Financial Structure Decisions Research Articles

Financial Crises and Capital Structure Decisions: Empirical Evidence from Emerging Markets

ABSTRACT This study analyzes emerging market firms’ capital structure decisions. We select the reference as 2007–2008 financial crisis and study the temporal behavior. We investigate if EM firms differ in decisions of issuing debt and equity and if their responses to the global financial crisis are explicable with the existing theories. Our findings suggest that the crisis behavior of EM firms is not fully conformable with the extant theories. Their debt and equity reversals are antithetical, that is in the reverse direction from the last extreme point, driving a pattern to stagger between substantial debt issues followed by equity expansions.

The Effect of the Financial Structure Decision and Governance Mechanism on Shareholders' Wealth: Nonlinearity Evidence from a Petroleum‐based Economy

AbstractThis study was designed to determine the nature of the association between the financial structure decision and shareholders' wealth—dividend payments—of firms listed on one of the largest stock markets in oil‐based economies, the Saudi stock market. The study used panel data for all nonfinancial firms listed in Saudi Arabia's primary stock market (TASI) during the period from 2000 to 2018. The pooled ordinary least squares, quantile, generalized method of moments and U‐tests were conducted to evaluate the association between the financial structure decision and dividend payment. The preliminary findings revealed a positive effect of financial leverage on dividend payments using a linear model. However, when a nonlinear model was used, the study found a nonlinear relation between the financial structure decision and dividend payouts, which exhibited an inverted U‐shaped curve driven by levels of debt. This nonlinear relation verifies the tenets of the trade‐off theory of optimum debt level based on the costs and benefits of the debt. Further, the study found a negative influence of firm performance, size, and age on dividend payments. The outcomes of this study may provide useful insights for policymakers, managers, and lenders into the optimal level of financial leverage and efficient dividend policies.

Financial integration and capital structure decisions of listed firms: evidence from China

PurposeThis paper investigates the impact of financial integration on the capital structure of the firms operating in mainland China, examining the firm-level and country-level integrating variables for 2,878 listed Chinese firms over the period of 1991–2016 in regard to the firms' capital structures. Finally, the study revisits the associations for the state-owned and multinational firms in the context of China.Design/methodology/approachA large sample of unbalanced data from firms were used to explore the relationship firm-level and country-level integrating variables has with firm leverage and maturity; this is accomplished using the fixed effect model. For robustness, a system-generalised method of moments was used.FindingsThe results indicate that internationalisation positively impacts the leverage and debt maturity of all listed Chinese firms and multinational firms and that state-owned firms are financed mainly by the state. For country-level integration, the authors find that credit and equity markets are negatively related to a firm's leverage. A negative relation with credit markets suggests that Chinese firms have much cheaper financing options than the benefits that arise from credit market integration. Moreover, the effect of equity market integration is more pronounced on Chinese firms' capital structure and debt maturity than credit market integration.Practical implicationsThe results provide valuable implications of financial integration for policymakers as well as capital structure decision-making for managers in China.Originality/valueFew studies have examined the impact of integration on firms' capital structures in developing countries. After controlling for unobserved heterogeneity and endogeneity, this study adds new multilevel integration evidence on the capital structure of Chinese firms.

Determinant of the financial structure of manufacturing firms in a developing economy: A study of selected listed manufacturing firms in Nigeria

This study principally interrogates what drives the financial structure of listed firms in an emerging economy, using Nigeria as a paradigm. The study specifically sought to examine the effects of selected major financial variables namely - assets tangibility, profitability and the size of the firms on their financial structure decision. The valid data used in study covered eight selected manufacturing listed firms in the Nigerian Stock Exchange. The study however adopted trade-off theory in the theoretical framework. In the methodology, we employed pooled ordinary least square (POLS) approach. The outcome of the study revealed that size of a firm is a major determinant of financial structure in Nigeria emerging economy for the period under study. From our analysis, p-values of other factors examined such as profitability and asset tangibility showed no significant effect. The study therefore, concluded that high costs of floating shares and bureaucracies in the listing procedures formed some of the challenges faced by these companies while making or adjusting the pattern of their financial structures. The paper recommended that the Nigeria Stock Market should be made operators and investment friendly by reducing the floating costs and effects changes to the stringent listing conditions.

Equity Financing and Financial performance of Listed Deposit Money Banks in Nigeria

The study examined the effect of equity financing on the financial performance of listed deposit money banks in Nigeria. Return on Assets was used as a measure of financial performance while share capital, retained earnings, and other reserves were used as independent variables. Data for the study was obtained from the audited annual reports of the 14 sampled deposit money banks for a period of 10 years covering 2009 to 2018. The study employed robust ordinary least square regression as a tool for analysis and testing of hypotheses based on the Hausman specification test. The result reveals that share capital has a positive and insignificant effect on return on assets while retained earnings and other reserves have a positive and significant effect on return on assets. The study concludes that retained earnings and other reserves improve the financial performance of listed deposit money banks in Nigeria, in line with pecking other theories. The study recommends, among others, that the board of directors should critically and closely monitor the financial structure decisions of the banks by closely ensuring that retained earnings and other reserves are ploughed back on profitable investments.

Econometric Analysis of the Impact of Financial Structure on Innovation Based on the Fixed Effects Panel Model

This study addresses the impact of financial structure on innovation. The mechanism of the impact of financial structure on innovation at different levels of economic development is elucidated from the perspective of optimal financial structure decision theory and development economics, and empirical evidence is provided using manufacturing data from 59 countries or regions for the period 1996–2015. The study finds that financial structure has no significant effect on innovation at lower levels of economic development, but at higher levels of economic development, market-based financial structure significantly promotes innovation in the industry. The role of financial structure in innovation shifts in the interval where per capita income is greater than 9747 International dollar (hereinafter called I$9747) and less than I$17070. This paper verifies that the innovation approach of technological imitation requires the support of a bank-based financial structure, while the innovation approach of independent innovation requires the support of a market-based financial structure. The differences in innovation approaches at different stages of economic development lead to the evolution of the inherent demand for financial structures in the economy. Promoting the evolution of financial structures according to the stage of economic development is of great significance in building an innovative country and leading the sustainable and healthy development of the economy.

Project Finance Structuring, Management and Sustainability of Healthcare Systems

This concept paper examines how project finance structuring and management affect the sustainability of healthcare systems. A good healthcare system is characterized by efficient health service delivery, adequate human resources, a sustainable financing system and good governance. The study was guided by the sustainability model, prospect theory, pecking order theory and the agency theory. This study adopted a qualitative approach, relying on articles previously reviewed. There is an urgent need to transform healthcare systems so that new and existing health problems can be dealt with decisively and more efficiently. This requires renewed commitment from governments, reprioritizing and readjustment of present healthcare programs, inter-sectorial collaborations that involve all relevant stakeholders including the communities, and renewed investments in sustainable healthcare policies that deliver maximum impact at minimal cost. Project Finance structuring is a framework in which risk structure and financial structure decisions are made and tied together in the project's legal structure, which, in turn, forms a foundation for funding the project on a limited recourse basis. From the analyses, institutions are yet to achieve ideal project finance structuring and management to achieve sustainable healthcare systems. Countries must come up with elaborate healthcare structures and management models to achieve sustainable healthcare systems. This paper explores the relationship between project finance structuring, management and sustainability of healthcare systems. The interrelationship between these variables determines the condition, functionality and adequacy of healthcare systems. In conclusion, health care should move towards quality improvement and safe practice through effective risk management in organizational process, equitable health financing mix and strong legal frameworks.

L’aide multicritère à la décision et la structure financière des PME

The operational research techniques were the first to be used in the solution of some financial problems. The traditional financial approach analyzes these problems in the context of optimization. It is based on the principle according to which an optimal financial structure is the one that allow the enterprise to maximize the expected return for a given level of risk. In this case, the solution of financial problems is based on an evaluation criterion (mono-criterion paradigm). But in reality, the modeling of financial decisions should take into consideration multiple criteria. In the case of an SME, these criteria should include those related to the owner-manager which represents the main decision maker. The aim of this paper is to examine the contribution of multicriteria analysis methods in solving financing problems, focusing on the financial structure decisions in SMEs. The results of this research show that using multicriteria analysis allows SMEs to structure the financial problem, evaluate financing alternatives using financial and non-financial criteria (both quantitative and qualitative), and achieve to a collective, transparent and justified decision.

Female directors, capital structure, and financial distress

The composition of the board of directors is highly relevant to a firm’s capital structure and likelihood of financial distress. This study builds on the complementary proposals of agency theory and gender theories based on gender-differential behavior. We examine whether the gender diversity of the board affects firms’ capital structure (leverage, cost of debt, and debt maturity) and likelihood of bankruptcy. For a sample of European firms over the period 2002 to 2019, we find that the percentage of women directors is the most influential board characteristic in terms of capital structure decisions. This characteristic is negatively related to leverage, cost of debt, and debt maturity. We also find that having a small and independent board with a high ratio of women directors reduces the likelihood of financial distress. However, CEO duality does not have a significant impact on the likelihood of financial distress or capital structure decisions.

Leverage structure decisions in Bangladesh: managers and investors’ view

The paper investigates the impact of managers' and investors' perceptions on financial leverage decisions in Bangladesh. To fulfill the purpose of the paper, the final structure of the questionnaire was made by adopting pre-testing and assessment of outer factor loadings and measures the internal consistency of all items in the test or scale using Cranach's Alpha. The composite reliability (CR) was tested by calculating the composite alpha and average variance extracted (AVE). The study employs partial least square structural equation modeling (PLS-SEM) to investigate the structured relationship between the observed and latent variables and extends the path analysis to test the hypotheses. The study reveals that corporate governance significantly and positively influences the leverage structure decision. The result intends to establish that if firms serve corporate governance, it will make the firms to manage more debt into the leverage structure decision. Results also reveal a negative and significant association between the determinants and financial leverage structure decision, and this relation signifies that when determinants tend to upturn, outside borrowing will fall into the financial leverage structure decision. The policy implications advanced from this study include the transformation of ownership structure, corporate governance, and financial policy to facilitate proper leverage structure decisions.

The determinants of capital structure in insurance companies Evidence from Saudi Arabia

The study examines the significant determinants of the insurance companies' capital structurelisted on the Saudi Stock Exchange (Tadawul) from 2010 to 2018. In this study, one dependentvariable capital structure is represented by leverage and six independent variables, firmcharacteristics variables (profitability, growth rate, risk, size, age) and macroeconomic variable(GDP). A random effect on a panel data regression model is employed as a tool of analysis. Thisstudy attempts to fill the lack of research in Saudi insurance companies to arrive at constructivesuggestions that could contribute to financial structure decisions. The results show thatprofitability, age and risk have a statistically significant negative effect on the capital structure.Growth rate and firm size significantly positively influence the capital structure, while grossdomestic product is insignificant.

Financial Flexibility Value and Capital Structure Decisions

Bu çalışmanın amacı, Borsa İstanbul 100’e kote olan işletmelerin finansal esneklik değeri ile sermaye yapısı kararları arasındaki ilişkiyi incelemektir. Bu kapsamda, 2006-2015 döneminde Borsa İstanbul 100 Endeksine kote olan 37 işletmenin finansal esneklik değeri, nakdin marjinal denklemi ve finansal esnekliğin beş faktörü yöntemi (Rapp vd., 2014; Rapp vd., 2012) ile hesaplanmış ve elde edilen finansal esneklik değeri ile sermaye yapısı kararları arasındaki ilişki panel regresyon analiz yöntemi kullanılarak incelenmiştir. Çalışmadan elde edilen sonuçlara göre yöneticiler, pay sahipleri ve borç verenlere önemli bilgiler sunan finansal esneklik değerinin Türkiye’de faaliyet gösteren firmalar için hesaplanabilir bir değer olduğu ve finansal esneklik değerinin borçlanma düzeyini negatif yönde etkilediği tespit edilmiştir.

Relation between financial information disclosure and capital structure decisions

The main aim of the present study is to relation between finansial information disclosure and capital structure decisions in companies listed on Tehran Stock Exchange. Methodology: Statistical population of this study is consisted of companies listed on Tehran Stock Exchange during the time period of 2009 to 2014 and sample volume is equal to 118 companeis by using screening method and after the elimination of outlaying observations. In this study rating of information including rating of regulations compliance, rating of timely financial disclosure, rating of financial forecasts disclosure, rating of annual financial reports disclosure and rating of company website disclosure were taken as independent variables in order to study their effect on capital structure decisions. Results: This study is an applied study in terms of goal, in terms of nature and content it is a descriptive - correlation study and in terms of research design, it is an ex post facto (semi-empirical) study, which means, it is conducted on the basis of historical and past data analysis (financial statements of companies). In this study, in which panel data with fixed and random effects are used, results obtained from firm data analysis by using multivariate regression at 95% indicated that there is a direct relationship between rating of timely financial disclosures, rating of financial forecasts disclosure and rating of annual financial reports disclosure with capital structure decisions. Conclusion: It was also indicated that there is no significant relationship between rating of regulations compliance and rating of company web site disclosure with capital structure decisions of a company.

The Impact of Firm Specific Characteristics on The Relation Between Financial Distress And Capital Structure Decisions

Purpose – This study investigates the effect of some of the firm level variables on the relation between financial distress and capital structure decisions. Design/ methodology/approach – The manufacturing firms listed in Turkish market between 2007 and 2017 are analysed. Fixed effect panel regressions are used in the analyses. Findings – Financial distress level increases as leverage and short-term debt maturity usage increase. Firm size, return on equity, asset tangibility variables are reported as effective on the association between leverage and financial distress. Return on equity and asset tangibility have impacts on the relation between financial distress and debt maturity. Discussion – The findings show that increased debt level results in higher level of financial distress which is in line with Trade-Off Theory. As the debt level of more profitable firms increases, the financial distress level of those firms increases. Moreover, increasing debt among large firms causes higher level of financial distress. Asset tangibility is also effective in reducing negative impact of debt on financial success. Increasing long term debt among firms with higher ROE, results in increased financial distress levels. Finally, increasing long-term debt ratio among firms with higher tangibility causes higher financial distress level.

Impact of Financial Leverage on Cash Flow Ratio: A Comparative Study Between MNCs and Domestic Companies Listed on DSE

Financial structure decisions have strategic role on owners’ welfare and also on survival of companies. Every company is supposed to maintain its optimum capital structure, although its measurement is very difficult. Based on secondary data the study intends to analyze and compare the impact of financial leverage on cash flow ratio of Multinational Companies (MNCs) and domestic companies listed on the Dhaka Stock Exchange (DSE) over a period of 20 years starting from 1996 to 2015. A total of 14 companies consisting of seven MNCs and equal number domestic companies were selected as sample from six industrial sectors. The explained variable of the study was Cash flow ratio (CFR), whereas the explanatory variables were indicators of financial leverage such as: Debt to assets ratio (TD/TA), Debt to equity ratio (TD/SE) and Debt to capital employed ratio (TD/CE). The study has found that Debt to asset ratio is positively related but Debt to equity ratio is negatively related with CFR in domestic companies. A mere 1% increase in Debt to asset ratio and Debt to equity ratio result in 0.501% increase and 0.03% decrease of CFR respectively. In MNCs, unlike domestic companies, Debt to asset ratio is negatively related, whereas Debt to equity ratio is positively related with CFR. For 1% increase of Debt to equity ratio, CFR decrease by 1.5% and vice-versa. On the other hand, for 1% increase in Debt to equity ratio, CFR increases by 0.0039% and vice-versa. The study concludes that financial leverage ratios have significant influence on cash flows of domestic companies but not on cash flows of MNCs in Bangladesh.

Determinant of Financial Structure Decision in Small and Medium Enterprises: A Pilot Study of Selected Registered Companies in Nigeria

In the world of corporate finance, financial structure decision of firms remains one of the most critical. Previous empirical studies have identified factors like size, asset structure, tangibility, profitability, risk, growth and market-to-book ratio all of which have been exhausted in literature as determinants of financial structure of firms. However, research on verifying the existence of these factors in small size firms has been minimal. This study presents a sample of SMEs in Nigeria which serves as a pilot survey for the test of the existence and strength of the identified determinant factors of financial structure. A panel data of ten firms for five years was analyzed using the pooled OLS. The result reveals profitability and size as the only determinant factor for firms under study. This shows a deviation from other studies on small firms in developing economies, the reason which may be country specific. The study provides a starting point for a more inclusive and comprehensive study on financial structure decisions of SMEs in Nigeria.

The Relationship between Financial Flexibility and Capital Structure Decisions

Making decisions about capital structure is one of the most challenging and problematic issues companies face and thereby it is the most crucial decisions companies have to make for their survival. The aim of this study was to investigate the relationship between financial flexibility and capital structure decisions in accepted companies in Tehran Stock Exchange with using Falkner and Wang Model. Results of testing hypothesis which are based on a sample- that is consisted of 82 firms for a period of five years from 2006 to 2011- using multivariate linear regression models as well as panel data method, implied that marginal value of cash is negative in terms of market, i.e. the market is not willing to raise funds and will not evaluate this increase to be positive in funds. Furthermore, findings represent that there is no significant relationship between marginal value of financial flexibility and capital structure decisions of firms and firms would not pay attention to financial flexibility level in their decisions regarding increasing or decreasing debts, which in long term would result in loosing financial flexibility as well as profitable investment opportunities.

Impact of Financial Structure on Firm’s Performance: A Study of Pakistan’s Chemical Sector

Firms have choices to raise their capital by various means including internally generated fund, new equity issue or various types of debt. The decision to select sources of finance is referred to as financial structure decision. Financial structure decision is very critical decision with great implications for the firm's performance. Theories proposed by the researchers to explain the financing decisions have always been subject of considerable debate. This study imperially explores the impact of debt financing on the profitability of the firms in Chemical Sector of Pakistan. The rationale behind the industry specific analysis is the fact that exogenous variables appear to force firms in the same industry in similar fashion. Therefore firms within same industry construct same type of capital structure. OLS has been applied to test the hypothesized relationship. Different perspectives have evolved over the period of time to explore the critical but very complex issue of financial structure decisions. Financial structure decisions base on many psychological and situational factors especially in developing countries like Pakistan. Financial Environment has great impact on financing decisions, the role of financial institutions is critical for capital restructuring decisions. In developing countries like Pakistan Financial Markets are incomplete and are unable to meet the financing requirements of the industry. Therefore, major source of debt financing for Pakistani companies is various types of loans with different maturities. Our results are not similar to the other studies conducted on capital structure. In oppose to literature our results reveal significant negative relationship between long term Debt and firms' performance and significant positive relationship between short term debt and the profitability.

The impact of financial structure on profitability of firms: a cross-sectional industry analysis of Nigerian quoted firms

This study empirically examines the impact of financial structure decision on the profitability of Nigerian quoted firms. Cross-sectional time series data of 72 Nigerian quoted firms were collated and analysed. Two hypotheses were proposed for the study, while the ordinary least square (OLS), fixed-effects (FE) and the gerneralised least square (GLS) regression were used on pooled and panel data to estimate the relationship between financial leverage and the different measures of profitability in Nigeria quoted firms. In determining the extent of the influence of leverage on the dependent variables, most of the industrial groups showed evidence of sizable positive influence of leverage on profitability and earnings yield. This was significant and robust with all the measures of leverage.

Financial Flexibility and Capital Structure Decision

We examine how the demand for financial flexibility affects firms' capital structure decisions. We find that: developing firms that are in the phase of financial flexibility building have low leverage; growth firms that are in the phase of utilizing financial flexibility to fund growth opportunities have high leverage; finally, mature firms that are in the phase of recharging financial flexibility have moderate leverage. The financial flexibility framework provides explanations for several capital structure puzzles raised in the literature, suggesting that financial flexibility can be an important missing link in existing capital structure theories.