Current Capital Structure Research Articles

Technologies of adaptive management as a mechanism for ensuring the stability of the development of companies

In this article, the essence of technologies, characteristics and analysis of the phases of business process implementation in project activity under adaptive management are established. Project structuring, allocation of main tasks based on systems theory and development of a functional project management system as a whole become important in adaptive management. It is necessary to consider the activities of development companies comprehensively, relying on the organizational structure through the preparation of real plans, based on the knowledge of all specialists - executors of the works. The activities of companies are clearly structured into processes, which in turn are divided into functions. At the same time, all participants in any project activity are the main elements of the company's structure, as they ensure the practical implementation of the idea and concept. Present-day problems in the organization and management of development companies that arise under the conditions of the functioning of business processes are revealed.Adaptive management is characterized by the choice of a financing strategy for the companies' activities. But it consists in ensuring, through certain actions, the closure of financing needs and the transition from the current capital structure to the future one. In this situation, one-part and parallel use of different funding sources and schemes occurs.The authors indicated the formation of mechanisms for the stable functioning of companies through a process approach. The environment has an impact on the implementation of any project: it is necessary to be able to determine, calculate and take into account the impacts: economic, social, financial, managerial, technological, technical and execution terms, that is, the external and internal environment. Under certain conditions, each of these impacts can be critical for the project and lead to its liquidation.The article notes that all information from all those responsible for business processes are formed into a single industry model that ensures stable functioning.The authors attach an important place to the information system of management, accounting, analysis of project implementation, actualization of problems of operational plans and professionalism of specialists.New approaches and improved methodology for ensuring the stability of the functioning of companies using adaptive management are proposed.

The relationship between goodwill and capital structure and the moderating effect of financial market development

PurposeThis study empirically investigates the relationship between goodwill assets and capital structure (i.e. debt ratio) of firms and the moderating effect of financial market development on the relationship between goodwill assets and capital structure.Design/methodology/approachThis research applied a quantitative method. The article collects large samples of listed firms from 23 developing and nine developed countries and applied the panel data techniques. This research used firm-level data from the DataStream database for both developed and developing countries. The study uses 4,912 firm-level data from 23 developing countries and 4,303 firm-level data from nine developed countries.FindingsThe findings reveal a significant positive relationship between goodwill assets and capital structure in developing countries, but goodwill assets have a significant negative relationship with capital structure in developed countries. Moreover, financial market development positively moderates the relationship between goodwill assets and the capital structure of firms in developing countries. The results inform firm managers that goodwill assets serve as additional collateral to secure debt financing. Moreover, policymakers should formulate a debt market policy that recognizes goodwill assets as additional collateral for the purpose of obtaining debt capital.Research limitations/implicationsThe study has several implications. First, goodwill assets are identified as a factor of capital structure in this study. Fixed assets have been identified as one of the drivers of capital structure in previous research, although goodwill assets are seldom included. Second, this article shows that along with demand-side determinants, supply-side determinants also play an important role in terms of the firms' choice about the capital structure. Therefore, firms should take both the demand-side and supply-side factors into consideration when sourcing for external financing (i.e. debt capital).Originality/valueThe study considered goodwill as a component of capital structure. The study analysis includes a large sample of enterprises, including 4,912 big firms from 23 developing countries and 4,303 large firms from nine industrialized or developed countries, which adds to the current capital structure information. Furthermore, a large sample size increases the results' robustness and generalizability.

Empirical Study on the Impact of Capital Structure on Profitability in Blockchain Industry-Based on the Data Analysis of 127 Listed Companies

Under the background of the rapid development of the digital economy, a new round of technological revolution represented by blockchain is emerging, and blockchain and other high-tech industries have become the technological support for economic development in the new era, which has attracted the great attention of countries around the world. How does the current capital structure of China's blockchain-listed companies generally affect their profitability? This paper adopts the data indicators of 127 blockchain-listed companies in 2022 for factor analysis and multivariate model regression to further analyze the impact of capital structure on profitability status. The empirical results show that: 1. The gearing ratio and long-term debt ratio of listed companies in China's blockchain industry are negatively correlated with profitability, and the effect of the gearing ratio on profitability is greater compared with the long-term debt ratio; 2. The equity ratio is positively correlated with profitability.

Optimal Capital Structure Analysis of PT Kencana Energi Lestari Tbk

In 2020, fossil fuels accounted for around 80% of the world's energy supply, but the 2022 global energy crisis highlighted their vulnerability and lack of sustainability, prompting a global shift towards renewable energy sources. Indonesia, recognizing its potential in renewable energy, has taken proactive steps to accelerate its transition, such as the issuance of Peraturan Presiden Nomor 112 Tahun 2022 to facilitate renewable energy development. PT Kencana Energi Lestari Tbk responded positively to the regulation and has allocated USD 30 million in 2023 to implement renewable energy strategies. They are also pursuing a USD 100 million renewable energy project in the Philippines. To fund its initiatives, PT Kencana Energi Lestari Tbk plans to use USD 9 million from internal cash reserves and obtain an additional USD 121 million from external financing sources. However, their current capital structure has a debt-to-equity ratio of 76.84%, which deviates significantly from the industry average of 35.92%, suggesting that it may not be optimal. This study employs the Weighted Average Cost of Capital (WACC) method to identify the most optimal capital structure that will maximize the company's value. The suggested capital structure consists of 34% debt and 66% equity, resulting in an optimal cost of capital of 12.2868%. To implement their renewable energy plan, PT Kencana Energi Lestari Tbk needs to secure a total funding of USD 23,947,572.54 through debt financing and USD 97,052,427.46 through equity financing.
 Keywords: optimal capital structure; renewable energy; financing plan

The financing of uncertain future investments

PurposeThe purpose of this study is to investigate the effects of two important financing sources, debt and cash, on a firm’s investment decisions and explores the intertemporal impact of this financing on future investment volatility.Design/methodology/approachThis paper first reports our results using ordinary least squares (OLS) estimation and then employ an instrumental variable (IV) strategy which addresses potential endogeneity that arises from future investment volatility on current capital structure and cash levels.FindingsThis paper finds firms with low levels of debt or high levels of cash experience higher future investment volatility, and the probability of large future investment increases with high cash levels. This study’s findings are economically important; for example, a one-standard-deviation increase from the mean of debt ratio implies an approximate 7.8% decrease in future investment volatility; and a one-standard-deviation increase from the mean of a firm’s cash level leads to a 47% increase in the probability of a large investment in the next year.Originality/valueThe findings of this study help firms understand the impact of their present financing decisions on the plausibility of their future investments. This paper contributes to the literature by making both novel and confirmatory findings. This paper was structured to include confirmatory findings for two reasons. First, this paper uses different methods to construct investment volatility and the related investment spike. Second, and more importantly, the hypotheses are interrelated and communicate how firms plan for and execute against uncertain future investments. Growth options are ephemeral, and the hypotheses structure provides a guideline for how a firm finances future growth options.

Issues on Bank’s Capital Structure and Profitability: A Developing Country Context

Purpose: The study aims to show the effect of capital structure on banks' profitability in developing countries. Design/Methodology/Approach: The study is conducted on 28 commercial banks from 2009 to 2016 of panel data to infer the concurrent relationship between capital structure and profitability. The preliminary diagnoses picked up the Generalized Methods of Moments (GMM) method to address the endogeneity issue in dynamic panel data. Findings: The study found that the bank's capital structure is negatively associated with profitability and vice versa. Moreover, asset tangibility and regulatory capital harm banks' current capital structure, whereas tax shield and 1-year lagged capital structure have a positive influence. On the contrary, a bank's profitability is positively associated with bank growth, and 1-year lagged profit, while credit risk and liquidity are negatively affected. The study implies that banks should use an appropriate mixture of debt and equity; otherwise, immature decisions in capital structure may demise banks' profitability, which will ultimately turn into bank failure. Practical Implications: Adherence to the adoption of stringent capital structure allures banks in maximizing profit to cope with market competition. Beyond the theoretical aspects, the study extends its scope in the practical implications of adopting a profit-maximizing capital structure in a developing country context. However, capital structure choice differs from bank to bank based on their performance and position in the market. The study clearly addressed some of the relevant issues which affect banks' performance adversely in practice. Originality/Value: The study contributes to the existing literature and tries to explain the role of capital structure in banks' performance, mostly in submerge economies.

DETERMINANTS OF CAPITAL STRUCTURE’S ADJUSTMENT SPEED: EMPIRICAL ANALYSIS OF REAL ESTATE, PROPERTY, AND CONSTRUCTION FIRMS

This study explored the determinants of capital structure, optimal capital structure, and adjustment speed in real-estate, property, and construction firms in Indonesia. It conducted a quantitative analysis of the annual report of 25 listed firms by employing a generalized method of moment approach with panel data to estimate the result. Results showed that the determinants of capital structure, such as profitability, tangibility, size, and liquidity, have a negative impact on leverage. By contrast, a non-debt tax shield has a positive impact. Based on the regression result, firms have an optimal capital structure target with a yearly adjustment speed of 80%. Furthermore, calculation of optimal target structure shows that firms require approximately three years to meet the discrepancy between their current capital structure and the targeted capital structure.

Assessing Effects of Capital Adequacy Ratio Requirements on Loan Demand of Kenya Commercial Bank Eldoret Town

Security of investors' reserve remains the significant worry of bank controllers. It is in this regard the capital sufficiency becomes significant and imperative. Capital adequacy is an origination that results from reworking the banks' current capital structure to rebuild the banking industry against the widespread establishment. This research's objective was to assess the effect of capital adequacy ratio requirements on the Bank of Kenya Commercial Bank's loan demand. The study adopted the Capital Buffer Theory. The study reviewed related literature to capital adequacy ratio requirements on the efficiency in the Bank. This study adopted an exploratory research design. The sample population of interest in this study consisted of all 23-bank employees of KCB, Referral Branch. The study adopted a census survey. The following research questions guided the interview. How effective would be capital adequacy ratio requirements on loan demand of Kenya Commercial Bank? The study used interview guides in the collection of data. Qualitative analysis was used to analyze the perception data collected from the key informants. Joint subjects were determined, and qualitative data, organizing, and discussing based on the main objective were done. These were presented using grouped data collected in the form of discussion. From the interviewed respondents, it was found that there might be significant impacts of capital adequacy ratio requirements on loan demand of KCB. The elasticity of loan rate due to capital adequacy ratio requirement might affect loan demand, implying that there would be a change in loan demand for every percentage change in the loan rate. The study recommends that bank regulators be keen on the banks' capital adequacy ratio by laying down financial regulations on liquidity since financial regulation aims to enable banks to improve liquidity and solvency. Stricter regulation may be suitable for bank stability, but not for bank efficiency; restricting banks may lower bank efficiency and increase the probability of a banking crisis. There is a need for capital supplementation to keep up with Capital Adequacy Ratio (CAR) since stricter capital adequacy, robust supervision, and market discipline power promotes technical efficiency. Keywords: Loan, Demand, Ratio, Capital, Bank DOI: 10.7176/RJFA/12-6-06 Publication date: March 31 st 2021

Short-term financial sustainability of agricultural cooperatives

PurposeFrom 2006 to 2016, Brazilian agricultural cooperatives exhibited a sharp increase in sales. Since the operational cycle of these organizations demands a positive net working capital that is usually funded by debt, the authors examine whether this rise in sales was obtained at the cost of the short-term financial sustainability. As a matter of comparison, the authors conduct the same analysis for Brazilian agricultural public traded companies.Design/methodology/approachThe authors employ the dynamic analysis of working capital method to measure the short-term financial sustainability of these organizations.FindingsThe authors find that the expansion of net working capital caused by the growth of the revenues of the sampled cooperatives was mostly funded by short-term debt, which rose by 31% in annualized terms. The authors also document that around 60% of these firms displayed a current capital structure that can be considered risky in terms of indebtedness, and that the majority of firms exhibited a non-sustainable growth in the period, what contrasts with the performance presented by Brazilian agricultural publicly traded companies, since only 16% of the firms from this group have shown a non-sustainable growth. This distinction seems to be explained by the lower capacity of agricultural cooperatives to provide resources from their operations.Originality/valueThe authors investigate the short-term financial sustainability of a unique dataset of 65 Brazilian agricultural cooperatives and provide insight for researchers analyzing the dual nature of these firms.

Corporate governance, ownership structure and capital structure: evidence from Chinese real estate listed companies

PurposeThis paper aims to contribute to the existing capital structure and board structure literature by examining the relationship among corporate governance, ownership structure and capital structure.Design/methodology/approachThe paper uses a panel data of 595 firm-year observations from a unique and comprehensive data set of 119 Chinese real estate listed firms from 2014 to 2018. It uses fixed effect and random effect regression analysis techniques to examine the hypotheses.FindingsThe results show that the board size, ownership concentration and firm size have positive influences on capital structure. State ownership and firm profitability have inverse influences on capital structure.Research limitations/implicationsThe findings suggest that better-governed companies in the real estate sector tend to have better capital structure. These findings highlight the unique Chinese context and also offer regulators a strong incentive to pursue corporate governance reforms formally and jointly with the ownership structure. Finally, the results suggest investors the chance to shape detailed expectations about capital structure behavior in China. Future research could investigate capital structure using different arrangement, conducting face-to-face meetings with the firm’s directors and shareholders.Practical implicationsThe findings offer support to corporate managers and investors in forming or/and expecting an optimal capital structure and to policymakers and regulators for ratifying laws and developing institutional support to improve the effectiveness of corporate governance mechanisms.Originality/valueThis paper extends, as well as contributes to the current capital structure and corporate governance literature, by proposing new evidence on the effect of board structure and ownership structure on capital structure. The results will help policymakers in different countries in estimating the sufficiency of the available corporate governance reforms to improve capital structure management.

Corporate Governance, Ownership Structure and Capital Structure: Evidence From Chinese Real Estate Listed Companies

Purpose – This paper seeks to contribute to the existing capital structure and board structure literature by examining the relationship among corporate governance, ownership structure and capital structure. Design/methodology/approach – The paper employs a panel data of 595 firm-year observations from a unique and comprehensive data set of 119 Chinese real estate listed firms from 2014 to 2018. It uses fixed effect and random effect regression analysis techniques to examine the hypotheses. Findings - The results show that the board size, ownership concentration and firm size have positive influences on capital structure. State ownership and firm profitability have inverse influences on capital structure. Research limitations/ implications – The findings suggest that better-governed companies in the real estate sector tend to have better capital structure. These findings highlight the unique Chinese context and also offer regulators a strong incentive to pursue corporate governance reforms formally and jointly with ownership structure. Lastly, the results suggest investors the chance to shape detailed expectations about capital structure behavior in China. Future research could investigate capital structure using different arrangement, conducting face-to-face meetings with the firm’s directors and shareholders. Practical implications– The findings offer support to corporate managers and investors in forming or /and expecting an optimal capital structure, and to policymakers and regulators for ratifying laws and developing institutional support to improve the effectiveness of corporate governance mechanisms. Originality / value – This paper extends, as well as contributes to the current capital structure and corporate governance literature, by proposing new evidence on the effect of board structure and ownership structure on capital structure. The results will help policymakers in different countries in estimating the sufficiency of the available corporate governance reforms to improve capital structure management.

How Will the TCJA of 2017 Change the Tax Benefits of Debt? – The Unintended Industry Effect of the Cap on Interest Expense

Using a production-based structural model, calibrated with data for the period 2001-2017, we find that for the typical firm the cap on the deduction of interest expense enshrined in the Tax Cuts and Jobs Act of 2017 reduces the tax benefits of debt by 1% of unlevered firm value. This impact differs across industries ranging from a decline of 0.3% to 3.7% of unlevered firm value. Industry specific capital to labor ratio is a key driver of these effects. The new tax provisions make firms’ current capital structure policies considerably less conservative - a typical firm’s marginal tax benefit declines from 14.3% to 7.8% of unlevered firm value because of the cap. A different structure of the interest rate cap can reduce its differential impact across industries while preserving limits on deductibility of interest expense, on average.

Методологічні засади створення цілісної системи відтворення капіталу

In the proposed paper substantiates the problem of organizing the efficient use of resources and controllability of the entire reproduction system, which is associated with the creation of a holistic system of capital reproduction, improving the institutional mechanism for forming a single process of capital functioning. Based on modern capital research, the composition of the capital system is determined. This representation of connections in the capital system and its structures is based on the methodology of institutional political economy. The causes of destructive processes in the socio-economic system are the deviation of the current capital structure from the fundamental one and its significant disproportions. This is due to the lack of management of the capital system and ignoring the laws of architectonics. The point of view on the inclusion of institutional capital in the capital system is substantiated, and author's own position on the concept of «institutional capital» is given. The creation of a holistic system of capital reproduction is associated with the functioning of the property system and institutional mechanisms of its management, in accordance with the concept developed by the author «Property system as a jointly separate resource system» (PS-JSRS). Harmonious social development, subject to ideal proportionality, is associated with compliance with the rule of the golden ratio, which is laid in the basis of the fundamental structure of the capital system. The institutional mechanisms of the PS-JSRS can become the basis for the implementation of strategies for balanced socio-economic development. The introduction of these mechanisms at the national, regional and global levels is able to reproduce the fundamental structure of the capital system of a separate country, region and the whole world. To return the structure of the capital system to the fundamental one, it is necessary to pursue a purposeful state policy (monetary, budgetary, industrial, structural, financial) aimed at overcoming imbalances and approaching equilibrium proportions.

Market Value and Capital Structure: A Study of Indian Manufacturing Firms

India witnessed significant development in stock market in the post 1990s due to series of reform measures. As result, firms are able to raise market based capital which helped them to reduce their dependence on institution based finance. Consequently, market valuation of the firm has become an important variable in corporate finance decisions. However, traditional theories of capital structure fail to offer unambiguous explanation on the impact of market value on capital structure. To bridge this lacuna in capital structure literature, Baker and Wrugler (2002) propounded market timing theory which argues that firms’ time the market, that is, firms raise equity capital when market valuation is high and buy back when market valuation is lower and hence the current capital structure of the firm is the cumulative result of past attempts to time the equity market. In this study we attempt to understand the role of market value in influencing the capital structure decisions of the manufacturing firms in India. We find that market value negatively influences the debt ratio both in short term and long term indicating the practice of market timing. Further, we find that negative impact does indeed come from changes in equity issues rather than changes in retained earnings or debt retirement.

An evaluation of current capital structure decisions of Turkish SMEs

Findings of this study suggest that Turkish SMEs happen to experience obstacles in raising finance to improve and develop their business environment. In particular, as information asymmetry and uncertain economic environment are the key barriers, financial constraints turn out to be main handicap for SMEs’ survival. Despite its own merits, SME owners, in family business case, are reluctant to take external finance for their projects with the intention not to lose their independence and control. The main purposes of this study are firstly to investigate the issue of financing of SMEs in Turkey in the theoretical context and secondly to make policy suggestions for the future. Miller and Modigliani (1958)’s basic capital structure theory, Myers, (1984)’s trade off theory, and Myers and Majluf (1984)’s the pecking order theory are the key standing theories to examine SMEs’ capital structure needs. The results of this study are similar to those reported for most Western economies that owners of SMEs follow a pecking order theory and prefer retained profit to external finance in order to cover their financing gaps.

Capital Structure Theory: An Overview

Capital structure is still a puzzle among finance scholars. Purpose of this study is to review various capital structure theories that have been proposed in the finance literature to provide clarification for the firms’ capital structure decision. Starting from the capital structure irrelevance theory of Modigliani and Miller (1958) this review examine the several theories that have been put forward to explain the capital structure.Three major theories emerged over the years following the assumption of the perfect capital market of capital structure irrelevance model. Trade off theory assumes that firms have one optimal debt ratio and firm trade off the benefit and cost of debt and equity financing. Pecking order theory (Myers, 1984, Myers and Majluf, 1984) assumes that firms follow a financing hierarchy whereby minimize the problem of information asymmetry. But neither of these two theories provide a complete description why some firms prefer debt and others prefer equity finance under different circumstances.Another theory of capital structure has introduced recently by, Baker and Wurgler (2002), market timing theory, which explains the current capital structure as the cumulative outcome of past attempts to time the equity market. Market timing issuing behaviour has been well established empirically by others already, but Baker and Wurgler (2002) show that the influence of market timing on capital structure is regular and continuous. So the predictions of these theories sometimes acted in a contradictory manner and Myers (1984) 32 years old question “How do firms choose their capital structure?” still remains.

Como os gestores brasileiros tomam suas decisões de custo de capital?

Although there are theories of capital structure and cost of capital since the 1950s, researches show that there is no unanimity about practical application by managers in several countries. This study, therefore, has the objective of presenting how Brazilian managers define the cost of capital of their companies. Unlike other studies, this work presents clarification not only about the methods and variables that make up the cost of capital, but it also deals with criteria related to time and sources of data collection, as well as the local customization values for emerging markets, taking developed countries as benchmarking. The survey is conducted with 40 public companies. Among the results, we note that companies: (a) internally calculate their cost of capital through WACC, (b) consider their current capital structure, (c) use historical interest rates of debt, (d) use nominal tax rates, (e) use financial current and long term liabilities to determine the total value of debts (f) use CAPM model for cost of equity, with benchmarking of historical data from other markets, adjusted to Brazil. Keywords: survey, cost of capital, WACC tropicalizing, emerging markets.

Capital structure and executive compensation contract design: A theoretical and empirical analysis

Compensation contracts including incentive instruments not only provide executives with positive incentives to increase shareholder wealth, but also create a negative value-dilution effect for existing shareholders. This study investigates this dilemma by conducting a benefit-cost analysis under a proposed structural form valuation framework. Our design mechanism shows that, given their firms’ current capital structure, shareholders are always capable of designing an optimal compensation contract to maximize their wealth. Due to the different research issue and assumptions, unlike findings of most previous studies, our model proposes that in a firm with a higher leverage ratio shareholders should provide a contract with higher incentive intensity for managers, and this proposition is supported by the empirical analyses which examine the sample of S&P index firms over the period 1992–2006 after adopting an updated fixed effects model.

Can the Changes in Capital Structure Due to Operating Profits Accumulate in the Long Term?

It is well documented that once-lagged operating profits are negatively related with the firm’s current leverage ratio. This paper examine whether the changes in capital structure due to operating profits can accumulate in the long run. I find that the historical operating profits have economically and statistically significant long-term effects on capital structure, and that the weighted average historical profits over entire firm history have more explanatory power on current cross-sectional capital structure variations than the well accepted four once-lagged leverage determinants all together do. The findings in this paper show that the current capital structure is, to a large extent, the cumulative outcome of historical operating profits.

Market Timing and Capital Structure

ABSTRACTIt is well known that firms are more likely to issue equity when their market values are high, relative to book and past market values, and to repurchase equity when their market values are low. We document that the resulting effects on capital structure are very persistent. As a consequence, current capital structure is strongly related to historical market values. The results suggest the theory that capital structure is the cumulative outcome of past attempts to time the equity market.