms of accuracy, completeness or consistency. The quality of the data used in the analysis could impact the robustness of the findings. Time Period: The study focuses on more recent years, which might limit the ability to compare the findings with studies conducted over different time periods. Historical trends or structural changes that could impact the relationship between revenue concentration and financial leverage might not be fully captured.Practical implicationsFirms with higher revenue concentration tend to have lower financial leverage. Recent years show a negative relationship between profitability and market leverage compared to earlier periods. Revenue concentration has a distinct effect on financial leverage, not fully explained by risks from relationship-specific investments or asset redeployability. Insights for firms in managing capital structure decisions, considering revenue concentration and its implications for leverage.Originality/valueThis research is one of the first papers that investigates the impact of revenue concentration on the capital structure choices of firms. By exploring the relationship between revenue concentration and financial leverage, the study contributes to the existing literature by shedding light on an underexplored area. Thus, this study adds originality to the field by addressing a research gap and contributing to the understanding of the relationship between revenue concentration and capital structure choices.

The Capital Structure of Islamic-Compliant Firms: Is There a Financing Hierarchy?

This article examines whether the basic premises according to the pecking order theory (POT) provide an explanation for the capital structure choice of firms operating under Islamic principles. Random effect regressions were performed to test the POT applying data from a sample of 93 Islamic-compliant firms listed on Saudi stock market over the period of 2006 to 2016. The results show that sale-based instruments (Murabahah, Ijara) track the financial deficit quite closely followed by equity financing and as a last alternative to finance deficit, Islamic-compliant firms’ issue Sukuk. In the crisis period, these firms seem more reliant on equity, then on sale-based instrument and on Sukuk as last option. The study findings also indicate that the cumulative financing deficit does not wipe out the effects of conventional variables, although it is empirically significant. This provides no support for the POT attempts by Saudi Islamic-compliant firms.

Testing the pecking order theory of capital structure: the case of Islamic financing modes

The purpose of this paper is to examine whether or not the basic premises according to the pecking order theory provide an explanation for the capital structure mix of firms operating under Islamic principles. Pooled OLS and random effect regressions were performed to test the pecking order theory applying data from a sample of 66 Islamic firms listed on Kingdom of Saudi Arabia stock market over the period 2006–2016. The results show that sale-based instruments (Murabahah, Ijara) track the financial deficit quite closely followed by equity financing and as the last alternative to finance deficit, Islamic firms issue Sukuk. In the crisis period, these firms seem more reliant on equity, then on sale-based instrument and on Sukuk as last option. The study findings also indicate that the cumulative financing deficit does not wipe out the effects of conventional variables, although it is empirically significant. This provides no support for the pecking order theory attempted by Saudi Islamic firms. This research highlights the capital structure choice of firms operating under Islamic principles. It explores the implication of the relevant Islamic principles on corporate financing preferences. It can serve firm executive managers in their financing decisions to add value to the companies.

Information asymmetry and financing choice between debt, equity and dual issues by Indian firms

This paper examines the role of information asymmetry in determining the capital structure choices of firms in an emerging market -India. Unlike the conventional capital structure studies examining the debt-equity framework, we introduce dual issues i.e. the simultaneous issue of debt and equity, into the analytical framework. Further, we also incorporate novel variables related to analyst coverage information as proxies for information asymmetry which are rarely used in the Indian capital structure studies. The findings suggest that asymmetric information is a key determinant of the security issue decisions. Specifically, equity issues are limited and are only conducted by firms facing lesser information asymmetry, which in turn supports the arguments of information-based models.

Determinants of Capital Structure: An Empirical Study of Selected Indian Manufacturing Companies

Research Problem: To re-examine the issue of non-linearity in capital structure choices of firms through the application of the hitherto un-applied technique of ‘panel data unconditional quantile regression’ with a view to indirectly ascertain the applicability of Trade-off Theory, Agency Cost theory and Pecking Order Theory through the analysis of the predictions of these theories on the firm-specific determinants of capital structure of Indian manufacturing firms. Research Objectives: (A) To choose the appropriate panel data model from three mutually exclusive panel data models ( Pooled Ordinary Least Squares Model, Fixed Effects Model and Random Effects Model ) for analysing the impact of firm-specific determinants of capital structure on the mean of the variable measuring capital structure ( say, “V”) in respect of Indian manufacturing companies listed on the Bombay Stock Exchange (BSE), with a view to indirectly assess the applicability of Trade-Off Theory (TOT), Agency Cost Theory (ACT) and Pecking Order Theory (POT) for an average company with mean (average) level of leverage. (B) To apply ‘unconditional quantile regression technique’ on the chosen panel data model for analysing the differential impact ( that is, non-linear behaviour) of the firm-specific determinants of capital structure over the entire unconditional distribution of the variable “V” in respect of Indian manufacturing companies listed on the Bombay Stock Exchange ( BSE ), with a view to assess indirectly the applicability of Trade-Offff Theory (TOT) , Agency Cost Theory (ACT) and Pecking Order Theory (POT) at different quantiles of the unconditional distribution of V, that is, for representative companies having varying (for example, ‘very low’, ‘low’, ‘moderate’, ‘high’ or ‘very high’) levels of leverage. A representative company at a particular quantile of leverage represents a company with the corresponding level of leverage, for instance, a representative company at the 50th quantile represents a company with median (or moderate) level of leverage, or a representative company at the 10th quantile may be said to represent a company with very low level of leverage.

Determinants of Capital Structure in Various Circumstances: Could They Be Similar?

The financial economics literature has given the capital structure choice of firms a lot of attention. Indeed, this literature includes not only econometric analysis of the determinants of capital structure, but also surveys of Chief Financial Officers on this financial decision. This paper reports the leverage ratios of listed Saudi and Palestinian non-financial firms and examines whether the differences in the determinants of their ratios are due to firms-specific factors, or country specific difference. Based on a total of 55 listed Saudi firms and 18 listed Palestinian firms during the period 2006-2012, and using the Seemingly Unrelated Regression, and Panel data Analysis, the results indicate that factors like asset structure and firm profitability impact the capital structure of both sets of firms. However, the differences in their impact are due to country-specific and not firm-specific factors. This result is not really surprising given that both sets of firms operated under different political and economic circumstances.

Determinants of capital structure in various circumstances: could they be similar

The financial economics literature has given the capital structure choice of firms a lot of attention. Indeed, this literature includes not only econometric analysis of the determinants of capital structure, but also surveys of Chief Financial Officers on this financial decision. This paper reports the leverage ratios of listed Saudi and Palestinian non-financial firms and examines whether the differences in the determinants of their ratios are due to firms-specific factors, or country-specific difference. Based on a total of 55 listed Saudi firms and 18 listed Palestinian firms during the period 2006-2012, and using the Seemingly Unrelated Regression, and Panel data Analysis, the results indicate that factors like asset structure and firm profitability impact the capital structure of both sets of firms. However, the differences in their impact are due to country-specific and not firm-specific factors. This result is not really surprising given that both sets of firms operated under different political and economic circumstances.

Determinants of Capital Structure: United Kingdom Versus Continental European Countries

AbstractIn this paper, we analyze how country‐specific differences influence capital structure indirectly through firm‐specific variables. We apply a system Generalized Method of Moments technique to a panel data sample of companies from five countries (France, Germany, Italy, Spain and the United Kingdom) during the period 1998–2008. As the different financial systems of European economies (bank‐oriented or market‐oriented) may influence capital structure differently through firm‐specific variables, we first examine the determinants of capital structure for each country separately and we then analyze whether the observed differences between the United Kingdom and the continental European countries are relevant. The results show that there are substantial differences in the capital structure choices of firms across five major European countries. These differences are motivated by the type of financial systems of the countries (bank‐oriented and market‐oriented) and influence the capital structure indirectly through the firm‐specific variables. Overall, our results support the relevance of the differences in the capital structure choices of firms across five major European countries, and in particular, the singularity of the United Kingdom (a market‐oriented economy) as opposed to continental European countries (bank‐oriented economies).

Crowding-out or shying-away: impact of corporate income tax on capital structure choice of firms in Pakistan

This article aims to investigate whether corporate income taxes affect the capital structure of nonfinancial firms listed on Karachi Stock Exchange Pakistan during 1972–2010. Empirical results suggest that taxes are positively related to total debt ratio and short-term debt ratio, whereas they are negatively related to long-term debt ratio. The negative relationship between taxes and long-term debt ratio appears illogical considering the tax advantage of debt in the presence of the corporate income tax. However, the observed crowding-out of corporate debt financing due to the presence of nondebt tax shields provides some logic on the demand side. While on the supply side the banks shy away from long-term debt in peculiar socioeconomic realities of Pakistan. The mixed relationships of corporate income tax with different measures of capital structure partially confirm the prophecy of trade-off theory in Pakistan. In addition, we find that other firm-specific variables which appear to significantly influence...

Overconfidence and optimism: The effect of national culture on capital structure

This study assesses whether variations in capital structure across countries can be explained by cultural traits. We analyze capital structure choices of firms in 42 countries and provide evidence that these decisions are affected by the degree of individualism of the country where the firm is located. We assert that managers in countries with high level of individualism exhibit strong optimism and overconfidence which cause an upward bias in perception of supportable debt ratios. Our results are robust to controlling for other firm- and country specific determinants of capital structure choices and to using alternative model specifications and estimation techniques.

Capital Structure and Corporate Performance of Nigerian Quoted Firms: A Panel Data Approach

This paper presents empirical findings on the impact of capital structure (leverage) on performance of quoted firms in Nigeria. The main objective of this study is to determine the overall effect of capital structure on corporate performance of Nigerian quoted firms by establishing the relationship that exists between the capital structure choices of firms in Nigeria and their return on assets, return on equity and tobin’s Q (a market performance measure). The effect of institutional factors such as size, tax and industry on firms’ performance was also established. The study employed panel data analysis by using Fixed-effect estimation, Random-effect estimation and Pooled Regression Model. The usual identification tests and the Hausman’s Chi-square statistics for testing whether the Fixed Effects model estimator is an appropriate alternative to the Random Effects model were also computed for each model. The empirical results based on 2003 to 2007 accounting and marketing data for 101 quoted firms in Nigeria lend some support to the pecking order and static tradeoff theories of capital structure. A firm’s leverage was found to have a significant negative impact on the firm’s accounting performance measure (ROA). An interesting finding is that all the leverage measures have a positive and highly significant relationship with the market performance measure (Tobin’s Q). It was also established that the maturity structure of debts affect the performance of firms significantly and the size of the firm has a significant positive effect on the performance of firms in Nigeria The study further reveals a salient fact that Nigerian firms are either majorly financed by equity capital or a mix of equity capital and short term financing. It is therefore suggested that Nigerian firms should try to match their high market performance with real activities that can help make the market performance reflect on their internal growth and accounting performance

Обзор современных исследований динамической компромиссной теории структуры капитала

Компромиссная теория структуры капитала предполагает, что фирмы выбирают источники финансирования, исходя из баланса издержек банкротства и налогового преимущества долга. В данной работе рассматриваются современные модели динамической компромиссной концепции структуры капитала. В большинстве исследований рассматриваются следующие основные аспекты, влияющие на решение фирмы о выборе целевого уровня финансового рычага: взаимосвязь инвестиционных и финансовых решений, политика рефинансирования и выплат инвесторам, затраты на капитал. Первая часть работы посвящена рассмотрению базовых исследований, описывающих динамические модели, основанные на ряде предпосылок и ограничений. Во второй части изучены более поздние модели, отбрасывающие некоторые ограничения. В третьей части рассматриваются вопросы скорости изменения структуры капитала и макроэкономическое влияние, изучаемое в последних исследованиях в этой области.

Effects of corporate governance on capital structure: empirical evidence from Pakistan

PurposeThe aim of this empirical study is to investigate whether corporate governance attributes such as board size, outside directors, ownership concentration, managerial ownership, director remuneration, and CEO duality affect capital structure choices of Pakistani firms.Design/methodology/approachMultiple regression analysis is used to estimate the relationship between corporate governance measures and capital structure of non‐financial firms listed on the Karachi Stock Exchange, Pakistan, during 2004‐2008.FindingsThe results suggest that board size, outside directors, and ownership concentration are positively related to the total debt ratio and the long‐term debt ratio, whereas director remuneration is negatively related. Managerial ownership is negatively related to the long‐term debt ratio. CEO duality is found to be highly insignificant in all regressions. Control variables such as profitability and liquidity are negatively related to the total debt ratio and the long‐term debt ratio, whereas firm size is positively related. Asset tangibility is positively related to the long‐term debt ratio and negatively related to the total debt ratio. Although Pakistani firms have weak internal and external corporate governance mechanisms compared to firms in developed countries, the empirical findings suggest that corporate governance attributes in part explicate the financing behavior of Pakistani firms.Practical implicationsThe empirical results of this study provide support to corporate managers in establishing an optimal capital structure, and to regulatory authorities for enacting laws and developing institutional support to make corporate governance mechanisms work more effectively in the country.Originality/valueThis research contributes to the literature by illuminating the significant links between some corporate governance measures and capital structure choices of firms in Pakistan.

Debt Covenants and Capital Structure: Evidence from an Exogenous Shock to Debt Capacity

This paper empirically examines how debt covenants impact the capital structure choices of firms, by utilizing an exogenous accounting based shock to the distance to covenant violation. We find that, on average, the shock to debt capacity had a positive impact on the debt choices of all treated firms, but the response was strongest by firms that were close to violating or in violation of the affected covenants, and that were otherwise financially unconstrained. Our findings suggest that debt covenants are a key component of the capital structure trade-off that influences debt choices well before they are triggered. We proceed to examine how the additional debt affected firms' corporate financial behavior and find that it did not result in an increase in investments or cash holdings, but rather was associated with lower profitability and a lower likelihood to enter default or bankruptcy. Some firms even maintained or increased their dividend payouts.

Institutional, macroeconomic and firm-specific determinants of capital structure

Purpose – The study aims to investigate the role of institutions, macroeconomic conditions, industry and firm characteristics on firm's capital structure decision within the context of nine African countries. Design/methodology/approach – A sample of 986 firms over the period 1999-2008 were analysed using a series of models that link institutional, macroeconomic, industry and firm-specific characteristics, on the one hand, and measures of capital structure, on the other. The paper used system generalized method of moments and seemingly unrelated regression which are robust to data heterogeneity and endogeneity problems to estimate the relationships between variables. Furthermore, the paper checked the robustness of findings using various estimation procedures. Findings – The paper found evidence that the legal and financial institutions, income level of the country in which a firm operates, growth rate of the economy and inflation matter in capital structure choices of firms in the sample countries. Furthermore, capital structure choice of firms in the sample countries was affected by industry and firm-specific characteristics. These findings signify the role that probability of bankruptcy, agency costs, transaction costs, tax issues, information asymmetry problems, access to finance and market timing play in capital structure decisions of firms in Africa. Research limitations/implications – As in most empirical studies, this study focused on listed firms. Nonetheless, future studies that focus on non-listed firms could add additional insights to the extant literature. Practical implications – The findings have practical implications for corporate managers, governments, legislators and policymakers in the African continent. Originality/value – The study focuses on firms in African countries for which cross-country studies such as this are rare. It also explicitly models industry variable as one of the determinants of capital structure, a marked departure from previous studies on capital structure decision of firms.

The Effects of Increasing Lending to Constrained Firms During a Crisis: Evidence from an Accounting Based Shock to Debt Capacity

This paper empirically examines how debt covenants impact the capital structure choices of firms, by utilizing an exogenous accounting based shock to the distance to covenant violation. We find that, on average, the shock to debt capacity had a positive impact on the debt choices of all treated firms, but the response was strongest by firms that were close to violating or in violation of the affected covenants, and that were otherwise financially unconstrained. Our findings suggest that debt covenants are a key component of the capital structure trade-off that influences debt choices well before they are triggered. We proceed to examine how the additional debt affected firms' corporate financial behavior and find that it did not result in an increase in investments or cash holdings, but rather was associated with lower profitability and a lower likelihood to enter default or bankruptcy. Some firms even maintained or increased their dividend payouts.

Capital structure choices

Corporate finance theory provides a number of competing hypotheses for explaining the capital structure choice of firms. The major ones are the ‘trade-off’ theory, which hypothesises an optimal combination of debt and equity capital, and the ‘pecking-order’ theory, which suggests a ranking order between different types of capital making a firm’s capital structure an aggregated result of successive financial decisions. Previous studies find evidence both supporting and contradicting the two theories. We examine the role and importance of different firm characteristics as well as to what extent managers in Swedish firms make capital structure choices in accordance with the theories and are affected by concepts like optimal capital structure, financial hierarchy, windows of opportunity, signalling, asymmetric information and flexibility. Our conclusion is that capital structure choices are built on a balancing notion suggesting a revised trade-off theory or alternatively an extended pecking order theory also incorporating agency costs and signalling.

Macroeconomic development and capital structure decisions of firms

PurposeThe purpose of this study is to examine the effect of macroeconomic factors on capital structure decisions of emerging firms.Design/methodology/approachA panel data covering a period from 1990 to 2006 for 34 emerging market countries were analyzed using the seemingly unrelated regression approach to mitigate the effects of multicollinearity and to test for the stability of parameter estimates across the countries.FindingsThe results largely suggest that the effect of macroeconomic factors on capital structure varies with capital structure measurement variable in most cases. Bank credit is significant in predicting capital structure choices of firms. The findings of the research also indicate a significantly negative relationship between gross domestic product (GDP) per capita and capital structure choices. Inflation on the other hand positively influences the choice of short‐term debt over equity. Stock market development is however insignificant in predicting capital structure decisions of firms and expectations of increasing interest rate positively influences firms to substitute long‐term debt for short‐term debt over equity. Most of the control variables namely asset tangibility, return on equity, return on assets and Tobin's Q were significant predictors of corporate financing. The results of the study generally supports existing literature on the impact of investment opportunity set, profitability, and stock market development, inflation, interest rate GDP per capita and bank credit on the capital structure decisions of firms.Originality/valueThe main value of this paper is to analyze the effect of macroeconomic factors on the capital structure decisions of firms using large dataset from emerging countries.

The Capital Structure in Stable and Extremely Unstable Political and Economic Environments

The issue of the financing choice of firms has kept its prominent status in the finance literature. This observation is not really surprising given the fact that the mix of funds (leverage ratio) affects the cost and availability of capital. Recently, a growing number of papers consider the financing issue of firms listed on emerging markets. This interest is due to several reasons including the fact that the problem of information asymmetry is more pervasive in developing countries. This paper examines the capital structure determinants of listed Jordanian and Palestinian companies. This interest stems from the fact that the two countries provide us with two totally contrasting environments. While Jordan has been enjoying stable economic and political conditions, one cannot really exaggerate the extent of the economic uncertainties and political tensions that prevail in the Palestinian Territories. Based on the time period 2003-2006, the reported results show that Jordanian and Palestinian firms have relatively low leverage ratios and that long-term debt is literally non-existent. In addition, the panel data analyses indicate that while the well-known determinants of the capital structure choice of firms are applicable to the Jordanian and Palestinian scenes, the empirical results indicate that there are some differences in the signs and magnitudes of the coefficients of the capital structure determinants. We conclude that these differences are due to country-specific factors rather than firm-specific factors.

Leverage, Profitability and the Ownership Structures of Listed Firms in China

The relationship between leverage, profitability and a firm’s ownership structure in China is investigated in this paper. It is an exploratory study based on all firms listed on the Shanghai and Shenzhen stock exchanges from 1999 to 2005. The results of the empirical analysis are reported in this paper. The most significant result is that foreign holdings are found to have a significant relationship with the leverage of listed firms in China. Whereas, somewhat unexpectedly, institutional ownership, through legal person holding companies, state ownership and private holdings are not found to have a significant relationship with the capital structure choices of firms in China. The results also suggest that some firm-specific factors that are relevant for explaining firm leverage generally referred to in studies in developed economies, such as profitability, growth opportunities, size and tax shields, are also relevant in China. The age of the firms and the industry to which they principally belong also has significant bearing. Yet direct government grants and the use of an internationally renowned auditing firm do not show a significant relationship.