Corporate Leverage Research Articles

Unlocking the mergers and acquisitions puzzle in the United Arab Emirates: Investigating the impact of corporate leverage on target selection and payment methods.

Following a long stream of literature on the drivers of Mergers and Acquisition (M&A) activities, this study examines the effect of corporate leverage on several decisions of M&A deals in the context of the United Arab Emirates (UAE). Using M&A data from the Thomson One database for the period between 2005 and 2022, we find that corporate leverage significantly influences the type of M&A target. This study further adds to the prior literature on the contradictory behaviours of high and low leverage firms by examining whether acquisition decisions differ amongst them in M&A deals in the UAE context. Results indicate that high (low) leverage firms are less (more) likely to acquire private targets and more (less) inclined to acquire a target from a different (same) industry. Furthermore, our results show that the relationship between the method of payment used in M&A deals and corporate leverage is insignificant. We control for endogeneity using Heckman's two-stage method. In brief, this paper extends the literature with conclusive evidence that considerations of capital structure can significantly anticipate and explain firms' behaviour toward M&A choices. The implication of findings may include a call to reform some aspects of the Competition Law in the UAE by requiring private firms to enhance their disclosure practices similar to their public counterparts.

How Does Labor Mobility Affect Corporate Leverage and Investment?

Abstract I develop a dynamic model to investigate how labor mobility impacts firms’ decisions. In the model, firms make investment and financing decisions, hire labor with different skill and mobility levels, and set wages through bargaining. The model predicts that, in response to an increase in labor mobility, high-skill firms operate with lower financial leverage, become less responsive to investment opportunities, and invest at lower rates, while low-skill firms remain unaffected. I confirm these predictions in the data using shocks to workers’ mobility across firms. The results are useful in understanding the effects of labor mobility changes driven by government policies or technological shocks, such as the rise of remote work.

Leverage manipulation and strategic disclosure: evidence from non-financial information in annual reports based on multimodal machine learning

ABSTRACT This study adopts multi-modal machine learning to deeply interpret corporate non-financial information and explore the influence of corporate leverage manipulation on non-financial information disclosure. It is found that enterprises will strategically disclose non-financial information when implementing leverage manipulation, that is, the emotion of non-financial information text is more positive, farther away and more difficult. Based on the motivation of leverage manipulation, when enterprises face greater pressure of ‘deleveraging’ policy and stronger financing constraints, enterprises are more inclined to disclose non-financial information strategically when implementing leverage manipulation. Further, the dual motives of leverage manipulation are explored deeply. For the samples with high ‘deleveraging’ policy pressure such as state-owned enterprises and high media attention, and the samples with strong financing constraints such as high short-term debt repayment pressure and high debt financing cost, the positive relationship between leverage manipulation and strategic disclosure of non-financial information is more significant.

Regulatory quality and corporate leverage: Evidence from a large international sample

Corporate leverage is strongly related to firm characteristics. However, this relationship varies across country-level institutions. In this study, we investigate whether country-level regulatory quality indirectly affects corporate leverage by moderating the effects of firm-level determinants of capital structure. Using a sample of 46,184 firms from 70 countries, we show that regulatory quality mitigates the positive influence of firm size and asset tangibility on leverage, while the negative influence of growth opportunities, R&D intensity, and profitability is similarly moderated. These results highlight the benefit of robust regulatory quality in facilitating the access to debt financing of small, R&D-intensive, and growth-oriented firms with few tangible assets.

Corporate Leverage Decisions in Malaysian Property Sector: Before and During Pandemic

Financial constraints and leverage decisions have challenged the survival and expansion of property businesses, especially during unfavorable economic conditions. This study aims to investigate the factors of corporate leverage in the Malaysian property sector from 2015 to 2021, covering the coronavirus disease (COVID-19) pandemic. The sample size of this study consists of 55 top-listed property companies in Bursa Malaysia. Six pre-determined factors from the current literature include profitability, firm size, tangibility of assets, liquidity, growth opportunities and non-debt tax shields. On top of the full-period test, this paper examines the possible changes in the relationship before and during the COVID-19 pandemic. Overall, our panel data analysis shows that firm size and growth opportunities significantly positively affect leverage, while liquidity negatively correlates with leverage. In our sample, profitability and non-debt tax shields do not exhibit significant roles in the relationship with corporate leverage. Our conclusion is robust across the periods of study and regression models. It contributes updated empirical evidence to the already scarce studies of financing decisions in the sector, which plays a crucial role in driving the nation’s economic growth.

Influence of stock return volatility on corporate leverage: evidence from an emerging economy

Influence of stock return volatility on corporate leverage: evidence from an emerging economy

Influence of Stock Return Volatility on Corporate Leverage: Evidence from an Emerging Economy

Influence of Stock Return Volatility on Corporate Leverage: Evidence from an Emerging Economy

The Impact of Digital Inclusive Finance on Corporate Leverage Ratio—Evidence from Listed Companies in the SME Board of China

The Impact of Digital Inclusive Finance on Corporate Leverage Ratio—Evidence from Listed Companies in the SME Board of China

Investor attention and corporate leverage manipulation

This study indicates that retail shareholders voicing their opinions through social media effectively reducing the leverage manipulation level of enterprises. Mechanism examination reveals that the effectiveness of information environment is vital mechanisms by which retail shareholders mitigate leverage manipulation level. Heterogeneity analysis indicates in companies with low level of confidence, the impact of small and medium-sized shareholders voicing their opinions on mitigating corporate leverage manipulation is more pronounced. The conclusions of this article are not only crucial for innovating corporate governance practices in the digital economy era but also hold significant implications for retail investors in safeguarding their own interests.

Central Bank Communication and Leverage Differentiation of Non-Financial Enterprises

ABSTRACT As an expectation management policy, central bank communication can affect corporate market expectations, thus effectively guiding corporate investment and financing behavior. Based on the quarterly data of non-financial listed enterprises from 2007 to 2020, this paper analyzes the relationship between central bank communication and non-financial corporate leverage differentiation. The results show that central bank communication can reduce corporate leverage differentiation. The increase in the degree of bank credit discrimination can further amplify the inhibitory effect of central bank loose communication on the leverage differentiation of non-financial enterprises. The mechanism analysis shows that central bank communication can affect the leverage differentiation of non-financial enterprises by reducing financial mismatches, stabilizing the market expectation mechanism, and reducing managers’ myopia. The results of the extended analysis show that the central bank’s loose communication can inhibit the degree of leverage differentiation between zombie firms and non-zombie firms, and improve the dynamic adjustment speed of corporate capital structure.

Private Placement of China-Listed Real Estate Firms: A Conceptual Idea

This article conducts a review of the literature on private placement and analyzes the risks facing China’s real estate companies. It argues that, within the framework of China’s hybrid economic model, private placement can serve as a market-oriented financing mechanism and risk mitigation strategy beyond the traditional banking system. The article focuses on the characteristics of private placement, prevalent hypotheses, and influencing factors. It also traces the evolution of financialization in the global real estate industry, outlines the development model of China’s real estate sector, and discusses the challenges and risks it encounters. Private placement offers various advantages, including reducing corporate leverage, strengthening working capital, and addressing information asymmetry issues. However, existing research in this field is still insufficient. Therefore, future research can provide a more robust theoretical foundation and guidance for policymakers, investors, and businesses.

Reverse mixed ownership reform: Does state-owned capital injection inhibit corporate leverage manipulation?

Reverse mixed ownership reform: Does state-owned capital injection inhibit corporate leverage manipulation?

Impact of the Global Financial Crisis and the Tunisia’s Jasmine Revolution on the Corporate Capital Structure: Evidence from Four Arab Countries

This paper provides new evidence on capital structure determinants in the Arab world with special focus on the impact of the 2008 global financial crisis and the Jasmine Revolution on four different corporate leverage ratios. The sample consists of 440 non-financial listed companies from four Arab- Mediterranean countries (Egypt, Jordan Morocco and Tunisia) and the panel data are analyzed from the period 2003–2019. Statistical analysis of results are carried out by using the ordinary least squares ; three dummy variables are included (time, country and industry). The results indicate cross-country variations in four different leverage ratios. Moroccan firms, contrary to those in Tunisia and Jordan, show lower leverage ratios. By contrast, they report higher levels of « size », « profitability » and « growth opportunities ». The results also show that the Jasmine Revolution as well as the 2008 global financial crisis affects the impact of firm-specific determinants : After crisis and Jasmine Revolution, the positive and the negative effects of « size » and « profitability », respectively, become more important. Profitability is the most significant explanatory factor of corporate capital structure in Arab countries. During the two sub-periods, the growth opportunities and their negative impact on the corporate financial decisions depend on the choice of the leverage ratio (total debt versus long term debt – book values versus market values). Asset tangibility is the most critical factor : its positive effect on capital structure is more important before the Jasmine revolution and/or the global financial crisis. The effect is initially positive but becomes negative when leverage ratio is calculated using total values of debt (book and market values of debt). Results on capital structure determinants in the Arabic context not depend only on the choice of the leverage ratio, but also on the period considered.

External governance mechanisms and capital structure: A cross-country analysis

This paper seeks to examine how external governance mechanisms related to shareholder protection and creditor rights affect the choice of corporate leverage. The main objective of the study is to examine the relationship between country-level investor protection and the choice of capital structure at the firm level. The sample includes 7490 companies from 40 countries. Data were collected from all publicly listed companies between the years 2013 and 2022, listed in the Van Dijk ORBIS Bureau, based on the fiscal year 2022. This paper opts for the panel data methodology. The results suggest that companies leverage themselves consistently with the Pecking Order Theory. It was observed that the mechanisms associated with the protection of both classes of investors (i.e., shareholders and creditors) significantly influence the capital structure of the companies. The results were robust to several variations in the model studied and indicate that greater investor protection makes firms less likely to use third-party capital. The opposition of insiders (executives and majority shareholders) to debt’s moderating role at their managerial discretion may be the driving force behind this. The differential of the study lies in the distinction between the mechanisms that affect the protection of minority shareholders and those that affect the rights of creditors.

Corporate Leverage's Effect on Profitability

Corporate Leverage's Effect on Profitability

Are Manager Policies Associated with Earnings Management Activity?

This study examines the effect of derivative ownership, leverage and tax avoidance on earnings management. This study uses samples from manufacturing sector companies listed on Indonesia Stock Exchange from 2018 to 2021. This research sample consisted of 72 observations based on the purposive sampling technique. Hypothesis testing was carried out using multiple linear regression analysis for panel data. The test results show that derivative ownership has a negative effect on earnings management, while corporate leverage has a positive effect on earnings management. Investors must be concerned about the companies with derivative instruments and corporate leverage because the management of these companies can perform earnings management. In addition, investors and creditors should consider the factors affecting the quality of earnings used to identify and evaluate investment opportunities

Deleveraging for talents: Human capital reliance and corporate leverage

AbstractUsing data from Chinese listed firms, we develop a measure of a firm's reliance on human capital that is based on its demand for highly educated employees. We find that a high reliance on human capital is linked to low corporate leverage, and this effect is more pronounced among firms at a high risk of human capital mobility and those facing high skilled‐labour adjustment costs. Our results indicate that firms strategically manage their capital structure to maintain financial flexibility, enabling them to effectively respond to the labour‐related costs associated with human capital losses and costly labour adjustments.

Sticky Leverage: Comment

We revisit the role of long-term nominal corporate debt for the transmission of inflation shocks in the general equilibrium model of Gomes, Jermann, and Schmid (2016, henceforth GJS). We show that inaccuracies in the model solution and calibration strategy lead GJS to a model equilibrium in which nominal long-term debt is systematically mispriced. As a result, the quantitative importance of corporate leverage in the transmission of inflation shocks to real activity in their framework is 6 times larger than what arises under the rational expectations equilibrium.

Economic policy uncertainty and corporate leverage - does cash holdings matter? Evidence from the U.S.

This research study examines the mediating role of cash holdings between the economic policy uncertainty (EPU) and corporate leverage relationship. Using stepwise regression analysis and annual firm-level data of 2,534 U.S. firms listed at NYSE over 1995–2018, we provide novel evidence that cash holdings significantly and partially mediate the EPU-leverage relationship, accounting for a 10.72% increase in the corporate leverage during EPU. We discover that the mediating role of cash holdings between EPU and leverage is sensitive to firm-level heterogeneity. Also, the mediating effect of cash holdings remains significant based on long- and short-term leverage. Finally, our findings are robust to outliers’ effect, alternate EPU measurement, endogeneity concerns and sample-selection bias. The findings of this study highlighted the role of firm cash holdings in a firm’s leverage decision during economic uncertainty and recommends increasing debt financing to incentivize value-increasing decisions and mitigate agency problems by reducing the cost of free cash flows. Policymakers should be aware of public and private firms’ challenges during high EPU. As we showed in this study, firms have to adjust their financial decisions during high economic uncertainty. Also, the study suggests that policymakers should maintain economic policies to avoid external shocks that may force firms to adjust their financial decision-making.

Social credit and corporate leverage: Evidence from a natural experiment in China

AbstractThe rapid growth of leverage is one of the risk factors for China's economy. To explore social credit's impact on corporate leverage's growth rate, we conduct the staggered difference‐in‐difference (DID) approach based on a quasi‐natural experiment of the social credit system reform. Our findings indicate that social credit significantly suppresses the growth rate of corporate leverage, which remains robust after some robustness checks. In addition, this effect can be attributed to alleviating agency costs and information asymmetry. Finally, our analysis reveals that the above effects are significant only for firms with poor corporate governance, high bankruptcy risk, low investment efficiency, and a low proportion of tangible assets. In summary, our study provides micro‐level evidence on the economic consequences of social credit system reform in China and policy insights on how the government can effectively control the growth rate of corporate leverage to prevent risk.