Leverage Ratio Of Firms Research Articles

The signaling effect of local government debt: Evidence from China

We conduct an empirical analysis of the influence of local government debt on the deleveraging behavior of listed firms in China between 2015 and 2021. In contrast to the findings in existing literature, we discover that the expansion of local government debt positively affects the growth of firm leverage ratios, which we term the signaling effect. The signaling effect is more pronounced in regions with high fiscal transparency, in firms that are not state-owned, not over-leveraged, less financially constrained, and non-real estate industry. We further explore the economic consequences of signaling effect on both firm performance and the local economy. We observe that in the short run, the signaling effect improves firm value and stimulates economic growth, but over the long term, its impact turns negative. Our main results are robust after addressing potential concerns related to endogeneity.

Employment Decline During the Great Recession: the Role of Firm Size Distribution

Abstract Over 8,000,000 jobs were lost in the Great Recession, creating widespread economic hardship. This paper documents a novel and robust empirical regularity that highly concentrated local labour markets experienced larger employment declines during the Great Recession. Through setting up a model with heterogeneous firms facing idiosyncratic productivity shocks, I show that firm size distribution summarised by the Herfindahl-Hirschman index plays a crucial role in the reallocation of workers, and it magnifies negative idiosyncratic shocks and attenuates positive ones. I undertake a series of empirical tests to rule out alternative explanations, and show that large employment losses in concentrated labour markets are not driven by highly concentrated industry locations being hit harder during the Great Recession, having smaller labour markets or higher firm leverage ratios. The effect of concentration level is larger in sectors with higher labour supply elasticity, or a higher variance of productivity shocks, and rises during the Great Recession compared to other periods, consistent with my model’s predictions.

The economic consequences of IFRS 16 adoption: the role of gearing restriction in debt covenants

PurposeThis study aims to examine the economic consequences of, and managerial behaviour in response to, the introduction of IFRS 16 Leases. It extends the debt covenant hypothesis to explain why firms reduce the use of operating leases with the introduction.Design/methodology/approachThis study develops a model, based on operating leases as an alternative financing source and the determinants of debt policy, to estimate the effects of gearing on operating lease intensity. High gearing is a proxy to probably closer to the violation of, or expected to violate, the gearing restriction in debt covenants given the retrospective capitalisation of operating leases, when IFRS 16 takes effect.FindingsThis study finds that operating lease intensity fell between 2011 (immediately after the first exposure draft leading to IFRS 16) and 2018 (immediately prior to the effective date of IFRS 16). It also finds that gearing affects changes in operating lease intensity over 2011 and 2018, consistent with the debt covenant hypothesis.Research limitations/implicationsThe introduction of IFRS 16 is a natural experiment with unique characteristics (the active lobbying behaviour, ex ante evidence on adverse economic consequences, a prolonged standard-setting period, etc.) valuable for accounting research.Practical implicationsA showcase about the relevance of financial reporting for contracting interests of firms and managers and a good reference for accounting standard setters in considering and managing the economic consequences of proposed accounting standards.Originality/valueThis study adds to the limited research on the consequences of accounting standards and documents the ex-post impact on firm leverage ratios and the behavioural aspects of reporting entities.

Leverage and the global supply chain

This study examines the effects of global supply chain pressures on firm leverage ratios. I find that firms have historically responded to global supply pressures by reducing the total debt ratio. However, during the extreme pressures of the COVID-19 pandemic, firms sharply increased short-term debt values while also reducing long-term debt. These results suggest that firms respond to moderate supply chain pressures by increasing their debt capacity, which is then utilized during unanticipated acute scenarios. Such findings emphasize the importance of global supply chain conditions as a discrete macroeconomic determinant of corporate policy.

Brand equity and corporate debt structure

AbstractWe use the firm's stock of trademarks and their ages to compute proxies for brand equity. We find that firms with more brand equity have lower equity and asset volatility and higher cash flows. Although suggestive of greater debt capacity, we find that firms with high brand equity use less debt. Further, brand equity has no influence on debt maturity. We provide evidence that the relation between brand equity and leverage is causal, using the enactment of the Federal Trademark Dilution Act in 1996, which exogenously increased the value of famous brands and significantly decreased the leverage ratio of firms with famous brands. This negative effect on leverage is weaker for firms with high business risk and low information asymmetry, and stronger for firms with collateralized trademarks. We argue that the negative effect of brand equity on leverage is more consistent with a pecking order mechanism than with a limited contractability mechanism.

Does Media Attention Lower Debt Financing? International Evidence

ABSTRACT This article examines the association between media attention and debt financing through a number of channels associated with information asymmetry reduction and whether this relationship changes with cross-country institutional environment characteristics. Focusing on a comprehensive international dataset, we find that overall media coverage is negatively related to firm leverage levels. Media-focused variables directly associated with information asymmetry levels, including press-initiated news, non-financial news, and the extent of positive news sentiment, are also negatively related to firm leverage ratios. Furthermore, the country-level institutional environment provided a substituting rather than legitimizing influence on the relationship between media news coverage and firm financing decision-making.

Determinants of capital structure for firms in an Islamic equity index: comparing developed and developing countries

PurposeThe paper aims to identify the differences between developed and developing country firms with respect to firm-specific and country-level determinants of their capital structure. For this purpose, all constituent firms in one of the oldest Islamic equity indices, Dow Jones Islamic Market World Index (DJIM), are considered and the Muslim-majority status of each firm's domicile country is recognized.Design/methodology/approachThe study employs Hausman–Taylor random effects regression with endogenous covariates to explain the debt ratios of firms in DJIM by separating them into developed and developing country subsamples in an unbalanced panel data setting. Developing country subsample is further split into two based on the Muslim-majority status of each firm's domicile country.FindingsConsistent with the previous literature, this study finds that firm-specific characteristics are the main determinants of their capital structure. Additionally, the paper shows that country-level characteristics have an impact on the debt ratio, however, the types of factors vary across developed and developing countries. Debt ratios in developing country firms are lower than those in developed country firms, largely due to the significantly smaller leverage ratios of firms in Muslim-majority countries. Although the debt ratios of DJIM firms are higher in “non-Muslim” countries, the set of firm-level capital structure determinants are not statistically explained by operating in a “Muslim” country. The study also documents that, before the global financial crisis of 2008, companies in developing countries have gradually become less leveraged worldwide.Originality/valueThis paper provides a new perspective into the differences between developed and developing country firms' capital structures by focusing on a relatively homogeneous data set restricted by leverage screening rules of an Islamic equity index and recognizing the Muslim-majority status of each firm's domicile country.

Structural design and performance analysis of China’s Local Government Financing Vehicles

In this paper, we investigate the reasons for the establishment and operation models of China’s Local Government Financing Vehicles (LGFVs). We also outline the current literature on the structural arrangement and the developments of LGFVs. Moreover, we employ the empirical analysis to examine the driving factors of the financial performance of LGFVs. Using 1,042 LGFVs that issued debt securities during the period 2011–2016, we find that the financial performance of LGFVs is positively associated with local tax revenues, local education levels, local saving deposits, and firm size but negatively associated with local government spending and firm leverage ratios. Based on our empirical findings, we finally propose policy recommendations for the establishment of relevant investment and financing platforms.

Employment Decline during the Great Recession: The Role of Firm Size Distribution

Over eight million jobs were lost in the Great Recession, creating widespread economic hardship. This paper documents a novel and robust empirical regularity, that highly concentrated local labor markets experienced larger employment declines during the Great Recession. I argue that pre-crisis concentration level was instrumental in modulating the transmission of negative shocks using a model with heterogeneous firms where recessions arise as an aggregate consequence of idiosyncratic firm shocks. My model predicts a larger decline in expected employment when the market has a higher initial concentration level. Relatively small firms are unable to absorb the large number of workers that get displaced when relatively big firms are hit by idiosyncratic shocks, as the absorption is limited by decreasing returns to scale (at the firm) and an upward-sloping labor supply (in the local labor market). I undertake a series of empirical tests to rule out alternative explanations, and show that large employment losses in concentrated labor markets are not driven by highly concentrated industry-locations being hit harder during the Great Recession, having thinner labor markets, having more large firms, or having higher firm leverage ratios.

Effect of Firms’ Characteristics on Timeliness of Financial Reports of Quoted Insurance Companies in Nigeria

Financial information needs to be made available to users as rapidly as possible to make corporate financial statement information relevant for decision making process. Timely reporting on financial statements is necessary for healthy financial markets. Against this backdrop, this study investigates the effect of firm characteristics on timeliness of financial reports on Nigerian insurance companies from 2008-2017. The study adopts ex-post facto research design and the data were sourced from the financial statements of the sampled companies. The dependent variable was measured by audit report delay while the independent variable was proxied by board size, firm leverage ratio and firm size. The analysis was conducted with the aid of STATA 12 software. The data were analysed by Pairwise correlation, descriptive statistics and ordinary least square (OLS) multiple regression technique. The result reveals that board size has a significant negative effect on audit report delay while firm size has a significant negative effect on audit report delay. The result further reveals that firm leverage has an insignificant negative effect on audit report delay. The study recommends among other things that management of large companies should always ensure that highly qualified personnel are placed at the final accounts section of the parent company and that compilation of financial reports should be gradual and not only towards the accounting year end to avoid unnecessary delay in publication of financial statements. Keywords: Timelines, Financial report, firm size and firm leverage DOI : 10.7176/RJFA/10-24-06 Publication date: December 31 st 2019

Is the financial accelerator story, empirically relevant for the determinants of the interest rate spread?

One implication of financial accelerator model, is that leverage of firms should be an important determinant of the interest rate spreads. In this paper we search for empirical evidence of the operation of such accelerator, using a detailed bank supervisory data set from the Guatemalan banking system. Using a Panel-VAR approach, and controlling for the usual determinants of interest rate spreads, we explore if the riskiness of firms and banks can still convey some explanatory power over the interest rate spread, as the financial accelerator hypothesis would suggest. From the ‘loan applicant perspective’, we evaluate the extent to which leverage ratios of firms can explain the spreads between the policy rate and four loan categories. Additionally, we explore the operation of the financial accelerator from the ‘loan granter perspective’, evaluating how much of the spread between different passive interest rates and the policy rate can be explained by a measure of the leverage of banks. Results show the existence of a financial accelerator mechanism operating in the Guatemalan banking system, from the loan applicant perspective. From the loan granter perspective, evidence seems weak, but sensible.

Does earnings management matter for firm leverage? An international analysis

ABSTRACT This paper examines the relation between corporate information environment and capital structure decisions, and whether this association changes with cross-country institutional environments. Using earnings management as a measure of the corporate information environment, we find that firms with higher earnings management activities have greater firm leverage ratios. We further document that the effect of earnings management on leverage is more pronounced in countries with weaker institutional environments. Overall, our study adds to the strand of research on imperfect factor markets and verifies the influence of information asymmetry on debt financing choices in a cross-country setting.

Financial development, financial constraint, and firm investment: Evidence from Thailand

This paper examines the effect of firm financial constraint and financial development on firm investment using data from non-financial companies in Thailand from 1999Q1 to 2015Q4. The empirical results showed a significant effect of firm financial constraint on their investment. The cash flow of firms had a positive effect on firm investment, while the leverage ratio of firms had a negative effect. Financial development also weakened the effect of firm financial constraint on firm investment. These effects were considerably higher in more financially constrained firms than less constrained ones.

Employment Protection and SME Capital Structure Decisions

This study examines the effect of employment protection (EP) on the capital structure of SMEs. We argue that EP is linked to both the level of leverage and leverage adjustments because of its impact on financial distress costs and a firm's operational leverage. Data on employment contract types allow us to compose company specific measures of exposure to EP using a panel data set of 14,858 Belgian SMEs between 2000 and 2012. Our results show that the leverage ratio of firms is higher and that firms are more likely to adjust leverage levels when they are subject to fewer EP obligations.

THE DEBT-EQUITY CHOICE OF JAPANESE FIRMS

Prior studies on the debt-equity choice of firms focus on capital market oriented economies. This paper examines whether firms in Japan, the world’s largest bank-oriented economy, adjust their debt-equity choice towards the target. We find that the leverage ratios of Japanese firms do adjust slowly towards their target levels. The adjustment speed has dwindled after the Asian Financial Crisis. In contrast to existing literature, we show that an increase in tangible assets reduces the leverage ratio of firms in Japan. It is also found that the effect of financial deficit is persistent while the market timing effect is not.Keywords: Debt-equity Choice; Pecking Order Theory; Market Timing Theory; Trade-Off Theory.

Banks' Risk Taking Behavior and the Optimization Monetary Policy

This study analyzes the behavior of risk taking on economic agents such as banks, households, and firms as a repond of monetary policy and macroprudential choices in Indonesia. The behavior of economic agents modeled in a DSGE models. In the model, the credit risk is modeled endogenously. Credit risk is a function of household and firm leverage ratio, bank leverage ratio, property market and general economy condition. Moreover, there are two types of bank in assessing the risks of credit. The results show that, endogenous credit risk, has an impact on the deepen procyclicality in credit. Furthermore, this research model contributes to a deeper understanding of the prudential policy framework. In the event of risk taking, analysis optimal policy responses using the loss function of central banks. The policy of lower interest rates should be combined with a loan to value ratio policy and increase CAR to generate the smallest losses

Capital Structure Determinants of Small and Medium Capitalised Firms

This study investigates first, the determinants of the capital structure and second, the speed of adjustment of capital structure of small and medium capitalised firms in Europe before and during the sovereign debt crisis period. The sample includes 306 firms from 10 European countries comprising 2,142 firm-year observations for the period 2006 to 2013. After controlling the influence of macroeconomic factors, industry-level and firm-level on debt levels, we report that small and medium capitalised firms have adjusted their capital structure during the sovereign debt crisis period and the speed of adjustment was quicker in non-stressed countries compared to the firms in the stressed countries. Our results show that small and medium capitalised firms from non-stressed countries have reduced leverage ratios, whilst the leverage ratios of firms in stressed countries have increased during the crisis period. Our findings suggest that determinants of leverage for small and medium capitalised firms in Europe are; size and asset tangibility. Furthermore, industry-level determinant is industry median leverage and macroeconomic-level determinates are GDP growth rate and inflation rate. Our findings also show that the quality of countries’ institutional factors have significantly influenced the speed of adjustment of leverage of small and medium capitalised firms during the crisis period. The policy implications of the findings indicate that improving country’s institutional environment will ease small and medium capitalised firms’ financial difficulties, which in turn facilitate their economic performance.

The Composite Effect of Stock Markets, Bank Stability and Country-Level Institutional Factors on Leverage

This paper analyzes the relation between firms' leverage, financial development and firm-level characteristics. I find financial development, measured as stock market turnover ratio or stock market capitalization, is negatively related to firm leverage while financial development, measured as the stability of a country's commercial banking system, is positively related to firm leverage. As stock markets become more developed, leverage decreases. This decrease is more pronounced for smaller firms as compared to larger firms. As banks become more stable, leverage increases and this increase is more pronounced for larger firms as compared to smaller firms. I also find that leverage is lower for firms in politically unstable and more corrupt countries. Conversely, firms are more levered in countries with stronger protection of creditor rights. A higher restrictiveness on foreign direct investment significantly increases leverage ratios of firms.

Importance of Judicial Efficiency in Capital Structure Decisions of Small Firms: Evidence from Pakistan

Empirical evidence to identify factors that are responsible for the sluggish development of bond and capital markets in Pakistan remains scanty. This paper is a step forward in this direction. Specifically, this paper draws on the recent developments in the area of law and finance to formulate several propositions on how judicial efficiency can have a differential impact on corporate capital structures of small and large firms. These propositions are tested using data of 370 firms listed at the Karachi Stock Exchange (KSE) and 27 districts high courts of Pakistan. The results indicate that leverage ratio decreases, when judicial efficiency decreases; however, this relationship is not statistically significant. This is due to the composition effect. Allowing judicial efficiency to interact with the included explanatory variables, the results show that worsening judicial efficiency increases leverage ratios of large firms and decreases leverage ratios of small firms, which is an indication of the fact that creditors shift credit away from small firms to large firms in the presence of inefficient judicial system. Results also indicate that the effect of inefficient courts is greater on leverage ratios of firms that have fewer tangible assets as percentage of total assets than on leverage ratios of firms that have more tangible assets. The results indicate that under inefficient judicial system creditors reduce their lending to small firms and firms with little collateral and redistribute the credit to large firms. This is why judicial inefficiency does not change volume of credit, but changes distribution of the credit. These results highlight the importance of judicial efficiency for small firms in the determination of their capital structures. JEL Classification: G10, G21, G32 Keywords: Judicial Efficiency, Leverage, KSE, Capital Market Development, Law and Finance.

A stock-flow-fund ecological macroeconomic model

This paper develops a stock-flow-fund ecological macroeconomic model that combines the stock-flow consistent approach of Godley and Lavoie with the flow-fund model of Georgescu-Roegen. The model has the following key features. First, monetary and physical stocks and flows are explicitly formalised taking into account the accounting principles and the laws of thermodynamics. Second, Georgescu-Roegen's distinction between stock-flow and fund-service resources is adopted. Third, output is demand-determined but supply constraints might arise either due to environmental damages or due to the exhaustion of natural resources. Fourth, climate change influences directly the components of aggregate demand. Fifth, finance affects macroeconomic activity and the materialisation of investment plans that determine ecological efficiency. The model is calibrated using global data. Simulations are conducted to investigate the trajectories of key environmental, macroeconomic and financial variables under (i) different assumptions about the sensitivity of economic activity to the leverage ratio of firms and (ii) different types of green finance policies.