Determinants Of Corporate Capital Structure Research Articles

An Empirical Analysis of Financial Leverage of KOSDAQ-listed Small and Medium Firms in Association with the Global Economic Turmoil

Purpose - The study addresses an empirical analysis to identify financial determinants of corporate capital structure for domestic firms, given the possible economic impact in association with the ongoing COVID-19 pandemic. Since relatively little attention has been paid on the issue for the small and medium enterprises (SMEs), it empirically attempts to identify financial components of leverage ratio for the SMEs, which may contribute to mitigating default risk by identifying status quo financial weaknesses after the COVID-19 period. Design/Methodology/Approach - Concerning empirical research settings, the sample observations are defined as the SMEs listed on the KOSDAQ exchange and the sample period is set to be the post period of the global financial crisis (from 2010 to 2018); three hypotheses are postulated to be tested on the issue. Findings - In the first hypothesis, among a total of 10 proposed variables, firm size, profitability, cash flow, foreign equity ratio, R&D ratio, and the interaction between tangible assets and high-tech sector were statistically significant to determine the market-valued debt ratio. In another hypothesis, most of the financial variables showed significant discriminating power between the SMEs and the large enterprises (LEs). Research Implications - Given the economic conditions that may be changed by the unprecedented COVID-19 pandemic, the results are expected to be applied in determining corporate target capital structure. It may eventually contribute to maximizing the value of the SMEs at the macro- and micro-levels.

The influence of religion on the determinants of capital structure: the case of Saudi Arabia

PurposeThis study aims to investigate whether a religious environment affects a firm capital structure.Design/methodology/approachThe authors use data from Saudi Arabia with a highly Islamic religious environment. The authors use an extreme bounds analysis (EBA), which provides a reliable analysis of the determinants of capital structure and aids the process of selecting explanatory variables when there is model uncertainty.FindingsThe authors find that firms in such an Islamic environment are relatively less leveraged compared to firms in a non-Islamic environment. The authors also find that firms located in an Islamic environment have different determinants of capital structure than firms located in a non-Islamic environment. Specifically, the Islamic society creates decision makers who are more risk averse, thus leading to a preference for corporate financing using internal funds.Practical implicationsThe results imply a potential challenge for growth-seeking firms located in religious Islamic societies.Originality/valueThis study is one of the first to examine the determinants of corporate capital structure in Saudi Arabia using EBA.

Institutional and Geopolitical Aspects of Bond Spreads Impacts on Corporate Capital Structure in Emerging Markets

This paper investigates the simultaneous determinants of corporate capital structure and bond spread of non-financial companies between 1998 and 2016, whilst controlling for the impacts of institutional, geographical, and political factors. It has been established in the development finance literature that a country’s financial and legal systems have a significant impact on the capacity of its private sector to raise investment funding. Our results show that the impacts of Common Law and French Law systems, and of “market-based”/“bank-based” systems disappear once institutional variables, such as country income level and the effectiveness of government, of the rule of law, and regulatory quality are taken into account. Institutional factors determine capital structure, but not corporate risk. Both variables interact significantly with each other, whilst profitability, tangibility and macroeconomic performance were found to be the common determinants of both leverage and corporate bond spreads.

Sectoral Analysis of the Determinants of Corporate Capital Structure in Malaysia


 
 
 This study investigates the determinants of corporate capital structure of various sectors in the Bursa Malaysia Main Market with the aim to establish whether the determinants of capital structure can be explained by either the trade-off or the pecking order theory. This study also examines whether there are any differences between the regressions for any two sectors or not. This study applies both the ordinary least squares (OLS) and the seemingly unrelated regression (SUR) estimators to estimate the leverage models, and subsequently determines the efficiency of each estimator. The results indicate that profitability, asset tangibility, growth opportunities, and firm size are important determinants of corporate capital structure. However, the signs of the regression coefficients suggest that the trade-o and pecking order theories are complementary. Moreover, the importance of some of these determinants differs across sectors. In most cases of the regression analyses between two sectors, the SUR estimator is found to be more efficient in explaining the determinants of capital structure among the various sectors. Hence, this study concludes that the SUR method could serve as a useful alternative methodology for capital structure research.
 
 

Determinants of Capital Structure on Trading and Manufacturing Enterprises: A Case of Nepal

This study mainly aimed at examining the determinants of capital structure in Nepalese trading and manufacturing firms. The study has covered eleven major on-financial enterprises of trading and manufacturing firm’s specific variables. Firm’s size, growth opportunity, asset tangibility, profitability, firm’s age, liquidity and interest coverage ratio have selected as variables to examine their effect on corporate capital structure. The study used both descriptive and causal comparative research design to examine the determinants of capital structure. Data required for undertaking the study were collected from secondary sources. For each enterprise, financial data for 10 fiscal years covering the period of F/Y 2005/2006 to F/Y 2015/2016.The study concluded that asset tangibility, profitability, liquidity and interest coverage ratio are the major determinants of corporate capital structure in Nepalese trading and manufacturing firms.

The Determinants of Corporate Capital Structure: Do CEO’s Cultural Values Affect the Firm Leverage Decision?

We explore the role of national culture of a Chief Executive Officer (CEO) in firms’ financing decision, enacted via the tripartite interaction between values, attitudes and behavior. Values are the cultural core that determines attitudes, ultimately steering the behavior of CEOs. Our research is novel as we go beyond the previous focus on firm nationality and examine the influence of cultural values of the individual CEO in the decision making process. By studying CEO and firm level data from 365 major companies in the USA from 2000 to 2015, we find that the CEOs’ cultural values of mastery and embeddedness, have a significant positive impact on firm incremental debt. Our results remain robust to alternative specifications and endogeneity concerns. Using a quantile panel regression approach we allow for the asymmetries between cultural values and leverage and explore the heterogeneous influence cultural values on the leverage decision. We find that the role of cultural values on borrowing is more economically significant at the two extreme levels of the gearing spectrum. Finally using a sample of Non US CEO’s we also show that cultural values are portable and contextual We conclude that cultural values contribute to the behavioral biases of CEOs which could lead to sub-optimal leverage decisions.

Firm Specific and Macro-Economic Determinants of Corporate Capital Structure: A Case of Nepalese Commercial Banks

This study examines the firm specific and macroeconomics determinants of capital structure in Nepalese commercial banks. The ratio of total debt to total assets, ratio of long term debt to total assets, and ratio of short term debt to total assets are the dependent variables. Bank size, assets growth, liquidity, profitability, and net worth are the independent variables. Bank specific data are collected from the Banking and Financial Statistics and Bank Supervision Report published by Nepal Rastra Bank and annual reports of the selected banks and macroeconomic data are collected from Economic Survey published by Ministry of Finance. The survey is based on 140 observations from 20 commercial banks in Nepal during the period of 2008 to 2014. The multiple regression models are estimated to test the significance and importance of capital structure in Nepalese commercial banks. The results show that there is positive relationship of bank size and gross domestic product with total debt to total assets ratio. The result also shows negative relationship of liquidity ratio, profitability and net worth with total debt to total assets ratio. This indicates that increase in liquidity, profitability and net worth leads to decrease in total debt to total assets ratio. The study revealed that bank size, profitability, net worth, gross domestic product and inflation have negative impact on long term debt to total assets. However, assets growth and liquidity ratio have positive impact on long term debt to total assets. The study also shows that there is positive impact of bank size, profitability, net worth, gross domestic product and inflation on short term debt to total assets ratio.

Inter-country Comparisons on Financial Determinants of Corporate Capital Structure for Firms in the United States and the Republic of Korea

The study conducts empirical analyses concerning the financial determinants of corporate capital structure. The sample observations selected were the...

Measurement Matters A Meta-Study of the Determinants of Corporate Capital Structure

This study aggregates the mixed empirical evidence of the seven most commonly investigated determinants of corporate capital structure. We apply meta-regression analysis on a data set of 3,890 reported results, manually collected from 100 primary studies covering firm observations from 57 countries over the past 65 years. Our results reveal that – in descending order of importance – tangible assets (positive sign), market-to-book ratio (negative sign), and profitability (negative sign) are significant determinants of corporate debt level. In addition, we identify the presence of publication selection bias in academic literature. Accordingly, specific results are systematically overrepresented, as authors prefer reporting statistically significant estimates in line with theory or corresponding to previous empirical research. Significant determinants as well as publication selection bias are more pronounced for characteristics like market-based measures of capital structure or total debt measures of capital structure or for top articles from highly renowned journals, as compared to book-based measures of capital structure or long-term debt measures of capital structure or randomly selected articles including more unknown and unpublished studies. Overall, these findings highlight the need to relativize existing statistically significant results in this field and instead provide independent analyses in future for scientific progress.

The Long-Term Stability of Corporate Capital Structure: Evidence from Japanese Firms

This paper attempts to examine whether there exists long-term stability of corporate leverage among Japanese firms, following the study of Lemmon, Roberts and Zender (2008) who find that US firms exhibit the remarkable long-term stability of leverage. The obtained results show that the leverage cross-sections of Japanese firms are also stable for a long time. Specifically, firms with relatively high (low) leverage continue to exhibit relatively high (low) leverage for twenty years. The results indicate that the theory of capital structure should incorporate permanent, time-invariant factors as important determinants of corporate capital structure. We also obtain the additional evidence that loans from commercial banks contribute to the stability of leverage considerably for Japanese firms.

Determinants of Corporate Capital Structure among Private Manufacturing Firms in Kenya: A Survey of Food and Beverage Manufacturing Firms

The purpose of this study was to investigate factors influencing corporate capital structure in private firms in Kenya. Although the capital structure issue has received substantial attention, it is noteworthy that most of the empirical work done focuses on data derived from developed economies that have many institutional similarities and their applicability in developing markets such as Kenya is not documented. Yet, the maintenance of an optimal capital structure is considered as one area where decision makers can influence the company’s value and risk. Specifically, the objectives of the study were to establish whether growth opportunities, firm size, firm profitability, and asset tangibility influence corporate capital structure. The study adopted a descriptive survey research design. The study population comprised 121 Food and Beverage private manufacturing firms registered with the KAM that are located in Nairobi and surrounding area. A sample of 36 firms was selected for the survey using stratified random sampling technique from which 30 questionnaires were returned. Primary data was sourced through personally administered questionnaires to the CFOs. Data was analyzed using descriptive statistics and inferential statistics. Multiple regression analysis was used to determine the interplay between the independent variables and dependent variable. Based on the findings, the study concludes that growth opportunities positively influence capital structure; firm size negatively influences the capital structure, there is an insignificant negative relationship between firm profitability and the capital structure, and there is insignificant positive interaction between asset tangibility and the capital structure of private firms in Kenya.

Firm-specific, industry-wide and country-wide determinants of corporate capital structure

This study examines the relative speed of adjustments of debt ratios and explanatory powers of three groups of determinants of capital structure: firm-specific, country-wide and industry-wide. The sample includes non-financial firms listed in the DJIA and NASDAQ for quarterly periods 1992–2010. For industry-wide variables, the results show that the prospects of many products in the industry call for higher debt ratios. For the effects of country-wide variables, a positive relationship exists between unemployment rates and debt ratios, constituting a warning signal that excessive use of debt financing adds to unemployment problems. In addition, the negative relationship between inflation and debt financing indicates that when inflation rises, firms prefer equity financing to avoid increasing interest burdens on earnings. A positive relationship also exists between debt financing and productivity growth, exports and unemployment rate growth. The comparative effect between firm-specific, industry-wide and country-wide variables shows that firms characterised by high debt ratios are much more influenced by assumptions of the theories of capital structure and macro variables than firms characterised by low debt.

Effects of ultimate ownership structure and corporate tax on capital structures: Evidence from Taiwan

Our study investigates how ultimate ownership structure and the corporate tax rate affect the equilibrium trade-off relation between manager ownership and debt in reducing agency costs. Considering the presence of the controlling shareholder, we find that higher corporate tax rates strengthen the trade-off relation between manager ownership and debt while higher control rights held by the controlling shareholder weaken it as well as the strengthening effect of corporate tax rate. Our study contributes to the literature by revealing tax and ultimate ownership structure dimensions and their interactions as additional determinants of corporate capital structure.

On the Determinants of Firm Leverage: A Structural Dynamic Estimation

I provide further evidence on the determinants of corporate capital structure by estimating a dynamic trade-off model of the firm that includes investment, leverage, and payout decisions. The structural model generates a leverage ratio that oscillates around a long-run, time-invariant level and consistently reproduces the convergence and stability of leverage reported by Lemmon, Roberts, and Zender (2008). The dynamic model sheds light on the role played by the primitive characteristics of the firm (e.g., production technology) to explain the cross-sectional variation in capital structure. I use Efficient Method of Moments (EMM) to recover the structural parameters.

Determinants of Capital Structure of Indian Corporate Sector in the Period of Bull Run 2003-2007 - An Econometric Study

There are three major theories in the Corporate Finance literature, namely, Trade-off theory, Agency Cost theory and Pecking-Order theory that highlight different determinants of corporate capital structure. In an attempt to study the determinants of capital structure in Indian scenario and to verify whether any of the above mentioned theories can characterize the Indian corporate financing, this paper makes an empirical study of the capital financing pattern of 76 Indian firms for the period 2003-2007, the period of unprecedented growth of Indian economy. The study makes fixed effect panel data (LSDV) regression and finds out that financing with internal funds, as suggested by pecking-order theory has emerged as a major feature of corporate capital structure. Some other determinants, however, have patterns of influences that match with the postulates of other two theories. The analysis finds out that the capital structure pattern on an average portends well for long term development of Indian corporate sector.

Determinants of corporate capital structure: evidence from an emerging economy

PurposeThis research paper aims at examining the determinants of corporate leverage in Egypt according to the assumptions of three theories of capital structure: tradeoff, pecking order, and free cash flow.Design/methodology/approachThe methodology utilizes the benefits of the partial adjustment autoregressive model to measure the speed of adjusting long‐term and short‐term debts to a target level.FindingsThe results indicate that companies use both long‐term and short‐term debt to adjust the leverage with a relative dependence on long‐term debt; the tradeoff‐related determinants of capital structure are taxes, debt/equity ratio and bankruptcy risk; the pecking order‐related determinants of capital structure are growth and profitability; borrowing decisions are not affected by the assumptions of free cash flow. Overall, the explanatory powers of the three regression equations are high and significant which indicate that the model construction is quite indicative.Originality/valueThe paper contributes to the literature in that it shows that the determinants of capital structure conform to those reported by other related studies in emerging markets as well as developed markets which supports the general conclusion that the determinants of capital structure in emerging and developed markets are converging.

Econometric Analysis of the Capital Structure Determinants

Studies on capital structure have been concentrated in developed countries; a few of them have been in countries such as India. This paper provides a) an empirical examination to the widely held existing theories on the determinants of corporate capital structure and their maturity; and b) attempts to develop and test a new theory on capital structure for large manufacturing firms in developing economies such as India. For, the different empirical and managerial implications about different periods of debt instruments, we analyze measures of short-term and long-term debt rather than only an aggregate measure of total debt. The study also analyses the empirical implications of liberalization of Indian economy, on the determinants of capital structure of the firm. Some of the results were found contrary to the classical financial theory.

Determinants of Corporate Capital Structure of Norwegian Manufacturing Firms

Under rational expectations, one may interpret a normal capital structure, contingent on variables that differ among firms, as an optimal capital structure. The firms are rational if they adjust to this common normalized capital structure since this norm minimizes the cost of financing. Estimating parameters in this normal capital structure I find that the determinants of capital structure are fixed assets, size, growth, taxes, return on assets and industry category. This study contributes by analyzing the maturity structure in Norwegian non-listed firms. Using a large sample panel data facilitates use of panel data techniques to wipe out unobserved firm heterogeneity that may bias the estimates of the parameters of interest. Robust estimates of standard deviation are also provided. The new findings of this study compared to previous studies are that only the fixed assets seem to have any economic significance as measured by the elasticity between debt and fixed assets. The other variables are statistically significant, however, they do not have a non-trivial magnitude of the elasticities. This study confirms the common belief that the asymmetric information about returns and expected bankruptcy costs have negative effects on the debt-ratio while agency cost of management, asymmetric information about risk and the tax shelter effects of debt financing are increasing the leverage of the firms. The tax effect is controversial since the Norwegian tax systems have been known to treat debt and equity neutrally. The inefficiency of debt financing of growth firms is not supported in the sample, except for the finding that growth firms have more short term debt.

Determinants of Corporate Capital Structure: Evidence from European Countries

Determinants of Corporate Capital Structure: Evidence from European Countries

Determinants of corporate capital structure: evidence from Hungarian firms

This paper investigates the capital structure of Hungarian firms using a cross-section and a panel data approach. The data set is composed of balance sheet data and information on market structure for 1100 firms from 1992 to 1996. Evidence is found of imperfections that constrain firms in the achievement of their optimal capital structure, but also some positive indications: there are no distortions typical of the planned system and no signs of the presence of soft budget constraints.