Practice Of Corporate Finance Research Articles

Debt Financing and Operational Efficiency of Companies listed at Nairobi Stock Exchange, Kenya

Background: As companies evolve, they confront a myriad of challenges, opportunities, and risks, demanding a laser focus on financial strategies. Within this landscape, the intertwined concepts of debt financing and operational efficiency emerge as critical determinants of a firm's performance and longevity. Debt financing sources presents an intricate landscape in which companies make their financial decisions. However, the existing literature often treats debt financing as a homogenous entity, lacking the granularity required to discern how the specific composition of debt, including the reliance on trade credit versus traditional short-term and long-term bank borrowings, might influence operational efficiency. Thus, this study aimed at identifying the effect of debt financing composition on operational efficiency of companies listed in NSE. Methods: The research focused on examining the link between debt financing structures and operational efficiency in 50 firms listed on the Nairobi Securities Exchange (NSE). The study collected panel data ranging between 2015 and 2022. A positivist research philosophy was employed, utilizing quantitative analysis techniques, specifically descriptive statistical analysis and random effects regression model. Findings: The regression results of the random effects model reveal the relationship between debt financing constructs and operational efficiency. The overall R-squared value for the model is 0.176, suggesting that around 17.6% of the variation in operational efficiency can be explained by the debt financing sub-variables. Furthermore, the model’s goodness of fit is assessed through the Wald chi-square test (χ² =72.61, p = 0.000), confirming its statistical significance. The coefficient for the independent variables trade credit, short-term borrowings, and long-term borrowings are (β = 0.331, p = 0.002), (β = 0.642, p = 0.001), and (β = 0.349, p = 0.001), respectively. The p-values are less than 0.05, indicating that the effects of trade credit, short-term borrowings, and long-term borrowings on the operational efficiency of firms listed at the NSE are statistically significant at the 5% level. Conclusion and Implications: The study concludes that debt financing comprising of trade credit, short-term borrowing and long-term borrowing have beneficial effects on operational efficiency. While all three sub-variables of debt financing contribute to enhanced operational efficiency, their application in corporate financing practices varies, with long-term borrowing being a common choice for funding total assets. In light of these findings, company managers should recognize debt financing as a strategic tool for improving operational efficiency. This recognition should be accompanied by a careful and thoughtful approach to utilizing the three components of debt: trade credit, short-term borrowing, and long-term borrowing.

The Impact of Family Ownership on Capital Structure and Business Performance

Financial decision making in family companies is a topical issue that has arisen from an awareness of the significant impact of family businesses on the economies of individual countries. This article deals with the capital structure and business performance of family firms in the Czech Republic, as there is still a significant gap in family business research and empirical verification. This study aims to investigate Czech family businesses’ corporate financing practices and compare them with population data from all active companies. The literature distinguishes between the positive and negative impacts of family ownership on capital structure and performance. Our empirical findings hypothesise that family businesses are more leveraged than non-family firms and vice versa. At the same time, a slightly positive impact from family influence on firm financial performance is indicated. This study uses descriptive statistics to detect family influence on corporate capital structure and financial performance regarding business sectors. The results of this study indicate that Czech family firms are less indebted than all/non-family businesses, and that they have proved to be more profitable in terms of ROEs and ROAs. Furthermore, significant differences in financial characteristics have been identified not just between individual business sectors but also between sample family firms and all/non-family firms within one business sector.

The Contribution of Philosophy to Ethical Corporate Finance: Challenges and Perspectives

This article explores the synergy between philosophy, corporate finance, and corporate social responsibility (CSR), emphasizing the importance of interdisciplinarity in addressing the complex ethical, social, and environmental challenges faced by organizations today. By integrating the teachings of philosophy and ethical theories, companies can enrich their understanding and practice of ethical corporate finance and CSR, developing conceptual frameworks, critical thinking skills, and systematic approaches for ethical decision-making and problem-solving. Companies that adopt ethical and responsible practices can promote value creation for stakeholders, financial performance, and long-term sustainability, thereby contributing to the achievement of sustainable development goals and the creation of a more just, sustainable, and responsible world.

Corporate Finance Practices in Nepal

The objective of the study is to explore the practises of capital budgeting, cost of capital, capital structure , and dividend policy adopted by firms in Nepal and to examine whether the practises differ with respect to various demographic variables like firms size, sector, and leverage. The study follows quantitative approach and descriptive research design. Survey was conducted during the month of July and August, 2020 to a population of 978 Nepalese firms with a response rate of nearly 10.33 per cent. The findings on capital budgeting practises of corporate Nepal show a strong preference for non-discounted methods like break even analysis and profitability. The majority of respondents use a WACC as an appropriate discount rate when evaluating any potential investment decision. The scenario analysis and sensitivity analysis of the most widely used techniques for project risk analysis. The Nepalese firms calculate their cost of equity based on regulatory requirement followed by investors requirements. Debt from financial institutions is the most preferred source of finance almost 80% of Nepalese firms have target dividend payout ratio and majority of firms focus on absolute level of dividend than dividend changes.

Gestão Financeira na Prática: Análise de Dados do Levantamento Brasileiro

ABSTRACT Objective: this article replicates in Brazil a survey - previously applied in North America and Europe - to inquire CFOs about the cost of capital, capital budgeting, and capital structure. Method: we rigorously translated and validated the questionnaire before administering it over the internet. We delivered the questionnaire to 1,699 Brazilian private and public firms and received 160 responses, with a return rate of 9.4%. We analyzed the responses conditioned to firm characteristics. Results: the results of the financial policy survey in Brazil indicate that firms employ NPV and IRR as preferred investment techniques and the CAPM and its variations as the method for computing the cost of equity capital. They are also concerned with the cost of debt and transaction costs of market instruments, and they use internal funds as their main investment funding source. The conditional analysis indicates that large, listed, and regulated firms behave differently regarding financial decisions than their counterparts. Conclusion: the main takeaway from this study is that the institutional environment (markets, institutions, instruments, and the economy) is an important determinant of the practice of corporate finance.

Three Corporate Finance Practices in Pakistan: A Review of Previous Studies and Way Forward

This study reviews the empirical studies arranged on Pakistani capital market and specifies the pattern of three corporate finance practices. The subject of corporate finance discusses the various activities performed at firm level such as capital budgeting, capital structure, and dividend payout policy. The capital budgeting technique consists of six methods i.e., net present value, discounted cash flow, payback period, and internal rate of return etc. but Pakistani firms often interested in net present value and internal rate of return for capital investment evaluation. Similarly, the capital structure decision carries the debate on two options of financing i.e., debt financing and equity financing but literature shows that the Pakistani firms generally follow the pecking order theory and prefer more debt financing. Similarly, as for concern dividend payout policy, literature discusses the different theories and determinants but still unable to generalize the dividend payout trend specifically in Pakistani context. Corporate managers and policymakers can use the conclusion for strategic purposes.

Green bonds as a tool against climate change?

AbstractAlthough green bonds are becoming increasingly popular in the corporate finance practice, little is known about their implications and effectiveness in terms of issuers' environmental engagement. With the use of matched bond‐issuer data, we test whether green bond issues are associated to a reduction in total and direct (Scope 1) emissions of nonfinancial companies. We find that, compared with conventional bond issuers with similar financial characteristics and environmental ratings, green issuers display a decrease in the carbon intensity of their assets after borrowing on the green segment. The decrease in emissions is more pronounced, significant and long‐lasting when we exclude green bonds with refinancing purposes, which is consistent with an increase in the volume of climate‐friendly activities due to new projects. We also find a larger reduction in emissions in case of green bonds that have external review, as well as those issued after the Paris Agreement.

Islamic Finance

This paper analyzes two basic forms of „sale-based Islamic finance“: murâbaḥa (credit sale) and the financing technology of tawarruq. The article examines the fundamentals of business ethics emerging through Islam, the anchoring and execution of sharî̕ a-compliant financial transactions in the secular Western private legal systems, clarifies the legal character of two main types of corporate finance practice, and answers the question of whether these banking transactions are subject to authorization or not.

Tax Code Change Impacts on the Practice of Corporate Finance

Public Law No. 115-97 (initially introduced in the house as the Tax Cuts and Jobs Act or TCJA) passed by Congress in 2017 has significantly revised the Internal Revenue Code of 1986. Since taxes play an important role in financial decision-making, the TCJA will impact decisions in many areas of corporate finance, including capital structure and capital budgeting. By using S&P 500 data, this paper attempts to broadly estimate these impacts. The lower corporate tax rate under the new law reduces the corporate incentive to borrow to benefit from the interest expense tax shield. The lower tax rate also reduces the depreciation tax shield and marginally raises the average cost of capital. However, an S&P 500 firm on average will receive an estimated $239 million per year in tax-related benefits, based on 2017 financial data. This annual benefit will decrease after five years as the 100% expensing of investments is gradually withdrawn after 2023.

The role of creditor rights on capital structure and product market interactions: International evidence

An extensive body of international business research examines how cross-country variations in legal institutions influence corporate finance practices. Building on this literature, as well as the literature on capital structure and product market interactions, we investigate the effect of an important dimension of legal institutions – creditor rights – on the product market performance of highly leveraged firms. Using a sample of 37,422 firms from 60 countries over the 1989–2016 period, we find that strong creditor protection benefits less leveraged firms, but adversely affects highly leveraged firms by increasing the adverse responses of customers, competitors, and employees. The adverse effect of creditor rights on the costs of high leverage is more pronounced for firms in countries with developed debt markets and banking systems, but mostly insignificant for firms in countries with developed equity markets and low information asymmetry. Our study offers new insights into the international business literature and contributes to the debate on the role of creditor protection by uncovering a potential cost based on capital structure and product market interactions.

Green Bonds as a Tool Against Climate Change?

While green bonds are becoming increasingly popular in the corporate finance practice, little is known about their implications and effectiveness in terms of issuers’ environmental engagement. Using matched bond-issuer data, we test whether green bond issues are associated to a reduction in total and direct (scope 1) emissions of non-financial companies. We find that, compared to conventional bond issuers with similar financial characteristics and environmental ratings, green issuers display a decrease in the carbon intensity of their assets after borrowing on the green segment. The decrease in emissions is more pronounced, significant and long-lasting when we exclude green bonds with refinancing purposes, which is consistent with an increase in the volume of climate friendly activities due to new projects. We also find a larger reduction in emissions in case of green bonds that have external review, as well as those issued after the Paris Agreement.

Corporate finance approaches of Icelandic private firms after the financial crisis

PurposeThe purpose of this paper is to provide insights about corporate finance decision-making of Icelandic private firms that have experienced a dramatic financial crisis in 2008–2010. It observes the capital budgeting methods and cost of capital techniques for private firms after a systemic financial crisis. Moreover, the paper identifies the main determinants of capital structure and capita rationing during this period.Design/methodology/approachThis paper surveys corporate finance practices of 80 out of the 250 largest bank-centred private firms after the financial crisis.FindingsHighly leveraged private firms that have experienced a dramatic financial crisis in 2008–2010 use payback and net present value techniques almost at a similar rate when assessing new investments. The sample firms largely rely on the cost of debt to determine the cost of invested capital. However, capital asset pricing model is the most popular method among the few sample firms that estimate the cost of equity. The need to maintain financial flexibility and cost associated with financial distress are the most influential factors regarding capital structures, whereas investment practices avoid capital rationing associated with the financial crisis.Research limitations/implicationsThe limitations of the study are that it is country specific and absence of data over the period before the financial crisis that may have been applied to present more insight into this topic.Practical implicationsSample firms fail to incorporate appropriate cost of capital methods and as the result they are likely to apply incorrect “hurdle rate” which could undervalue or overvalue new investments. This paper indicates that capital budgeting decisions by managers of the bank-centred Icelandic private firms who tend to be major shareholders do not reflect the tendency to expropriate outside and minority investors. Private firms that have emerged from the meltdown of the financial system highlighting the importance of “special” lending relationship in assisting bank-centred firms to avoid the severity of financial constraints.Originality/valueThis study employs a failure of the banking system to provide new knowledge about corporate finance practices of private firms after the financial crisis that have curtailed the access to both internal and external sources of capital.

Cross-listing and corporate malfeasance: Evidence from P-chip firms

The rapid growth of the private sector in China in recent decades has resulted in a large number of capital-hungry private sector firms. An increasing number of these firms choose to raise equity capital on international exchanges, which typically have stronger disclosure, corporate governance, and investor protection regulations. In light of international investors' and regulators' concerns about the corporate finance practice of China's private sector firms, particularly regarding the integrity of their reported earnings, we investigate whether these firms aggressively manipulate their accounts by examining those listed in Hong Kong, commonly known as P-chips. We find systematic evidence that P-chips engage in more earnings management and other corporate misbehaviors than their counterparts in Hong Kong. We posit and provide evidence consistent with cross-jurisdictional enforcement difficulty as a possible explanation for P-chips' questionable practices, and discuss its implications.

Financial Flexibility and Opportunity Capture: Bridging the Gap Between Finance and Strategy

Logically, the practice of corporate finance and corporate strategy should be closely coordinated, but in reality there remains a massive gap between the two. This can lead strategically oriented firms to de‐emphasize or even discard NPV. Neither financial theory nor competitive strategy has been very open to the economic value of investment opportunity capture. Strategy must recognize that financial flexibility provides powerful advantages and financial theory must evaluate entire strategic programs rather than discrete, stand‐alone projects.Necessarily, the financial discussion of cost of capital and capital structure has to change. The authors offer two specific concepts to bridge the Gap between Finance and Strategy:1) Reserve Financial Capacity is the annual sum of Free Cash Flow, Financing Flexibility and Cash Reserves over the period envisioned for strategy execution. Individual projects must belong to strategic programs in the sense that they either: 1) keep the base business running; 2) preserve an existing competitive position; or 3) form part of a program to enhance advantage or fashion a strategic breakout.2) Strategically Sustainable Cost of Capital is the true, blended cost of capital required to complete an entire capital program.These concepts provide financial rigor to firms with well‐defined strategies and allow managements to wield Financial Flexibility as a strategic weapon, creating options on unique buying opportunities, such as at the bottom of industry cycles.

Corporate Finance Practices in Sri Lanka

The aim of this study was to investigate the use of corporate finance practices in terms of capital budgeting, cost of equity capital and capital structure in Sri Lanka. A comprehensive primary survey was conducted of 38 out of 150 financial officers of companies listed on the Colombo Stock Exchange (CSE) in Sri Lanka. Stratified random sampling was used to select the participants in order to represent the different sectors in CSE. Collected data were then analyzed by applying mean and percentage analysis. Results of the survey revealed that NPV was the most frequently ?always? cited capital budgeting method, followed by IRR and PB. CAPM was the most preferred method to calculate the cost of equity capital followed by average historical rate of return on common stock. Remarkably, most firms would use a discount rate for entire company to evaluate the project. Further, it was evaluated that how finance professionals make adjustments for risk factors. It was concluded that risk of unexpected inflation, interest rate risk, term structure risk, business cycle risk, size based risk, market to book ratio and momentum were mostly adjusted by discount rate while commodity price risk, foreign exchange risk and distress risk were mostly adjusted by cash flow. Further, this study was to find out whether Sri Lankan finance professionals behave as expected by pecking order theory of capital structure patterns. Findings of the study are in line with the pecking order theory that firms are having preference to internal finance for their capital. This research has proffered a more reliable and comprehensive analysis of corporate finance practices in Sri Lankan companies.

Reconfiguration of Financial System Elements to Restore Economic Growth: The System Simplicity and Transformation towards State-Based and Corporate-Based Types

Highlight The analysis indicates that credit in general have been driving the long-term economic growth more than diversity of financial systems or financial innovations. However, the driver becomes a drug as GDP growth needs a several times faster growth of credit. The scholastic review of the traditional system characteristics (functional, intermediation, institutional) stresses the characteristics as different sides of one coin and the characteristics conventional simplicity cannot explain the system little contribution to economic growth. The research also stresses practical complexity of the financial system, not only the problematic of "too-big-to-fail" banks, but also interrelations of such seemingly uncorrelated natural and social disasters as the Iceland volcano and the Arab Spring, Obama care and military tensions in Ukraine. Conventional market-based or bank-based approaches are criticized as staying too far from primary distribution of money by corporate finances and secondary redistribution by public finances, based on statistics of fixed capital investments and its sources. The article collects opinions and evidences that the financial system simplicity should become a conventional trend combined with the financial instruments approach. The only few leading financial instruments should be offered widely, but others should service the niches to decline an excessive burden of the financial sector for economies. The important contribution of public finances to long-term economic growth is not only visible by sovereign borrowings and infrastructure investments, but also by income redistribution, optimization of consumption and maximization of output by the current budget. The article also collects the evidences and explanations that large non-financial corporations effectively invest in fixed capital and support credit sales without real financial intermediation, and also that many financial services are now provided by IT companies without banks. Problem set and research methodology Financial system, the system types and elements and the country specific features are one of the most popular topics for scientific articles. At the same time, the publications rarely stress the reality that financial system is neither the economic driver, at least in 2008-2016, nor the accumulator of financial sources for economic growth. The mainstream economic thought points that major economies face cyclical crisis, not systematic, and only the time is needed. Economic history of the 20th century shows that financial systems of major economies changed noticeably during every financial crisis and economic cycle. Such system elements as commercial banks, financial markets, public budgets, corporate finance practices fundamentally act without any significant changes. However, economies are really driven by few of the most influential financial institutions and financial instruments, which have been changing from one generation or a long economic cycle to another. Hence, providing many historic analogues of the past transformation of financial system seems to be an important illustration of modern challenges and proposed shifts. The bulk of literature is written about the financial system nature and its role, about two conventionally popular market-based and bank-based models, as well as about the system complex approach. The review of such literature forms a first third of this article and allows shaping the analytical approaches to another proposed system types, such as state-based and corporate-based. Avoiding a wide observation of conventional thought, only several articles were segregated for the review, either from the respective international finance organizations or highly ranked by citations. Financial system has been developing by bright economic events. Thus, the article mainly interprets them and specifies their influence, along with the system shift to unconventional state-based and corporate-based types. …

Corporate finance practices in Morocco

PurposeThe purpose of this paper is to examine corporate finance practices in the frontier market of Morocco and compare the practices used by Moroccan companies to those in other countries. It focuses primarily on capital budgeting and real options. The study also examines whether corporate finance practices used in Morocco are consistent with more theoretically superior techniques.Design/methodology/approachThe study uses a mail questionnaire to gather data from chief financial officers and other senior executives of Casablanca Stock Exchange (CSE) listed companies.FindingsMoroccan managers generally view the internal rate of return, accounting rate of return, and payback method as more important than the theoretically superior net present value. Few of the responding firms use real options when making capital budgeting decisions. They tend to use less sophisticated techniques to evaluate investment opportunities and calculate the cost of capital than their counterparts in developed countries. The most frequently used techniques by CSE-listed companies to estimate the cost of equity capital are the cost of debt plus an equity risk premium and the accounting return on equity. CSE-listed companies rely heavily on management’s subjective judgment to estimate cash flows.Research limitations/implicationsDespite a 40 percent response rate, the number of responses did not permit examining whether differences in firm size, industry, educational background, and other characteristics affect the results. Although non-response bias is a potential limitation, test results show no statistically significant differences between the responding and non-responding companies on any of the five characteristics analyzed. These findings lessen concern about potential non-response bias. Given that the findings relate to a frontier market, they are most likely generalizable to similar countries in the Middle East and North Africa region.Practical implicationsThe findings may be useful to various parties including corporate managers, boards of directors, and financial analysts. Given that investment decisions affect shareholder wealth, understanding the practices used by corporate managers is crucial in deciding what projects to undertake. This research raises awareness for management to review their corporate finance practices, compare them with their peers, and examine whether these techniques are aligned with proper allocation of resources and value maximization.Social implicationsOverall, the findings imply that Moroccan firms have room to improve their corporate finance practices. Failing to do so could have serious implications ranging from the inefficient allocation of resources in the economy to the destruction of shareholder value.Originality/valueTo the authors’ knowledge, this is the most comprehensive study using survey methodology to investigate corporate finance practices in Morocco. It provides new insights on such topics as capital budgeting, capital structure, cost of capital estimation, and real option techniques.

The Dark-Side Effects of Creditor Rights: Evidence from Capital Structure and Product Market Interactions

An extensive body of international business research examines how cross-country variations in legal institutions influence corporate finance practices. Building on this literature, as well as the literature on capital structure and product market interactions, we investigate the effect of an important dimension of legal institutions – creditor rights – on the product market performance of highly leveraged firms. Using a sample of 37,422 firms from 60 countries over the 1989–2016 period, we find that strong creditor protection benefits less leveraged firms, but adversely affects highly leveraged firms by increasing the adverse responses of customers, competitors, and employees. The adverse effect of creditor rights on the costs of high leverage is more pronounced for firms in countries with developed debt markets and banking systems, but mostly insignificant for firms in countries with developed equity markets and low information asymmetry. Our study offers new insights to the international business literature and contributes to the debate on the role of creditor protection by uncovering a potential cost based on capital structure and product market interactions.

Correlations among the corporate finance decision, governance and financial performance in emerging market value: The study in Indian context

The research paper investigated on the financial decision, corporate governance and financial performance in emerging market value, such as in the Indian Context. In spite of the significant published work on investigations into corporate finance decision and Practices, Corporate governance and financial performance, none have comprehensive research in the context of emerging market value in India. Without a doubt most of the pragmatic research the above mention topic has been conducted in developed market such as the USA and UK. The practical evidence shows that the way corporate boards make the decision is not always in tune of with academic decision procedures and theories. The main aim of the present research paper is to study whether theories are associated with the behaviors of financial manager in the terms their practices in the context of Indian emerging market value. The study is based on the survey condected to collect and to analyze data on corporate financial decision, corporate governance, financial performance, associated with the capital budgeting techniques to capital structure, cost of capital, and dividend policy. The study adopted the methodology to investigate the research from the perspective financial manager toward concerns for the sustainable business practices when making the corporate financial decision. The study was conducted in the context of Indian emerging market, through the structured and semi structured questionnaires from the listed companies of NSE in the region of Hyderabad, Bangalore, Chennai, Mumbai and Delhi. The findings of the research have significant implications for both academics and practitioners in the Indian context. It may provide insights on corporate governance in companies in India.

CFOs’ views on corporate financing decisions

Purpose The purpose of this paper is to examine the managerial views on the corporate financing practices of firms in the emerging market of Sri Lanka. Design/methodology/approach A survey approach was employed using chief financial officers (CFOs) from the top non-financial firms listed on the Colombo Stock Exchange. Findings CFOs’ views on corporate financing practices are not fully consistent with the theory: financial hierarchy appears to be more important and firms are less leveraged. Most Sri Lankan CFOs perceive some policy factors as important and theoretically support: volatility of earnings and cash flows, tax advantages of interest deductibility, transaction costs, timing of interest rates, low foreign interest rates and debt equity targets. These factors are high priority in emerging markets but either not important at all or less important in developed markets. Matching debt maturity with the life of assets is equally important in both markets. Most CFOs adhere their financing to the local debt market, while a few firms use foreign debt. CFOs are concerned about earnings per share (EPS) dilution, providing a natural hedge in foreign debt issues, credit ratings, under/overvaluation of stocks and corporate control, whereas they are significantly important in developed markets. Age and education mostly explain the differences. Research limitations/implications The study is restricted to large companies in a relatively smaller market. Hence, sample size is relatively small, even though it shows a higher response rate. Practical implications The study offers insights for corporate financing decision-makers that could impact on firm value through a shift in emphasis toward capital structure theories. Originality/value The paper focuses on corporate financing practices in Sri Lanka in search of emerging market features that could mitigate the gap in the emerging market literature through survey evidence.