Dynamic Capital Structure Research Articles

Capital structure adjustment speed over the business cycle

This paper extends the DeMazro and He (2019) model of capital structure dynamics by introducing macroeconomic conditions. Our goal is to analyze how business cycle risks impact a firm’s capital structure adjustment speed. Based on our calibration, the model predicts that the capital structure adjustment is slower in the presence of macroeconomic risk. Importantly, we also demonstrate that firms adjust their capital structure faster in good macroeconomic states versus bad economic states, which is consistent with empirical evidence. Finally, we provide several new predictions for how the key parameters of the model affect a firm’s capital structure adjustment speed.

Optimal Capital Structure and Speed of Adjustment under Hyperinflation and Dollarization

Economic challenges in Zimbabwe have resulted in firms being pushed out of their optimal leverage. Firms are faced with the need to move back to the optimal level of financing to improve their value. They tend to adjust quickly to the optimal level whenever failing to do so is costlier. This study employs a dynamic capital structure model to examine the determinants of optimal leverage and the speed of adjustment under a hyperinflation and dollarization period (2000–2016). The study shows that firms have an optimal leverage and there are costs of adjusting to this level of capital. Findings are consistent with theoretical predictions of the static trade-off theory (STT) and agency theory. The adjustment factors for all the models were found to be at least 0.475 and are higher under hyperinflation than under dollarization. Both firm and macroeconomic factors explain the optimal capital structure while the former also explains the speed of adjustment. Policies focusing on improving access to and reducing costs for finance will assist firms to maximize value as they adjust to the desired financing mix. The policies adopted may vary in response to the economic environment.

Capital structure dynamics: China and India (Chindia) perspective

PurposeThe purpose of this study is to investigate the dynamics of capital structure for businesses in China and India. Whether and how they adjust their capital structures to witness the trade-off behaviour in the light of different macro-level factors.Design/methodology/approachFirms listed on the National Stock Exchange and Shanghai Stock Exchange over the period of 2009-2018 are used for the study. System generalized method of moments proposed by Blundell and Bond (1998) is deployed due to the use of dynamic short panel data.FindingsIndian firms revert to their target leverage ratios at a higher rate as compared to Chinese firms (30 and 20 per cent, respectively). Further, the inflation rate, bond market and stock market development are significant factors impacting leverage in the case of India, whereas bond market development significantly impacts leverage in the case of China. These results are robust across various definitions of leverage and other firm and institutional control variables.Research limitations/implicationsThis study has implications for various stakeholders. The study highlights that development in financial markets and economy impact the financing decisions and should be a cause for concern for the financial managers and policymakers. Thus, managers can use the findings of the study if they desire to maintain their target capital structures for better firm valuation and the policymakers can support them in achieving the same. Even, the investors can make informed investment decisions considering macro-level factors impacting firms’ financing choices.Originality/valueIt is believed to be the first piece of research effort to consider the novel paradigm of the macro-level factors impacting the target leverage to estimate the adjustment speed. Secondly, it is a pioneering study, which attempts to compare the trade-off behaviour of the top two emerging economies of the world.

CEO AGE AND THE DYNAMIC CAPITAL STRUCTURE EVIDENCE FROM MALAYSIA

This paper aims to investigate the dynamic capital structure of Malaysian firms from upper echelon perspective. Specifically, we test the speed of adjustment towards the target leverage and the age of Chief Executive Officers (CEOs) as a determinant of dynamic capital structure. Utilisation of the System Generalized Method of Moments finds 33.93 of% speed of adjustment for Malaysian firms. The CEOs age is also found to be inversely related to both the optimum leverage and speed of adjustment towards the optimum leverage. As the CEOs age increases, the optimum leverage and speed of adjustment decrease. Our results are robust using the long-term leverage while controlling several firm characteristics that are known to impact the firm’s capital structure, year of effect, and industry fixed effect. The results suggest that CEOs age is a potential factor of Dynamic Capital Structure decision. The findings also highlight the failure of older CEOs in maximising the benefits of debt interest tax shield which prompts higher financial costs and lower firm value. The practical implication of our study lies on the need to attentively look at the CEOs age while hiring a qualified CEO that could improve the firms’ performance.

Determinan Leverage Optimal Di Bursa Efek Indonesia

Research on capital structure, recently characterized by the use of dynamic capital structure. The use of dynamic capital structure basically wants to know the existence of optimal leverage as hypothesized by Trade-Off Theory and Speed off Adjustment (SOA) to optimal leverage. This research tries to overcome this problem, by using dynamic panel data by using company characteristics and macroeconomic factors. The use of General Method of Moment (GMM) to overcome the problem of econometrics due to the use of dynamic models. Samples taken from manufacturing companies listing on the Indonesia Stock Exchange 2009-2015. The inference model and the determinant behavior of capital structure can be explained by Trade-Off Theory and Pecking Order Theory. The variable characteristics of the company and macro economy are significant and are marked according to the hypothesis. The findings of this study include: the influence of profitability, size, tangibility, growth opportunity and business risk. In addition, on average companies in Indonesia can increase their debt to utilize tax shields

Leverage Dynamics Under Segmented Equity and Debt Markets

We study a continuous-time dynamic capital structure model in which a firm can continuously adjust its capital structure. Unlike previous models, we assume heterogeneous equity and debt holders and segmented equity and debt markets. We show that the expected future equity and debt market returns, but not realized market returns, affect the firm's debt issuance policy and speed of leverage adjustment. The effect is stronger for firms with larger asset beta. We empirically test and confirm our model predictions.

Debt-Equity Swap, Subsidy and Optimal Government Policy

In 2016, the Chinese government proposed a one-time debt-equity swap (DES) program to assist firms in financial distress and to reduce the leverage ratio of non-financial firms. We use a dynamic capital structure model to study the effects of this program on firms with and without subsidy. A DES can increase a firm’s value by lowering its leverage ratio and reducing its expected bankruptcy cost. The subsidized firms initially take more debt and are thus more incentivized to undertake a DES. Notably, a firm’s undertaking a DES can have opposite effects on government value: on the one hand, it can increase government value from the tax-benefit channel, but on the other hand, it can reduce government value by extending the period of tax shields and subsidies granted to a firm. Consequently, we show that the optimal government policy depends on the characteristics of firms and the ultimate goals of government. In particular, the optimal policy for subsidized weak firms is a DES with subsidy removal, which introduces a tradeoff between a DES and a subsidy.

Dynamics of Capital Structure and Firm value of Indian listed firms: A PLS-SEM approach

The present study examines the determinants of capital structure and evaluates their direct and indirect effect on firm value. Data over the financial years 2013 to 2017 was considered for the pres...

The dynamics of capital structure and firm value of listed industrial goods in Nigeria

This paper aims to establish the effect of capital structure on the firm value of fourteen (14) quoted industrial goods companies operating in Nigeria for ten years (2008 to 2017). Data were obtained from the annual reports and accounts of the sampled firms. The indicators for capital structure comprises of long term and short term debt, while proxies for firm value include return on equity and share price. Multiple regressions were used to analyze the data. Long-term debt appeared negative and significant, with a return on equity. Like previous studies, value seems to be enhanced when industrial goods companies employ more internal funding, short term debt than long term debt. Regarding the share price, short-term debt significantly increases share price. However, long-term debt does not impact the share price of listed industrial goods companies in Nigeria. This paper recommends that management and board of directors should ensure the optimum level of financing mix in their composition of capital that enhances their business worth, particularly by minimising long-term loans.

Foreign Ownership and Capital Structure Dynamics

Foreign Ownership and Capital Structure Dynamics

Callable or Convertible Debt? The Role of Debt Overhang and Covenants

Many U.S. corporate bonds are either callable or convertible. While callable bonds provide a higher coupon to bondholders in exchange for a firm's repurchase option of its claim, convertible bonds offer investors the option to exchange a firm's debt to equity. This paper analyzes the choice between these two debt contracts. Using a dynamic capital structure theory model that includes an investment choice, we show that firms which are more exposed to debt overhang issue callable rather than convertible bonds. Convertible bonds are preferred if the firm has a higher initial level of debt. However, if bonds have covenants attached, the firm is more likely to issue callable bonds. Our empirical findings support the theory.

Dynamics of Capital Structure, Risk-Taking Behavior, and Profitability across the Vietnamese Banking System: Evidence from a Panel Vector Autoregression

The paper examines the interdependence between the profitability, risk-taking behavior, and capital structure across the Vietnamese banking sector, using panel vector autoregression with quarterly data of the 22 banks over 2014Q1–2019Q3. The outcomes indicate profit or solvency shock increases leverage, while the profit and solvency respond negatively to the leverage shock and their movement over time path is pretty similar. This reflects that the insolvency risk is sensitive to the wellbeing volatility due to the weak capital. Moreover, the forecast variance in the leverage is mainly predicted by the profitability shock, while that of solvency is by the leverage one. The estimated variance in prosperity is mainly explained by the inefficiency shock. Thus, regarding policy recommendations, in the long run, Vietnamese financial regulators need to be continuously consistent with capital strength-supporting policies. However, other policies facilitating an effective financial environment are also simultaneously established to help banks minimize operating costs for higher management efficiency and thereby profitability. This supports the banks to partially offset the negative impact of increased capital which might reduce their profitability. Finally, strengthened supervision policies are also necessary, especially when the banks are more profitable because they intentionally relax borrowing and leverage restrictions.

PENCAPAIAN TARGET LEVERAGE MELALUI SPEED OF ADJUSTMENT KARAKTERISTIK PERUSAHAAN

This paper aims to determine the effect of company characteristics on target leverage with the relation of the speed of adjustment to target leverage. The speed of adjustment is examined to complete the analysis of the concept of dynamic capital structure in Indonesia. The characteristics of the companies studied are profitability, company size, company growth, industry, tangibility, inflation and the deficit and financial surplus of companies in the property, real estate and construction sectors listed on the Indonesia Stock Exchange in 2008 to 2015. The results of this study show that property, real estate, and construction sector companies are significantly implementing leverage targets. The data also shows that there is a significant effect of speed of adjustment to the leverage target which is faster when the company has a financial surplus compared to when the financial deficit.

Capital structure dynamics of Indian corporates

PurposeThe purpose of this paper is to examine the capital structure determinants and speed of adjustment (SOA) toward the target capital structure of firms.Design/methodology/approachThe study has used the generalized method of moments (GMM) model and two-stage least squares (TSLS) to the panel data of 3,310 Indian firms, from January 2000 to March 2018, to determine the adjustment speed toward target capital structure. Further, the study employed a fully modified ordinary least square technique to shed light on the dynamic nature of the adjustment process.FindingsThe results of the GMM estimations indicate that Indian firms are adjusting their capital structure toward the target rate of 10.38 percent per year. Similarly, the findings of TSLS estimate specify a SOA of 15.49 percent per year. The low adjustment speed suggests the prevalence of higher adjustment costs of Indian firms.Research limitations/implicationsFuture research can be undertaken by including certain macroeconomic factors such as GDP, inflation and the interest rate, which also affect the SOA since firms are pretentious by market conditions while designing capital structure for firms.Practical implicationsIn the current financial and regulatory set-up when there are frequent perturbations in the capital market, the study will be valuable for regulators, firms and academicians. The work would enable the concerned stakeholders to manage their scare resources and capital effectively by a better way to make informed decisions. It will facilitate managers of young companies to identify and regulate the factors that are more pertinent for them to make flexible financial decisions concerning the capital structure.Originality/valueThe study amplifies on previous studies and provides new insights on the speed of the adjustment process of Indian firms, helping to modify and refine their capital structures toward the optimum capital structure. This will not only enhance the financial flexibility in the capital structure of Indian corporates but also be of great value to the policymakers and other stakeholders.

Foreign ownership and capital structure dynamics

This study explores the relationship between foreign investors and the dynamics of capital structure. Using a sample of listed firms in Taiwan during the period from 1997 to 2016, our results reveal that firms with higher foreign ownership are less likely to issue debt, indicating that foreign investors serve as a direct substitute for debt by enhancing corporate governance. Moreover, foreign investors help reduce leverage adjustment costs, which in turn increases the speed of adjustment toward target leverage. Overall, this study highlights the important role played by foreign investors in shaping firms’ optimal capital structure decisions and shareholder wealth maximization, and thus provides evidence in supporting a positive view of foreign ownership in emerging markets.

Capital Structure Dynamics and Financing Imbalance: Evidence from an Emerging Economy

This paper considers the trade-off and pecking order theory in a unified framework and examines the influence of adverse selection costs on target adjustment process by investigating the relationship between firms’ financing imbalance and their target adjustment speed. Using a large dataset of 2718 non-financial and non-utility listed firms over a period of 2004–2005 to 2015–2016, the study observes that Indian firms adjust toward target leverage with a moderate adjustment speed of 32–36 percent. Moreover, firms with above-target debt make faster adjustment than firms with below-target debt, and firms with financing deficit make faster adjustment than firms with financing surplus. The extensions of target adjustment model by considering financing imbalance and direction of deviation together, and also by incorporating extent of deviation further reveal that firms try to avoid equity and prefer to deal in debt while making adjustments toward the target. In fact, firms deal in equity only when they are highly deviated from target leverage. All these findings suggest that adverse selection costs play significant role in the adjustment process. Therefore, though capital structure decisions of Indian firms are guided by trade-off theory, significance of pecking order arguments cannot be negated. This study makes important contributions to the existing literature as prior studies on impact of financing imbalance on adjustment speed are based on US which is very much different from emerging economies, particularly India.

DETERMINAN STRUKTUR MODAL DINAMIS : STUDI EMPIRIS DI BURSA EFEK INDONESIA

<p><em>Research on dynamic capital structure basically wants to know the existence of targeted leverage as hypothesized by Trade-Off Theory and Speed off Adjustment (SOA). Later developments, the magnitude of the speed of adjustment can be used as a determinant of capital structure theory used by the company. Another problem in dynamic capital structure research is the use of analytical tools that can produce biased and inconsistent predictors. To overcome this, this study uses dynamic panel data with the General Method of Moment (GMM) approach. Samples were taken from non-financial companies listed on the Indonesia Stock Exchange in the 2009-2015 period. The results of the inference show the existence of Dynamic Trade Off Theory and the variables of company characteristics and macroeconomic significantly influence the dynamic capital structure. In addition, it is known that there is an influence of company size and growth Opportunity on the speed of adjustment. Another finding is that he knows that managing profitability follows and Pecking Order Theory.Keyword</em><em>s</em><em> : capital structure, static model, dynamic model</em></p>

Board interlocks and capital structure dynamics: evidence from China

AbstractUsing a sample of Chinese A‐share listed companies from the Shanghai and Shenzhen stock exchanges from 2007 to 2016, this paper investigates the effects of director network centrality on the speed of capital structure adjustment. The results indicate that firms in the central position of the director network have a higher speed of capital structure adjustment and a lower extent of deviation from the target capital structure. This effect is mainly significant for non‐state‐owned enterprises (non‐SOEs). Collectively, the evidence shows the network of interlocked directors creating mechanisms for information and resource exchanges, which enhance the efficiency of corporate financing polices.

On the Dynamic Capital Structure of Nations: Theory and Empirics

We analyze the optimal capital structure of a nation from a corporate finance perspective. In particular, we draw an analogy between a nation's fiat money and corporate equity following Bolton and Huang (2018). Based on dynamic capital structure theory, we develop a stochastic model to determine the optimal combination of fiat money and foreign-currency debt used by a nation to fund its investments. The optimal capital structure of a nation depends on the trade-off between the inflation risk of fiat money and the default risk of foreign-currency debt. Introducing outstanding debt to our model sheds light on how a nation dynamically adjusts its capital structure over time. Based on an analysis of 22 emerging economies, the empirical results support our theoretical model of the capital structure of a nation.

Firm Profitability and Adjustment of Capital Structure: Indian Evidence

The present study investigates the relevance of capital structure dynamics in Indian context by examining the speed at which firms adjust towards their target capital structure. Apart from symmetric adjustment speed, the study also investigates the asymmetries in adjustment speed based on profitability of firms. Using partial adjustment framework on an unbalanced panel of 28,532 firm-year observations comprising 2,718 listed firms over a period of 2004–2005 to 2015–2016, the study finds that Indian firms maintain target leverage and adjust towards the same with a moderate annual adjustment speed of around 32 per cent. The study further observes that high-profitability firms, in general, adjust significantly faster than low-profitability firms which possibly indicate better accessibility in the financial market, lesser costs of adjustments and ability to adjust payout ratio for the former than the latter. Further investigation reveals that high-profitability firms make more adjustment in case of over-leverage, whereas low-profitability firms make more adjustment in case of under-leverage. These results possibly indicate the implications of availability of internally generated funds. Overall, the study concludes that adverse selection cost plays important role in the target adjustment process and hence, both trade-off theory and pecking order theory have relevance in Indian context.