Financing Behavior Of Firms Research Articles

Cost of Capital: Literatures Review about Calculation Methods and Influencing Factors

As one of the core concepts of corporate financial management, on the one hand, cost of capital is the cost of corporate financing and related to the financing behavior of firms, on the other hand, cost of capital is the necessary rate of return for investors, which decides investment activities. How to calculate cost of capital? What are the influencing factors for cost of capital? These two questions will play a fundamental role in judging whether cost of capital is high in China and promoting the cost reduction task proposed by the current supply-side reform.

Corporate Leverage: Structural Equations Framework in an Emerging Economy

Purpose The purpose of this paper is to investigate the financing behavior of firms in Pakistan. Previous studies have investigated corporate leverage determinants within any particular industry, such as manufacturing industry, textiles industry, etc., with varying results. This is one of the few studies that examine the determinants of leveraging attitude of firms across industrial sectors for textiles, large industries, and small industries. Thus, the study provides an insight into the general debt financing behavior in Pakistan and allows a basis for comparison of the leveraging decisions across industries. Design/methodology/approach The study employs the structural equations methodology which captures the endogenous relationship between profitability and leverage. Thereby, eliminating bias and providing more accurate results. Findings The findings suggest that the leveraging decisions differ across sectors and that each industry has its own distinctive debt requirements/characteristics. The authors conclude that a singular approach taken by investors and analysts would provide inaccurate assessment of firms’ debt financing policies and strategies. Research limitations/implications There is a limitation on data availability in emerging countries, and a larger sample would have provided more robust results. Therefore, the study has only taken three sector sub-divisions, and more industry categories would have provided in-depth insights into the industry-wise leveraging behavior. Practical implications This is the first study to suggest that the borrowing attitude of firms differ across industries and vary due to their specific needs. This has implications for government regulators, investors, and creditors in providing a more customized approach to analyzing and meeting the external financing needs of firms. Originality/value This study is the first to use simultaneous equations model to eliminate bias that is prevalent in similar studies in Pakistan. The SEM captures the endogenous relationship between profitability and leverage. The research provides important information about the underlying financing behavior across industries, which has largely been ignored.

Financing behavior of firms in tranquil and crisis period: Evidence from China

AbstractThis study investigates the financing behavior of Chinese firms in tranquil and crisis situation over the period 2002–2014. We divide the sample into three sub-periods; pre-crisis, during-crisis, and post-crisis. The results indicate some noteworthy findings as this study incorporates firm and country-level factors. We find that the firms’ financing choice depends on the market conditions. The results show that Chinese firms have significantly decreased their dependence on leverage after the eruption of global financial crisis. Furthermore, we find that financial crisis of 2007–2008 has significantly affected the explanatory power of all factors. Moreover, profitability, size, and liquidity are important factors determining capital structure of the firm in financial crisis period.

Inequality and the Financial System— The Case of Germany

Income inequality is rising in Germany. This is true for both functional as well as personal income distribution. After reunification in 1990, a general increase in inequality can be observed. This trend becomes particularly pronounced in the 2000s. In the literature on financialisation a link between the developments in the financial sector, the financing behaviour of firms, and income distribution is established. Also, in the varieties of capitalism literature a connection between the prevailing institutions, among them the financial institutions, and the tendency of an economy towards higher or lower inequality is made. This study attempts to investigate if changes in the financial sphere may have caused the higher inequality in Germany. There are different ways in which the financial sector could have contributed to the increased inequality. Growth of the financial sector or large increases in incomes paid in this sector could lead to higher inequality directly. Alternatively, different behaviour of financial institutions and new financial actors could affect distribution in the non-financial sector so that the financial sector indirectly affects inequality.

The financing behaviour of firms and financial crisis

Purpose – The purpose of this paper is to contribute to the capital structure literature by examining the determinants of capital structure from the context of South Africa and to provide evidence of the effects of the 2007/2008 global financial crisis on firm-level determinants of debt-equity choice. Design/methodology/approach – This paper begins by embarking on an extensive review of literature on extant empirical research on capital structure. The panel econometric technique is further adopted to examine firm-level determinants of capital structure and also the impact of 2007/2008 financial crisis. Findings – The findings of the paper suggest that theories of capital structure underpinning debt-equity choice of firms in developed economies are also applicable in the South African context. The authors also find a strong evidence of the effects of the financial crisis on the capital structure of firms in South Africa. Practical implications – This paper serves as springboard on which further research can be grounded and also highlights the interaction between the South African economy and the global economy. Originality/value – The paper provides a fresh evidence on the determinants of capital structure from the Sub-Saharan African context and to the authors’ knowledge, this is the first paper that examines the effects of the 2007/2008 financial crisis on capital structure of firms in South Africa.

Determinants of Capital Structure: Empirical Evidence from Pakistan

This study investigates capital structure of nonfinancial firms registered on Karachi Stock Exchange (Pakistan) from 2003 to 2008 to find which independent variables determine the capital structure of Pakistani firms. We find statistically significant coefficients for profitability, size, tangibility, growth, dividend and inflation. The negative relationships between profitability and leverage; positive relationships between growth and long term debt and dividend and total debt of firms confirm the presence of pecking order theory in determining the financing behavior of Pakistani firms. The strong positive relationships between tangibility and leverage and size and leverage support the theortical predictions of trade-off theory. The positive relationship between expected future inflation and current borrowing supports market timing theory. The research finds significant change in financing behavior of firms across industries. We find partially different results from other studies in Pakistan as well as in developing countries. Conclusion from perior research from developed world is also valid in Pakistan.

A Study of Financing Behavior of Japanese Firms with Firm-Level Data from Corporate Enterprise Quarterly Statistics - 1994-2009: Introduction and Summary

From early spring to late summer in 2010 I investigated the financing behavior of Japanese firms with over 10 million in paid-in capital, using firm-level financial data from Hojin Kigyo Tokei Kiho (Corporate Enterprise Quarterly Statistics) of the Ministry of Finance. “A Study of Financing Behavior of Japanese Firms with Firm-Level Data from Corporate Enterprise Quarterly Statistics - 1994~2009”, divided into five discussion papers, constitutes the report. This Introduction and Summary forms the first of the five papers. The other four papers are:[I]. The Low “Bank-Dependence Ratio” and the Further Increase in the “Independence of Firms from Banks”.[II]. The Reality of Short-term Shocks like the “Credit Crunch” of 1997-1999 and the “Financial Crisis” of 2007, and the Effectiveness of “Emergency” Economic Measures – A Follow-up to Miwa [2008].[III]. The Reality of Trade Credit and its Link to Bank Borrowing and Inventory: (1) Overall Discussion and Preliminary Investigation.[IV]. The Reality of Trade Credit and its Link to Bank Borrowing and Inventory: (2) Correlation Coefficients and Multiple Regressions. This Statistics collects quarterly financial data from about 20,000 randomly sampled non-financial firms in 5 size-categories, most of which are unlisted small businesses. Using firm-level data in 1994-2009, I investigate the financing behavior of the firms in Japan during “the Lost Two Decades.” I explore the reality of the “Credit Crunch” of 1997-1999 and the “Financial Crisis” of 2007, the effectiveness of the policy measures adopted, and the effect of the “zero-interest-rate, quantity easing” monetary policy. The most surprising finding is that the ratio of zero-short-term-borrowing was the highest, 50% in 1998 and two-thirds in 2008, among the smallest firms. The average (short-term bank borrowing)/(total asset) ratio was also lowest among this group. This “Independence from Banks” is a fundamental challenge to the basic premise of the conventional wisdom about the Japanese financial market and corporate finance.

Financial constraints and security issuance

We examine the security issuance decisions of financially constrained firms. Since constrained firms are more susceptible to revenue management problems, our study sheds light on the financing behaviour of firms with revenue-related issues. Our results show that financially constrained firms obtain higher announcement returns than unconstrained firms when they issue bonds whereas the returns are similar when they issue stocks. Also, firms that face higher financial constraints are more likely to issue bonds than common stocks. We find that financially constrained firms assign different weights to the factors that affect the debt-equity choice than the weights assigned by unconstrained firms.

The impact of monetary policy on the financing behaviour of firms in the Euro area and the UK

According to the ‘broad credit view’ bank-dependent firms are more strongly affected by monetary contractions than firms with access to non-bank forms of external finance. Within the credit view the bank lending channel focuses on the special role of bank loans, and predicts that monetary contractions reduce loan supply to firms facing information problems. However, the ‘relationship lending channel’ argues that, especially in bank-based economies, bank-dependent firms have close ties with banks, which may reduce the sensitivity of their use of bank debt to monetary shocks. The sensitivity of corporate debt structures to changes in the monetary policy stance is analysed using a sample of 22,000 firms in the Euro area and the UK. Evidence is found for the credit view, the relationship lending channel, but not for the bank lending channel.

Corporate Fraud and Real Investment

This paper studies the real investment and financing behavior of firms around the period of fraud identified in SEC Accounting and Auditing Enforcement Releases. In the pre-fraud period, the typical fraudulent firm has a higher valuation, invests more and exhibits higher Q-sensitivity of investment than industry peers. The fraud period, by contrast, is characterized by significant drops in valuation and investment. I find no support for the hypothesis that fraudulent firms waste real resources by overinvesting during periods of fraud to signal value. Fraud appears to be an attempt to cover up bad investments made in response to the market's high valuation in the pre-fraud period.

Buffer stock money and pecking order financing: Results from an interview study among Dutch firms

In the eighties The Netherlands has recorded a marked increase in the quantity of money. This development was notably attended by a rise in money balances of nonfinancial firms. In an attempt to trace the causes of this development, the Dutch central bank conducted a large-scale survey in 1991. The results corroborate previous econometric research on disaggregate Dutch money demand functions which identifies buffering of profits as the main cause of the increased money holdings by firms. The main contribution of the survey is that it reveals pecking order financing behaviour of firms as an important microeconomic reason for this buffer stock mechanism in firms' money holdings.