Level Of Growth Opportunities Research Articles

A Longitudinal Study of Sales-Based Investment and Leverage Decisions

The paper develops a system-based approach to investigate the dynamic adjustment of debt structure and investment policies in a context of risky sales. Empirical results were obtained through a panel data set of US DJ-IA firms/constituents index firms with different sectors. The analysis supports that environmental change does not affect equally the different industry since operating leverage differs among industries and so the sensitivity to sales variance. Including adjusted-specific variance, we find that there is no monotonic relation between leverage, sales and investment. The firm may choose a low debt level in response to high sales variance but high leverage to attenuate the negative relation between sales variance and current level of investment. We further find that while the overall effect of debt maturity on leverage is unaffected by the level of growth opportunities, the shorter the maturity of debt is the smaller the direct effect of sales variance on investment.

The Differential Impact of Leverage on Firm Investment: Evidence From Advanced and Developing Countries

This paper examines the differential impact of leverage on investment across firms with varying levels of growth opportunities in both advanced and developing countries. Contradictory research findings on the strength of this relationship for firms with low or high growth opportunities are reported; where even divergent results in previous studies using the same country for analysis are found. By using a multi-country framework, we confirm a negative impact of leverage on firm investment, where a stronger negative impact is consistently found for firms with low growth opportunities in both advanced and developing countries.

Market Timing, Growth Opportunities and Capital Structure

We examine the impact of market timing on capital structure via a measure of mispricing that is not contaminated by the level of growth opportunities. Using a decomposition of the market-to-book ratio developed by Rhodes-Kropf, Robinson and Viswanathan (2005), we show that market timing has a significant persistent impact on current leverage. Growth prospects also substantially impact firms’ leverage, consistent with traditional capital structure theories. These findings reconcile Baker and Wurgler (2002) results with subsequent studies [e.g., Kayhan and Titman (2007), Hovakimian (2006)] challenging the ability of the historical market to book ratio to adequatetly assess historical market timing activities.

The determinants of capital structure: The case of long-term debt constraint for Jordanian firms

This paper contributes to the capital structure literature by investigating the determinants of capital structure of Jordanian companies with the constraint of inadequate long-term debt as their source of financing and regional risk. We firstly document that Jordanian companies mostly depend on short-term debt, as a result of the banking credit policy that promotes short-term debt. Our results suggest that the level of gearing in Jordanian firms is positively related to size, tangibility, and earning volatility, and negatively correlated to profitability, the level of growth opportunities, liquidity and stock market activities. The level of gearing measured by short-term debt is, however, negatively correlated to tangibility. The Gulf Crisis between 1990 and 1991 is also found to have a significant but positive impact on Jordanian corporate leverage. We conclude that the capital structure decision with inadequate long-term debt access is influenced more strongly by factors such as Stock‟s Market activity (SMA).

Testing for inconsistencies in the estimation of UK capital structure determinants

This article analyses the determinants of the capital structure of 1054 UK companies from 1991 to 1997, and the extent to which the influence of these determinants are affected by time-invariant firm-specific heterogeneity. Comparing the results of pooled OLS and fixed effects panel estimation, significant differences in the results are found. While the OLS results are generally consistent with prior literature, the results of our fixed effects panel estimation contradict many of the traditional theories of the determinants of corporate financial structure. This suggests that results of traditional studies may be biased owing to a failure to control for firm-specific, time-invariant heterogeneity. The results of the fixed effects panel estimation find larger companies to have higher levels of both long-term and short-term debt than do smaller firms, profitability to be negatively correlated with the level of gearing, although profitable firms tend to have more short-term bank borrowing than less profitable firms, and tangibility to positively influence the level of short-term bank borrowing, as well as all long-term debt elements. However, the level of growth opportunities appears to have little influence on the level of gearing, other than short-term bank borrowing, where a significant negative relationship is observed.

Capital structure and its determinants in the UK - a decompositional analysis

Prior research on capital structure by Rajan and Zingales (1995) suggests that the level of gearing in UK companies is positively related to size and tangibility, and negatively correlated with profitability and the level of growth opportunities. However, as argued by Harris and Raviv (1991), ‘The interpretation of results must be tempered by an awareness of the difficulties involved in measuring both leverage and the explanatory variables of interest’. In this study the focus is on the difficulties of measuring gearing, and the sensitivity of Rajan and Zingales' results to variations in gearing measures are tested. Based on an analysis of the capital structure of 822 UK companies, Rajan and Zingales' results are found to be highly definitional-dependent. The determinants of gearing appear to vary significantly, depending upon which component of debt is being analysed. In particular, significant differences are found in the determinants of long- and short-term forms of debt. Given that trade credit and eq...

On the Determinants and Dynamics of UK Capital Structure

In this paper we analyse the determinants of the capital structure for a panel of 1,054 listed UK companies from 1991 to 1997, giving a total of 6,001 firm-year observations. We find significant differences in the results depending on whether the estimation is undertaken using OLS or panel estimation, suggesting OLS results are inconsistent due to their failure to take into account firm effects. We extend the fixed effects panel estimation by incorporating time interactions with the intercept and each of the independent variables. Analysis of the dynamics in the panel reveals significant changes over time in the relationship between gearing and the level of growth opportunities, company size, profitability and tangibility. Over the period of analysis, there is a trend for larger companies to use more long-term securitised debt, with smaller companies making increasing use of long-term bank borrowing and trade credit. Companies with high levels of growth opportunities are in general reducing their level of indebtedness, particularly at short maturities. During the early years of the analysis, there is a strong negative relationship between gearing and profitability. However, there appears to be a significant shift during the 1990s, with short-term bank borrowing and trade credit becoming significantly positively related to profitability by the mid 1990s. Our results suggest the nature of the credit market in the UK has changed significantly during the 1990s.

Dynamics in the Determinants of Capital Structure in the UK

In this paper we analyse the dynamics in the capital structure for UK companies from 1991 to 1997. We observe significant changes in the relative importance of the various debt elements over time, as well as changes in the relationship between gearing and the level of growth opportunities, company size, profitability and tangibility. Our results suggest that the nature of the credit market in the UK has changed significantly during the 1990s, with large companies using less bank finance, and banks increasingly lending to smaller firms. At the same time, bank debt appears to have become more closely related to corporate profitability and collateral values.

Capital Structure and its Determinants in the UK - A Decompositional Analysis

Prior research on capital structure by Rajan and Zingales (1995) suggests that the level of gearing in UK companies is positively related to size and tangibility, and negatively correlated with profitability and the level of growth opportunities. However, as argued by Harris and Raviv (1991), interpretation of results must be tempered by an awareness of the difficulties involved in measuring both leverage and the explanatory variables of interest. In this paper we focus on the difficulties of measuring gearing, and test the sensitivity of Rajan and Zingales' results to variations in gearing measures. Based on an analysis of the capital structure of 822 UK companies, we find Rajan and Zingales' results to be highly definitional-dependent. The determinants of gearing appear to vary significantly, depending upon which component of debt is being analysed. In particular, we find significant differences in the determinants of long and short-term forms of debt. Given that trade credit and equivalent, on average, accounts for more than 62 percent of total debt, the results are particularly sensitive to whether such debt is included in the gearing measure. We argue, therefore, that analysis of capital structure is incomplete without a detailed examination of all forms of corporate debt.

The Determination of the Seniority Structure of Debt: Theory and Evidence

The purposes of this paper are to provide a theory of determining the firm's optimal seniority structure of debt and examine the relation between the firm's seniority structure of debt and its characteristics. Unlike previous studies, we develop a theoretical model which explicitly includes the benefits and costs associated with senior debt financing, corporate taxes, risk-aversion in the capital market, and costs of financial distress. We next show how a value-maximized firm searches for the optimal trade-off among the present values of the tax advantage of debt, loss of tax credits, expected costs of financial distress, costs of senior debt financing, and benefit of limited liability. Numerical analysis results show that the firm's value is not only a strictly concave function of its capital structure (with a unique global maximum), but also a strictly concave function of its mix of senior and junior debts (with a unique global maximum). We then show that a firm's optimal seniority structure of debt (i.e. the market value of senior debt divided by the sum of the market values of senior and junior debts) increases for low levels of asset riskiness and decreases when asset riskiness becomes sufficiently great. Our model also suggests that a firm's optimal seniority structure of debt increases for low levels of growth opportunities and decreases for high levels of growth opportunities. We test the predictions of our model on the relation between the firm's seniority structure of debt and its characteristics by using the data for the firms in COMPUSTAT over the 1972 through 1991 time period. The empirical evidence is consistent with our theoretical predictions.

Chaebol, Investment Opportunity Set and Corporate Debt and Dividend Policies of Korean Companies

This paper examines explanations for the association between Korean Chaebol, which are giant conglomerates supported by various government initiatives, and corporate debt and dividend policies. Unlike in the US, the Korean corporate sector is dominated by the Chaebol which are characterized by concentrated family ownership, political affiliation and bank ownership. These institutional arrangements are likely to encourage more debt financing. In addition, the study also investigates whether firms with more growth options measured in terms of the investment opportunity set (IOS) have lower leverage and dividends. Results using observations from 411 Korean firms showed that for a fixed level of growth opportunities, Chaebol carry higher levels of debt. Results also show that growth options were negatively associated with leverage and dividends. No association, however, was found between Chaebol and dividends.