Capital Structure Changes Research Articles

The enterprise capital structure management model

Purpose. To create management algorithms for the enterprises capital structure and mathematical formalization of optimization of this structure. To investigate the dynamics of changes in the share of profitable enterprises to assess, analyze and forecast changes in the capital structure of homogeneous groups of enterprises. Methodology. Both empirical and theoretical methods of cognition are used to conduct the research. Methods of scientific observation and comparison are used to form the topic of scientific work, goals and objectives of the study. Methods of analysis and synthesis, induction and deduction, abstraction are used to determine the essential features of capital structure management. Methods of system structuring and modeling are used to create a mathematical model. The analogy method is used to find the weight factor of the objective function. The axiomatic method and the method of convergence from the abstract to the concrete were used for the practical application of the mathematical model, in particular, to analyze the dynamic index of related companies, stratified by size, industry, and so on. Findings. The dynamics of the preconditions for changing the capital structure is studied, the regularities of this change for groups of homogeneous enterprises are revealed. The uneven influence of the crisis on the approaches to the formation of capital structure in groups of homogeneous enterprises is revealed, and the reasons for this are investigated. The similarity of tendencies of formation of capital structure in groups of inhomogeneous enterprises is pointed out. A correlation was found between the decrease in the share of equity and a significant prevalence of external borrowing with an increase in net loss. Moreover, it is established that enterprises, whose total amount of equity and current liabilities is stable and comparable in size with external borrowing, show a decrease in losses. Originality. Algorithms for capital structure management and a mathematical model for optimizing capital structure are proposed. A method of comparative analysis of changes in capital structure for homogeneous groups of enterprises has been introduced, which provides an opportunity to assess the impact of external risks and crisis factors in the past and predict the necessary changes in capital structure during both the new crisis and after the crisis. Practical value. The developed algorithms and mathematical model can be used in research and management practice to manage capital structure. Useful for different categories of professionals are approaches to the analysis of capital structure, the results of the analysis of the causes of change, the study on trends and their consequences for homogeneous enterprises.

FINANCIAL MANAGEMENT OF CORPORATIONS: EMPIRICAL STUDY OF FACTORS OF INFLUENCE ON BORROWING BORROWING FUNDS

Introduction. The article is devoted to the identification of factors influencing the capital structure of corporations in the process of financial management through the use of regression analysis tools. It is established that the greatest influence on the attraction of borrowed sources of capital financing is exerted by the cost of equity of the current period and the weighted average cost of total capital of the previous period. The share of net assets directly affects corporate borrowing, although to a much lesser extent than the cost of capital. At the same time, profitability indicators have the opposite effect: their increase leads to a decrease in the level of borrowed capital, and corporations in this case turn to their own sources of capital financing, in particular, through retained earnings. The level of dividends has the opposite insignificant effect: the growth of stock profitability leads to the refusal of loan financing.Purpose. Substantiation of factors influencing the capital structure of corporations through their empirical research.Results. The study revealed that the most influential factors on the capital structure of corporations are the cost of equity and the weighted average cost of capital of the corporation in the previous period. An inverse relationship has been established between the value of the corporation's total capital in the previous period and borrowing: while the weighted average cost of capital increases, corporations reduce borrowing. At the same time, the cost of equity has a direct impact on the change in capital structure in the direction of increasing borrowed funds. Rising equity contributes to corporate access to borrowed financial resources. Originality. The originality of the article lies in the proposal to the identification of factors influencing the capital structure of corporations in the process of financial management through the use of regression analysis tools.Conclusion. The share of net assets, as hypothetically expected, directly affects corporate borrowing, albeit to a much lesser extent than the cost of capital. At the same time, profitability indicators have the opposite effect: their increase leads to a decrease in the level of borrowed capital, and corporations in this case turn to their own sources of capital financing, in particular, through retained earnings. The level of dividends has the opposite insignificant effect: the growth of stock profitability leads to the refusal of loan financing.

Dividend commitment in firm bylaws and capital structure change

AbstractDividend policies can predict changes in capital structure. We focus on a unique setting, namely, dividend commitment emerging from a new dividend policy in China, and explore its relation to leverage. We find a commitment to increase dividends is associated with a subsequent reduction in leverage, and this negative relation is enhanced in firms without preliminary conditions specified for their commitments or with greater dividend smoothing in previous periods. Robustness tests support the main findings. Further analysis addresses four internal mechanisms that play essential roles in the above link, and we provide further details about how leverage is reduced.

The Spillover Effects of Hurricane Katrina on Corporate Bonds and the Choice Between Bank and Bond Financing

AbstractWe use an exogenous event, namely, the spillover effects of Hurricane Katrina on corporate bonds through the liquidation of bond holdings by insurance companies, to study how companies react to temporary changes in the relative availability of bond and bank financing. We find that the negative shock on bonds induces firms to shift from bond financing to bank-based borrowing and to shorten the debt maturity. This shift in debt policy does not revert in the long term. There is no significant change in capital structure, suggesting that the substitution from bonds to bank loans is sufficient for the amount of borrowing.

Stock price reactions to capital structure changes in Chilean firms: Examining the effects of ownership structure, growth opportunities and leverage

We analyzed the effects of ownership structure, capital structure and growth opportunities on stock price reactions when companies issued debt or equity. Our results, based on event study methodology and IV regressions from a sample of 70 Chilean firms, indicate that controlling shareholder ownership has a negative effect on stock price reactions for debt issuances and a positive effect for equity issuance. These results indicate that debt issuances are a substitute for majority shareholder monitoring, and that equity issuances are associated with superior corporate performance. Equity issuances are a means for expropriating wealth from non-controlling shareholders. Debt and growth opportunities have a non-linear effect.

Pengaruh Defisit Pendanaan Internal Terhadap Struktur Modal

Companies manage its capital structure in order to provide benefits to the company so as to encourage management to manage the capital structure so that the composition of debt or equity can be adjusted with the aim of management in selecting the composition. This research focuses on the pecking order theory by taking a sample of 33 property, real estate, and building construction companies listed on the Indonesia Stock Exchange with the observation year 2015 to 2017. The purpose of this study is to see if there is consistency of research, as well as the previous studies to answer the research gap of extended pecking order theory model to see the effects of internal funding deficit and the debt ratio to the addition of forming internal funding deficit (dividends payment, additional working capital, investment and net cash flow) for additional debt ratio that can be used as a factor affecting changes in capital structure. The final results in this study support the hypothesis that the entire internal funding deficit has a positive effect on additional debt ratio. Dividend payments, additional working capital, net cash flow, and investment have a positive effect. So the company can be said to support the pecking order theory. Keywords—: capital structure; pecking order theory; internal funding deficit; dividend payments; additional working capital.

Do Firms Purposefully Change Capital Structure? Evidence from an Investment-Opportunity Shock to Drug Firms

AbstractWe study the capital structure changes of drug firms after an investment-opportunity shock brought about by the Biologics Price Competition and Innovation Act. Using a difference-in-difference approach, we show that the shock led drug firms to make their capital structures less constraining by decreasing leverage, shortening debt maturity, increasing unsecured debt, and reducing convertible debt. New debt covenants became less restrictive and firms raised equity to preserve borrowing capacity. Our results support the view that firms actively manage their capital structures to bolster financial flexibility and increase debt capacity in response to new investment opportunities.

Corporate opportunities in the process of defense against hostile takeovers

The methods and tactics of defending against hostile takeover in practice are a very complex process. In general, they can be classified into three basic groups: preventive, active and universal. Preventive defense measures impose barriers to possible hostile takeovers, such as: dual capitalization, recapitalization, ESOP shares, poison pills, changes to corporate statutes, gold and silver parachutes, change of place of registration. If preventative measures are not effective enough and an unwanted takeover bid is sent to the target corporation, then active defense measures are in place: White Knight, shareholder persuasion, green mail, standstill agreement, capital structure change, litigation, Pak-Man defense. Some anti-takeover methods have universal application.

Western-style capital market reforms in Russia: Implications for market efficiency and firms’ financing decisions

Over the past decade, the Russian government implemented numerous reforms aimed at attracting investor capital and improving the capital market conditions. These reforms included adoption of stringent listing regulations and governance norms, revisions in the tax and ownership laws, restructuring of the major stock exchanges, and more importantly, adoption of International Financial Reporting Standards (IFRS) in 2011. We employ an adaptive market hypothesis (AMH) perspective formulated by Lo (2004, 2005) to examine whether the informational efficiency of the market changed over time as a result of these reforms. While we report that the Russian stock market is still not weak-form efficient, as it was before the reforms, we find the evidence of improvement in efficiency over time. Next, we find that financing decisions of Russian public firms changed following adoption of IFRS when financial statements became more transparent and better aligned with informational needs of local and foreign investors. Particularly, Russian companies that adopted IFRS were more likely to raise finance via issuance of equity rather than debt instruments, whereas for non-adopters there was no change in the firm capital structure. Finally, we report that there was an increase in the inflow of foreign direct investments (FDI) in the post-reform period, suggesting that the above noted reforms conferred significant benefits to the entire Russian economy.

Capital structure and performance: evidence from European listed companies

Purpose - The paper aims to investigate the existence of a relationship between financial structure and performance for European listed companies. Methodology - The reference period of the study is three years (2015-2017). In line with Modigliani and Miller’ Theory we assume that independent variable (debt/equity ratio) does not influence performance (measured by ROE and ROA). We use correlation and linear regression analysis. Findings - Results show the existence of a weak relationship between capital structure expressed as debt/equity ratio and performance measures. However, the R2 of the model has a limited explanatory capacity, so only an insignificant part of the variability of performance measures can be explained by changes in capital structure. The remaining part depends on factors not included in the linear models formulated. Conclusion- The study shows that the financial structure does not condition the economic and financial performance of European listed companies.

Contribution of factor structure change to China’s economic growth: evidence from the time-varying elastic production function model

The time-varying factor share runs through the entire process of the Chinese economic miracle, unlike the ‘Kaldor Facts’ in developed countries. Following the new structural economics theory, we construct a time-varying elastic production function model that characterises the structural changes of China’s economic element, and decompose the driving force of economic growth to measure the contribution of factor structure. We found that, from 1978–2017, the average contribution of capital, labour, technological progress, and factor structure change to the GDP was 67.01%, 10.38%, 23.08%, and −0.47%, respectively. The measurement results can aptly portray the impact of policy changes in China’s unique gradual reform process, such as the economic market reforms in 1992, the global financial crisis in 2008, and the policy changes of the new economic normal in 2014. Meanwhile, the results reveal that improving factor allocation can accelerate the total factor productivity and promote high-quality development of China’s economy.

Pengaruh Struktur Modal Berdasarkan Profitabilitas, Pertumbuhan Aset, dan Ukuran Perusahaan pada Perusahaan Manufaktur

This study aims to measure the level of influence of profitability, asset growth, and company size on changes in capital structure in manufacturing companies. The method used for sample determination is purposive sampling with analytical methods using descriptive statistics, classic assumption tests and multiple panel data regression. The data tested in the study were 112 companies in the basic and chemical industry sectors, consumer goods, and the textile and garment sub-sector listed on the Indonesia Stock Exchange (IDX). The results showed that partially profitability had a negative and significant effect on capital structure, while asset growth had a positive and significant effect. Then the company must be able to choose the right combination of financing sources in order to be able to produce optimal profits.

Small asset credit union executive succession concerns

Abstract Managerial succession in small and medium size businesses is accompanied by strategic change. When succession planning is absent, firms encounter difficulties in selecting plans that facilitate commercial viability. This paper examines the effects of succession planning constraints in the context of small asset credit unions. Although these experience continuation of the business, executive succession causes significant changes in strategic direction, capital structure, and employee performance. Evidence of these changes reinforce how board policies and operating procedures ought to be developed in a collaborative manner to support executive change.

How does capital structure change product-market competitiveness? Evidence from Chinese firms.

Finance research shows capital structure has an important effect on the product-market competitiveness of firms. Our paper documents an asymmetric effect of capital structure on firms’ competitiveness in a sample of Chinese firms. Firms whose capital structure is characterized by a low leverage but rapid leverage growth has a dominant position in their product market. The industry average leverage ratio is also a critical factor influencing firms’ competitiveness. High debt levels hinder firms’ competitiveness. The influence of capital structure on firms’ product-market competitiveness varies based on the extent of industry concentration. In highly concentrated industries, high leverage level and slow leverage growth suppress firms’ competitiveness to a larger extent compared with industries with low concentration.

KOSZT KAPITAŁU I STRUKTURA KAPITAŁOWA PRZEDSIĘBIORSTW BRANŻY MIĘSNEJ NOTOWANYCH NA GIEŁDZIE PAPIERÓW WARTOŚCIOWYCH W WARSZAWIE – DYSKUSJA NA TEMAT PROBLEMU WYCENY

The cost of capital is an important parameter in the assessment of efficient use of sources for business financing. This is also a measure enabling the indirect verification of the basic aim of the company’s long-term business operations – an increase in value. So far, not fully transparent model of evaluating the cost of equity, both in theory and practice, has been developed. As a result, estimations concerning the cost of capital and value of companies are to a large extent subjective. The research – using the CA PM model together with its accepted parameters – proves the stability and precision of the applied methodology. Estimating the cost of capital is of special significance in companies from the Polish meat industry. These entities (in the years under investigation) were obliged to increase investment expenditures as a result of Poland’s accession to the European Union and the necessity to adjust to western-European standards and further consolidation – both in the vertical and horizontal dimensions. Pro-developmental activities required changes in sources of finance and as a result – changes in capital structure. The dilemma concerning “safer” yet more expensive equity, or “cheaper” yet less stable foreign (interest) capital remains unsolved to this day.

Capital Structure and Stock Prices: Empirical Evidence from Listed Beverage, Food and Tobacco Companies in Sri Lanka

The share price of a firm is affected by various factors. Determination of share price is not an easy task. The share price movement is based on the firm’s fundamentals, Market efficiency, Macroeconomic Indicators and Perception of the Investors. Several studies have proven that share price of firms are explained by its capital structure. This study tests the relationship between capital structure and share prices of the listed Food and Beverage Tobacco companies in CSE for the period from 2011/2012 to 2016/2017. It analyzes the relationship between share price and capital structure by employing panel least square method approach. According to the results of the study there is a positive relationship between debt to equity and share prices .The results were statistically significant at 1% level of significance. The results indicate adding debt to overall capital positively effects on the share prices. These findings have important implications for managers or people who take decisions regarding capital structure. The changes in capital structure may have a significant impact on stock prices of the companies.

International Mergers and Acquisitions Laws, the Market for Corporate Control, and Accounting Conservatism

ABSTRACTExploiting the staggered enactment of country‐level mergers and acquisitions (M&A) law as an exogenous increase in corporate takeover threat, this paper examines how a disciplinary market for corporate control affects accounting conservatism. Following M&A law adoption, we find increased accounting conservatism, with more pronounced effects in countries with weak shareholder protection and in those experiencing larger growth in takeover activity. Further analysis reveals that elevated takeover threats increase conservatism through changes in capital structure and investment decisions as well as improvements in board monitoring. Our findings highlight the importance of the market for corporate control in shaping financial‐reporting outcome.

Empirical evidence on the relationship of capital structure and the value of the firm among Mexican public firms

This paper estimates the impact of capital structure changes on the market value of a sample of 69 non-financial firms listed in the Mexican Stock Exchange, during the period 2004 to 2014. Using Pooled Ordinary Least Squares (OLS), Fixed Effects (FE) and Random Effects (RE) regressions, we confirm the extensively documented positive influence of leverage on firm value; i.e. there is a clearly positive and statistically significant relationship between changes in financial leverage (debt ratios and debt to invested capital) and changes in Tobin’s Q (our proxy variable for firm value). When the sample is distributed in sub samples of firms with low and high leverage, small and big size, low and high profitability, or low and high risk, the financial leverage coefficients vary in magnitude and, in the case of debt ratios, remain highly significant. Our main contribution consists in the analysis of the estimated parameters, contributing to a better understanding of the impact of financial leverage changes on the value of different types of firms. These findings have important implications for corporate financial strategies, as well as for portfolio managers’ investment choices.

International Mergers and Acquisitions Laws, the Market for Corporate Control and Accounting Conservatism

Exploiting the staggered enactment of country-level mergers and acquisitions (M&A) law as an exogenous increase in corporate takeover threat, this paper examines how a disciplinary market for corporate control affects accounting conservatism. Following M&A law adoption, we find increased accounting conservatism, with more pronounced effects in countries with weak shareholder protection and in those experiencing larger growth in takeover activity. Further analysis reveals that elevated takeover threats increase conservatism through changes in capital structure and investment decisions as well as improvements in board monitoring. Our findings highlight the importance of the market for corporate control in shaping financial-reporting outcome.

Financial Flexibility and Capital Structure

Exploiting exogenous variation introduced by a significant change in S&P’s methodology, we show that credit ratings have a first-order causal impact on capital structure and investment decisions. Quantifying debt capacity within a firm’s credit rating (Ratings Capacity) using precise metrics, we show that capital structure is highly sensitive to changes in Ratings Capacity. Credit ratings explain more variation in capital structure changes than other firm-specific determinants. Firms with low adjustment costs and attractive investment opportunities are more responsive to Ratings Capacity. Increased Ratings Capacity causes significant expansion in investment and reductions in share repurchases, suggesting wide impacts on financial policy.