Long-term Leverage Research Articles

The impact of digital financial development on corporate leverage ratio: The case of a-share listed non-financial enterprises in China's Shanghai and Shenzhen stock exchanges.

This study investigates the impact of digital finance on corporate leverage ratios. The study employed a large sample of China's Shanghai and Shenzhen A-share non-financial listed enterprises from 2011-2020. The study's results depict that the development of digital finance can significantly reduce the leverage ratio of enterprises. We empirically identified that digital finance affects the difference in the term structure of the corporate leverage ratio. It was found that the development of digital finance has a significant negative impact on enterprises' short-term and long-term leverage ratios. Moreover, our heterogeneity analysis shows that the negative effect of digital financial development on corporate leverage ratios is different in state-owned and non-state-owned enterprises, large-scale and small-scale enterprises, and high-leverage and low-leverage enterprises. Mechanism analysis shows that the development of digital finance can reduce corporate leverage by lowering financing costs, alleviating financing constraints, and weakening non-systemic risks. Therefore, policymakers should focus on developing and adopting digital finance by creating a supportive regulatory environment, improving access to digital financial services, and encouraging innovation in the digital finance sector. Finally, our results remain robust after addressing endogeneity issues and conducting robustness checks.

Debt and Duration: Why You Should Rethink Your Mix of Short-term Debt

Financing of a business involves several choices and tradeoffs: a key choice that CFOs often make is: “How much debt should we take on to finance our business?” A related question, often neglected is: “What kind of debt?” All forms of lending are not the same and one key dimension of debt is its maturity period. Short-term debt and long-term debt have different impacts on the profitability and valuation of a firm. Do investors demand higher returns on equity if the composition of debt includes more of certain kind of debt? The question has long bothered corporate finance as well as scholars. Recent research by Friewald, Nagler, & Wagner has uncovered an insight that should help CFOs, as it found a clear link between the level of debt, the maturity (ranging from short to long term) of debt and equity returns.1 The essence of their finding is: “… Equity returns increase in short-term leverage but not in long-term leverage”. Meaning that your equity investors expect higher returns on capital, the more your mix of short-term debt increases. In this essay, we explain why this happens, and we outline takeaways for managers of corporate finance. We illustrate how the nature of the industry in which your business operates, impacts your debt financing – both the level, as well as the mix of short- and long-term debt

How oil price uncertainty influences corporate capital structure: evidence from BRIC countries

ABSTRACT This paper examines how corporate capital structures in emerging markets – Brazil, Russia, India, and China (BRIC) – were impacted by oil price uncertainty (OPU) from 2007 to 2019. We find that the relationship between OPU and firm leverage in BRIC markets is nonlinear and U-shaped. The extent to which OPU affects both short- and long-term leverage varies across nations. These findings are robust to endogeneity tests. Furthermore, while the OPU effect on corporate leverage is lessened in high-growth enterprises, it is strengthened in materials and energy companies. From an OPU perspective, this paper contributes intriguing knowledge of the corporate finance field.

Can Technological Advancements be Effective for the Economic Value of the Companies? Insights from the DSE Listed Food and Allied Companies

Purposes: Adopting technology in the production process increases the overall efficiency of inputs used in the production, and enhances a firm's economic value. Methodology: This study tries to explore the impact of technology on firm performance from 8 listed Food and Allied companies spanning 2015-2021 listed on DSE. Total factor productivity (TFP) is an inclusive measure that apprehends the contribution of all aspects that improve the efficiency of production including technology. Therefore, the contribution of technical advancement to the firm is captured by TFP, applying the Solow residual method. TFP is the main study variable and some other control variables, such as tangibility, liquidity, firm size, and growth; long-term leverage ratio and net debt tax shield are used as exogenous variables to increase the robustness of the model and improve the value of both the firm performance ROA and ROE. Results: Finally, this study concluded that investment in technology in the food and allied sectors has a notable impact on a firm’s performance. Therefore, the study indicates that economists, policymakers, and business management can use TFP growth as an indicator for making their long-term decision policy and increase the overall sustainable economic productivity, growth and efficiency of the firm and can contribute to accelerating the economic growth of the country.

Deleveraging and green technology innovation: Evidence from Chinese listed companies

To address the relationship between 'deleveraging' and 'green development transformation', it is necessary to seek a leverage ratio that promotes green technology innovation and avoids financial risk. Using fixed-effects models, this study empirically examines the influence of a company's leverage ratio on green technology innovation based on the annual data of Chinese listed companies from 2007 to 2022. The results show that: (1) there is an inverted U-shaped relationship between the leverage ratio and green technology innovation, with a turning point of 51.79%; (2) Short-term leverage has a more noticeable effect on green technology innovation than long-term leverage. Commercial credit promotes green technology innovation, while bank lending has been proven to damage green technology innovation; (3) There are distinct heterogeneous effects of company’s leverage on green technology innovation among Chinese listed companies owing to ownership, scale, and industry; (4) Leverage affects green technology innovation through R&D investment and financial distress.

The effects of economic policy uncertainty and large investment project on leverage

The dominant view on firms’ financial leverage suggests a stable, long-term leverage ratio, while previous studies recognise that factors like macroeconomic fluctuations and unanticipated financing needs can cause deviations from this target leverage. This study seeks to explore the joint effect of economic policy uncertainty (EPU) and large long-term investments on firms’ leverage decisions, specifically focusing on how these factors influence target leverage dynamics and financial flexibility. This study uses 2,865 listed firms in NYSE, NASDAQ, and AMEX from 1990 to 2019. The data is analysed through fixed effect panel regression model. The results show that EPU negatively affects firms’ leverage, which are reduced through joint effects with large investment for five years. This study also demonstrates firms’ financial flexibility motive to protect the debt capacity of large investments and enhance their capabilities.

CEO turnover, product market competition, and leverage policy

We study how CEO turnover, jointly with product market competition, affects firm leverage policy. About 18% of public nonfinancial US firms in Compustat experience significant switches in their long-term leverage policy every year. Without apparent changes in their operating fundamentals. We find that CEO turnover, especially external and forced turnover, explains shifts in long-term leverage policy. In addition, utilizing the product market fluidity measure and large import tariff changes, we find that, only when coinciding with intensified product market competition, external and forced CEO turnover is significantly and positively associated with the likelihood of firms leveraging up from zero to positive. Our evidence suggests that external and forced CEO turnover is an important vehicle for accomplishing changes in corporate policies necessitated by increases in product market competition.

How does the effect of external financing on profitability differ across tiers? Evidence from the automotive supply chain

Due to the importance of automotive industry for the Czech Republic (in a broader sense for European countries) and due to the unprecedented development of both national and European economies caused by the COVID-19 outbreak, also having implications on the financial sector, we aim to explore the main determinants of operating performance within the automotive supply chain. This study is based on the data sample composed of complete individual financial statements (audited if available) of firms conducting their business in the Czech Republic from 2011 to 2018 and belonging to the automotive supply chain. This supply chain is defined as (sub) deliveries of the Czech automotive industry represented mainly by companies classified under NACE 22, 27, 25, 24. The hypothesis claiming that the investment and leverage-based variables are the important drivers of operating profitability was only partly confirmed (valid predominantly for Tier 3), which shows that the supply chain organization also plays a crucial role as well as (valid for Tier 1). Also, we have shown (illustrated) that the assumption of different capital structures among tiers is valid. The average overall indebtedness of Tier 3 is higher by approximately 50% (altogether, the short- and long-term leverage are higher by 40% and 62% respectively) than Tier 1 firms. The need for relatively high capital expenditures (applicable to Tier 1) and working capital investments (applicable to Tier 3) is partly facilitated by external funds reflected in the indebtedness, which is associated with the costs reducing overall low profits from these investments. The leverageprofitability relationship seems to be nonlinear for long-term debts contrary to short-term debts where the linear relationship prevails.

The determinants of financial distress cost: A case of emerging market

The determinants of financial distress cost: A case of emerging marketAll authorsMuhammad Farooq, Ahmed Imran Hunjra , Saif Ullah & Mamdouh Abdulaziz Saleh Al-Faryan https://doi.org/10.1080/23322039.2023.2186038Published online:08 March 2023Display full sizeThis study analyses the cost of financial distress of non-financial firms listed on the Pakistan stock exchange. Furthermore, it considers the moderating role of concentrated ownership in the relationship between debt and expected financial distress costs. We used the panel data of 214 firms from 2010 to 2018 to analyse the results. We apply fixed effect model to test the hypotheses. We find that ex-ante financial distress costs are based not only on the probability of financial distress but also affect the amount of time and money spent during the distress period. The use of tangible fixed assets and long-term leverage lowers the cost of financial distress, whereas the use of short-term debt has no significant impact on the cost of financial distress. Furthermore, the company’s ownership structure dampens the impact of these factors. Corporate management may reduce the cost of financial distress through better management of fixed assets and financial leverage.

Social unrest and corporate behaviour during the Arab Spring period

While several facets of social unrest have been well-studied in the literature, one aspect which has remained largely unaddressed is its impact on corporate behaviour. To examine this closely, integrating data on 12 MENA country-firms covering both oil exporters and oil importers during 2001–2015 with a newly constructed measure of social unrest, we exploit the natural experiment of the Arab Spring to tease out the impact of social unrest on firm behaviour. The findings suggest that there is an increase in leverage, driven mainly by an increase in long-term leverage, although at a higher cost. Robustness tests reveal a cyclical pattern in the evolution of such leverage wherein short-term leverage declines and rises thereafter, whereas the reverse holds for long-term leverage. We undertake several robustness tests of the baseline findings and continue to find evidence in favour of a discernible impact of social unrest on corporate behaviour.

Capital Structure Determinants: New Evidence from the MENA Region Countries

The objective of this paper is to investigate empirically the determinants of capital structure for a sample of 1101 firms from 11 MENA region countries over the period 2003-2017. Using a comparative approach, we find that firm-specific determinants explain better differences in capital structure choices than other country-specific determinants. Comparisons between countries, sub-regions (GGC and non-GCC countries) and legal origin (Common and Civil law countries) show furthermore that there are differences in terms of significance and importance of capital structure determinants. The most important determinant in the MENA region is profitability. The firm’s capital structure is positively impacted by size, tangibility of assets and private credit and it is negatively impacted by profitability, growth opportunities, GDP growth rate and stock market capitalization as a proportion of GDP. Moreover, we find that total leverage ratio, expressed in market values, give better results than leverage ratio expressed in book values and long-term leverage ratios expressed in book and/or market values. Finally, there is some evidence that the “Jasmine Revolution” has had an impact on firms’ capital structure determinants. Specific-level determinants play a much more prominent role after the revolution than in the past.

Interest Rate Liberalization and Firm Leverage in China: Effects and Channels

We examine whether and how interest rate liberalization affects firm leverage in China. We find that interest rate liberalization exerts a negative effect on the leverage of firms. Specifically, firms experience a reduction in total leverage during the liberalization period, and firms’ short-term leverage declines more relative to long-term leverage. Mechanism analysis shows that firms with high information asymmetry enjoy more decline in leverage relative to firms with low information asymmetry, and further, liberalization policy enables the reduction in credit transaction costs, which indicates that the behavior of banks actively collecting corporate information is an important channel that interest rate liberalization impacts firm leverage. Finally, in additional tests, we find that the impact is more salient when firms are non-state-owned, and loss making. Compare to operating liabilities, firms experience more reduction in financial liability.

Determinants of Capital Structure: Empirical Evidence of Manufacturing Companies in the Republic of Serbia

The subject of research in the paper is the capital structure of companies in the Republic of Serbia. The research sample consists of companies that operated in the manufacturing industry in the Republic of Serbia in the period 2006–2020. The aim of the research is to identify firm-specific variables that have significant influence on the capital structure of the analyzed companies. Using a panel data methodology, three leverage models were estimated: long-term leverage, short-term leverage, and total leverage. The research results confirm the importance of company size, profitability, tangibility, and risk in determining the capital structure of companies in the Republic of Serbia. However, the research results show that size, profitability, and tangibility of assets have the opposite effect on long-term leverage compared to short-term and total leverage. That is, the behavior of companies in the Republic of Serbia in the case of long-term leverage is in accordance with the predictions of the trade-off theory, while in the case of short-term and total leverage, the behavior of companies can be explained by the pecking order theory.

The impact of Covid-19 on the capital structure in emerging economies: evidence from India

PurposeCapital structure is an important corporate financing decision, particularly for companies in emerging economies. This paper attempts to understand whether the pandemic had any significant impact on the capital structure of companies in emerging economies. India being a prominent emerging economy is an ideal candidate for the analysis.Design/methodology/approachThe study utilizes three leverage ratios in an extended market index, BSE500, for the period 2015–2021. The ratios considered are short-term leverage ratio (STLR), long-term leverage ratio (LTLR) and total leverage ratio (TLR). A dummy variable differentiates the pre-epidemic (2015–2019) and pandemic (2020–2021) period. Control variables are used to represent firm characteristics such as growth, tangibility, profit, size and liquidity. Dynamic panel data regression is employed to address endogeneity.FindingsThe findings point out that Covid-19 has had a significant, negative effect on LTLR, while the impact on STLR and TLR was insignificant. The findings indicate that companies based in a culturally risk-averse environment, such as India, would reduce the long-term debt to avoid bankruptcy in times of uncertainty.Research limitations/implicationsThe study covers the impact of the pandemic on Indian companies. Hence, generalization of the findings to global context might not be valid.Practical implicationsTo maintain economic growth in the post-crisis period, Indian policymakers should ensure accessibility to low-cost capital. The findings provide impetus to deepen the insignificant corporate bond market in India for future economic revival.Originality/valueDeveloping countries are struggling to revive the economies postpandemic. This is particularly true for Asian economies which are heavily reliant on banks for survival. This research finds evidence to utilize bond market as a source of raising capital for economic revival.

Firm-level political risk and corporate leverage decisions

This study examines the effects of firm-level political risk on firm leverage decisions and speed of adjustment. We uncover that firm-level political risk has a negative impact on a firm's total and long-term leverage. We also find that firms facing high political risk tend to prefer debts with short-term maturity. However, firm-level political risk is positively related to debt specialisation, suggesting that firms are more inclined to adopt fewer debt types when they face high political risk. Further analysis reveals that firms with high political risk are associated with a faster speed of adjustment to target than those with low political risk. Our results are robust to endogeneity concerns and the effects of financial crisis.

Research on the impact of digital inclusive finance on private enterprise’s leverage level with financial constraint as a mediating variable

Along with the advent of the digital economy, digital inclusive finance has increasingly played an important role in alleviating the enterprises’ financing difficulties and contributing to healthy economic development. This paper examines the effect, mediating mechanism and heterogeneity of digital inclusive finance on the leverage of private enterprises by empirically analyzing the private enterprises on the Shanghai Stock Exchange and Shenzhen Stock Exchange from 2011-2017. It shows that digital inclusive finance can significantly reduce the leverage level of private enterprises. Also, it can be achieved mainly through alleviating enterprises’ financing constraints. The heterogeneity analysis shows that the dual effect of digital inclusive finance in alleviating financing constraints and reducing leverage level is more significant for large private enterprises and middle-western regions. In addition, the impact of digital inclusive finance on reducing short-term leverage is more significant compared to long-term leverage. Therefore, this paper enriches the research related to the impact of digital inclusive finance on enterprises at the micro level, and provides empirical evidence for promoting the development of digital inclusive finance and optimizing the financial supply system.

On the heterogeneity of the long-term leverage-growth relationship: A cross-country analysis of manufacturing firms

Despite a great deal of studies, the relationship between firm leverage and its impact on growth remains still unclear. We offer an analytical framework, which based on a comprehensive literature review and of related empirical reasoning, helps explaining the long-term leverage and firm growth nexus. Both the theoretical views and empirical evidence are mixed, and the lack of consensus may be the result of inconsistent estimation techniques and of the dual interpretation that firm leverage has. Analysing debt from credit institutions to firms in France, Italy, and Spain, and observed from 2010 to 2016, we bring a selection framework to trial. The comparative perspective seeks the establishment of regularities, while the use of a dynamic quantile panel estimator unravels its heterogeneity. Strong non-linearities are detected, but the selection framework finds no support. On the contrary, only firms in the lowest-growing deciles of the growth distributions benefit consistently from leverage.

The evolving moral economy of indebtedness in Chile: resignifying credit and debt in the oldest neoliberal society

Credit is ubiquitous in the life of Chilean households, the oldest neoliberal society. It is a key feature in the budgeting, shopping, and consuming practices of families. Consequently, to be indebted is a normal expectation in Chile. Families engage with the ‘necessary evil’ of credit in different ways, representing a massive, regular use of credit as short, medium and long-term leverage tools, with store cards being the main source of credit for lower and moderate income families in general. Moral obligations together with conventional and unconventional financial knowledge accompany the everyday situated economic practices of families. Addressing both the normalisation and the moralisation of credit, I attempt to make the case for the ongoing resignification of credit and debt and the evolving moral assessments of indebtedness, focusing on moderate and low-income households, namely those who embrace credit during recent decades. This article contributes to the discussion about the meaning of debt, to understand the financialisation of everyday life by looking at situated economic practices, and to recognise the social, moral and relational foundations of the economic practices. From the coming of the expansion of credit, households have learnt to deal with economic rationalities and internal and external moral judgements in order to justify their use of credit. Together with structural factors, this develops indebtedness assessments from detachment to naturalisation, placing credit and debt in the centre of ‘decent life’ expectations.

The Interplay of Leverage, Financing Constraints and Real Earnings Management: A Panel Data Approach

Organizations are formed to gain long-term benefits. However, sometimes myopic management for feigned value enhancement led to the early demise of the firm. Further, to the best of our knowledge empirical role of financing constraints has not yet been explored between the relationship of leverage and earnings management practices. Therefore, the present study aims to empirically examine the impact of leverage on Real Earnings Management (REM) practices and how financing constraints influence this association. Employs a panel dataset of 3250 non-financial Chinese listed firms for a time period spanning from 2009 to 2018. Leverage is categorized into short-term, long-term, and total leverage to check the individual effects of each leverage category on REM practices. The data were analyzed through panel data fixed-effects and random-effects techniques as an econometric approach. First, consistent with positive accounting theory, the impact of total leverage on REM is positive. Second, compared to the long-term leverage, short-term leverage has more pronounced effects on managers’ opportunistic behavior towards using REM. Third, the influence of total leverage is higher (lower) on REM practices in financially unconstrained (constrained) firms. Fourth, the influence of short-term leverage on REM practices compared to long-term leverage is also weak in the financially constrained firms. These findings imply that, to avoid the consequences of managerial myopia, investors should abstain to invest in the firms that use higher amount of short-term debt and are financially unconstrained. This study is the first research to examine the impact of different leverage categories on REM practices in an emerging market, i.e., China, where the legal and financial structure is much poor.

Forecasting volatility of EUA futures: New evidence

In this paper, we judge the predictability of EUA's own short- and long-term asymmetry, extreme observations, as well as jump components on its volatility by comparing the GARCH mixed frequency data sampling model and its asymmetry, extreme observation and jump extensions. The in-sample estimation results show that both long- and short-term asymmetries, extreme observations, and jump information have substantial effect on the EUA volatility. The out-of-sample forecast assessment results further illustrate the predictability of these volatility components on EUA volatility. Specially, among all asymmetric extension models, the model extended by both short-term asymmetry, long-term asymmetry and long-term leverage has better predictive performance. Among all extreme observation extension models, the model extended by only short-term extreme observations has better predictive performance. Among all jump extension models, the model extended by only the short-term jump information and the model extended by both the short-term and long-term jump information perform better, and their forecasting performance outperform all the other extension models in most cases. These findings are robust even if the assessment method, the rolling window length and the lag order are changed. It is worth mentioning that the advantage of these extension models in predicting EUA volatility is mainly seen in periods of low volatility. However, even during periods of COVID-19 pandemic, the predictive performance of the two well-performing jump extension models cannot be underestimated.