Problem Of Capital Structure Research Articles

A Preliminary Research on Financing in Enterprises

The capital structure theory is a very important question in economy, the modern capital structure theory by Modigliani and Miller is proposed based on the assumption of perfect capital market. The core problem of capital structure is the company financing options, with the vigorous development of the world capital markets, enterprise's financing way has become increasingly flexible and diversified, the enterprise should choose different financing ways according to their own situation, give full consideration to the development, production scale, repayment ability and financing risks. This paper briefly introduces the types of enterprise financing, analyses the Chinese enterprises' financing condition, puts forward some suggestions on the selection of corporate financing patterns.

An Analytical study of Financial Ratios and their effect in EPS on Cement Companies in India

The cement industry has a massive contribution to India’s GDP and infrastructure development. Due to the demand of cement, new companies from outside also started functioning in our country, but these industries face several problems. Companies are closed or merged due to a lack of financial sustainability and capital structure problems. The study is based on the effect of capital structure on shareholder’s value. In this study as a researcher, it has been tried to study and find out the relation of ROA, ROE, leverage ratios, and correlation with EPS. The sample size is five companies from the BSE list (Bombay Stock Exchange), and the last five years of data are studied. As the cement industry is capital-centric, this study will help the industry understand the facts that fulfill the financial objectives.

Optimal Dividend and Capital Structure with Debt Covenants

We consider an optimal dividend and capital structure problem for a firm, which holds a certain amount of debt to which is associated a financial ratio covenant between the firm and its creditors. We study optimal policies under a bankruptcy framework, using a mixed reduced and structural approach in modeling default and liquidation times. Once in default, the firm is given a grace period during which it may inject more capital to correct the situation. The firm is liquidated if, by the end of the grace period, assets do not exceed the debt. Under this setup, we maximize the discounted amount of dividends distributed minus the capital injected up to the time of liquidation. It gives rise to a two-dimensional singular control problem leading to a non-standard system of variational inequalities. Beyond the usual viscosity characterization, we completely solve this problem and obtain a description of the continuation, dividend and capital injection regions enabling us to fully characterize the optimal policies. We conclude the paper with numerical results and illustrations.

Variable pay: Is it for the worker or the firm?

Why do firms pay their workers with variable pay? The standard explanation appeals to a problem that the worker faces, e.g., agency. We develop a model of variable pay endogenously driven by the capital structure problem of the firm, and not a worker related problem. If workers face a low probability of job termination, firms use more variable pay, and more leverage. This can have important implications for understanding compensation practices in organizations. We provide empirical evidence consistent with firms using variable pay to increase leverage.

Analysis of Trade off Between Debt and Equity of Firms in Indian Cement Industry

Cement industry has a huge contribution to India’s GDP and infrastructure development. Due to demand of cement new companies from outside also started functioning in our country but there are several problems which are faced by these industries. Companies are closed or merged due to lack of financial sustainability and capital structure problems. The study is based on the trade off relationship between debt and equity in the firm. In this study as a researcher, it has been tried to study and find out the relation of ROA, ROE, advantage ratios and correlation with EPS. For this, the sample size is 5 companies for BSE list (Bombay Stock Exchange) and about last ten years of data is studied. As cement industry is capital-centric in nature, this study will help the industry to understand the facts, which fulfill the financial objectives.

Analysis of Trade off Between Debt and Equity of Firms in Indian Cement Industry.

Cement industry has a huge contribution to India’s GDP and infrastructure development. Due to demand of cement new companies from outside also started functioning in our country but there are several problems which are faced by these industries. Companies are closed or merged due to lack of financial sustainability and capital structure problems. The study is based on the trade off relationship between debt and equity in the firm. In this study as a researcher, it has been tried to study and find out the relation of ROA, ROE, advantage ratios and correlation with EPS. For this, the sample size is 5 companies for BSE list (Bombay Stock Exchange) and about last ten years of data is studied. As cement industry is capital-centric in nature, this study will help the industry to understand the facts, which fulfill the financial objectives.

Capital Structure and the Substitutability versus Complementarity Nature of Leases and Debt*

The capital structure irrelevance argument of Modigliani and Miller (1958) implies that the use of debt or leases should have no impact on firm values. This classical argument leaves out several important considerations crucial for the result, in particular, counterparty credit risk. We re-examine the capital structure problem for firms that can utilize debt and leases in the presence of counterparty risk. Our numerical and empirical estimates show a negative term structure of lease rates that steepens as a function of counterparty risk. Moreover, we document numerical evidence for the complementary relationship between debt and leases in the presence of counterparty risk.

Effect of Profitability, Operating Leverage, Firm Size, and Growth Sales on Capital Structure

Capital structure is a financial decision related to the composition of corporate debt, preferred stock and common stock used by the company, managers must be able to raise capital, both from within the company and from outside the company efficiently. The problem of capital structure is an important issue for every company, because good bad corporate capital structure will have a direct influence on its financial position. The importance of determining the structure of capital because it can be a strong foundation for the company to run its production activities, and able to obtain optimal benefits for the company. The purpose of this research is to obtain empirical evidence of profitability, operating leverage, firm size and sales growth on the capital structure of banking companies listed in Indonesia Stock Exchange period 2013-2015. Determination of the sample using purposive sampling method where the determination of the sample is determined using the criteria of banking companies listed on the Indonesia Stock Exchange period 2013-2015 and banking companies that publish the financial statements in succession during the period 2013-2015, obtained 10 companies that meet the criteria in 3 Years of observation resulting in 30 samples. Hypotheses were tested using multiple linear regression analysis techniques. Based on the results of multiple linear regression analysis it is known that profitability and firm size have no effect on capital structure. However, operating leverage and sales growth have a negative and significant influence on capital structure.
 Keyword: profitability, operating leverage, company size, sales growth, capital structure

Subsidized Coordination and Political Bargaining for Bail-Outs

Can banks exploit the political economy to generate revenue? If bank creditors (local depositors) are voters, the bank's capital structure can act as a tool to impact the electorate and thus bail-outs by changing the relative group size of voters who favor as opposed to object bailouts. As the bank relies more on deposit financing, then given a firm failure, the politician grants larger bailouts due to economic voting. Ex ante, this generates a deposit insurance effect that alters the bank's optimal capital structure problem. The creditors' anticipation of high bailouts, allows the bank to reduce funding costs today, thereby increasing revenue. The bank, therefore, faces a trade-off: Classically, more creditors increase the bank's likelihood of failure but given failure, bailouts are larger due to economic voting. Bank funding costs become non-monotone in debt. Depending on the lenience ('influencing') with which non-creditor voters punish the politician when granting bailouts, funding costs can monotonically decline in deposit financing, allowing the bank to set maximally high debt ratio while maintaining voluntary participation of her depositors in a setting where no explicit deposit insurance exists.

Analysing capital structure of spanish chemical companies using self-organizing maps

PurposeThis paper aims to analyses the capital structure of the Spanish chemical industry during the period between 1999 and 2013, with a twofold objective. First, to determine whether the assumptions of pecking order theory are fulfilled throughout the study's timeframe. Second, by using data covering the years before the crisis and the worst years thereof, this study shows how the crisis has affected the capital structure of the companies included in this sample.Design/methodology/approachA particular kind of unsupervised neural network, self-organizing maps, is applied. This methodology allows to cluster firms avoiding the need to establish relationships between the different variables involved in the problem beforehand.FindingsCompanies are clustered into groups with different degrees of accomplishment of the pecking order theory. The hypothesis about risk is the one that experience a greater variation in the period before and after the crisis. Moreover, companies' capital structure has been lightly disrupted by the crisis.Originality/valueThe originality of this paper lies in applying an unprecedented methodology to the problem of capital structure. Therefore, the capital structure problem can be approached without setting any function relationship previously.

The superiority of FCFF over EVA and FCFE in capital budgeting

Misapplication and misinterpretation of capital budgeting techniques can lead to serious capital allocation and capital structure problems. Mainstream literature suggests at least ten approaches for free cash flow and discount rate estimation (leading to the same net present value – NPV) but their benefits vary a lot. We emphasise the application risks when using these techniques without considering the cost of capital for the whole company, thus leading to value decreasing investment decisions. A comparative analysis with a classical free cash flow to equity (FCFE) and economic value added (EVA) methodology will make a strong case for free cash flow to firm (FCFF) as the most efficient approach. We also shed additional light on the main risks associated with the FCFE technique and project-based weighted average cost of capital (WACC) in the capital budgeting process.

The Capital Structure of Russian Companies: Testing Trade-off Theory Versus Pecking Order Theory

Вопросы формирования структуры капитала в российских компаниях остаются не исследованными с позиций современной финансовой теории. В статье показаны результаты эмпирических тестов двух наиболее распространенных концепций – компромиссной и порядка выбора источников финансирования - на примере панельных данных 62 крупных российских компаний, охватывающих 9 отраслей. Исследование выполнено в рамках Научно-учебной лаборатории корпоративных финансов факультета экономики ГУ-ВШЭ как проект направления «Создание и управление стоимостью компании в новой экономике». Построенные эконометрические модели опираются на методы эмпирического анализа структуры капитала компании на растущих рынках, а также тесты данных концепций на материалах развитых рынков капитала. Выявлены детерминанты структуры капитала. Проведенные тесты и проверки на устойчивость по всей панели не позволяют отклонить ни одну из концепций. Анализ на подвыборках показал, то применительно к компаниям с высоким уровнем долга, существенно увеличиваются коэффициенты при внутреннем дефиците финансовых средств, в части регрессий становится незначимым свободный член, что позволяет считать, что им более соответствует логика концепции «порядка финансирования». Результаты показывают, что данная концепция описывает выбор структуры капитала в подвыборке компаний с государственной собственностью. Более высокая объясняющая сила этой концепции очевидна и по результатам тестирования подвыборки публичных компаний.

FINANCIAL RISK ANALYSIS IN THE BUILDING SECTOR:A CASE STUDY OF ROMANIA (GALATI COUNTY)

The importance given to the problem of capital structure comes from the influence of debt on equity profitability (financial leverage) and the financial risk induced by debt. This paper is actually an analysis of the evolution of financial risk in the building sector during 2001–2008 on a sample of 11 enterprises in the Galati County, Romania. In this approach, we used information from the balance sheets of enterprises, provided by the Register of Commerce. To carry out this analysis two methods were used, which rely on the breakeven point and the leverage.Analysis of aggregate data reveal a low fluctuating trend of financial risk, which shows that by the end of 2008 the effects of the economic and financial crisis still have not been felt as much as statistics show in 2009. The conclusion that emerges from this study is that the world crisis produces major effects on the building sector, but they can be seen a bit later. The effects are disastrous for economy (lack of work, offs of staff, etc.), which is why the government began to seek solutions to relaunch this sector.p>

Shareholders and stakeholders value creation: an analytic foundation for value creation indicators

The academic debate on the theory of the firm has been monopolized for long period by the contraposition between the shareholders model and the stakeholders model. Jensen (2001) introduced the concepts of enlightened value maximization and recognizing the importance of the different constituencies for the maximization of the firm's market value. Masera (2006a) developed a quantitative synthesis of the enlightened stakeholders theory, supporting the idea that the total value of the firm is maximized when the management maximize both the remuneration of the shareholders and the efficiency and the satisfaction of the all the other stakeholders. In this paper, this thesis will be formalized by proposing model in which stochastic behavior for the most relevantvalue indicators is assumed. We will show that the model can be easily extended, allowing the simultaneous analysis of both value creation and capital structure problems. JEL Codes: D21, G32 Keywords: Firm, Firms, Shareholder

Personal bankruptcy costs: Their relevance and some estimates

The paper argues that there is a need for the formal treatment of personal bankruptcy costs in the finance literature. The need arises out of the relevance of such costs to both corporate and personal financing decisions. We show that (a) personal bankruptcy costs (like personal taxes) are relevant to the corporate capital structure problem and that (b) differential bankruptcy costs across corporations and individuals can result in a clientele model of individual investment-borrowing decision which could lead to institutional arrangements designed to minimize combined bankruptcy costs. Further, we develop a theory of personal bankruptcy and a set of testable hypothesis with regard to their costs. Some preliminary estimates of personal bankruptcy costs are reported which suggest that they are higher than corporate bankruptcy costs. There is also some evidence of economics of scale in personal bankruptcy costs.

Taxes, unequal access, public debt and corporate financial policy in the United Kingdom

The effect of corporate and personal taxes on the capital structure of the firm has been a subject of intense research in finance over several decades. However, specific features of tax systems are often overlooked in order to retain analytical tractability. The exclusion of public debt is another simplifying feature used in the modelling of the capital structure problem. In this paper we present a general equilibrium analysis of capital structure theory incorporating the impacts of the specific tax features of Government debt and financial intermediation in the United Kingdom. The implications of our model are shown to be consistent with the recent situation in the United Kingdom. That is, companies were not borrowing via the corporate debenture market; corporate borrowing was effected by the medium of bank loans.

The Value of the Tax Subsidy on Risky Debt

The effect of corporate taxes on the market value of a levered firm continues to be a central issue in recent contributions in finance theory (e.g., Miller 1977; DeAngelo and Masulis 1980; Kim 1982; Modigliani 1982). In these and other studies (e.g., Krause and Litzenberger 1973; Scott 1976; Brennan and Schwartz 1978; Kim 1978), the relationship between market value and capital structure is established by formulating a tax subsidy function that specifies the partial effect of debt on the expected tax savings at the corporate level under the existing U.S. tax code. A working assumption in most of these studies is that both principal and interest are tax deductible. This assumption is made in the spirit of the original Modigliani and Miller (1963) formulation in which debt is taken to be perpetual and riskless. Indeed, it is well known that the tax shield provided by the deduction of principal in a singleperiod framework has the same value as the tax shield from interest deductions in the case of perpetual and riskless debt. Under this assumption, it is shown that in the absence of non-debtThis paper examines the relationship between leverage and the value of the firm, when non-debt-related tax shields are available and the corporate tax is levied as an income tax. In a previous paper, De Angelo and Masulis argue that, in the presence of nondebt-related tax shields, the relationship between debt and firm value is concave, resulting in an interior optimal capital structure when there is a tax-induced differential in the cost of corporate debt. Their result derives from the fact that they assume the payment of debt principal and non-debt-related depreciation charges are deductible. However, the former deduction is consistent with a wealth tax, while the latter is consistent only with an income tax. We show that if the interest alone is deductible, the debt-firm value function is convex, resulting in corner solutions to the capital structure problem. * The authors wish to thank Richard Castanias, Richard Green, Lemma Senbet, and especially an anonymous referee for helpful comments, and Richard Green and Robert Dammon for computational assistance.

Bankruptcy, interest tax shields and ‘optimal’ capital structure: A cash flow formulation

AbstractThis paper presents a cash flow formulation of the capital structure problem in the presence of corporate taxes. In contrast to the classic result of Modigliani and Miller, it is shown that an optimal capital structure does not involve exclusive reliance on debt financing.

The determination of corporate optimal capital structure under value maximization and informational asymmetry

In this article we examine the optimal capital structure of the firm under conditions of informational asymmetry, i.e., when the manager of the firm is viewed by the market as possessing inside information about the firm's future profitability. Unlike previous research on this topic, in this study we preserve the objective of value maximization when examining the signaling property of corporate capital structure. We also recognize explicitly the other consequences of debt financing on the value of the firm. An integrated analysis of the capital structure problem within the context of rational expectation is presented, and a signaling equilibrium is derived and discussed. The nature of the welfare costs that emerge from the existence of informational asymmetry is also analyzed.

The Cost of Capital and U.S. Capital Investment: A Test of Alternative Concepts

IN THE RECENT LITERATURE on corporation finance, the role of the cost of capital in financial structure decisions has come under debate. Charles W. Haley and Lawrence D. Schall [19] argue that the concept can be misleading when applied to decisions on capital structure. Other difficulties with the concept applied to capital structure problems have been pointed out by Stewart Myers [25] and clarified by D. J. Ashton and D. R. Atkins [3], while a defense of its use in this context is presented by Timothy Nantell and C. R. Carlson [26]. The more widespread use of the cost of capital as a hurdle rate for investment has also spurred recent debate by Fred Arditti [2], James Ang [1], as well as by Haley and Schall. Objections raised regarding the use of the cost of capital in this context are less severe than for capital structure decisions, and are at least partially matters of semantics. A defense of the cost of capital used in this context is contained in Nantell and Carlson as well as in a recent paper by William Beranek [5]. Haley and Schall summarize the difficulties with the weighted average cost of capital as being concerned with two points, (a) there may be a different cost of capital for different risk levels and for different time periods, (b) internal and external financial investments can have differing rates of return under certain conditions. Although technical problems such as those now cited remain with the concept of the cost of capital used as a hurdle rate, they appear to be of a refined and relatively minor nature when compared to the unresolved empirical questions associated with the cost of capital. The cost of equity alone accounts for much of the difficulty. It has been variously represented in the literature as a dividend yield, an earnings yield, an ex-post return on stock, and as the return on the general class of real assets. In addition, at least four substantively different groups of ideas have emerged over the past several decades as to how we may best represent fluctuations in the overall cost of capital through time. This produces a dilemma for those interested in empirical research into capital and investment theory. For, even if we agree upon the theoretical role of the cost of capital, which measure should be used to represent this role and why? Virtually no empirical results exist at present to support either the choice of one cost of capital measure over another or to support the decision that we may remain indifferent among the alternatives that have been presented.