Firm Leverage Research Articles

Fiscal Policy, Economic Uncertainty and Tax Avoidance Behavior Evidence from Pakistan Stock Exchange

This study adds novelty in extending the tax literature by examining the fiscal policy's government spending and economic policy uncertainty and their impact on the tax avoidance behavior of Pakistan's non-financial listed firms of Pakistan from 2011 to 2020. The panel regression is used to analyze the sample size of 295 non-financial listed firms in the Pakistan stock exchange (PSX). The results show that economic policy uncertainty has a significant positive relationship with the tax avoidance measures of accounting effective tax rate, current effective tax rate, and long-run accounting effective tax rate respectively. This indicates that the increase of uncertainty in economic policy surges the tax payments of the listed Pakistani non-financial firms. The Government spending measured by Government size has a significant negative relationship with the long-run accounting effective tax rate. The study also consists of the control variables including cash, firm leverage, firm age, and firm size. Cash, leverage, and firm age have a significant positive relationship with tax avoidance measures. The study provides the policy implications for the policymakers that they should analyze the different economic policies with respect to different firms and how their effective tax rates are affected by these policies. Furthermore, the government spending which is regulated by the fiscal policy, the policy makers when setting it should keep this in their consideration that the increase in the Government spending in the long run can potentially promote the tax avoidance behavior of the firms. This study has significance for the policymakers and the academicians in understanding the tax avoidance behavior of firms concerning the fiscal and uncertainty of the economic policy in Pakistan.

Cash flow volatility and leverage: Evidence from non-financial Jordanian companies

This study investigates the relationship between cash flow volatility and leverage in Jordanian firms. The research purpose is to investigate whether cash flow volatility affects a company’s capital structure in Jordan. Panel data analysis is used in this study for a sample of 72 shareholder non-financial companies in Jordan from 2009 to 2020. The findings show that cash flow volatility has a significant link with leverage, indicating that companies with higher cash flow volatility tend to use more debt financing. In addition, the study finds that firm size, return on assets, and tangibility are positively associated with leverage, while growth is not significantly related. The study suggests that firms in Jordan should take cash flow volatility in consideration when making capital structure decisions. The study provides evidence that cash flow volatility is a vital determinant of leverage in Jordanian companies. The findings suggest that managers should consider the cash flow volatility effect on the capital structure alternatives of their firms. AcknowledgmentI want to thank Amman Arab University for its support.

Cash flow management and its effect on firm performance: Empirical evidence on non-financial firms of China.

The main purpose of this research is to investigate the impact of changes in cash flow measures and metrics on firm financial performance. The study uses generalized estimating equations (GEEs) methodology to analyze longitudinal data for sample of 20288 listed Chinese non-financial firms from the period 2018:q2-2020:q1. The main advantage of GEEs method over other estimation techniques is its ability to robustly estimate the variances of regression coefficients for data samples that display high correlation between repeated measurements. The findings of study show that the decline in cash flow measures and metrics bring significant positive improvements in the financial performance of firms. The empirical evidence suggests that performance improvement levers (i.e. cash flow measures and metrics) are more pronounced in low leverage firms, suggesting that changes in cash flow measures and metrics bring more positive changes in low leverage firms' financial performance relatively to high leveraged firms. The results hold after mitigating endogeneity based on dynamic panel system generalized method of moments (GMM) and sensitivity analysis considering the robustness of main findings. The paper makes significant contribution to the literature related to cash flow management and working capital management. Since, this paper is among few to empirically study, how cash flow measures and metrics are related to firm performance from dynamic stand point especially from the context of Chinese non-financial firms.

Impact of corporate governance on firm performance: a case of Pakistan stock exchange

This study investigates the impact of Corporate Governance on Firm Performance. The corporate governance has been operationalized through eight indicators including the Board Size, Ownership Structure, CEO Duality, Independence of Audit Committee, Firm Size, Firm Age, Firm Leverage, and Firm Growth, while the Firm performance has been factored into Return on Assets, and Return on Equity. Pakistan stock exchange has been used as the unit of analysis, taking 100 public listed firms from the non-financial sector, as the sample. Data around the study variables have been collected and analyzed for a period of 10 years, i.e., 2013-2022, using suitable statistical tools. The findings reveal that lean board size, moderate leverage, CEOs serving on various boards, high independence on audit committees, large firm size, young firms, and sustainable growth positively impact the firm performance. High leverage has been found to have an adverse impact on firms’ profitability, especially in the wake of high interbank offered rates. These findings are important the practitioners, corporate regulators, and researchers. Future studies are recommended to take more indicators from the corporate governance index into account for understanding their impact on firm performance.

Firm Leverage and Boom-Bust Cycles

Firm Leverage and Boom-Bust Cycles

UNRAVELING THE LINK BETWEEN OWNERSHIP STRUCTURE AND INTELLECTUAL CAPITAL EFFICIENCY: A STUDY OF NON-FINANCIAL FIRMS IN PAKISTAN

This study examined the effect of ownership structure on intellectual capital efficiency of nonfinancial firms listed on PSX 100 in Pakistan. This research has covered the data of non-financial firms from period 2010 to 2018 from the official website of Pakistan Stock Exchange and furthermore from the companies‟ financial statements. The independent variable of this research is ownership structure which is divided into five different categories family ownership, government ownership, institutional ownership, individual ownership and foreign ownership while the dependent variable of the research is value added capital efficiency which is divided into three components human capital efficiency, structural capital efficiency and capital employed efficiency which is calculated by using Public’s model Intellectual Capital Efficiency. The results of this study have shown that family ownership have a positive significant relationship with intellectual capital efficiency, government ownership a negative significant relationship with intellectual capital efficiency, institutional ownership a positive significant relationship with intellectual capital efficiency and foreign ownership structures have a positive significant impact on intellectual capital efficiency, while individual ownership, firm age, firm size and firm leverage have an insignificant impact on intellectual capital efficiency. The purpose of this study is to add to existing literature of ownership structure and intellectual capital efficiency in regard to Pakistan. Keywords: Ownership structure, intellectual capital efficiency, agency theory, resource-based theory.

Financial Development and Firm Leverage in Pakistan: Conventional and Islamic perspective

The purpose of this study is to examine the impact of Islamic finance vs conventional finance development on firms’ leverage and debt maturity in Pakistan. We extract the annual data for the period 2010 to 2020. The final sample comprises 325 firms, after excluding financial firms, listed in Pakistan Stock Exchange (PSE). We use OLS and Fixed-Effects regression to estimate the impact of Islamic and conventional finance development on firm leverage and debt maturity. Our findings hold using battery of robustness check. We demonstrate that stock market development has a negative impact on leverage while conventional bank development is positively linked with leverage. Further, we find that overall Islamic finance development (Islamic bank and Sukuk market) is positively associated with leverage and debt maturity, in contrast, conventional finance development is inversely linked with debt maturity. Collectively, our results support the importance of Islamic finance supply-side factors on firms’ capital structure decisions. Our findings require the attention of regulatory bodies for financial development in Pakistan.

Firm Leverage and Stock Price Crash Risk: The Chinese Real Estate Market and Three-Red-Lines Policy

Firm Leverage and Stock Price Crash Risk: The Chinese Real Estate Market and Three-Red-Lines Policy

Determinants of Capital Structure Evidence from Saudi Arabia

This study aims toinvestigate the most important determinants of capital structure in non-financial Saudi Arabian firms listed in Saudi Stock Exchange (TADAWUL) from 2010-2021, using a fixed effect with robust standard regression. Theories of capital structure have different views and conclusions as well as the empirical works. Thus, determining the factors affecting the capital structure in a different context like Saudi Arabia that has a unique feature such as the absence of corporate tax, undeveloped and illiquid bond market, will add to the existing literature. The study finds a positive relationship between each size, asset tangibility, and market- to book with firm leverage On the other hand, there is a negative relationship is found between profitability and sales growth. Some of the findings are consistent with the trade-off theory such as firm size while some of the findings support the picking order theory. Empirical findings should help corporate managers understand the nature of the market and make optimal capital structure decisions.

The impact of firm leverage on investment decisions: The new approach of hierarchical method

This paper investigates the impact of firm leverage on its investment activities. Especially, the research is conducted in the context of the Vietnamese emerging market, an incomplete market in South East Asia with the existence of inefficient market problems such as information asymmetry and agency conflicts which are the root cause of the relationship between corporate leverage and investment. Regarding methodology, we build the two main types of econometric models: traditional multiple regression and multilevel model (also called hierarchical, mixed, or nested data model). The purpose of employing the multilevel model is to observe the hierarchical structure of data and the effect of each data level in the hierarchy on firm investment that the traditional regression model may fail to achieve. We construct three-level predictors (three levels of leverage) for investment: observation unit, firm level, and industry level. We find that debt used in a firm can harm or reduce its investment activities. All three hierarchical levels of leverage show negative and significant effects on investment. Especially, the impact of leverage at the first level of data clustering on investment gets stronger under the moderation of industry leverage. In this case, the multilevel model is a more appropriate estimation method than the traditional regression.

Readjusting the speed of leverage adjustment during the COVID-19 pandemic?

PurposeRecognizing the severity of COVID-19 on the US economy, the authors investigate the behavior of US-listed firms towards leverage speed of adjustment (SOA) during the pandemic. While prior evidence (based on an international study) shows that firm leverage increased during the pandemic leading to a higher SOA toward leverage ratios, leverage for US firms during the same period reduced drastically. Yet there is a dearth of empirical studies on the behavior of US-listed firms' SOA during the pandemic. The authors fill this void.Design/methodology/approachThe study includes US-listed non-financial and non-utility firms for the period 2015Q1-2021Q4, covering a total sample of 45,213 firm-quarter observations. The authors’ empirical strategy is based on the generalized method of moments (GMM) and firm-fixed effect methodology, controlling for firm- and quarter-fixed effects.FindingsThree main findings are established: (1) while the SOA toward book target increased during the pandemic, SOA toward market target increased significantly only for less valued and cash-constrained firms; (2) firms in states most impacted by the pandemic adjusted faster towards target ratio; and (3) while the emergence of the pandemic and the overall firm-level risk increased (decreased) the deviation from book (market) target, firm-level risk partially mediated the effect of the pandemic on how far firms deviated from target ratio.Practical implicationsThis study enhances our understanding of leverage adjustment during the crisis and shows that risk avoidance motive and the market value of firms are key determinants of convergence rate during the crisis and further demonstrates that market leverage is more sensitive to market dynamics. As such, caution must be taken when dealing with and interpreting market leverage SOA.Originality/valueAlthough prior evidence based on international study provides insights into how firms behave toward their leverage ratios because of the pandemic, little is known about how US firms react to the pandemic in terms of the target ratios, particularly (1) since the USA is one of the severely affected countries and (2) firms in the USA reduced their leverage ratios as against what prior evidence shows. The authors provide evidence to explain how and why US firms reacted toward their SOA during the pandemic.

Debt enforcement, financial leverage, and product failures: Evidence from China and the United States

AbstractBuilding on capital structure and product market interactions, and the role of debt enforcement in leveraged firms' investments, we examine whether cross‐country debt enforcement can produce different associations between financial leverage and product failures. Results show that different debt enforcement systems can generate opposite leverage effects. In countries with weak/nearly ineffective debt enforcement, financial leverage shows an incentive investment effect due to low default costs, and thus highly leveraged firms tend to invest more and are less likely to have product failures. Conversely, in countries with strict/effective debt enforcement, distressed companies tend to have an underinvestment effect and more product failures.

Governance Components and Social Performance: Company Analysis of G20 Countries

This study is aimed to obtain empirical evidence of the influence of Management, Shareholders, and CSR Strategy on the Social Performance of companies from countries listed in the G20 forum. The study also used four control variables: Firm Size, Firm Age, Firm Leverage, and Firm Profitability. The data used is secondary data from the Thomson Reuters Eikon database of 60 companies engaged in Consumer Non-Cyclicals (Staples), more specifically, namely those engaged in the Food and Beverages sector in 2012-2021. This study used Panel Data Regression Analysis; Fixed Effect Model with the help of STATA 17. The results of this study show that Management and CSR Strategy have a significant and positive effect on Social Performance. Meanwhile, Shareholders have an insignificant and negative influence. This research adds to the high value of the scientific literature because it provides a good overview and basis for understanding how companies can provide Social Performance in accordance with company policies and performance.

Corporate QE in Europe during the COVID-19 crisis and debt overhang

This paper finds that shareholders of highly leveraged firms benefit relatively less compared to bondholders from the corporate QE announcements by the ECB and the Bank of England, 2020, as evidence of debt overhang. Firms more heavily impacted by the pandemic gain less from corporate QE, which could also reflect debt overhang. The monetary and fiscal responses to the pandemic are complements in the sense that a stronger pandemic-related fiscal response and higher pre-announcement sovereign CDS spreads enhance the positive effects of corporate QE on equity and debt valuations.

Firm leverage and labour share: evidence from China

We examine the relationship between firm leverage and firm-level labour shares by using the panel threshold effect model. Based on the sample of Chinese firms listed in the Shanghai Stock Exchange (SHSE) and the Shenzhen Stock Exchange (SZSE) from 2010 to 2019, we find that leverage has a significant threshold effect on the labour share of firms, and on average, firm leverage is positively associated with the labour share when the debt per labour is less than 640,000 CNY (approximate 89,600 USD). When the firm leverage exceeds the threshold, firm leverage is negatively associated with labour share. We also find significant heterogeneity over state-owned enterprises (SOEs) and non-state-owned enterprises (non-SOEs), capital-intensive firms and labour-intensive firms, firms with different levels of financial constraints and firms in different life cycles. We contribute to prior literature by revealing the nonlinear association between leverage and firm-level labour share. Therefore, various policies (e.g. made credit policy to restrict lending to firms without sustainable profitability) must be implemented to increase the labour share of enterprises as well as achieve the higher-quality development of the economy in the long term.

Bankruptcy law, creditors' rights and dividend policy: evidence from a quasi-natural experiment

PurposeThe purpose of this paper is to examine how changes in creditors' rights affect the dividend policy behavior of corporate firms.Design/methodology/approachThe authors use the implementation of the bankruptcy and insolvency code (IBC) in India in 2016 as a quasi-natural experiment setup. Differential application of this law allows them to use the Difference in Differences approach to extract the marginal impact of change in creditors' rights on the dividend policy.FindingsThe authors show that firms responded to strengthening creditors' rights by decreasing their dividend payout. Further, the authors observe that this negative response is conditioned on firm leverage and the nature of the creditor, i.e. public or private. The firms with a greater leverage ratio and a greater proportion of private debt in the total debt in the pre-event period have shown greater response to the change in the law. Lastly, the authors show that stock markets positively respond to the observed decrease in dividends only when a corresponding decrease in the leverage accompanies such a decrease.Originality/valueThe authors contribute to the finance and law literature from several aspects. First, the authors extend this stream by bringing to light the dividend policy response of firms when they are subjected to a change in creditors' rights. Second, the authors also show how firm-level factors like financial policy and the nature of the creditor condition their response to IBC. Lastly, the authors also examine the market reaction to the dividend policy response of firms to the change in bankruptcy law.

Moderating Role of COVID-19 Crisis on Firm Leverage Speed of Adjustments: Evidence from Pakistan

This study evaluates the impact of firm-specific, industry-specific, and macroeconomic determinants on the speed of capital structure adjustment and to see if COVID-19 impacted these relationships. Using quarterly data of all listed non-financial firms in Pakistan for the period 2016-2021, a dynamic panel data model using the generalized method of moment (GMM) was used for estimation. It was found that firm size, growth potential, non-debt tax shield, and GDP growth positively impact firm leverage, while profitability and tangibility negatively impact leverage. The study found evidence of convergence to target leverage by Pakistani firms. These firms' capital structure adjustment speed was estimated as 16.7% per quarter. Moreover, COVID-19 was not found to affect the adjustment speed of firms, directly. Furthermore, greater distance from target leverage, growth potential, and GDP growth rate resulted in a lower speed of adjustment, whereas higher profitability and liquidity were found to increase the speed of adjustment.

Leverage made at home: Investors' margin loan usage and firm leverage

The “homemade leverage” conjecture by Modigliani and Miller (1958) implies that firm leverage and investors' leverage are substitutes. Using the data of margin loans by Chinese stock investors, we find that investors take significantly fewer margin loans on a stock when the company announces new bank loans. This effect is entirely driven by investors' margin loan repayment upon announcements, and is stronger for firms with higher institutional ownership or lower leverage. The findings suggest that investors undo the change in firm leverage by adjusting margin loans usage, supporting the “homemade leverage” conjecture.

Esg and Dividend Policy in Indonesia

The purpose of this paper is to determine the effect of environmental, social and corporate governance (ESG) performance on company dividend policy in Indonesia. This paper uses three controlled variables: firm size, firm age, and firm leverage. The data used in this research are secondary data from Thomson Reuters Eikon Database on 17 companies listed on the Indonesian Stock Exchange over 2011-2020. To analyze the data, this research uses Panel Data Regression Analysis with Common Effect Model aided by STATA 17. The results show that Environmental, Social and Corporate Governance performance has a positive and significant effect on company dividend policy in Indonesia. This paper adds value to the existing literature as it provides an overview of the impact of Environmental, Social and Corporate Governance, especially in relation to the performance of companies Indonesia. It can therefore provide a good basis for understanding of how Indonesian companies can be more appealing to investors.

Heterogeneous effects of macroprudential policies on firm leverage and value

We empirically investigate the effect of financial institution-targeted macroprudential policies on firms using a comprehensive macroprudential policy dataset and corporate panel data across 35 countries. We find that tightening of macroprudential measures persistently curbs the leverage of firms, while loosening is related to the increase in leverage. We also find that this effect on leverage is heterogeneous across firms, as net macroprudential policy actions reduce the procyclicality of leverage more significantly for small firms and firms with high leverage. Also, we estimate the effect of macroprudential policies on firm value to evaluate potential policy trade-offs as the policies restrict the firms' access to credit during economic booms while protecting them from future financial crises. The effect of macroprudential policies on firm value is generally positive despite the policies' restrictive nature. Further, the effect on firm value is heterogeneous depending on firm characteristics: the positive effect becomes stronger as firms are less leveraged, but this positive effect is weaker for firms that grow faster, suggesting potential costs of macroprudential policies for these firms.