Corporate Finance Research Articles

Analysing the Impact of Capital Structure on Firm Value: A Study in Corporate Finance

Abstract: This study investigates the relationship between capital structure and firm value across various industries. Using a cross-sectional quantitative analysis, the research examines how different levels of debt, equity, and financial leverage affect firm value, measured by market capitalization and Tobin's Q. The findings suggest that firms with moderate debt levels experience enhanced firm value, benefiting from the tax shields provided by debt without incurring significant financial distress. However, excessive financial leverage negatively impacts firm value, as firms face increased risk of financial instability. The study supports key theories such as the trade-off theory and pecking order theory, demonstrating that capital structure decisions are influenced by factors such as firm size, profitability, and industry characteristics. The implications for corporate managers and investors include optimizing debt-equity balance to maximize firm value while managing financial risk. Future research should focus on industry-specific dynamics and longitudinal analyses to further explore these relationships.

Strategic Navigation of Firm-Specific Risks: A Comprehensive Analysis of Corporate Finance Challenges and Solutions

Abstract: This paper delves into the multifaceted nature of firm-specific risks (FSRs) within corporate finance, highlighting operational, financial, and strategic risks as pivotal challenges confronting companies across industries. Through detailed examinations of scenarios ranging from regulatory hurdles in the pharmaceutical industry to cyber threats in retail and currency fluctuations impacting multinational corporations, this study elucidates the intricate web of internal and external factors contributing to FSR. Furthermore, it explores the critical role of corporate governance, emphasizing board structure, transparency in financial reporting, and robust internal controls in effectively managing these risks. By integrating advanced data analytics and risk modeling with comprehensive risk management frameworks, the paper showcases strategies for identifying, assessing, and mitigating FSRs, thereby enhancing corporate resilience and strategic agility. This analysis not only contributes to the academic discourse on risk management but also offers practical insights for practitioners aiming to fortify their organizations against the unpredictability of the business landscape.

Debt maturity and climate change exposure: does life cycle moderate?

PurposeIn this study, I explore how climate exposure influences debt maturity and whether the life cycle moderates this relationship.Design/methodology/approachThis study employs robust panel fixed-effects regression models on 32,249 firm-year observations over 2002–2022. The meticulous examination of the relationship between climate exposure and debt maturity and the use of IV regression models to address endogeneity ensure the validity and reliability of the findings. Exploiting an external shock to validate the results further enhances the robustness of the analysis.FindingsThe study reveals that climate change exposure significantly negatively affects debt maturity, a finding that holds for both climate-related opportunities and regulatory risks. While the life cycle impacts debt maturity, it exacerbates the negative effect for firms in the introductory and growth phases. This exacerbation is due to underinvestment problems and a lack of financial flexibility. These findings shed new light on the relationship between climate exposure and debt maturity, providing valuable insights for corporate finance professionals and strategic managers.Practical implicationsThe evidence presented in this study has strategic implications for corporate managers, investors, academia and other stakeholders. The insights on the choice or substitution of debt maturity during certain life cycle phases can provide valuable guidance to management, empowering them to make informed decisions.Originality/valueThe dynamic role of the corporate life cycle in the relationship between capital structure and climate exposure is a novel area of research. This paper significantly contributes to our understanding of the combined relationship of firm life cycle and climate exposure on debt maturity, offering a fresh perspective on an underexplored topic. This study’s unique approach and original findings will pique the interest of academic researchers and corporate finance professionals alike.

Leveraging Islamic Social Finance for Fair and Sustainable Tertiary Education Funding for Orphans in Malaysia: Insights from Sri Lanka

The primary objective of this paper is to draw lessons from Sri Lanka's experience with OrphanCare utilizing Islamic social finance, while also identifying avenues through which Malaysia could establish a sustainable model for achieving a similar purpose. This study uses a qualitative, exploratory approach to investigate the operational framework of OrphanCare in Sri Lanka and its potential lessons for Malaysia. Due to limited secondary sources, an unstructured interview with OrphanCare representatives was conducted to gather in-depth insights. The research unfolds in two phases: first, data collection from both primary (interviews) and secondary (reports, literature) sources to identify gaps and challenges; and second, the analysis of this data using content analysis. The OrphanCare interview from Sri Lanka offers crucial insights for Malaysia's mission in enabling orphan access to higher education. Challenges, like financial constraints and limited support networks, align with Malaysia's inequality reduction goals. Tertiary education benefits, including employability and personal growth, are highlighted. Islamic social finance lessons stress its transformative potential, while collaboration and long-term commitment are its strengths. Recommendations include education funds, support networks, career guidance, awareness campaigns, and sustainable collaborations. A regulatory framework featuring the Orphans Education Fund with a 2% annual contribution from listed companies, managed by National Higher Education Fund Corporation (PTPTN), is proposed. This paper demonstrates originality by uniquely proposing the utilization of Islamic Social Finance to enhance orphan access to tertiary education. It draws insights from Sri Lanka's OrphanCare model and presents innovative strategies for Malaysia to tackle inequalities through collaborative efforts and a robust regulatory framework.

Corporate financialization and export product quality: evidence from China

We examine the impact of corporate financialization on export product quality using data from Chinese A-share listed companies from 2000 to 2015. Our findings indicate that corporate financialization inhibits the upgrading of export product quality through ‘innovation crowding out’ and ‘factor substitution’ effects. Heterogeneity tests reveal that this negative effect is pronounced for firms with strong motivations for market arbitrage, precautionary savings, tunneling, as well as higher managerial overconfidence. Additionally, firms exporting to high-income countries, engaging in general trade in less digitally developed regions, and adopting compensation incentives are more susceptible to the disincentive effects of corporate financialization on export product quality.

Capital structure of special-purpose governments

PurposeThe paper examines whether special purpose governments follow the pecking order model when raising capital, replacing firm equity in the original model with local intergovernmental revenues. Special purpose governments are a relatively underexamined component of state and local governments, and their capital structure choices have important implications for America’s aggregate fiscal health. This paper seeks to illuminate special purpose governments’ choices among available forms of capital.Design/methodology/approachTo address our research inquiry regarding whether special-purpose governments adhere to the pecking order theory, we narrow our focus to a specific group of transit entities. Our investigation utilizes data sourced from two distinct repositories: the United States Census of Governments and the National Transit Database. To facilitate integration of these disparate datasets, we establish a correspondence between them using the Federal Information Processing Standard and the transit identification number. Initially, our analysis employs maximum likelihood estimation, comparing these estimates to those generated by a naïve model. Subsequently, we derive parameter estimates through the application of a bivariate probit model.FindingsThe paper supports the pecking order hypothesis where internal funds are consumed first, debt is consumed next and IGR is consumed last. The results are robust and are not influenced by simultaneity bias.Research limitations/implicationsThe paper uses transit special purpose governments as the special purpose government of interest. These transit special purpose governments have high fixed costs that may inform their capital structure decisions relative to non-transit special purpose governments. Additionally, transit special purpose governments often have a profit-maximizing objective that may not uniformly apply to other special purpose governments, such as school districts, who lack such an incentive.Practical implicationsOur research should grab the attention of state and local politicians, voters, policy experts and scholars. Special-purpose governments, a key part of our governmental system, are on the rise. Understanding them better can guide decision-making on how to allocate resources, set policies and plan strategically. This knowledge boosts financial reporting quality, transparency, accountability and public confidence. Journalists can leverage our findings to ensure accurate and thorough reporting, fostering accountability and trust. Additionally, debt markets and analysts can factor this information into their risk assessments.Originality/valueThe paper enhances our understanding of how special purpose governments interact with existing models of corporate finance when making capital structure decisions.

Strong financial regulation and enterprise digital innovation: promoting or inhibiting?

ABSTRACT Modern financial regulatory systems are vital in bridging the gap between digital and real economies. In this context, enterprises have the opportunity to achieve digital innovation transformation. This study examines the causal relationship between strong financial regulation and enterprise digital innovation using a quasi-natural experiment, focusing on the ‘Guiding Opinions on Regulating the Asset Management Business of Financial Institutions’ (NAMR). We observed a significant improvement in enterprises’ level of digital innovation after the NAMR implementation. Channel analysis confirms the micro-mechanisms of strong financial regulation, eased corporate financing constraints, increased R&D investment, and digital innovation. Furthermore, digital innovation driven by strong financial regulation can significantly improve corporate profitability. We also found that the positive effect of strong financial regulation on enterprise digital innovation is particularly significant in non-state-owned enterprises, highly competitive industries, and regions with high financial development levels. This study expands the understanding of how strong financial regulation affects enterprises’ digital innovation, with practical significance for understanding the relationship between financial regulation, corporate financial investment, and innovation decision-making.

Green Technology Innovations and Corporate Customer Concentration—The Perspectives of Financing Constraints and Social Responsibility

Green technology innovations propel both economic development and environmental sustainability. Exploring the contributing factors to green technology innovations carries important policy implications, but research from the perspective of supply chain relationships has been rare. This paper examines the impact of corporate customer concentration on green technology innovations and explores its influencing mechanisms using the data of Chinese A-share listed companies. The results show that a high customer concentration inhibits the quantity and quality of green technology innovations, a finding that is robust when endogeneity is addressed and when alternative measures and an alternative estimation model are employed. Financing constraints and social responsibility play intermediary roles in the impact of customer concentration on green technology innovations. A high customer concentration tends to increase corporate financing constraints and reduce corporate social responsibility performance, which hinder green technology innovations. The heterogeneity analysis reveals that the inhibitory effect of customer concentration on green technology innovations is less severe in digitally transformed enterprises, mature enterprises, or enterprises with a high level of market power. As this study provides a novel perspective on the contributing factors to corporate green innovations, it offers important policy recommendations.

Micro-mechanisms of digitalization-driven financing for renewable energy: Growing capital pools and shifting flows

Recent facts from China suggest that the advancement of digitalization is altering the market expectations regarding renewable energy. Limited studies have offered evidence encompassing the stock effect of digitalization that enhanced corporate financing and the flow effect that initiated speculative behavior. However, a comprehensive discourse remains insufficient. This paper investigates the synergetic effects of digitalization's stock and flow on renewable energy financing, employing the business data of all listed companies in China from 2003 to 2023. The results demonstrate that: (1) Digitalization's stock has expanded the potential fund pool for renewable energy financing, yet it is challenging to influence the flow of funds; digitalization's flow has triggered a flood of funds into the renewable energy industry, but this relies on the new investors attracted by the stock. (2) The synergetic effect governs the systematic influence of digitalization on renewable energy financing and mitigates the measurement bias when considering only a single effect. (3) We further contemplate the indirect effects of renewable energy market expansion, technological progress, and global energy market fluctuations, alleviating concerns regarding the omitted variable bias. The results of the differential regression and generalized method of moments also indicate the robustness of the conclusion.

The Bond Market: A Pillar of Risk Management and Economic Stability

This essay investigates the utility of the bond market in risk management, corporate finance, and economic forecasting. It explores how the bond market’s inherent characteristics of safety, stability, and liquidity make it a crucial component of the global financial system. By examining the issuance of debt instruments, such as bonds, and their role in maintaining corporate control while accessing capital, the essay highlights the advantages of debt financing. Moreover, it underscores how these attributes help corporations manage financial risks and optimize their capital structure. Furthermore, the bond market’s predictive power is analyzed through key indicators like the yield curve and credit spreads, which provide early warnings of economic downturns. The yield curve, in particular, is known for its ability to forecast recessions when it inverts. Credit spreads, the difference between yields on corporate bonds and government securities, also serve as a barometer for economic health and investor sentiment. To bring these theoretical insights into a practical context, the essay includes case studies, such as Apple Inc.’s strategic use of debt. Apple's case demonstrates how a company can leverage debt to finance growth while preserving equity and maintaining financial flexibility. These examples illustrate the tangible benefits and strategic importance of the bond market in corporate finance. The essay concludes with suggestions for leveraging the bond market’s predictive capabilities, emphasizing the need for continuous monitoring and analysis of bond market signals to inform economic and financial decision-making. It also explores future research directions in the evolving financial landscape, considering how technological advancements and regulatory changes may impact the bond market's role in global finance.

Research On the Impact of Stock Market Price Fluctuations on Corporate Financing Costs

The fluctuation of stock market prices is one of the research areas that has attracted much attention in the current financial market. As the core of the stock market, price fluctuations not only affect investors’ investment returns, but also increase the financing costs of enterprises. This article delves into the factors that affect stock market price fluctuations, analyzes the impact of stock market price fluctuations on corporate financing costs, and further proposes corresponding suggestions to promote sustainable development of enterprises and stable operation of financial markets.

Dampak Rasio Kecukupan Modal dan Risiko terhadap Profitabilitas pada Bank Konvensional di Indonesia

Purpose: To determine the effect of capital adequacy ratio, market risk, credit risk, liquidity risk, operational risk, bank size, and other variables on banking profitability in Indonesia. Methodology: Panel data regression analysis; purposive sampling; capital adequacy ratio, market risk, credit risk, liquidity risk, operational risk, bank size as instruments; 39 banks listed on Indonesia Stock Exchange; return on assets as dependent variable. Results: Capital adequacy ratio and bank size have a positive and significant influence on profitability. Credit risk and operational risk have a significant negative effect. Market risk and liquidity risk have no significant effect. Limitations: The study is limited to data from banks listed on the Indonesia Stock Exchange between 2018-2024, so it may not reflect conditions outside this period or region. Contribution: This research is useful in the fields of banking management, corporate finance, and investment strategy.

Cracking the Code: Hidden Choices and Visible Impacts Pattern Recognition in Corporate Finance

AbstractResearch in corporate finance suffers from bounded rationality due to static modeling. Adopting factor analysis, an unsupervised machine learning approach, and balance sheet information (accounts) over time, we find underlying dynamic latent corporate finance decisions. Our study identifies three latent corporate finance decisions adopted by executives in Pakistan, (1) long-term capital investment, (2) short-term debt credit, and (3) financial flexibility. The order of the decisions and the empirical tests highlight agency problems rooted in familial ownership concentration. We find that long-term capital investment and short-term debt credit decisions significantly reduce the firms’ present and future performance. Conversely, managers do not embrace financial flexibility, despite its ability to improve performance. The study highlights a contradiction, firms bounded by ownership concentration prefer control over performance and do not make decisions to optimize and protect minority shareholders’ wealth, depicting a moral hazard problem.

Why Do Companies Share Buybacks? Evidence from the UK

We examine the key drivers behind management decisions on share repurchase from various theoretical perspectives, including the free cash flow theory and the signaling theory/hypothesis. Specifically, we investigate the relationship between share repurchase and three key drivers: surplus cash, undervaluation, and leverage, along with several control variables. Using a sample of UK-listed non-financial companies from 2012 to 2022, we apply logistic regression, standard OLS regression, and Tobit regression to identify the factors influencing share repurchase. Our findings reveal that firms repurchase shares to distribute cash to shareholders with surplus cash and Surplus investing cash flow. This study also finds that undervalued smaller firms with lower market-to-book ratios and lower leverage are more likely to repurchase shares. Our study highlights the key factors motivating companies’ share repurchases, such as undervaluation, surplus cash, and leverage, examined from various theoretical perspectives, including the free cash flow theory and signaling theory. Focusing on the UK context, as well as adding a new angle in regard to applying logistic regression, standard OLS regression, and Tobit regression in combination, this research contributes to the existing body of knowledge in corporate finance. The outcome of the study has plausible implications for financial managers and investors in selecting stocks. Its practical implications will help investors gain a better understanding of the factors and forces influencing share repurchase decisions.

Assessing the Impact of Women Discrimination in HRM Practices on Three-component Model (TCM) of Organizational Commitment: A Study on the Indian Banking Sector

Notably, social-psychological approaches such as relative deprivation theory (personal and collective) and social exchange theory posit that there exists a negative association between women discrimination in HRM practices and organizational commitment. It is pertinent to note that the study of organizational commitment is significant across behavioral and attitudinal perspectives as well as differing conceptualizations. Considering this, the present study aims to investigate the causal linkages between women discrimination in HRM practices and the three-component model (TCM) of organizational commitment in the Indian banking sector. To test the hypothesized relationships, partial least squares structural equation modeling (PLS-SEM) was used on a sample of 394 women employees from the following banks in Northern India—State Bank of India, Punjab National Bank, Housing and Development Finance Corporation Bank, and Jammu and Kashmir Bank. The results obtained revealed that women discrimination in HRM practices has a significant negative impact on all three components of the TCM approach of organizational commitment—affective commitment, continuance commitment, and normative commitment. Specifically, the negative effect was found more on affective commitment and normative commitment, unlike continuance commitment. Consequently, the current study has thrown light on theoretical and managerial implications along with directions for future research.

Excess control of family board seats and corporate financing constraints

Excess control of family board seats and corporate financing constraints

Impact of the regional financial reform on corporate financialization: Evidence from China

This study employs the data of Chinese A–share listed companies from 2007 to 2022, considers the implementation of the regional financial reform pilot zone policy as a quasi-natural experiment, and tests the impact of this reform on the financial asset holdings of nonfinancial firms by using a difference-in-difference model. Based on the findings, the regional financial reform restrains the financialization of nonfinancial firms through two paths: 1) promoting profit equalization, which reduces the return gap between real and financial investments; and 2) balancing the allocation of credit resources, which curbs corporate participation in shadow banking. Further analysis showed that the governance effect of the regional financial reform is especially prominent for firms in regions with lower administrative, market development, and financial development levels, especially in the central and western regions. In the economic consequences test, we found that the dampening effect of the regional financial reform on corporate financialization can promote real investments, especially innovation investments. These findings not only enrich the research on the determinants of corporate financialization and the economic consequences of the regional financial reform, but they also provide insights for financial reforms in other emerging economies.

Can existing corporate finance theories explain security offerings during the COVID-19 pandemic?

We document substantial increases in corporate security offerings during the COVID pandemic. While the increase in seasoned equity offerings (SEOs) can be attributed to shifts in macroeconomic conditions, increases in convertible and straight bond offerings cannot be explained by standard security choice determinants. We furthermore find that COVID-period SEO announcements are often contaminated with Research and Development (R&D)-related news, with the SEO proceeds more likely to be hoarded as cash. Overall, COVID-period SEOs align with market timing behavior, but the increase in COVID-period convertibles and straight bonds cannot be reconciled with pre-pandemic corporate financing rationales or government interventions. We furthermore demonstrate that the COVID pandemic differs substantially from the Global Financial Crisis (GFC) in terms of security offering choices and announcement returns.

Factors Influencing Household Debt Structure under Various Credit Constraints

Household debt is a critical component of family financial management, especially considering the prevalence of credit constraints. This study investigates the determinants of Chinese household debt structure, focusing on the choice between formal and informal borrowing and the proportion of formal debt under different credit constraints. Data from the 2018 China Family Panel Studies (CFPS) are analyzed using the bi-probit model. The results indicate that higher levels of household education and internet use significantly enhance the likelihood of accruing formal debt and weaken the tendency to engage in informal debt. This study innovatively employs the KZ index, traditionally used in corporate finance, to assess credit constraints at the household level. This new household credit constraint index demonstrates that the factors affecting the debt structure vary with the level of credit constraints, underscoring the complexity of household financial behaviors in China’s evolving credit landscape.

Digital Transformation in Corporate Finance: Implementing Cloud-Based Solutions for Enhanced Efficiency

Digital Transformation in Corporate Finance: Implementing Cloud-Based Solutions for Enhanced Efficiency