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59
Testing For Inconsistencies in the Estimation of UK Capital Structure Determinants
- Applied Financial Economics
, 2004
"... We analyse the determinants of the capital structure of 1,054 UK companies from 1991 to 1997, and the extent to which the influence of these determinants are affected by time-invariant firm-specific heterogeneity. Comparing the results of pooled OLS and fixed effects panel estimation, we find signif ..."
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We analyse the determinants of the capital structure of 1,054 UK companies from 1991 to 1997, and the extent to which the influence of these determinants are affected by time-invariant firm-specific heterogeneity. Comparing the results of pooled OLS and fixed effects panel estimation, we find significant differences in the results. While our OLS results are generally consistent with prior literature, the results of our fixed effects panel estimation contradict many of the traditional theories of the determinants of corporate financial structure. This suggests that results of traditional studies may be biased owing to a failure to control for firm-specific, time-invariant heterogeneity. The results of our fixed effects panel estimation find larger companies to have higher levels of both long-term and short-term debt than do smaller firms; profitability to be negatively correlated with the level of gearing, although profitable firms tend to have more short-term bank borrowing than less profitable firms, and tangibility to positively influence the level of short-term bank borrowing, as well as all long-term debt elements. However, the level of growth opportunities appears to have little influence on
Asymmetric Capital Structure Adjustments: New Evidence from Dynamic Panel Threshold Models
, 2008
"... This paper proposes a novel empirical approach, called dynamic threshold models of leverage, to testing the dynamic trade-o ¤ theory, allowing for costly and asymmet-ric capital structure adjustments. The framework enables us to consistently estimate asymmetric speeds of adjustment in di¤erent regim ..."
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This paper proposes a novel empirical approach, called dynamic threshold models of leverage, to testing the dynamic trade-o ¤ theory, allowing for costly and asymmet-ric capital structure adjustments. The framework enables us to consistently estimate asymmetric speeds of adjustment in di¤erent regimes, each of which is associated with a di¤erential adjustment cost. We examine several variables that proxy for adjustment costs,
nancial exibility and
nancial constraints that a¤ect capital structure adjust-ment. The empirical results suggest that
rms deviating considerably away from the target leverage undertake slower adjustment, low-growth
rms adjust more quickly, and internal nancial constraints (measured by payout ratios and
rm investment) signi-cantly reduce the speed of adjustment. Overall, the paper documents strong evidence in favor of heterogeneous (but relatively fast) speeds of adjustment and asymmetric adjustment paths, a
nding consistent with the dynamic trade-o ¤ theory of capital structure. JEL Classi
cation: C12, G32.
The Firm-Specific Determinants of Corporate Capital Structure: Evidence from Turkish
- Panel Data’, Investment Management and Financial Innovations, Volume 3, Issue 3
, 2006
"... The purpose of this study is to carry out empirical testing, using dynamic panel data methodology, to analyze the impact of firm specific characteristics on the corporate capital structure decisions of Turkish firms. The sample covers 123 Turkish manufacturing firms listed on the Istanbul Stock Exch ..."
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The purpose of this study is to carry out empirical testing, using dynamic panel data methodology, to analyze the impact of firm specific characteristics on the corporate capital structure decisions of Turkish firms. The sample covers 123 Turkish manufacturing firms listed on the Istanbul Stock Exchange (ISE) and the analysis is based on the year-end observations of ten consecutive years running from 1993-2002. In this study, the panel data methodology is used and six variables- size, profitability and growth opportunities in plant, property and equipment, growth opportunities in total assets, non-debt tax shields and tangibility- are analyzed as the firm specific determinants of the corporate capital structure. This work contributes to the existing body of literature in the way that all of the independent variables of the study are significant determinants for the capital structure decisions of Turkish firms. Our analysis shows that variables of size and growth opportunity in total assets reveal a positive association with the leverage ratio, however, profitability, growth opportunities in plant, property and equipment, non-debt tax shields and tangibility reveal
Capital Structure Determinants: An Empirical Study of French Companies in the Wine Industry
"... The main objective of the paper is to explain the leverage of French companies in the wine industry. Different capital structure theories are reviewed in order to formulate testable propositions concerning the levels of debt of the French wine companies. A number of regression models are developed ..."
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The main objective of the paper is to explain the leverage of French companies in the wine industry. Different capital structure theories are reviewed in order to formulate testable propositions concerning the levels of debt of the French wine companies. A number of regression models are developed to test the hypotheses.
Determinants of Capital Structure: A Case of Life Insurance Sector of Pakistan
"... Current study investigates the impact of firm level characteristics on capital structure of life insurance companies of Pakistan. For this purpose, leverage is taken as dependent variable while profitability, size, growth, age, risk, tangibility of assets and liquidity are selected as independent va ..."
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Current study investigates the impact of firm level characteristics on capital structure of life insurance companies of Pakistan. For this purpose, leverage is taken as dependent variable while profitability, size, growth, age, risk, tangibility of assets and liquidity are selected as independent variables. The result of OLS regression model indicates that size, profitability, risk, liquidity and age are important determinants of capital structure of life insurance companies.
Testing the Trade-Off and Pecking Order Theories: Some UK Evidence
, 2005
"... Abstract In this paper, we conduct empirical tests for the two leading but contradicting theories of capital structure: the trade-off and the pecking order theories. To examine former theory, we use a partial adjustment model, and an error correction model as a generalised specification of the part ..."
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Abstract In this paper, we conduct empirical tests for the two leading but contradicting theories of capital structure: the trade-off and the pecking order theories. To examine former theory, we use a partial adjustment model, and an error correction model as a generalised specification of the partial adjustment process. This framework allows us to nest the cash flow deficit variable necessary to examine the pecking order theory. The empirical models are estimated by IV and GMM methods, which are argued to yield consistent estimates for dynamic panel data. The finding suggests that the trade-off theory holds well and consistently outperforms the pecking order theory. JEL Classification: G32.
PECKING ORDER VERSUS TRADE-OFF: AN EMPIRICAL APPROACH TO THE SMALL AND MEDIUM ENTERPRISE CAPITAL STRUCTURE
"... IVIE working papers offer in advance the results of economic research under way in order to encourage a discussion process before sending them to scientific journals for their final publication. * This paper is based on Chapter IV of the doctoral dissertation “The determinants of SMEs capital struct ..."
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IVIE working papers offer in advance the results of economic research under way in order to encourage a discussion process before sending them to scientific journals for their final publication. * This paper is based on Chapter IV of the doctoral dissertation “The determinants of SMEs capital structure: an empirical approach to the Spanish case ” by Francisco Sogorb-Mira, supervised by José López-Gracia, at Alicante University. The authors would like to thank the evaluation committee members
The effect of diversification on capital structure
"... The effect of diversification on capital structure Previously, empirical financial studies paid little attention to the role of diversification strategy on financial choices. The aim of the present study is to analyze the financing strategies of multibusiness firms, suggesting the relevance of sorti ..."
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The effect of diversification on capital structure Previously, empirical financial studies paid little attention to the role of diversification strategy on financial choices. The aim of the present study is to analyze the financing strategies of multibusiness firms, suggesting the relevance of sorting the diversification phenomena into its related and unrelated components. The implications of our findings are very relevant in that they explain earlier contradictory results on capital-structure determinants. The degree of product specialization/diversification and the direction of diversification (related or unrelated) translate into different corporate financial behaviours. In particular, the two types of diversification- related or unrelated, had opposite effects on debt. Specifically, a related-diversification strategy, which is associated with lower debt ratios, has a negative influence on leverage. By contrast, unrelated diversity, which is associated with higher debt usage, has a positive effect on debt. According to the coinsurance effect and the transaction-cost hypothesis, unrelated-diversified firms have a higher debt capacity and can assume more debt as a source of finance. Moreover, the capital-structure decisions of unrelated-diversified firms seem to be strictly aimed at reaching their target optimal debt level—a behaviour that is consistent with the trade-off hypothesis. On the other hand, related-diversified firms adjust
Pecking Order Behavior in Emerging Markets
, 2008
"... Pecking order behavior is a very important financial hypothesis that attempts to explain how capital structure choices are made. Prior empirical evidence has been lukewarm in its support of this behavior. Most of the research has been conducted using samples of American firms. This paper examines th ..."
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Pecking order behavior is a very important financial hypothesis that attempts to explain how capital structure choices are made. Prior empirical evidence has been lukewarm in its support of this behavior. Most of the research has been conducted using samples of American firms. This paper examines the validity of the pecking order hypothesis in emerging market countries. One of the driving forces behind the pecking order hypothesis is that managers have more information about the value of the company than do outside investors. Examining pecking order behavior in emerging markets would seem like an ideal place to find support for the hypothesis because the problems for outside investors are huge. Compared to investors in the US, investors in emerging markets receive less information, the information they do receive is likely to be distorted (managed), and the legal rights they possess are worse than their counterparts in the US. Using a sample of 23 countries, we find no support for this hypothesis. Firms in these countries finance their deficit mainly with equity and issue equity much more often than would be expected under this hypothesis. Contrary to the pecking order hypothesis, firms with major asymmetric
Evaluation of credit risk based on firm performance
"... Evaluation of credit risk based on firm performance In this paper we investigate whether technical efficiency is an important ex-ante predictor of business failure. We use samples of French textiles, wood, and R&D companies to obtain efficiency estimates for individual firms in each industry. Th ..."
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Evaluation of credit risk based on firm performance In this paper we investigate whether technical efficiency is an important ex-ante predictor of business failure. We use samples of French textiles, wood, and R&D companies to obtain efficiency estimates for individual firms in each industry. These efficiency measures are derived from a directional technology distance function constructed empirically using non-parametric Data Envelopment Analysis (DEA) methods. We summarize the effect of efficiency on the likelihood of default in terms of the franchise value hypothesis which states that more efficient firms will be less likely to fail. Estimating probit and logit regression models we find that efficiency has significant explanatory power in predicting the likelihood of default over and above the effect of standard financial indicators. Our empirical analysis also shows that caution needs to exercised when using the solvency ratio as an ex ante predictor of business failure.
