Corporate Capital Structure Decisions Research Articles

Zinsabzugsbeschränkung durch die Zinsschranke, Fremdkapitalsteuerschild und unternehmerische Kapitalstrukturentscheidungen (Interest Barrier-Induced Interest Deduction Restrictions, the Debt Capital Tax Shield, and Entrepreneurial Capital Structure Decisions )

Legal minimum equity capital requirements aside, shareholders can generally freely decide whether to finance their companies with equity or debt capital. While it is a known fact that debt capital is generally tax-favored, in their annual financial statements many corporations report equity capital in excess of the minimum legal requirement. The shareholders' financing decisions may be motivated by special tax rules that were implemented in many countries in recent years (e.g., thin capitalization, interest barrier) in order to scale back the extent of debt financing and to prevent misuse of the debt financing option. A secondary aim of these special rules – which in Germany recently arrived in the shape of an interest barrier in order to protect the national tax base – is to increase companies' equity ratio. A significant stream in financial economics research has been dedicated to the complex problem of corporate capital structure decisions for many decades now. A number of these studies focus on the interest barrier. However, prior research in this field has so far mainly concentrated on how many companies are affected by this rule. So far there has been no attempt to examine the impact of the interest barrier on corporate decision-making concerning the capital structure. This paper uses model calculations to look at how the interest barrier influences the economic benefits of such corporate decisions. The aim is to find out whether the rule always causes investors to prefer equity financing over debt financing. We incorporate the interest barrier in Miller's (1977) capital structure model in order to analyze the barrier's influence on corporate financing decisions. It is demonstrated how the individual parameters in the various scenarios impact on the critical income tax rate. We find that whenever the individual income tax rate is in the interval of possible income tax rates, the equity versus debt capital decision may become irrelevant. We can conclude that, as a rule, both the model with a tax barrier and one without a deduction restriction can lead to a so-called 'Miller equilibrium'. It also emerges that the interest barrier causes debt financing to become a less attractive option. Because the amount of deductible interest depends on gross income, this indicator has a strong influence on the critical income tax rate. The lower the gross income, the less attractive the debt financing option.

Board of Directors and Capital Structure: Evidence from Leading Malaysian Companies

Malaysia is one of the rapidly developing economies in South-East Asia which embraces the concept of good corporate governance due to the 1997-1998 Asian financial crises. This study investigates the relationship between board of directors and company’s capital structure in an emerging market, Malaysia. This research paper covers 75 non-financial leading Malaysian companies, which are employed as a price index, listed on Kuala Lumpur stock exchange (KLSE) from the year 2005 to 2008 fiscal years. A multiple regression analysis has been used to examine the linkage between board of director’s features and capital structure decisions of the listed companies. Measures of board of directors employed are size of the board, presence of non-executive directors on the board, presence of independent non-executive directors on the board and CEO/Chair duality. Results reveal that board size and presence of independent non-executive directors on the board have significant, negatively and positively correlation with debt to asset ratio respectively. However corporate capital structure decisions are not found significantly influenced by CEO/Chair duality and the presence of non-executive directors on the board. Consequently based on the results, board of director’s features such as board size and presence of independent non-executive directors on the board play an important role in determination of financial mix of the companies.

Credit supply and corporate capital structure: Evidence from Japan

In this paper we examine how financial constraints, especially fluctuations in the supply of credit, affect the capital structure of 1537 publicly listed Japanese firms from 1980 to 2007, in a data set with 33,000 observations. It is one of the first studies to do so and is inspired by the recent studies of Leary (2009) and Faulkender and Petersen (2006). Japan was selected due to the extreme credit supply fluctuations observed during the last 30 years. It thus offers an ideal natural experiment to test the impact of credit supply on corporate capital structure. In particular, in our panel data study we investigated the impact of the asset bubble in the 1980s and the credit crunch of the late 1990s on corporate capital structure decisions. The results of this paper show, among other findings, that financial policy decisions are indeed influenced by monetary conditions and the supply of credit. In particular, smaller sized firms face financial constraints, especially during economic downturns.

Local corporate ownership and capital structure decisions in Nigeria: a developing country perspective

PurposeThe primary aim of this paper is to investigate the nature, degree and direction of the effects of certain classes of corporate ownership on capital structure decisions among firms.Design/methodology/approachUsing a sample of 71 quoted companies in Nigeria, the study adopts panel fixed effects regression models to estimate the relationship between financial leverage and corporate ownership, while controlling for some firm‐specific characteristics like profitability, firm size and firm age.FindingsThe study finds that discrimination between indigenous and foreign firms is a major determinant of financial leverage in Nigeria; and that the consistency of empirical results and capital structure theories across countries depends much on the dominant nature of corporate ownership structure.Research limitations/implicationsAn attempt to widely generalize the results of this study may be challenged by its relatively small sample. With data from just a sample of 71 firms, the robustness of the country‐, time‐ and company‐ effects may not have been fully captured in the estimation process.Practical implicationsThe paper provides necessary platforms, especially to corporate managers, for aligning financing decisions and ownership structure to other structural characteristics such as size, age, and profitability.Originality/valueThe study is unique because it examines ownership effects on leverage using selected ownership classes; and because it focuses on an economy with harsh corporate operating environment and constrained capital market condition..

Ownership structure, corporate diversification and capital structure

PurposeThe purpose of this paper is to investigate whether, and to what extent, corporate diversification into related and unrelated businesses affects capital structure choices, and whether ownership structure is germane to the understanding of corporate diversification strategies and debt‐equity financing choices.Design/methodology/approachUnivariate approaches include the parametric two‐sample t‐test, non‐parametric Kolmogorov‐Smirnov test and Kruskal‐Wallis rank test, and cluster analysis. Multivariate approaches include panel data regressions to identify the sign and magnitude of the effect of diversification on capital structure, after controlling for a number of industry and firm characteristics as suggested in the literature.FindingsCorporate diversification into related or unrelated industries has opposite effects on capital structure, after controlling for ownership structure and corporate governance mechanisms. Consistent with the prediction of organizational economics, an increase in the degree of business relatedness is associated with a reduction in debt while an increase in business unrelatedness is associated with an increase in debt. In addition, there is strong evidence that government‐controlled firms use less debt financing and that government ownership weakens the positive relationship between unrelated diversification and leverage. The results are robust to different measures of capital structure.Originality/valueTraditional finance literature has not been able to provide conclusive evidence on what affects corporate capital structure decisions. This paper shows that a corporate strategy perspective, with its emphasis on a managerial decision‐making process, can provide a behavioral basis for understanding capital structure choices.

How Do Pensions Affect Corporate Capital Structure Decisions?

How Do Pensions Affect Corporate Capital Structure Decisions?

How Do Pensions Affect Corporate Capital Structure Decisions?

This article examines the capital structure implications of defined benefit corporate pension plans. The magnitude of the liabilities arising from these pension plans is substantial. We show that leverage ratios for firms with pension plans are about 35% higher when pension assets and liabilities are incorporated into the capital structure. We estimate that the tax shields from pension contributions are about a third of those from interest payments. Pension contributions have a modest effect in lowering firms' marginal corporate tax rates. Once pensions are considered, firms are less conservative in their choice of leverage than has been previously thought. We show that firms incorporate the magnitude of their pension assets and liabilities into their capital structure decisions. The Author 2009. Published by Oxford University Press on behalf of The Society for Financial Studies. All rights reserved. For Permissions, please e-mail: journals.permissions@oxfordjournals.org., Oxford University Press.

Ownership structure, corporate governance and capital structure decisions of firms

PurposeThe purpose of this paper is to examine the effect of ownership structure and corporate governance on capital structure decisions of firms on the Ghana Stock Exchange (GSE).Design/methodology/approachTo analyze the impact of ownership structure and corporate governance on firms' financing decisions, unbalanced panel data covering a period from 2002 to 2007 is employed using the seemingly unrelated regression approach to mitigate the effects of multicollinearity among the regressors.FindingsThe regression results reveal that managerial shareholding significantly positively influences the choice of long‐term debt over equity. Among the corporate governance variables, board size is found to be positively and statistically significantly related to capital structure choices. Firm level factors such as volatility in earnings, asset tangibility, dividend payout ratio and profitability are significant determinants of corporate capital structure decisions on the GSE. The findings are largely consistent with theories of capital structure decisions observed in the literature.Originality/valueThe main value of this paper is to provide a comprehensive understanding of the impact of forms of ownership and other governance practices on capital structure decisions of firms from an emerging market perspective.

The interaction of corporate dividend policy and capital structure decisions under differential tax regimes

The interaction of corporate dividend policy and capital structure decisions under differential tax regimes

Bank Loan Supply, Lender Choice, and Corporate Capital Structure

ABSTRACTThis paper explores the relevance of capital market supply frictions for corporate capital structure decisions. To identify this relationship, I study the effect on firms' financial structures of two changes in bank funding constraints: the 1961 emergence of the market for certificates of deposit, and the 1966 Credit Crunch. Following an expansion (contraction) in the availability of bank loans, leverage ratios of bank‐dependent firms significantly increase (decrease) relative to firms with bond market access. Concurrent changes in the composition of financing sources lend further support to the role of credit supply and debt market segmentation in capital structure choice.

Bank Loan Supply, Lender Choice, and Corporate Capital Structure

This paper explores the relevance of capital market supply frictions for corporate capital structure decisions. To identify this relationship, I study the effect on firms' financial structures of two changes in bank funding constraints: the 1961 emergence of the market for CDs, and the 1966 credit crunch. Following an expansion (contraction) in the availability of bank loans, leverage ratios of bank-dependent firms significantly increase (decrease) relative to firms with bond market access. Concurrent changes in the composition of financing sources lend further support to the role of credit supply and debt market segmentation in capital structure choice.

The Impact of Thin Capitalization Rules on Shareholder Financing

From a tax planner's point of view, it is often attractive to choose debt over equity financing. As this has led to an increase of debt financing of corporations, many countries have introduced thin capitalization rules to secure their tax revenues. We analyze the influence of section 8a of the German Corporate Tax Code on corporate capital structure decisions. Furthermore, the impact of the new interest barrier is taken into consideration. The existence of the Miller equilibrium as well as definite financing effects depend significantly on the fraction of long-term debt, of substantial shareholders and when capital gains are realized.

Regression analysis of proportions in finance with self selection

Abstract Numerous papers in finance study the conditional mean of some proportion or fraction with a mass point at zero. We argue that most, if not all, of these studies use mis-specified statistical models, especially when firms or individuals choose to not do something for different reasons. To address these issues, we develop a new statistical model, the zero-inflated beta model, and apply it to the analysis of corporate capital structure decisions to demonstrate its applicability.

Local Corporate Ownership and Capital Structure Decisions in Nigeria: A Developing Country Perspective

Local Corporate Ownership and Capital Structure Decisions in Nigeria: A Developing Country Perspective

The Interaction of Corporate Dividend Policy and Capital Structure Decisions Under Differential Tax Regimes

We develop a valuation model that integrates corporate capital structure and dividend payout policies. The resulting extended Miller (1977) model explicitly incorporates the different tax rates on corporate income, personal interest, dividends, and capital gains. We apply the model to ten different U.S. tax regimes since 1979 and generate several testable predictions. When the dividend tax rate exceeds the capital gains tax rate, dividend payout can partially offset value enhancing effects of leverage. When the two rates are close, dividend payout loses its moderating influence. Using the S&P 1500 universe, we obtain empirical results that are consistent with the model's predictions.

The Influence of Credit Ratings on Corporate Capital Structure Decisions

The Influence of Credit Ratings on Corporate Capital Structure Decisions

Kapitalstrukturen börsennotierter Aktiengesellschaften – Deutschland und USA im Vergleich

Summary: Existing comparative evidence on corporate capital structure decisions in the U.S. and Germany traditionally reveals that German firms chose substantially higher levels of debt financing. Within the past years, however, Germany has experienced repeated initiatives by both legislative and regulatory bodies to promote equity finance. This paper tries to shed first light on how these initiatives affect the debt-equity-decision of German corporations and whether a convergence of German leverage levels to Anglo-American financing patterns can be observed. For this purpose we compare capital structures for a panel of U.S. and German public corporations over the past 10 years. The obtained evidence suggests that aggregate leverage ratios do indeed converge. Yet this development is primarily driven by recent German IPOs which seem to respond to the revamped institutional setting by choosing higher levels of equity. Established German corporations, by contrast, do not seem to have systematically adapted their financing patterns over the past decade.

Employee Stock Options, Corporate Taxes, and Debt Policy

ABSTRACTWe find that employee stock option deductions lead to large aggregate tax savings for Nasdaq 100 and S&P 100 firms and also affect corporate marginal tax rates. For Nasdaq firms, including the effect of options reduces the estimated median marginal tax rate from 31% to 5%. For S&P firms, in contrast, option deductions do not affect marginal tax rates to a large degree. Our evidence suggests that option deductions are important nondebt tax shields and that option deductions substitute for interest deductions in corporate capital structure decisions, explaining in part why some firms use so little debt.

Employee Stock Options, Corporate Taxes and Debt Policy

We find that employee stock option deductions lead to large aggregate tax savings for Nasdaq 100 and S&P 100 firms and also affect corporate marginal tax rates. For Nasdaq firms, including the effect of options reduces the estimated median marginal tax rate from 31 percent to 5 percent. For S&P firms, in contrast, option deductions do not affect marginal tax rates to a large degree. Our evidence suggests that option deductions are important nondebt tax shields and that option deductions substitute for interest deductions in corporate capital structure decisions, explaining in part why some firms use so little debt.

THE CAPITAL STRUCTURE CHOICE: NEW EVIDENCE FOR A DYNAMIC TRADEOFF MODEL

Most academic insights about corporate capital structure decisions come from models that focus on the trade‐off between the tax benefits and financial distress costs of debt financing. But empirical tests of corporate capital structure indicate that actual debt ratios are considerably different from those predicted by the models, casting doubt on whether most companies have leverage targets at all. In particular, there is considerable evidence that corporate leverage ratios reflect in large part the tendency of profitable companies to use their excess cash flow to pay down debt, while unprofitable companies build up higher leverage ratios. Such behavior is consistent with a competing theory of capital structure known as the “pecking order” model, in which management's main objectives are to preserve financing flexibility and avoid issuing equity.The results of the authors' recent study suggest that although past profits are an important predictor of observed debt ratios at any given time, companies nevertheless often make financing and stock repurchase decisions designed to offset the effects of past profitability and move their debt ratios toward their target capital structures. This evidence provides support for a compromise theory called the dynamic tradeoff model, which says that although companies often deviate from their leverage targets, over the longer run they take measures to close the gap between their actual and targeted leverage ratios.