Structure Irrelevance Research Articles

Capital structure and business failure: The collapse of Canada’s Dome Petroleum

In popular lore, the failure of Canada’s once-biggest company, Dome Petroleum, was caused by the interventionist policies of the federal government or its misadventures drilling for oil in the Arctic. But these factors acted in varied ways on the company. Rather, corporate finance theories offer more insight into the dynamics that led to Dome’s takeover by the American oil major Amoco in 1988. Dome was unique in its unwillingness to issue new share capital during its growth phase and instead relied on easy debt financing. This in turn was a result of both insider preferences as well as capital market imperfections. The transformation of capital structure from a background into a critical weakness, this paper argues, making use of newly available data and company archives, provides a more convincing explanation of Dome’s failure than other factors. The relevance of capital structure highlights the enduring analytic utility of the Modigliani-Miller theorem of capital structure irrelevance.

Firms’ financing choice between short-term and long-term debts: Are they substitutes?

When selecting debt to finance their operations and investments, companies face crucial decisions regarding the appropriate types of debt. Despite the classic Modigliani–Miller (1958) capital structure irrelevance result, real-world market frictions can significantly impact a firm's capital structure decisions. This reality means that one debt type is not a perfect substitute for another, due to differences in important factors including maturity structures, funding purposes, rollover risks, and funding costs.

A Modigliani-Miller theorem for the public finances of globalized economies

In line with the capital structure irrelevance principle of Modigliani and Miller (1958), this article shows that when international capital allocation choices are determined by well-informed, deep-pocketed global financial investors, there are no net gains a government of a highly internationally financially integrated (“globalized”) economy can consistently extract from resorting to one type of deficit financing (say, debt) versus another (say, money) or by issuing debt in one form versus another. The article proves a new Neutrality Theorem whereby, in a globalized economy the cost of the capital needed by governments to finance their deficits is independent of whether: i) financing originates from debt or money, ii) debt is denominated in domestic or foreign currency, and iii) money and debt are issued under floating or fixed exchange rates. The theorem's two corollaries show that governments seeking to monetize their deficits must remunerate money holdings with a real return that varies inversely with credibility and directly with the stock of money The article points to areas for future research.

The effect of Asset quality on the Value of Commercial Banks in Kenya

Well-functioning banks diminish not only the transaction costs, but also the moral hazard and asymmetric information issues observed in the financial market. Despite the role played in financial inclusion, commercial banks in Kenya have seen increased liquidity risk, declining profitability and credit risk that has weakened the sector's stability. This research sought to determine the effect of asset quality on commercial banks value in Kenya. The study was anchored on four main theories including Capital Structure Irrelevance Theory, Interest Rate Theory, Signaling theory and liquidity preference theory. This study adopted an explanatory research design and followed a positivism research philosophy. The study involved all the 43 commercial banks in Kenya which were selected using census sampling. The study covered a 7-year period between 2014 and 2021. Secondary data was used for the study and was obtained from the audited annual financial reports of the commercial banks in Kenya and CBK. The collected data was analyzed by uses of descriptive and inferential analysis with the help of Statistical Package for Social Sciences (SPSS) version 26 and STATA. Tables and figures were used to present the analyzed data. The study established that Asset Quality has a positive impact on the commercial banks value in Kenya. The study concludes that banks should improve their asset quality by adopting effective risk management strategies and banks to improve their management efficiency by investing in employee training and development programs, adopting technology to automate processes, and streamlining operations. Commercial banks can improve their liquidity by implementing effective liquidity risk management strategies. The study recommends the banks to improve their asset quality by adopting effective risk management strategies.

The effect of capital adequacy on the Value of Commercial Banks in Kenya

Well-functioning banks diminish not only the transaction costs, but also the moral hazard and asymmetric information issues observed in the financial market. Despite the role played in financial inclusion, commercial banks in Kenya have seen increased liquidity risk, declining profitability and credit risk that has weakened the sector's stability. This research sought to establish the effect of capital adequacy on value of commercial banks in Kenya. The study was anchored on four main theories including Capital Structure Irrelevance Theory, Interest Rate Theory, Signaling theory and liquidity preference theory. This study adopted an explanatory research design and followed a positivism research philosophy. The study involved all the 43 commercial banks in Kenya which were selected using census sampling. The study covered a 7-year period between 2014 and 2021. Secondary data was used for the study and was obtained from the audited annual financial reports of the commercial banks in Kenya and CBK. The collected data was analyzed by uses of descriptive and inferential analysis with the help of Statistical Package for Social Sciences (SPSS) version 26 and STATA. Tables and figures were used to present the analyzed data. The study established that Capital adequacy has a positive impact on the commercial banks value in Kenya. The study concludes that financial soundness indicators such as capital adequacy are more important in determining the ability of a bank to produce value for its share-holders. The study recommends banks to improve their capital adequacy by retaining profits or raising new capital through various means such as issuing new shares, selling assets, or borrowing from financial institutions. Additionally, banks to improve their asset quality by adopting effective risk management strategies and banks should improve their management efficiency by investing in employee training and development programs, adopting technology to automate processes, and streamlining operations. Commercial banks can improve their liquidity by implementing effective liquidity risk management strategies.

FINANCING AND CAPITAL STRUCTURE

The capital structure denotes the composite blend of debt and equity utilized by a business entity.In the past, the concept of capital structure was commonly categorized as a highly specialized and technical aspect of corporate management that pertained to a limited number of individuals within an organization.In the perspective of a conventional business individual, the likelihood of this vicinity to produce ample profits was rather low.The generation of considerable revenue is observed to be comparatively pronounced in certain financial domains, such as appropriately identified investment initiatives, when juxtaposed with other areas of financial pursuits.In recent times, there has been a substantial transformation in the prevailing circumstance.The area of capital structure has garnered significant attention and interest within academic discourse.The present discourse concerns both the theoretical and practical aspects of finance.The utilization of said funds may be extended towards facilitating the comprehensive functioning of the enterprise and executing investment operations. The various forms of capital structure commonly recognized include equity share capital, debt financing, preference share capital, and vendor financing.The present study aims to examine various aspects related to capital structure, including the challenges associated with the precise measurement of capital structure. Additionally, individual authors suggest that there exist numerous intriguing areas for future exploration in this domain.Anticipated outcomes encompass factors such as the provision of capital from the supply side, the correlations between capital structure and labor agreements, financial contracting, the dynamic trade-off theory, and the rate of capital structure adjustments. The aforementioned concepts will be subjected to scrutiny to evaluate their potential applicability as findings for research purposes.Some emphasis is also placed on the issue of asymmetric information and moral hazard that may arise between the parties involved in a given scenarioThe role of investors and issuers of diverse securities is fundamental in the financial domain.In the following, we also examine the three fundamental principles underlying the concept of capital structure in the realm of finance. The concept of capital structure irrelevance, the significance of the debt tax shield, and the interrelationship between the financing decisions and firm value represent essential themes in the field of finance.Attention is also focused on the expected financial costs associated with insolvency and their impact on determining the optimal capital structure.These ideas try to figure out if a firm can make more money by changing how it gets its money. Each idea has a unique answer, which means capital structure is a complex but interesting subject.

The Evolution of Modern Capital Structure Theory: A Review

Capital structure has been one of the most controversial and debatable topics in corporate finance theory since the birth of Modigliani and Miller’s (MM) first capital structure irrelevancy theory in 1958. Following MM’s (1958) first quantitative theorem, several finance economists and scholars across the globe have theorized and empirically investigated to clarify the nature of corporate capital structure and the impact of a firm’s capital structure decision on its value and financial performance. This review article briefly overviews the evolution of modern capital structure theory in the corporate finance literature, from its classical root (MM capital structure irrelevance theory) to its recent development (BFO theory). The paper compares and contrasts the arguments of invaluable theoretical papers to comprehend the strengths and weaknesses of each theory. The review indicates that there is no universal capital structure theory that comprehensively explains the real-world financing behavior of firms and the capital structure-firm performance nexus. In other words, the capital structure puzzle is still unsolved in corporate finance literature.

Capital Structure and Profitability. The Case of Companies Listed in Romania

Abstract Alongside with the acquisition and the efficient use of assets (investment decision and asset management), financial managers are concerned with their financing. The capital structure of a company is of interest not only for practitioners but also for theorists so that in the last six decades important theories were developed from the capital structure irrelevance theory of Modigliani and Miller to theories that include market imperfections and incentives into the models (the static trade-off theory, the pecking order theory). In practice, financial managers take into account not only quantitative determinants, but also qualitative ones, so that the decision becomes complex and the outcome differs across industries and companies. Many empirical studies were performed in the last decades in an effort to identify the relationship between the chosen capital structure and the performance of a company. We aim to add specific results to empirical studies already performed. Our study investigates the relationship between the financial mix and the profitability of companies listed in Romania, covering the interval 2017-2021.

Capital structure irrelevance in the laboratory: an experiment with complete and asymmetric information

Capital structure irrelevance in the laboratory: an experiment with complete and asymmetric information

Refuting the unfolding-argument on the irrelevance of causal structure to consciousness

The unfolding argument (UA) was advanced as a refutation of prominent theories, which posit that phenomenal experience is determined by patterns of neural activation in a recurrent (neural) network (RN) structure. The argument is based on the statement that any input–output function of an RN can be approximated by an “equivalent” feedforward-network (FFN). According to UA, if consciousness depends on causal structure, its presence is unfalsifiable (thus non-scientific), as an equivalent FFN structure is behaviorally indistinguishable with regards to any behavioral test. Here I refute UA by appealing to computational theory and cognitive-neuroscience. I argue that a robust functional equivalence between FFN and RN is not supported by the mathematical work on the Universal Approximator theorem, and is also unlikely to hold, as a conjecture, given data in cognitive neuroscience; I argue that an equivalence of RN and FFN can only apply to static functions between input/output layers and not to the temporal patterns or to the network’s reactions to structural perturbations. Finally, I review data indicating that consciousness has functional characteristics, such as a flexible control of behavior, and that cognitive/brain dynamics reveal interacting top-down and bottom-up processes, which are necessary for the mediation of such control processes.

Rubinstein and the M&M Capital Structure-Dividend Policy Theorems

Rubinstein criticizes both the Modigliani & Miller capital structure theorem and dividend policy theorem explained in M&M [6] and M&M [4]. He criticizes the M&M theorems in six points. They are similarity with some former opinions, firm value and stock value confusion, additional assumptions requirement opinion, general rejection of the capital structure irrelevancy, importance of separation opinion between dividend and retained earnings, and conflict between the M&M [6] and M&M [4] articles about dividend irrelevancy opinion. They do not accept the similarity assertion. After my study on Fisher [2], Williams [9], and Morton’s opinions in Rubinstein [8], I believe that, it could be thought that Rubinstein is right. Rubinstein also seems right about the conflict between the M&M [6] and M&M [4] articles. The other assertions of Rubinstein could be seen as a brain training. The M&M accept in advance that the M&M theorem is an innovation and a new opinion.

A revisit of capital structure puzzle: Global evidence and analysis

The ongoing debate on optimal capital structure is one of the core issues of corporate finance literature since it is initially and academically presented by Modigliani and Miller (M-M theorem 1958 & 1963). Nonetheless, the existing corporate finance literature hardly provides global empirical evidence on the impact of financial leverage on firm value. To address the issue, based on cross-country panel testbed as of Dec. 2004–Dec. 2018 for high and low geared firms, the test results indicate that the overall firm performances of high geared firms are significantly lower than those of low geared firms. We document that high geared firms are financially less stable, and thus subject to lower value as compared to counterpart ones, because additional debt can cause value destruction due to bankruptcy. Interestingly, our finding is consistent across different dimensions: cross-country, cross-industry, size group, and period analysis. However, this empirical evidence is inconsistent with M-M propositions on capital structure irrelevance theory (1958; 1963). The underlying probable reason could be that M-M theory is based on the assumptions of a perfect world which makes the theory idealistic, impractical & dead in real world. Hence, by addressing a core issue of corporate finance, the study notably contributes for providing a global evidence of the impact of leverage on firm performance. Therefore, this study significantly contributes to deeply rethinking the proposition of financial gearing on firm value; and thereby to design the optimal capital structure decision for sustainable finance and responsible investments for wealth maximization.

Capital Structure & Corporate Finance Techniques to Maximize Firm Value & Investor Returns

A firm’s capital structure describes the way in which a company is financed and how its free cash flows or net profits are distributed to investors. In what follows we review how capital structure can be organized to maximize firm value and investor returns. Firstly we look at fundamental theory from corporate finance, namely the Modigliani and Miller propositions. The assumptions from this theory describe capital structure features that can be manipulated to benefit corporations and investors. Secondly we review trade-off theory and how corporations can exploit the tax advantages from issuing debt without exposing themselves excessively to bankruptcy risks. We discuss how firms use trade-off theory to optimize their capital structure to maximize firm value. This is a cyclical activity that is greatly influenced by the state of the economy, the company’s beta and financial health. Finally we present two case studies where we firstly create a replicating portfolio to demonstrate Modigliani and Miller capital structure irrelevance and secondly show how debt financing can increase firm value and equity beta.

RETURNS TO DEBT AND EQUITY IN FARM PRODUCER ORGANIZATIONS

ABSTRACTWhile the capital structure irrelevance proposition is the point of departure in corporate finance, it is unknown if debt‐or‐equity decisions matter to farm producer organizations. To inform decisions of capital acquisition, a panel study is conducted to estimate the relationships of different types of debt (current, long‐term) and equity (allocated, unallocated) to the financial performance of 707 farm producer organizations in the United States during the 2005–2011 period. Using 3,120 observations, the panel analysis indicates net sales in period t is increased by $1.97, $9.59, and $4.01 with an addition of $1 in current debt, allocated equity, or unallocated equity in period t‐1. Furthermore, the magnitude of the positive relationship of an additional dollar of allocated (unallocated) equity to net income is estimated at $0.32 ($0.14). We thus reject the notion managers and directors of farm producer organizations should decide to use debt or equity with a coin toss.

Irrelevance of Governance Structure

Does corporate governance structure matter for firm value? We develop a model in which the allocation of control rights between shareholders and managers (“governance structure”) affects managers’ incentive to invest (strong governance tightens managerial freedom and weak governance loosens it), and firms’ investment decisions are linked through a market for resources. We show that in a competitive equilibrium, which is socially efficient, corporate governance is irrelevant to firm value even in the presence of agency costs and incomplete markets. Our analysis, therefore, provides an important benchmark against which the effects of governance structures could be evaluated.

CAPITAL STRUCTURE, PROFITABILITY AND FIRM VALUE: EVIDENCE FROM MINING COMPANIES

This research investigates the impact of firm capital structure on profitability and firm value of the twenty eight mining companies listed in Indonesia Stock Exchange from the year 2009 to 2013. The capital structure is measured by the proportion of debt over total asset, ROA and ROE are used to measure the firm profitability, meanwhile stock price is applied to measure firm value. This study uses panel data regression analysis. After controlling with external factor such as GDP rate and inflation rate, and internal factor such as revenue growth and firm size (total asset), we find leverage has negative impact on ROA however they are not significant, thus it could be said capital structure has no effect on financial performance. The indicators that significantly affect financial performance come from the control variable, which is revenue growth. Our research also finds that the capital structure has a significant effect towards firm value. The firm size and GDP rate is more impactful towards firm value. This contradicts with the MM’s capital structure irrelevance proposition, but supports other theories such as pecking order theory and Trade-off theory

Effect of Equity Financing Options on Financial Performance of Non-Financial Firms Listed at the Nairobi Securities Exchange, Kenya

Corporate finance managers worldwide have for a long time consistently sought to maximize shareholders’ wealth and their firm’s market value through their decisions on firm’s capital structure. However, both scholars and practitioners of corporate finance are yet to agree on the optimal mix of equity and debt that maximizes a firm’s financial performance. The purpose of this study was to examine the effects of equity financing options namely common stock (CS), retained earnings (REN) and total equity (TED) as ratios of total assets on the financial performance measured as return on assets (ROA) and return on equity (ROE) of Kenya’s listed firms. Utilizing panel econometric techniques namely pooled ordinary least squares (OLS), fixed effects (FE) and random effects (RE), the study analyzes the effects of equity variables as ratios of total assets on the financial performance of 40 non-financial firms listed at the Nairobi Securities Exchange between 2009 and 2015. The study’s empirical results show that CS ratio significantly and negatively affects ROA while REN ratio has a statistically significant and positive effect on ROA. Overall, TE ratio positively and significantly affects ROA. On the contrary, ROE is not significantly affected by the equity variables in the sample. While the non-significant effects of equity on ROE find support in Modigliani and Miller’s capital structure irrelevance theory, the positive effects of REN ratio and the negative effects of CS ratio on ROA, which are largely supported by the trade-off theory, may explain the pecking order theory’s prioritization of internal capital sources over debt and equity issuances. Thus, corporate finance managers should find a place for internal financing options particularly retained earnings to maximize equity holders’ returns on assets employed. Additionally, corporate finance managers should endeavour to minimize on the use of CS due to its negative effects on shareholder earnings on their assets. Nonetheless, a reasonable balance between CS and REN should be considered since the positive effect between TE and ROA is an appraisal for an optimum mix of equity financing options.

Capital Structure and the Substitutability versus Complementarity Nature of Leases and Debt*

The capital structure irrelevance argument of Modigliani and Miller (1958) implies that the use of debt or leases should have no impact on firm values. This classical argument leaves out several important considerations crucial for the result, in particular, counterparty credit risk. We re-examine the capital structure problem for firms that can utilize debt and leases in the presence of counterparty risk. Our numerical and empirical estimates show a negative term structure of lease rates that steepens as a function of counterparty risk. Moreover, we document numerical evidence for the complementary relationship between debt and leases in the presence of counterparty risk.

Revisiting M&M with Taxes: An Alternative Equilibrating Process

Modigliani and Miller present an equity-quantity shifting equilibrating process to achieve an optimal firm value in the presence of corporate taxes. However, in the era in which they derived their various propositions regarding the relation between a firm’s value and its capital structure, well-capitalized takeover specialists including private equity firms and sovereign funds did not exist, at least by today’s standards. In this paper we develop a simple arbitrage strategy, made viable by the presence of takeover firms, which presents an alternative equilibrating process to achieve the same optimal firm value. This alternative process is markedly different from that of the Modigliani and Miller theorem in terms of its predictions for debt use and restores the prospect of capital structure irrelevancy despite the existence of corporate taxes.

Does capital structure matter? Reflection on capital structure irrelevance theory: Modigliani-Miller theorem (MM 1958)

Since the 1950s, corporate financing has been an arena for on-going debates that focus on Modigliani and Miller's pioneering theorems of 1958 and 1963. The main purpose of this paper is to present a critical reflection on the debate around corporate capital structure irrelevance that was triggered by Modigliani and Miller theorem in 1958, while taking in consideration the literature, theoretical and empirical findings and the recent global financial crisis (i.e. debt crisis). The paper will briefly review and discuss alternative theories of capital structure, such as the traditional view, the trade-off theory and the pecking order theory in light of reality and perfect capital market hypothesis. The paper starts by defining the concept of capital structure, followed by discussing the assumptions of perfect capital markets under which 'the Modigliani and Miller's irrelevance theory' was originally conceptualised. It finally reflects on the findings before proceeding with the paper's conclusion.