Lower Leverage Levels Research Articles

The impact of the Bank of Japan’s exchange traded fund and corporate bond purchases on firms’ capital structure

AbstractThis study examines how the Bank of Japan’s (BOJ’s) exchange-traded fund (ETF) and corporate bond (CB) purchases affect the capital structure of Japanese listed firms. The results first suggest that the BOJ’s ETF purchases reduced the equity risk premium for firms included in the purchases, thereby lowering their cost of equity. These firms issued more stocks and became less dependent on bond debt and bank loans than control firms, resulting in a lower level of leverage. On the other hand, the BOJ’s CB purchases lowered the risk premium of bonds eligible for such purchases, which implies a decline in the cost of bond debt. Firms eligible for CB purchases issued more bonds, while reducing bank debt but to a smaller extent, thus having higher leverage than firms not eligible for CB purchases. Categorizing firms into four groups based on whether their stocks were included in ETF purchases and/or their bonds were eligible for CB purchases further shows that the policy impacts on firm financing have differed depending on which group a firm fell in. These results indicate that the BOJ’s ETF and CB purchases have had a considerable impact on the cost of capital, securities issuance activities, and corporate capital structure.

Leverage ratio, risk‐based capital requirements, and risk‐taking in the United Kingdom

AbstractWe assess the impact of the leverage ratio capital requirements on the risk‐taking behaviour of banks both theoretically and empirically. Conceptually, introducing binding leverage ratio requirements into a regulatory framework with risk‐based capital requirements induces banks to re‐optimise, shifting from safer to riskier assets (higher asset risk). Yet, this shift would not be one‐for‐one due to risk weight differences, meaning the shift would be associated with a lower level of leverage (lower insolvency risk). The interaction of these two changes determines the impact on the aggregate level of risk. Empirically, we use a difference‐in‐differences setup to compare the behaviour of UK banks subject to the leverage ratio requirements (LR banks) to otherwise similar banks (non‐LR banks). Our results show that LR banks did not increase asset risk, and slightly reduced leverage levels, compared to the control group after the introduction of leverage ratio in the UK. As expected, these two changes led to a lower aggregate level of risk. Emperical results indicate that credit default swap spreads on the 5‐year subordinated debt of LR banks decreased relative to non‐LR banks post leverage ratio introduction, suggesting the market viewed LR banks as less risky, especially during the COVID 19 stress.

Board Size and Leverage in Indonesian’s Pharmaceutical Companies. The Moderating Role of Profitability

This empirical study examines the relationship between board size, leverage, and profitability in the pharmaceutical sector. Using a sample of pharmaceutical companies from 2019 to 2022, the study reveals that board size has a significant positive impact on leverage. Additionally, profitability acts as a moderator in the relationship between board size and leverage. The results indicate a significant negative relationship between board size and leverage when considering profitability, suggesting that larger boards in pharmaceutical companies are associated with lower levels of leverage. These findings contribute to the existing literature on corporate governance and financial performance, highlighting the significance of board size in shaping leverage decisions and influencing profitability. The study suggests that larger boards in the pharmaceutical sector exercise caution in managing debt, leveraging their enhanced monitoring capabilities, diverse expertise, and increased accountability. Policymakers, industry practitioners, and investors can use these insights to make informed decisions regarding board composition, financing strategies, and evaluating the financial performance and risk profiles of pharmaceutical companies.

Does being Shariah-compliant affect capital structure decision: evidence from emerging markets

Purpose This paper aims to examine the relationship between Shariah compliance and corporate capital structure decisions. This study explores the variation of capital structure speed of adjustment. Design/methodology/approach The authors’ sample includes a sample of the largest 200 nonfinancial firms trading in the Malaysian and Pakistan stock markets. This study uses ordinary least squares and dynamic two-step system generalized method of moments to test the hypotheses of the study. Findings The results show that Shariah-compliant firms use a lower level of leverage than the noncomplaint firms. Moreover, while both types of firms have optimal capital structures, the speed of adjustment toward the targets is slower for Shariah-complaint firms than non-Shariah-compliant firms. This variation can be seen through the different levels of market imperfection experienced by the two types of firms. Shariah-compliant firms follow Islamic rules that restrict the type and degree of leverage, thus affecting the availability of external funding to Shariah-compliant firms. Research limitations/implications The findings call for more development and innovation of financing instruments that comply with Shariah rules that will increase of supply of external funds for Shariah-compliant firms and, thus, reduce market imperfections that are faced by Shariah-compliant firms. Originality/value The study contributes to the limited number of studies that examine the nexus between conventional corporate theories and Islamic corporate finance.

Investment Efficiency and Earnings Quality: European Evidence

This study aims to analyze the relationship between earnings quality and investment efficiency in the European context, in order to understand whether higher earnings quality mitigates investment inefficiencies. To further understand the relationship between earnings quality and investment efficiency, the roles of cash and financial constraints are also analyzed. We use firm-year data based on unbalanced panel data, and control for country, year, and industry fixed effects using a sample composed of listed and unlisted European companies from 19 countries and 17 industries for the period 2010–2018. The results show a positive and significant relationship between earnings quality and investment efficiency. In both scenarios of investment inefficiency, overinvestment and underinvestment, the results suggest that a higher quality of reported earnings mitigates investment inefficiencies. The results also suggest that the negative relationship holds for cash-constrained and unconstrained firms, and that in firms that are financially unconstrained (higher levels of cash and lower levels of leverage) the combined effect with earnings quality is associated with a lower investment efficiency.

Which Factors Play a Role in CoCo Issuance? Evidence from European Banks

This article explores the reasons why some banks issue Contingent Convertible (CoCo) bonds, but others do not. To this end, we use a binary logistic model and control for the determinants suggested by the literature. Our findings suggest that larger banks and those with higher Tier 1 capital, higher net loans, higher wholesale funding, lower levels of leverage, and lower risk-weighted assets have a higher tendency to issue CoCos and were the early adopters of this novel financing instrument. Our results also suggest that banks in countries with higher annual growth rate of GDP per capita and those listed as Globally Systematically Important Banks (G-SIBs) were more likely to issue CoCos. These results are difficult to explain by traditional capital structure theory, which assumes that companies voluntarily choose their optimal capital structures, but suggest that banks were more likely to be encouraged or nudged to issue CoCos by following regulators’ advice.

Shariah compliance and stock price synchronicity: evidence from India

PurposeThis paper aims to document the effect of shariah compliance on stock price synchronicity.Design/methodology/approachThis paper uses the data of non-financial firms from India and various estimation procedures (pooled OLS and instrument variable regression) to test the arguments presented in this paper. The time period of the study ranges between 2000 and 2019.FindingsThe results show that shariah-compliant firms have significantly higher levels of synchronicity than non-compliant firms. The findings hold after comprehensive inclusion of relevant controls and to a number of sensitivity tests. The authors attribute this result to the unique financial characteristics (lower levels of leverage, liquidity and cash) of shariah-compliant firms. The paper argues that these characteristics are related to better information environment which is responsible for higher levels of synchronicity. The paper also shows that the difference in the synchronicity levels of the two groups is less pronounced for those shariah-compliant firms that have relatively high levels of leverage and cash ratios.Originality/valueThe authors believe that this is an initial attempt to document the impact of shariah compliance on stock price synchronicity.

CSR reporting levels and financial quality: comparative analysis in indonesian sharia and conventional banking

The variables tested and analyzed in this study are social responsibility disclosure, earnings quality, profitability, leverage, loss occurrence, and banking characteristics in Indonesia. More specifically, this study compares these variables to Islamic banks and conventional banks. This is done to reveal some various significant effects of religiosity norms that exist in the sharia principles of Islamic banking and do not exist in conventional banking. Measurement of the level of CSR disclosure is carried out using a dichotomous content analysis procedure which is prepared based on the GRI G4 standard. The finding show that conventional bank in Indonesia has a higher level of CSR disclosure than the islamic bank, but its not significantly different from the statistic test. Further descriptive analysis regarding the different characteristics of these two entities have been done to find the reasons for this finding. Subsequent findings show that the significant age gap of these banks affects the stability of the bank and their level of management ability. The characteristic of the conventional banks are older in age, larger in asset size, and their awareness of using better quality auditors are better. Even so, Islamic banks have a better level of earnings quality, lower losses, and a lower level of leverage.

PENGARUH KINERJA KEUANGAN TERHADAP CORPORATE SOCIAL RESPONSIBILITY PADA PERUSAHAAN PERBANKAN YANG TERDAFTAR DI BURSA EFEK INDONESIA PERIODE 2014-2018

ABSTRACTObjective: This study aims to determine the effect of financial performance on corporate social responsibility. The population in this study are banking companies listed on the Indonesia Stock Exchange (IDX) of 45 companies. Determination of the sample using purposive sampling. The samples used in this study were 21 companies with 105 observations. Methodology: The analytical model used to test hypotheses is multiple linear regression analysis and uses SPSS as a statistical test tool.Finding: H1, H2, and H3 Â accepted at the 5% confidence level.Conclusion: The results of this study indicate that company size (X1) has a negative and significant effect on corporate social responsibility. The bigger the size the company then the existence of assets owned by the company is unemployed, forcing the company to spend more costs, thereby reducing the allocation of costs used to disclose broader social information. Profitability (X2) has a positive and significant effect on corporate social responsibility. the greater the level of profits owned by the company, the wider the company discloses social information. While leverage (X3) does not affect corporate social responsibility. The higher or lower level ofleverage owned by a company will not influence the company in disclosing its social information.Â

Investigating the Effects of Board and Firm Characteristics on Firm Performance: An Agency Theory Perspective

The study aims to investigate the effects of various board and firm features on firm performance. Based on an agency theory perspective the study used a sample of 384 observations from the Egyptian Stock Market (EGX) from 2016-2018, the paper uses statistical analyses to identify the characteristics which affect the firm performance by independent variables. The study includes testing the hypothetical conditional influence of seven variables on the firm performance. The results of this study show that board size, CEO duality, firm size and financial leverage have a significant positive effect on firm performance. In contrast, the other variables; board independence, audit quality and firm industry, had an insignificant association with firm performance. The results of the study support that large companies which have large boards of directors with low levels of leverage and CEO duality have better financial performance than other firms. However, the impact of economic and political characteristics on the firm performance is not investigated in this study therefore one must be careful when generalizing the results. The current study contributes to the accounting literature by adding some evidence on the significant effects of some board and firm characteristics, namely role duality, board size, firm size, and leverage on the financial performance of the firm.

Venture capital backing: financial policies and persistence over time

<abstract> <p>The present article seeks to analyze the financial policies of companies backed by Private Equity and Venture Capital funds (PE/VC). Our sample consists of firms completing an initial public offering between January 1991 and December 2000. Our hypotheses relate to the difference between VC and non-VC-backed firms in terms of financial policies and their persistence. We use four measures to evaluate the firms' financial policies: i) Cash holdings; ii) Leverage; iii) dividends out of their earnings; and iv) interest coverage. To test the four hypotheses, we run Pooled OLS regressions. The results suggest that VC-backing firms keep a higher level of cash holdings than non-VC-backed firms. This effect lasts for at least 8 years after the IPO. We show that VC-backed firms are associated with a lower level of leverage over the first 8 years after the IPO. Differently, while interest coverage is lower in the first years after the IPO, results are not persistent, even reverting in later years. Finally, we do not find statistically significant evidence of a difference between VC- and non-VC-backed firms on dividend to earnings ratio. Our results are robust across statistical methods and different methodologies.</p> </abstract>

Do working capital management practices influence investment and financing patterns of firms?

PurposeThe present study aims to investigate the impact of working capital management (WCM) practices on the investment and financing patterns of listed nonfinancial companies in Pakistan for a span of 10 years.Design/methodology/approachThe study is based on secondary financial data of 354 listed nonfinancial Pakistani firms during the period of 2005–2014. The two-step generalized method of moment (GMM) regression estimation technique is employed to ensure the robustness of results.FindingsEmpirical testing reveals that: excessive funds tied up in working capital have a negative impact on the investment portfolio of sample firms. Besides, a negative relationship between change in fixed assets and excess net working capital posits that, eventually, firms use idle resources tied up in short-lived assets to boost their investment activities. Furthermore, larger working capital levels were associated with higher leverage ratio which indicates that firms with inefficient WCM policies have to rely heavily on long-term debt to meet their short-term financing requirements. Additional results indicate that firms that take more time to sell inventory and convert receivables to cash, make more use of debt. Results of cash management models illustrate that cash-rich firms have lower leverage levels which signal the strong financial health and internal revenue generation capability of such firms.Originality/valueThere is a dearth of empirical studies that examine the implications of WCM decisions on a firm's capital structure. Besides, these studies are only confined to how a WCM policy influences the long-term investment activities of a firm. The research contributes to the extant literature by empirically revealing a link between the WCM practices and the firm's long-range investment and financing patterns. Hence, financial managers shall account for the impact of their short-term financial management decisions on the capital structure of the firm.

Can banks monitor small business borrowers effectively using hard information?

AbstractWe investigate whether banks rely on hard information to monitor small business borrowers and to what extent hard information is credible. Using Japanese firm‐level data, we show that banks reduce the amount of lending to defaulting firms if the firms are financially distressed and suffer operating losses. In contrast, banks do not significantly reduce the amount of lending to defaulting firms with low levels of leverage and high profitability. This implies that banks mitigate type II errors if they receive default signals using the hard information of informationally opaque small businesses.

Is integrated reporting associated with corporate financing decisions? Some empirical evidence

PurposeThe emerging practice of integrated reporting (IR) has raised curiosity regarding how it impacts on firms and their stakeholders. The purpose of this paper is to examine whether a firm’s decision to provide integrated reports is associated with its financing decisions and whether financial reporting quality mediates the relationship.Design/methodology/approachA usable sample of 832 firm-year observations was employed based on a dataset drawn from companies listed on the Johannesburg Securities Exchange (JSE) for the period between 2009 and 2015.FindingsThe findings show that firms that provide integrated reports tend to have lower levels of leverage, and this effect is partially mediated through financial reporting quality. We further document that the partial effect of financial reporting quality on leverage is stronger for firms that provide integrated reports than is the case for other firms. The findings suggest that IR enables firms to employ equity financing, which is a more informationally-sensitive source of capital than debt financing.Originality/valueThis study is the first to document evidence suggesting that management can draw on IR in devising optimal financing strategy.

Dynamic effects of financial spillovers on bank lending: evidence from local projection-based impulse response analysis

ABSTRACTUsing local projections, we find that a positive (detrimental) financial stress (FS) shock affects bank lending more quickly and is more persistent than a negative (benign) FS shock. The study confirms that there is timing asymmetry, but we do not find magnitude asymmetry between positive and negative shocks. Furthermore, we find that a bank balance sheet characterized by a higher level of liquidity and efficiency and a lower level of leverage tends to better insulate lending from the impact of FS spillovers. Our findings have important implications for policymakers who seek to develop more efficient and resilient banking sectors.

The Impact of Private Equity and Venture Capital Funds on post-IPO Operational and Financial Performance in Brazilian invested companies

The present article seeks to analyze the legacy and its persistence over time in terms of financing and operational policies and financial performance, of companies invested by Private Equity and Venture Capital funds (PE/VC). The PE/VC industry is characterized by the function of identifying companies with large return potentials and that grow arithmetically – due to capital constraints – to provide adequate and necessary sources of capital and experience for exponential growth. In this study, we used four measures that relate to companies’ financial policies and their persistence over time: i) cash & equivalents; ii) leverage; iii) Return on Assets (ROA); and iv) sales growth. The results suggest that PE / VC invested companies imply higher levels of cash & equivalents and are associated with a lower level of leverage during the first 5 years after the IPO. In addition, companies financed by PE/VC funds show higher profitability and higher sales growth compared to non-invested companies in the short term, i.e., in the first 3 years after the IPO.

The Importance of Being Prudent: Leverage and the Informational Content of Dividends

This paper studies how the informational content of dividends is affected by leverage. While higher dividends convey good news at low levels of leverage, dividends become a bad signal when leverage is high. Quantitatively, a dividend increase is predicted to have a positive stock price reaction for the median public U.S. firm, but the effect is reversed at higher levels of leverage. The same switch occurs for other corporate actions, including debt buybacks, debt issuance and risk taking. The results highlight the importance of studying the various determinants of firms’ financial decisions jointly.

The impact of cash flow volatility on firm leverage and debt maturity structure: evidence from China

PurposeThe purpose of this paper is to investigate the influence of cash flow volatility on firm’s leverage levels. It also analyzes how cash flow volatility influences the debt maturity structure for the Chinese listed firms.Design/methodology/approachThe authors construct the measure for cash flow variability as five-year rolling standard deviation of the cash flow from operations. The authors use generalized linear model approach to determine the effect of volatility on leverage. In addition, the authors design a categorical debt maturity variable and assign categories depending upon firm’s usage of debt at various maturity levels. The authors apply Ordered Probit regression to analyze how volatility affects firm’s debt maturity structure. The authors lag volatility and other independent variables in the estimation models so as to eliminate any possible endogeneity problems. Finally, the authors execute various techniques for verifying the robustness of the main findings.FindingsThe authors provide evidence that higher volatility of cash flows results in lower leverage levels, while the sub-sampling analysis reveals that there is no such inverse association in the case of Chinese state-owned enterprises. The authors also provide novel findings that irrespective of the ownership structure, firms facing high volatility choose debt of relatively shorter maturities and vice versa. Overall, a rise of one standard deviation in volatility causes 8.89 percent reduction in long-term market leverage ratio and 26.62 percent reduction in the likelihood of issuing debentures or long-term notes.Research limitations/implicationsThis study advocates that cash flow volatility is an essential factor for determining both the debt levels and firm’s term-to-maturity structure. The findings of this study can be helpful for the financial managers in maintaining optimal leverage and debt maturity structure, for lenders in reducing their risk of non-performing loans and for investors in their decision-making process.Originality/valueExisting empirical literature regarding the influence of variability of cash flows on leverage and debt maturity structure is inconclusive. Moreover, prior research studies mainly focus only on the developed countries. No previous comprehensive study exists so far for Chinese firms in this regard. This paper endeavors to fulfill this research gap by furnishing novel findings in the context of atypical and distinctive institutional setup of Chinese firms.

IFRS Adoption and Stock Prices of Japanese Firms in Governance System Transition

This study examines firms' decision to voluntarily adopt IFRS in a setting where there are changes to the governance system in a traditionally code law country, as well as how the market responds to such decisions. We find the probability of voluntary IFRS adoption to be higher among firms that have a high proportion of foreign shareholders, undertake quality audits, have low levels of leverage, feature a nominating committee, and are included in the new market index. In addition, the stock prices of IFRS adopters tend to increase around the announcement date of IFRS adoption, compared to those of non-adopters. Finally, market reactions are smaller for firms that feature a nominating committee, and are included in the new market index—perhaps because IFRS adoption by these firms is less surprising to market participants, and because IFRS adoption is not expected to add large incremental value to these firms.

Does debt curb controlling shareholders' private benefits? Modelling in a contingent claim framework

Debt is not frequently analyzed in relation to the conflict between controlling and outside shareholders. At the same time, debt leverage stands as a key variable in the design of a control contract as it has a strong disciplinary role. A simple option valuation model is used to show that debt is also a governance variable because it can moderate or enhance private benefits. It is argued that an asymmetrical self-regulation mechanism may develop in the case of control by a dominant shareholder. The joint questions of control, private benefits, and debt levels are linked within an inside corporate governance framework. At low levels of leverage, debt is relatively less disciplinary compared with a non-private benefits case. When leverage exceeds a threshold point, it becomes strongly disciplinary. We show that under given conditions, a self-regulation mechanism develops where the controlling shareholder is incentivized to hold less debt when he/she wants to increase his/her private appropriation rate.