Trade-off Theory Research Articles

The Predictability of Capital Structure Theories in the Current Global Economy: An Analysis of the Debt Maturity Structure of Hotel Operations in The World s Top 20 Tourism Destinations

Variables that affect capital structure decisions and their effect on firm value vary over time. They change by country, industry, time, firm tipe, etc. thats why the subject still being consider. In this context, we investigated the macroeconomic variables that affect the term structure of debt and capital structure decisions in lodging companies by employing the Generalized Moments Method over the period 2004-2017. It has been determined that the macroeconomic factors that affect the debt maturity and the capital structure of the lodging companies vary in the context of the development level. In addition, it can be said that capital structure decisions of accommodation enterprises in developed and developing countries act in line with the assumptions of Trade-off and Pecking Order theories on a variable basis.

REIT Leverage Puzzle

Real Estate Investment Trusts (REITs) utilize significant financial leverage, with a typical REIT employing around 40 percent of debt financing. For non-taxable entities like REITs, the absence of tax benefits raises questions about the optimal level of financial leverage. This study explores the effects of leverage on shareholder returns in REITs and provides empirical evidence supporting the trade-off theory of capital structure. Our findings indicate that some REITs may have reached their optimal level of financial leverage, beyond which the marginal benefit diminishes. Additionally, the study reveals that high leverage can create agency conflicts between managers and shareholders, leading to a market penalty on REITs with excessive financial leverage. Importantly, we also find that the impact of financial leverage on REIT performance varies depending on the economic context, showing divergent trends pre- and post-financial crisis and during the COVID-19 pandemic recovery phase. The implications of these findings are critical for understanding REITs’ governance and financial management.

Influence of Company Internal Factors and Macroeconomics on Capital Structure Moderated by Firm Size

Aims: This study aims to determine the influence of internal company factors and macroeconomics on the capital structure of non-financial companies listed in the LQ-45 index on the Indonesia Stock Exchange.
 Study Design: Companies listed in the LQ-45 index on the Indonesia Stock Exchange from 2018-2022.
 Place and Duration of Study: LQ-45 index on the Indonesia Stock Exchange and the population is 45 companies. Use purposive sampling the sample is 17 companies.
 Methodology: Using purposive sampling, researcher obtained 83 unbalance data panel. The test of the sample using descriptive statistic test, classical assumption test, and moderated regression test to test the hypothesis using SPSS 25.
 Results: The result showed that profitability positively and significantly affects capital structure. Liquidity has a negative and significant effect on capital structure. Tangibility has an insignificant positive impact on capital structure. Meanwhile, inflation and GDP have negative and insignificant effects on capital structure. Firm size significantly moderates the effect of profitability and liquidity on capital structure. Meanwhile, the firm size does not significantly moderate the tangibility, inflation, and GDP effect on capital structure.
 Conclusion: Looking at the profitability variable, companies contained in the LQ-45 index tend to follow the trade-off theory. The company still considers the return on debt in funding operations and investments. Companies also tend to make profits as dividends to shareholders. The firm size is able to moderate the effect of profitability on capital structure significantly. Firm size can weaken the positive influence of profitability on the capital structure.

DETERMINAN STRUKTUR MODAL: ANALISIS SEBELUM DAN PADA MASA COVID-19

Companies must be able to combine their capital structure through internal and external funding to maximize company value while minimizing costs. This research examines the factors of ownership structure, asset structure, and liquidity on capital structure and differences in influence before and during the Covid-19 pandemic. This research uses a quantitative design with multiple linear regression analysis. Testing was carried out on manufacturing companies listed on the Indonesia Stock Exchange for the 2018-2021 period with a sample of 447 data with a distribution of 228 data for 2018-2019 and 219 data for 2020-2021. The study's results proved that institutional ownership and managerial ownership did not affect capital structure, capital structure was negatively affected by asset structure, and liquidity was negatively affected. No differences in ownership, asset structure, or liquidity were found before and during the Covid-19 pandemic. The results of this research provide relevant theoretical contributions to agency theory, pecking order theory, and relevant trade-off theory.

Examining Free Cash Flow Theories in the Non-Financial Sector of Pakistan: A Comprehensive Analysis of PSX-Listed Non-Financial Firms

The aims of this research were to analyze free cash flow related theories in the non-financial sector of Pakistan namely agency theory, Pecking order theory, and static trade-off theory. Free cash flow was taken as dependent variable along with three independent variables (Tax rate, leverage, and retention). Moreover, firm’s size, growth, dividend, tangibility, profitability, and cash flow volatility were taken as controlling variables. The data were extracted from four hundred eighty-eight non-financial firms listed on PSX for the period of 20 years, i.e., 2001-2020. We used weighted least square model for analysis due to heteroscedasticity diagnosed in data set. The study found that free cash flow is negatively related to leverage and tax, while the relationship with retention is positive. The results of this study are consistent with the hypothesis of agency theory, trade-off theory, and pecking order theory. This study is of paramount significance in comprehending the intricacies of free cash flow theories within the non-financial sector of Pakistan. The findings derived from this analysis have the potential to make substantial contributions to the enhancement of strategic financial management practices.

Financial Performance Of Sharia Commercial Banks In Indonesia: Does Capital Structure Matter?

Islamic banking has experienced a surge in financial growth in the last decade. Global economic challenges have encouraged many conventional banks to transform into sharia banks. Sharia banking can increase its operational efficiency by applying debt and equity financing methods by trade-off theory. This research investigates the effect of capital structure as measured by the debt-to-asset ratio (DAR) and debt-to-equity ratio (DER) on the financial performance of Sharia Commercial Banks as measured by return on assets (ROA) and return on equity (ROE). This research is quantitative with multiple linear regression analysis techniques. The data source comes from OJK Sharia Banking Statistics for 2017-2021. This study shows that DAR and DER have a significant effect on ROA. Apart from that, DAR has a substantial impact on ROE. However, this study indicates that DER does not significantly affect ROE.

Cognitive trade-offs in scientific theorizing as an aspect of cognitivism in information science (the theory of cognitive trade-offs)

Cognitive trade-offs in scientific theorizing as an aspect of cognitivism in information science (the theory of cognitive trade-offs)

THE EFFECT OF PROFITABILITY, FIRM SIZE, AND CAPITAL STRUCTURE ON FIRM VALUE IN MANUFACTURING COMPANIES

The purpose of this research is to determine the effect of profitability, firm size, and capital structure on firm value of manufacturing companies in consumer non-cyclical sub-sector listed on the Indonesia Stock Exchange (IDX) during 2020-2022. There are 140 data used as samples which were taken from 49 consumer non-cyclical companies listed on Indonesia Stock Exchange (IDX) for three years in a row. Samples were taken based on purposive sampling techniques, one of non probability sampling methods which was determined by selected criteria. Data used for this reseach is secondary data which is the annual reports from 2020-2022. This research uses multiple regression analysis and helped by Microsoft Excel and SPSS program version 29. Refering to signaling theory and trade-off theory, assumption in this research that are used as hypotheses in this study are profitability has positive and significant effect on firm value, firm size has positive and significant effect on firm value, and capital structure has negative and significant effect on firm value. The results of this study find that profitability has positive and significant effect on firm value, firm size has negative and insignificant effect on firm value, and capital structure has positive and significant effect on firm value. Simultaneous, profitability, firm size, and capital structure have significant effect on firm value.

Are shariah and non-shariah firms’ capital structure determinants and financial performance related? Evidence from Malaysia

This comparative analysis is an attempt to explore the core differences among the capital structure determinants of Malaysian Shariah and non-Shariah firms. Besides, this investigation also explores which financial category in Malaysia, either Shariah or non-Shariah, maintained its performance, i.e., earnings; during the peak period of the COVID-19 pandemic and to what extent their performance is related. For analysis purposes, this investigation used 454 firms’ 17 years’ financial data, i.e., 2005-2021. The Panel Data Static models are executed to perform the empirical investigation. The debt-to-equity ratio is selected as a dependent variable, whereas total assets, sales, current assets, growth, return on equity, non-debt tax shield, and earnings per share are nominated as independent variables. The results indicate that fixed assets and growth are core determinants for both types of firms. This endorses the validity of these two investigated determinants for the whole Malaysian firm. Moreover, current assets, non-debt tax shield, fixed assets, growth, and earnings per share are also observed as main and significant determinants for Shariah-tagged firms. The positive significance of tangibility, non-debt tax shield, and liquidity explain why the Trade-off theory is more dominant in the Malaysian context. Besides, the outcomes obtained from descriptive statistics and Independent Two-sample t Test explain that both financial categories of Malaysian listed firms maintained negative earnings during the COVID-19 peak period, i.e., 2020. The results will help policymakers devise the best financing model i.e., Shariah and non-Shariah, specifically during the uncertain financial fiascos.

Effect of Risk on Total Debt of Companies Listed on the Nairobi Securities Exchange, Kenya

Despite the availability issue, debt financing continues to be an essential form of funding for businesses. Risks have been a major source of uneasiness for owners, executives, experts, as well as shareholders globally. The Kenyan enterprises have a greater susceptible to variations in currency rates in the nation’s economic climate, which is growing to become increasingly open with an increase in global trade. The study objective is to investigate the effect of risk on total debt of companies listed on Nairobi Securities Exchange. The study was underpinned by tradeoff theory and pecking order theory. The study utilized causal research design. Secondary data was used to collect data from yearly accounting statement from 2007-2011. Panel regression was used to analyze the fixed effect model. The result showed that risk negatively and substantially affects total debt. The study recommended that the management of listed firms should understand the tradeoff theory and pecking order theory. The study also recommended that risk should continually be monitored by companies to be in line with the prevailing economic conditions. This can be ensured by studying other factors trend that can affect the risk of companies.

Intellectual capital efficiency, institutional ownership and cash holdings: a cross-country study

PurposeThis study aims to investigate the roles of intellectual capital efficiency and institutional ownership on cash holdings and their speed of adjustment.Design/methodology/approachUsing a sample of 432 firm-year observations of tourism-listed companies, three measures of cash holdings are used as dependent variables and intellectual capital efficiency and institutional ownership as independent variables. The financial data is collected from the S&P Capital IQ database for the period 2015–2020. Two system-generalized methods of moment estimation are used for the robustness checks of the results.FindingsThe study provides evidence that an increase in intellectual capital efficiency in tourism firms results in lower cash holdings. The research findings also report that characteristics such as firm size, age and market-to-book value ratio are associated with cash holdings. Furthermore, institutional ownership in these firms did not affect the cash holdings. The results also confirm the existence of a target cash holding level to which the tourism firms attempt to converge. These results are robust to the alternative proxy of cash holding and endogeneity tests.Research limitations/implicationsThe study uses intellectual capital efficiency measured by the model proposed by Pulic. Alternative measures of intellectual capital can be included in future studies. Future research can also investigate the impact on cash holdings before and during the pandemic for tourism companies. The study is limited to the impact of institutional ownership; thus, research can be extended to consider other types of ownership.Practical implicationsThe findings of this study indicate that tourism companies should take into account the impact of intellectual capital efficiency on their cash holding decisions. The industry uses a specific financial management strategy in light of better efficiency and possibly values the opportunity cost of holding more cash. Additionally, regulators should re-examine the role of institutional ownership in tourism firms, as it was found to have no impact on cash holdings. The regulators may need to consider other factors, such as firm size and age, when developing policies and regulations to ensure that tourism firms have adequate cash holdings.Originality/valueThis study adds to the body of knowledge on the factors that influence cash management and ideal cash levels for the tourism industry. The examination of the effect of intellectual capital on cash holdings is a novel contribution, filling a gap in the existing literature. The findings on the speed of adjustment towards optimal cash holdings also provide support for the trade-off theory.

Cost of Capital and Investment Decision of Non-Financial Firms Listed at Nairobi Securities Exchange, Kenya

The main purpose of the study was to assess the influence of cost of capital on investment decision of non-financial firms listed at the Nairobi Securities Exchange, Kenya. The study employed the theory of Modern Portfolio and The trade-off theory. The study employed descriptive research design. The study was carried out at firms listed at the NSE, Kenya with a population of 46 non-financial firms listed at the Nairobi Securities Exchange (NSE) as at December 2019. A census of 46 non-financial firms was considered. Secondary data was collected from annual reports of the non-financial companies listed at NSE and the NSE handbooks. Expert opinion was used to ensure data validity and reliability. The data was analyzed descriptively by means and the standard deviation, while multiple regression analysis was used to establish the influence between the variables. Regression results showed that cost of equity has a positive effect on financial performance as measured by Return on Assets (β = 0.2737, p = 0.0000); cost of preference shares affects investment decision negatively and significantly (β = -0.2430, p = 0.0015), and that the effect of cost of debt on investment decision is significantly positive (β = 0.2934, p = 0.0000). Given from the findings of the study that less than 34% of variations can be attributed to the cost of capital on investment decisions for the listed non-financial firms, this study has proved that effective working capital management practices will play a crucial role in improving the overall profit margins for the listed non-financial firms at NSE. In conclusion, cost of debt is a significant positive contributor to the investment decision of the non-financial listed firms at the NSE. The debts are essential when the firm is lacking finance in running its daily expenditure smoothly. The NSE and other regulating authorities such as the Capital Markets Authority (CMA) should therefore ensure that policies are put in place to help the firms manage their cost of capital efficiently. These policies must be in line with the Sustainable Development Goals (SDGs). These policies may include availing access to credit facilities and promoting trading in shares of the listed firms and these policies should be integrated with SDGs, which recognizes that action in one area will affect outcomes in others, and that development must balance social, economic and environmental sustainability.

Capital structure of single family office-owned firms

Single family offices (SFOs) manage trillions of dollars worldwide. The enormous value of assets under management highlights their key role as a cohesive wealth management tool globally. Despite the increasing relevance of SFOs, research on SFOs is still in its early stages. Particularly little is known about the capital structure of the firms owned by SFOs. By drawing on a hand-collected sample of 173 SFO-owned firms in the DACH (Germany, Austria, Switzerland) region, we compare the capital structure of SFO-owned firms with the capital structure of family-owned firms. Our empirical results show that SFO-owned firms display a higher long-term debt ratio than family-owned firms, indicating that SFO-owned firms follow trade-off theory, similar to private equity-owned firms. Additionally, we show that this effect is stronger for SFOs that sold their original family firm. In contrast, family-owned firms tend to be more conservative in their financial decision-making and seem to follow the logic of the pecking order theory.

ESG and debt structure: Is the nature of this relationship nonlinear?

The relationships between environment, social, and governance (ESG) scores and debt structure are examined using the two-stage least square model with annual data from Chinese listed firms over the 2011–2020 period. The research results suggest that the ESG composite scores and long-term debt have a U curve based nonlinear relationship. The results are robust to endogeneity concerns, alternative regression model specifications, alternative ESG scores, and after controlling for additional variables. In addition, the relationship between debt maturity and S scores (but not the E and G scores) is significant in the nonlinear model. Second, the effect of ESG on long-term debt is stronger for firms within polluting industries when compared to firms in less polluting industries. Third, the effect of ESG on long-term debt is stronger when economic policy uncertainty is low. Fourth, dynamic effect investigations show that ESG activities generate long-term effects on debt maturity. Finally, an inverse U curve relationship between ESG scores and cost of debt is documented. All these results are consistent with the well-established trade-off theory. Policy wise, firms should pay attention to the S dimension when considering debt structure, and to the economic policy environment when considering the impact of ESG activities on debt structure. Academic research can focus on verifying whether these results are generalizable across countries and the stage of economic development of markets investigated.

Analysis of the capital structure of startups in light of the tradeoff and pecking Order theories

Purpose: Startups have significant differences compared to other companies. They have many intangible assets (e.g., team tenure and experience of founders), are risky, and tend not to generate profits in their initial years (Heirman & Clarysse, 2007; Weber & Zulehner, 2009). Does the startups’ financing choice also differ from that of traditional companies? We analyzed the capital structure of startups in their first years of life based on the classic tradeoff and pecking order theories. Methodology/approach: We collected data on 40 startups in the city of Ribeirão Preto, São Paulo, Brazil, through a questionnaire on the profiles of the founders, company characteristics, bottom-line performance and financing sources. The data collected covered the year of founding and the three subsequent years. Findings: The results indicated that these startups mainly financed themselves through the founders’ capital in all four years covered. Only in the third year did they start using resources generated internally, indicating pecking order adherence. However, the presence of angel investors and government subsidies contrasted with the absence of bank debt. In line with the tradeoff theory, bank debt was not a viable financing option in the early years of these firms since they had low profitability and high risk. Theoretical/methodological contributions: We offer a theoretical contribution by analyzing the adequacy of traditional financial theories in the specific context of startups. Originality: The finance literature about startups is scarce, and few studies have analyzed these companies from the capital structure theoretical perspective. Social contributions / for management: We provide a panorama of the financing of startups to support their financial planning regarding fundraising.

Three-way interaction moderation model of legal origin in strengthening the role of firm characteristics in choice of sukuk type

Purpose This study aims to learn how a three-way interaction moderation model is used to analyse the role of country-specific characteristics, in the form of the implementation of Sharia law and legal origin in a particular country, in the choice of sukuk type. Design/methodology/approach The firm profitability and firm leverages of sukuk issuer are used as the firm characteristics that can influence the choice of sukuk type between Mudharaba sukuk, Ijara sukuk and Murabaha sukuk. The research sample of 545 global sukuk issuances, obtained from the IIFS database, includes the issuance of Mudharaba sukuk, Ijara sukuk and Murabaha sukuk from ten sukuk issuer countries all over the world. Findings The research results show that the probability of choosing Mudharaba and Ijara sukuk is found in issuers sukuk with a high firm leverage, while the probability of choosing Murabaha sukuk is found in issuers sukuk with a high firm profitability. A three-way interaction moderation model is used in this research to explain that sukuk issuers in countries that implement Sharia law and adopt a legal origin common law system will have a higher choice of Mudharabah and Ijarah sukuk types if the firm’s leverage is high. If the firms’ profitability is high, then the sukuk issuer prefers Murabaha sukuk. Research limitations/implications The use of firm’s characteristic variables is based solely on trade-off theory and pecking order theory. Also, limitations on the implementation of Sharia law in countries that do not provide opportunities for countries that apply a mixed law system. Practical implications The role of Sharia law and common law legal origin is proven, through a three-way interaction model, to strengthen the interaction of the firm leverage and choice of Mudharaba sukuk. Social implications Legal certainty for Islamic financial institutions is created in the context of ease of investing in sukuk. Flexibility in the structure is also one of the factors that encourage the development of market acceptance of sukuk. The right structure of the sukuk can be used for specific target markets. Originality/value There has been no study carried out on a three-way interaction moderation model used to analyse the role of country-specific characteristics. The role of Sharia law and common law legal origin is proven, through a three-way interaction model, to strengthen the interaction of the firm leverage and choice of Mudharaba sukuk.

Dynamics of speed of leverage adjustment and financial distress in the Indian steel industry

Business managers strive to attain the optimal capital structure (OCS), which allows them to raise capital at a minimal cost, thereby maximising their returns. Balancing risk and reward is crucial in determining the target capital structure. Therefore, understanding the optimal leverage ratio and the Speed at which leverage adjustments are made is vital to managers. This study examines the optimal leverage ratio, the speed of adjustment, and the factors contributing to achieving the target capital structure for select 208 steel firms, particularly in an emerging economy like the Indian steel industry. A partial adjustment model is utilised, employing the Generalised Method of Moments (GMM) technique. Additionally, the Altman Z-score is employed to evaluate the financial distress of these steel firms. Very few studies have specifically focused on determining the Speed of adjustment (SOA) using GMM of emerging economies like the Indian steel industry. The findings indicate that steel firms take approximately 2.13 years to reach their target leverage, supporting the existence of the dynamic trade-off theory. The results also highlight the relationship of selected variables (Profitability, Growth, Size, Tangibility, NDTS, Liquidity, and Financial Distress) with the Speed of leverage adjustment and the weak financial position of these businesses.

Modeling the Relationship between Capital Structure and Company Value in the Perspective of Agency and Trade-Off Theory

This study is carried out to investigate the link between capital structure and company value from the perspective of agency and trade-off theory. This model formulates that the use of debt can increase profitability through monitoring mechanisms and disciplining by creditors. Profitability can reduce and increase financial distress and company value. The sample consists of companies in the LQ45 index for the period 2017-2020 and model testing uses path analysis. The results show that (i) there is a positive influence of capital structure on profitability, (ii) profitability significantly increases company value (iii) profitability affects the decrease in financial distress (iv) Financial distress significantly increases company value, (v) profitability and financial distress do not mediate capital structure on company value, (v) profitability mediates the influence of capital structure on company value (vi). These results have important implications, where an increase in debt positively affects company value due to the supervisory mechanism and discipline from the debtor. Meanwhile, the theoretical implication is to confirm agency theory and trade-off theory.

Inspecting sector-specific capital structure determinants: The case of Malaysian Shariah firms

This study is set to inspect sector-specific capital structure determinants for publicly listed Malaysian Shariah-tagged firms. For this purpose, a 17-year data sample set comprising 343 Shariah firms in Bursa Malaysia’s main market is constructed. The seven key determinants, namely fixed assets, non-debt tax shield, current assets, growth, return on equity, size, and earnings per share, are measured as capital structure determinants in relation to the debt-equity ratio. Deploying a Dynamic Panel Data Model via an efficient econometric assessor, i.e., Generalized Method of Moments, the investigation exposes that current and fixed assets are observed as the key significant sector-specific capital structure determinants for Malaysian Shariah-tagged firms. Also, the positive and significant lagged dependent variables of each studied sector indicate the presence of a targeted capital structure and Speed of Adjustment (SOA). The occurrence of SOA explains variations in the debt-equity choices of Malaysian Shariah firms at the sector level. The significant tangibility and liquidity in most sectors and the significant lagged dependent variables across all sectors directly suggest the significance of the dynamic theory of Trade-Off. As a whole, it is observed that the sector-level capital structure framing practices of Shariah-tagged firms are not similar. This study aims to investigate the optimal debt-equity mix for listed Malaysian Shariah-complaint enterprises operating in diverse sectors. The observed outcomes are the baseline for policymakers to formulate a better financing model that supports Malaysian Shariah firms to maintain a dynamic or targeted capital structure at all times.

Untangling the Puzzle of Cash Holding Net Working Capital & Financial Performance: A Case of Pakistan Stock Market

Purpose:This study examines the impact of liquidity, cash flow operations, and cash holding on a firm’s profitability, with a moderating role of net working capital.The trade-off and pecking order theories are studied to formulate hypotheses to test the explanatory variables that affect a firm’s profitability of companies in Pakistan Stock Market.
 Methodology:The quantitative approach was used in this study and the panel data of selected companies were extracted from the Osiris database from 2009 to 2018.
 Findings:The results show a significant positive connection between liquidity, cash flow operations, cash holdings, net working capital and ROA. As a result, the study’s model was accepted, explaining that liquidity, cash holdings, and cash flow operations positively and significantly affect the ROA.
 Implications/Originality/Value:Limited evidence is available regarding the impact of net working capital on the affiliation between cash holding and profitability within the Pakistan Stock Market. The present study endeavors to address the above gap by investigating the moderating impact of net working capital on the association between selected factors of cash holding and profitability.