Trade-off Theory Research Articles

Internal factors affecting the financial performance of an organisation's business processes

PurposeAlthough there are many efforts within organisations to improve the financial performance of business processes, the results of studies on the impact of internal factors on the financial performance of business processes in an organisation are inconsistent, even contradictory. Therefore, this paper aims to examine the extent and trends of the impact of factors inside companies on the financial performance of business processes and discover lessons learned to improve the financial performance of business processes.Design/methodology/approachThis analysis was done through a quantitative study of listed companies in Vietnam. Pooled OLS regression, REM, FEM and robust regression were performed on 566 companies.FindingsThe results provide four main findings. First, firm size and operational efficiency strongly correlate with financial performance. Second, financial leverage has a negative, significant connection with financial performance. Third, net working capital has a positive and meaningful relationship with EPS and a negative association with ROE. Fourth, liquidity does not have any significant association with financial performance.Research limitations/implicationsThis study only restricts the internal factors affecting the financial performance of business processes without mentioning the external factors. Furthermore, this study is limited to one emerging country and has not been compared with companies in different countries.Practical implicationsThe findings of this study may help inform users inside and outside the organisation to understand the factors that affect the financial performance of business processes. As a result, information users will focus more on aspects that can improve their financial performance to make informed decisions.Originality/valueThis study has many differences compared to previous studies. First, it focuses on the internal factors affecting the financial performance of business processes in non-financial listed companies in Vietnam, which has an emerging economy. First, it focuses on the internal factors affecting the financial performance of business processes in non-financial listed companies in Vietnam, which has an emerging economy. Second, this study analyses data in companies' financial statements for the ten years from 2012 to 2021, when the Vietnamese economy, in particular, and the world economy experienced many fluctuations due to the impact of the post-financial crisis 2007–2008 and the COVID-19 pandemic. Third, this study provides empirical evidence to support RBV, RDT theories and the trade-off theory of capital structure.

Relationship of Precrisis Financial Decisions With the Financial Distress and Performance of Small- and Medium-Sized Restaurants During COVID-19

Based on the trade-off theory of capital structure and the information asymmetry theory of business financing, we evaluated the association of informal financing with the financial performance of small- and medium-sized enterprises (SMEs) in the restaurant industry. This study collected survey responses directly from small- and medium-sized restaurant owners ( n = 178) during the COVID-19 pandemic. The findings of the study suggested that reliance on “family, friends, relatives, and third-party lenders” for financing was associated with lower financial performance during a crisis for restaurants. Results were robust when controlled for the owner’s gender, business affiliation, firm age, and relative firm size. Furthermore, we also found that the relative firm size of SMEs moderated this relationship such that, for mid-sized firms ($2–5 million annual revenues), the negative association with financial performance was lower than that for smaller firms (<$2 million annual revenue) and larger firms (>$5 million annual revenues). This article theoretically contributes to the literature by investigating the influence of informal financing on a firm’s performance, and the role of relative firm size within the category of SMEs in this relationship. Findings from the study provide practical guidance for SMEs and informal lenders.

Sectoral analysis of capital structure adjustment: evidence from emerging market

PurposeThis paper aims to investigate the non-homogeneity in the speed of adjustment (SoA) of the capital structure of manufacturing companies. It also attempts to study the key determinants that accelerate the speed of adjustment towards the target leverage level.Design/methodology/approachUsing the dynamic panel fraction (DPF) estimator on the partial adjustment model, the study captures the heterogeneous SoA of 2,866 firms across eight prominent sectors of the Indian manufacturing industry from 2009 to 2020. To ensure robustness, the empirical inferences of DPF are cross-verified with the estimates of panel-corrected standard errors (PCSE).FindingsThe authors find a combination of the capital structure's slow, moderate and rapid adjustment speed along with the relevance of trade-off theory. Interestingly, the lowest and fastest SoA is recorded by the dwindling textile sector and expanding food and agro sector, respectively. Profitability, firm size, asset tangibility and non-debt tax shields are the key firm-specific parameters that impact the SoA towards the target.Originality/valueAvailing the rarely employed estimator ‘DPF’ and the objective of documenting diverse and non-uniform adjustment speeds across the Indian manufacturing sectors marks a novel addition to capital structure literature.

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.

How do funding diversity and non-performing loans affect bank performance in different economic cycles?

This paper aims to study the impacts of bank funding diversity, non-performing loans (NPLs), and business cycles on bank performance. We employ Fixed Effect Models and the two-step system Generalized Method of Moments to examine a sample of 37 Vietnamese banks from 2005 to 2020. Our findings report that a one percentage point increase in the funding diversity index empowers ROA by 0.031 percentage points. Our results indicate that one positive standard deviation of real GDP from the trend calculated by the Hodrick-Prescott filter increases the ROA by 0.004 percentage points. However, a percentage point increase in non-performing loans reduces ROA by 0.075 percentage points. Our findings are also robust in various proxies of bank performance, economic cycles, and FED interest rate cycles. The findings help determine the optimal funding strategy for policymakers and bank managers. These findings suggest that bank managers develop long-term credit policies to control NPLs, improving sustainable performance. Regulators closely monitor macroeconomic factors to maintain banking stability in different economic stages. Our findings align with the diversification theory, trade-off theory, and prior literature.

Corporate Cash Holdings and Speed of Adjustment: Does Shariah Compliance Matter?

This study examines the impact of the shariah complaint status on corporate cash holdings, the speed of adjustment towards its target cash holdings, and the effect of firm-specific factors on corporate cash holdings. The data of non-financial firms listed on the Pakistan Stock Exchange from 2015 to 2020 has been collected. The panel data methodology is used. The findings imply that shariah-compliant firms hold more cash than non-shariah-compliant firms. The adjustment speed toward its target cash holdings is faster in shariah compliant firms. The financial leverage and cash flows show a negatively significant effect on corporate cash holdings. The working capital, dividend, and profitability exert a significant positive change on cash holdings. Explaining the cash-holding determinants reveals that trade-off and pecking order theories play a central role. This study is beneficial for policymakers, managers, and investors.

Determinants of Indebtedness in Expanding Portuguese Hotels

The hotel industry has been one of the fastest-growing economic sectors in Portugal in recent years. According to the European Best Destinations website, Portugal has consolidated itself as a destination of excellence. The explanation of the capital structure of firms remains relevant in financial research. However, prior international empirical evidence is not exclusive and is still scarce in the Portuguese hotel sector, which motivated this research. This study aimed to analyse the influence of determinants on the capital structure of 821 Portuguese hotels between 2011 and 2019 (until the constraints of the COVID-19 pandemic affected the international tourism sector) and to determine whether strategies were conducted according to trade-off and pecking order theories. This study used an econometric approach based on the static panel data model, with tests recommending the fixed effects model estimated by the least squares dummy variables (LSDV) within. The analysed determinants were return on assets, size, tangibility, growth opportunities, risk and other tax benefits besides debt in order to explain the indebtedness through three alternative measures. The results of this research show that managers sought an optimal combination of equity and debt, which was weighted between tax savings and the cost of financial distress. However, they pursued this objective through the hierarchical sequencing of funding sources in order to minimise the costs of information asymmetry.

URBAN QUALITY OF LIFE EVALUATION USING LAND PRICE WITH STATUS-QUALITY TRADE-OFF THEORY AND ECOSYSTEM SERVICES

Urban Quality of Life (UQoL) is the main objective of sustainable development in the urban context. It is now widely recognised as a multidimensional concept. The satisfaction provided by the elements related to accommodation, such as housing and land, greatly contributes to the satisfaction with quality of life. Meanwhile, the UQoL also contributes to housing and land prices in cities. Our review shows that most current studies on this interrelationship are limited to several dimensions of UQoL and their impact on housing or land prices. This article will fill the gap by using the land price as an input for calculating a UQoL index from the viewpoint of the Status-Quality Trade-Off theory and ecosystem services. A case study was conducted in Cau Giay District, Hanoi, Vietnam, to create a map of the UQoL index and investigate the interrelationship UQoL – land price. In an ideal condition, this interrelationship should be positive (high/low UQoL index – high/low land price). However, this research revealed two other negative scenarios: “high UQoL index – low land price”, and “low UQoL index – high land price”. These negative scenarios can bring many business opportunities and therefore be interesting for stakeholders in the real estate market.

Determinants of Capital Structure Evidence from Saudi Arabia

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

Market Capitalized Scale and Corporate Capital Structure — Evidence from CSI300’s Listed Firms

The firm’s market capitalization is an ideal proxy of the size of listed firms. Hence, this paper uses the firm’s market capitalization to capture the firm size instead of using other prior proxies to investigate the relationship between the market capitalized scale and corporate capital structure by employing the Generalized Method of Moments (GMM) method to conduct analysis based on a sample of the 300 largest listed firms in China from 2010 to 2017. The CSI300 list consists of two subsample (CSI100 and CSI200), divided upon the firm’s market capitalized scales to represent both large-cap and small-cap firms. Our paper contributes to the literature on corporate finance by obtaining some new empirical results to assess the effect of market capitalized scale on corporate capital structure. We find that the market capitalized size has a significantly negative association with corporate leverage. We also find that both the Trade-Off Theory (TOT) and Pecking-Order Theory (POT) can partially explain the capital structure of the listed firms of the CSI300 Index such that the negative relationship between the market capitalized scales and corporate leverage is firmly identified in small-cap firms. Third, we observe that the greater validity of the POT’s predictions is enhanced in small-cap firms such that the greater inverse impact of profitability and the more significant positive effect of growth opportunities on corporate leverage are clearly shown in small-cap firms. Inversely, the more significant adverse effects of non-debt tax shields on corporate leverage are found in large-cap firms and there is no difference in the impact of tangible assets on debt ratios between CSI100’s listed companies and CSI200’s listed enterprises. Academics and practitioners could use our findings to draw better implications while policymakers could use our results to obtain better policies to improve the banking system with small listed companies.

Examining Capital Structure Determinants for ASEAN Energy Firms

Increasing energy insufficiency is the main trench for the South East Asian countries. Though, there are rare empirical inquiries in relation to the energy firms’ capital structure determinants for the firms functioning in the Association of Southeast Asian Nations (ASEAN). Therefore, this study is an attempt to discover the capital structure determinants of energy firms that are functioning in the six key economies of ASEAN region which are Malaysia, Indonesia, Thailand, Philippines, Cambodia and Vietnam. In this setting, a total of 144 energy firms’ yearly Panel Data is involved over 14 years period from 2007 to 2020. The seven core determinants of capital structure, namely tangibility, return on equity, current ratio, non-debt tax shield, inflation and annual gross domestic product are inspected in relation to capital structure which is measured by ratio of debt to total asset. Employing both Panel Data models that are Static and Dynamic models via using robust estimator i.e. Generalized Method of Moments (GMM), the results reveal that tangibility and profitability are the most prominent determinants among all others. Evidently, the two newly introduced capital structure determinants that are inflation and energy consumption for ASEAN region energy firms are also reported significant by dissimilar estimators. The significant character of tangibility, profitability and lagged dependent variable directly infers the relevance of Dynamic Trade-Off theory. The findings provide new ways for policy makers to construct parallel strategies which will not only help out to overcome the energy scarcity issues but also to enhance regional level integration.

Does ambiguity matter for corporate debt financing? Theory and evidence

Traditional tradeoff theories puzzlingly predict that firms use high leverage, issue debt carrying a high duration and low yield spread, and have optimal debt policies highly affected by managerial risk-shifting behavior. We offer an ambiguity-based explanation for these corporate debt puzzles. The key intuition is that ambiguity-averse managers hold the worst-case belief about EBIT growth, resulting in upward (downward) distortion of bankruptcy (restructuring) probability. While firms under ambiguity aversion take less leverage, optimal leverage increases with ambiguity (if holding information constraints fixed). Our theoretical predictions about the impact of ambiguity aversion on corporate debt financing are supported by empirical evidence. Moreover, we document that the tradeoff models allowing for ambiguity aversion achieve a better performance in fitting real data, and information-constraint heterogeneities can be a distinctive determinant of leverage variations.

Firms’ rollover risk, capital structure and unequal exposure to aggregate shocks

We examine how debt rollover risk affects firms’ capital structure following aggregate profitability shocks. Exploiting plausibly exogenous variation in perceived exposure to the Covid-19 pandemic, we find firms that are highly exposed to both rollover risk and aggregate shocks significantly raise leverage, compared to less exposed firms. The effect is amplified when regulators provide liquidity support to debt markets. Higher exposure to both risks, and consequent increase in leverage, leads to substantially diminished distance to default. We show the increase in leverage is consistent with standard trade-off theory, suggesting equity-holders tolerate a lower distance to default as long as cash flows received in continuation exceed that received in bankruptcy. Overall, our findings highlight how financial constraints can meaningfully affect firm policies following negative economic shocks.

The Impact of Debt Financing on Startup Profitability

If a start-up company is unable to grow due to a lack of capital, it is prudent to investigate the possibility of using debt as a source of funding. This study examines the impact of debt financing on the profitability of start-ups using trade-off theory and pecking order theory and uses regression analysis to select factors that are correlated with debt financing structure and profitability for listed companies on the National Equities Exchange and Quotation System (NEEQ) from 2012 to 2021. At the end of the theoretical and empirical analyses, the impact of debt financing on the profitability of start-ups is analyzed and corresponding countermeasures are proposed. Finally, the findings of the study are summarized and the shortcomings of the study and the prospects for future research are outlined. The findings of this study are that debt level structure is negatively related to profitability, indicating that gearing has a negative impact on the profitability of start-ups. In terms of debt type structure, mercantile credit has a positive effect on the profitability of start-ups and bank financing have a detrimental effect on profitability. Overall, debt financing has a negative impact on the profitability of start-ups, but business credit has a positive impact on profitability.

The influence of cash flow volatility on firm use of debt of different maturities or zero-debt: International evidence

The empirical international literature on the relationship between firm cash flow volatility and debt maturity and zero-debt policy provides contradictory evidence. Using a large international sample, we find that cash flow volatility is positively associated with our measure of debt maturity at less than the 1% level of significance. Relative to unconditional means of debt maturity, a one standard deviation increase in cash flow volatility implies a 2.57% decrease in the probability of firms using long-term debt, a 5.83% increase in the probability of firms using only short-term debt and an 11.8% increase in the probability of firms using zero-debt. Overall, our results support the screening and the trade-off theories that firms with high cash flow volatility are screened out of the long-term debt market.

Does the Efficiency of a Firm’s Intellectual Capital and Working Capital Management Affect Its Performance?

This study explores the efficiency of intellectual capital (ICE) and working capital management (WCME) in the GCC industrial sector and its potential impact on firm performance. The data were gathered from Standard & Poor’s database from 2015 to 2019. This study uses data envelopment analysis (DEA), regression analysis, and robustness tests to accomplish its aims. The results indicate that most firms do not employ their intellectual and working capital investments well and need improvement actions to achieve the best practices. The regression model results reveal that ICE and WCME significantly and positively influence firms’ performance. The results of this study support the resource-based, trade-off, and pecking order theories. The study findings have important implications for many stakeholders; for example, they would be helpful for firm decision-makers in managing their investments in intellectual and working capital to achieve the best practices and improve a firm's performance. In addition, the findings would be helpful for financiers, because high-performance firms are likely to have more reasonable valuations that facilitate debt financing. Moreover, the findings have noteworthy implications for trading procedures as investors aspire to attractive economic returns for their investments in corporations that pasture ICE and WCME issues. Additionally, these findings have important implications for employee job satisfaction and retention by improving IC management.

Apital structure adjustment in Latin American firms: An empirical test based on the Error Correction Model

The objective of this article is to analyze the capital structure adjustment of Latin American firms through the pecking order and trade-off theories using a sample of 975 non-financial firms for the period 2000-2017. The results support the existence of a target capital structure. Adjustment speeds ranged between 48.9% and 74.3% and generate a rapid convergence of leverage towards its target level. Financial deficits explained less than half of the changes in debt, which contradicts the pecking order theory. The results of the error correction model indicated that companies dynamically deviate from their long-term capital structure. The convergence speeds in the partial adjustment model increased up to 69.5% and 91.7% with the error correction method. These results are relevant for firms and investors.

Does COVID-19 affect small and medium enterprises’ capital structure in vietnam?

This study estimates the effect of COVID-19 on listed small and medium enterprises’ capital structures in Vietnam from 2010 to 2020 by a dynamic panel model with 825 observations. Conducting the generalized method of moments, the findings show that COVID-19 is a significant factor affecting small and medium enterprises’ capital structures. The current results are explained based on the signalling theory. Although the findings are consistent with the previous empirical studies indicating the capital structure and exploring its determinants in diverse ways, these studies are interpreted based on agency theory, pecking of order, trade-off theory. Furthermore, our results are robust to a series of endogeneity checks using an alternative method of regression.

Impact of Determinant for the Selection of Capital Structure of PSUs in India: A study

Purpose of Research: Public Sector Undertakings (PSUs) have been playing a pivotal role in accelerating the pace of industrialization and achieving social and economic goals. The capital structure decision of the firm and the impact of determinants in capital structure decision is an important issue in the recent era for measuring the performance of any firm. Determinants of leverage can influence the selection of the capital structure of the business. Hence, in this study, we try to find out the relationship between the determinant of capital structure and leverage in the capital structure decision-making process of the PSUs in India. This study has been conducted to identify important factors along with the measurement of their level of significant capital structure theory. From the analysis, it is observed that most of the determinants follow the trade-off theory which means PSUs follow the trade-off theory of capital structure in the present situation in India.

Evolutionary biological perspectives on current social issues of breastfeeding and weaning.

Breastfeeding and weaning are actively studied from evolutionary, medical, and social research perspectives because of their close association with infant mortality, lifetime health, and human population dynamics. Each discipline benefits from an interdisciplinary exchange of knowledge regarding the bases, processes, and consequences of these phenomena. However, current social issues related to breastfeeding and weaning have received little attention from an evolutionary biology perspective. We address this gap by reviewing current social issues related to human breastfeeding and weaning in an evolutionary framework. This approach helps build a conceptual framework with the goal of better understanding ultimate causes of or influences on these current social issues. The six social issues reviewed here fall into three categories: the spatiotemporal constraints of breastfeeding, abuse of breast milk as valuable material, and mismatch in breastfeeding practices. Some of these issues have an evolutionary basis. We analyze the structure of these social issues and discuss their possible solutions in terms of extension of the trade-off theory in evolutionary biology. Our discussion on the current social issues in breastfeeding and weaning highlights the effectiveness of an approach rooted in evolutionary theory and biological anthropology.