Access to Capital, Capital Structure, and the Funding of the Firm

Based upon a large data set of public and private firms in the United Kingdom, I find that compared to their public counterparts, private firms rely almost exclusively on debt financing, have higher leverage ratios, and tend to avoid external capital markets, leading to a greater sensitivity of their capital structures to fluctuations in performance. I argue that these differences are due to private equity being more costly than public equity. I further examine the private firms subsample to show that private equity is more costly than its public counterpart due to information asymmetry and the desire to maintain control.     

Debt Issues around Mergers & Acquisitions

We investigate firms’ debt financing choices among bank loans, public bonds and privately placed debt around mergers and acquisitions (M&As). We find that prior to M&As, firms with above-optimal leverage tend to pursue arm’s-length debt financing in lieu of bank debt. We find that three-day CARs for highly levered firms and acquirer’s long-run performance are negatively associated with non-bank financing. This supports a monitoring avoidance hypothesis for highly levered firms’ non-bank debt financing decisions in M&As. As a falsification test, we do not find the same debt financing considerations of acquirer firms during their post-M&A period.     

Too much of a good thing? A theory of short-term debt as a sorting device

This paper shows that the liquidity risk associated with short-term debt financing can be used to sort insolvent firms out of financial markets when their solvency risk is private information. Notwithstanding this sorting role of short-term debt, unregulated financial firms tend to choose an inefficiently short debt maturity structure. This inefficiency arises for two reasons. First, by issuing more short-term debt, low-risk firms reduce their expected funding costs. This leads to a misalignment of private and social incentives as firms fail to fully internalize the social costs of becoming illiquid. Second, while the sorting role of short-term debt is reflected in a decline of long-term interest rates when more short-term debt is issued, creditors’ inability to observe firms’ solvency risk leads to an excessive reduction of long-term interest rates. This further distorts firms’ funding choice towards short-term debt.     

Compliance with pension‐related mandatory disclosures and debt financing

Using hand‐collected data on the level of pension‐related mandatory disclosures required by International Accounting Standard 19 Employee Benefits, we test whether compliance levels with these disclosures convey information that affects firms’ access to the public instead of the private debt market, as well as the cost of their new debt issues. We document a higher tendency to access the public debt market for firms with higher levels of pension‐related disclosure. Furthermore, we find that firms with higher levels of pension‐related disclosure enjoy a lower cost in terms of issuance of public debt, but not a lower cost for private debt issues. Thus, the benefits of disclosure in reducing information risk are only realisable when creditors rely heavily on financial statements in their decision making, due to the limited access to private information. Additional tests reveal that high compliance levels effectively mitigate the negative effect of pension deficits on the cost of public debt. These findings provide novel evidence in the extant literature on the role of mandatory (and, in particular, pension‐related) disclosures on firms’ debt financing. They also have important policy implications.     

Does debt capacity matter in the choice of debt in reducing the underinvestment problem?

We test the impact of debt capacity on firms’ simultaneous decisions of leverage and debt maturity in reducing underinvestment problems. Examining 24 OECD countries for the period between 1990 and 2011, we find strong evidence, that, unlike previous studies, the role of leverage and debt maturity in reducing underinvestment problems is not homogeneous across firms with varied debt capacity. We find new evidence that, when firms face lower debt capacity constraints, they benefit from their ability to use a greater amount of debt if they shorten their debt maturity, or gain from using longer maturity of debt if they decrease their leverage to reduce underinvestment problems. Our results suggest that they also benefit from the ability of their firms to gain from interest tax shields by financing more with debt or long-term debt, and hence use debt maturity and leverage as strategies substitutes. However, when firms are constrained by concerns over debt capacity, they tend to opt for a lower level of debt that is mainly short-term to reduce the underinvestment problem. Our results suggest that firms with lower debt capacity cannot completely resolve their underinvestment problems by using short-term debt or low leverage, implying that the effects of the liquidity risk outweigh those of underinvestment problems, and hence impose a constraint on firms’ choice of debt.     

Does the source of debt financing affect default risk?

We examine whether the source of debt financing is important for assessments of firms’ default risk. This study reveals that during the 2007–2010 financial crisis, firms that depend mainly on financing from banks suffer higher increases in default risk than do firms with no such dependence. Conversely, firms that rely solely on financing from public debt markets do not experience significant increases in default risk. These findings suggest that the bank supply shock theory explains the transmission of financial shocks to the real economy. Finally, firms that depend on bank financing cannot offset the adverse impacts of bank lending shocks by substituting bank loans with publicly traded debt.     

Demand for fair value accounting: The case of the asset revaluation boom in Korea during the global financial crisis

When the fair value accounting (FVA) option for property, plant, and equipment was introduced in the midst of the global financial crisis, a significant proportion of Korean firms elected FVA. We attribute this unusual boom in asset revaluations to the nation's culture of government intervention and civilian compliance, which was particularly espoused during this period of financial turmoil, and a foreseeable option to switch back to historical cost accounting. We find that among those firms whose debt‐to‐equity ratios are low, public firms opt for the FVA option more often than private firms, suggesting that the need to communicate fair value information with diversified equity holders is more important than the need to do so with creditors. In contrast, among those firms whose debt‐to‐equity ratios are high enough to warrant such unfavorable dispositions as new debt freezes and monitoring by regulators, we find no difference in the FVA choice between private and public firms. These findings imply that during the global financial crisis, private firms that rely heavily on debt financing have a strong incentive to utilize FVA to comply with government guidelines for the debt‐to‐equity ratio and to ease a potential hold‐up problem by influential creditors.     

IFRS Adoption and the Choice Between Public and Private Debt: Evidence from South Korea

This article examines the association between mandatory International Financial Reporting Standards (IFRS) adoption and corporate choice between public debt and private debt. If IFRS adoption increases the quality of lenders’ information environment provided on financial statements, firms are more likely to access the public debt market. Using a sample of public and private debts financing firms from 2000 to 2014 in Korea, we find that firms that file financial reports under the IFRS are less likely to finance from public debt markets, implying that the mandatory IFRS adoption has exacerbated the information environment of the public debt market in Korea.     

Liquidity crisis,relationship lending and corporate finance

This paper investigates the consequences of the liquidity shocks in wholesale funding markets during the 2007–2009 financial crisis on bank lending and corporate financing. We show that banks that relied more heavily on wholesale funding contracted lending more severely than banks that relied more on insured deposits. We then examine the effects of loan contraction on the financial positions of publicly traded firms. We find that both during and after the crisis, the change in leverage of bank-dependent firms is less than that of firms with access to public debt markets. In addition, bank-dependent firms rely more on cash than net equity issuance to finance operations. We also find that firms with established bank lending relationships weather the crisis better. Such firms are able to attain higher levels of leverage during the crisis, add to their cash holdings, secure new bank credit, and achieve higher profitability as a result.     

Being private,Big 4 auditors,and debt raising

This study investigates the role of auditor choice (Big 4/Non-Big 4) in debt financing for private and public firms. We find private firms have less access to debt than public firms, and Big 4 auditors support debt raising in both private and public firms. Consistent with private firms facing greater information asymmetry, Big 4 auditors are more important for debt raising in private firms than in public firms. The benefit of appointing Big 4 auditors for private firms' debt raising is greater in the opaque information environment of the global financial crisis. It is also greater when firms are smaller, younger, or have poorer financial reporting quality. We also find evidence consistent with Big 4 auditors mitigating agency conflicts and enhancing debt raising when ownership concentration is higher in private firms.     

Institutional arrangements and debt financing

I find that institutional arrangements have an impact on the real economy by affecting firms’ choice between private and public debt and the subsequent financing costs. Using new debt issued by firms in 26 non-US countries, I find, after controlling for firm characteristics predicted by debt agency and information asymmetry theories, that the level of financial market development, the efficiency of bankruptcy procedure, the integrity and enforceability of laws, and the transparency of financial information have significant impacts not only on firms’ debt choice and yield to maturity in domestic debt market, but also their issuance choice in the international debt market.     

What Happens During the Private Period?: Evidence from Public‐to‐Private Reverse LBOs

This study provides new evidence on the restructuring activities undertaken by public‐to‐private reverse leveraged buyouts (RLBOs) while owned by private equity firms. The authors' comprehensive sample of public‐to‐private LBOs that return to public ownership through IPOs enables them to observe changes in profitability, valuation, financial structure, operating structure, and cost structure from the time the firms go private through (and after) their emergence through (re‐) IPOs. With their exclusive focus on reverse LBOs involving public‐to‐private deals, the authors reach findings that contradict previous conclusions about RLBOs. At the time of the LBO, the target firms in reverse LBOs are more levered than their peers, pay higher dividends, and are more profitable than their peers. At the same time, however, they appear to have lower market valuations before the buyouts. During the private period, the target firms of reverse LBOs achieve significant increases in employee productivity, asset restructuring, and improved gross margins, while operating with substantially higher levels of debt financing, lower levels of cash and working capital, and greater concentration of equity ownership. After the companies return to public ownership through IPOs, such companies continue to operate with higher leverage and ownership concentration than their publicly traded peers while producing further increases in profitability, resulting in substantial increases in both enterprise and equity valuation. The authors' analysis also shows that higher debt levels from the buyout play an important role in increased enterprise values. The evidence suggests that possible undervaluation as well as expected efficiency gains from restructuring actions are the primary motives for such reverse LBOs.     

What drives leverage in leveraged buyouts? An analysis of European leveraged buyouts’ capital structure

This paper examines leverage in European private equity‐led leveraged buyouts (LBOs). We use a unique, self‐constructed sample of 126 European private equity (PE)‐sponsored buyouts completed between June 2000 and June 2007. We find that determinants derived from classical capital structure theories do not explain leverage in LBOs, while they do drive leverage in a control group of comparable public firms. Rather, we document that leverage levels in LBOs are related to the prevailing conditions in the debt market. In addition, our results indicate that reputed private equity sponsors use more debt and that secondary buyouts have higher leverage levels.     

Does geopolitical uncertainty affect corporate financing? Evidence from MIDAS regression

This paper investigates the effect of geopolitical uncertainty on (market) leverage ratio, debt maturity, and choice of debt source. Using a new monthly index of geopolitical uncertainty and annual data for corporate financing variables, we find that under geopolitical uncertainty firms tend to reduce debt and increase market leverage. We argue that this increase is driven by asymmetrical reductions in the numerator (total debt) and the denominator (total debt and equity) of the leverage ratio. Under geopolitical uncertainty, firms tend to shorten their debt maturity structure and—especially those firms with lower credit quality—to substitute bank debt for public debt.     

Geographic diversification and agency costs of debt of multinational firms

This paper examines the agency conflicts between shareholders and bondholders of multinational and non-multinational firms and provides an explanation for the puzzle that multinational firms use less long-term debt, but more short-term debt than domestic firms. Using a sample of 6951 firm–year observations for multinational and domestic firms over the 1988–1994 period, we find that alternative measures of agency costs have statistically significant negative effects on the firm's long-term leverage. The results, however, also show that the negative effects of agency costs of debt on long-term leverage are significantly greater for multinational than non-multinational firms. It is documented that the effect of the agency costs of debt on leverage are increased by the firm's degree of foreign involvement. The evidence shows that firm's increasing foreign involvement exacerbates agency costs of debt leading to lower (greater) use of long-term (short-term) debt financing. This result is also confirmed using alternative measures of foreign involvement. The evidence is consistent with the view that multinational corporations (MNCs) are susceptible to higher agency costs of debt than domestic corporations because geographic diversity renders active monitoring more difficult and expensive in comparison to domestic firms. The results fail to support the view that MNCs' lower long-term debt ratios are due to the advantages of the internal capital markets.     

Financial integration and emerging markets capital structure

This paper investigates the impact of country-level financial integration on corporate financing choices in emerging economies. Examining 4477 public firms from 24 countries, we find that corporate leverage is positively related to credit market integration and negatively related to equity market integration. As integration proceeds to higher levels, high-growth firms seem to obtain more debt than low-growth firms; large firms seem to obtain more debt - especially long-term debt - and issue more equity than small firms. Also, there is evidence that firms are able to borrow more funds in countries with more efficient legal systems during integration process.     

External financing and earnings management: Evidence from international data

Corporate financing conditions in the external capital market are significantly affected by information asymmetry, while internal financing is not. Given that earnings information influences market perceptions regarding firms’ quality, firms relying on external financing should have incentives to manage earnings to improve their financing conditions. This study investigates the effect of corporate external financing behavior on earnings management. Using a sample comprising 75,790 observations of 12,874 firms in 43 countries, we find that accrual-based and real earnings management are positively associated with firms’ reliance on external financing. This positive relationship holds especially true for firms that rely on equity rather than debt financing. We argue that reliance on external financing (especially equity financing), which is subject to problems arising from information asymmetry, generates a motive for earnings management.     

Why does capital structure choice vary with macroeconomic conditions?

We develop a computable general equilibrium model explaining financing over the business cycle. To avert agency conflicts, managers must hold a high percentage of their firm's equity. During contractions, firms substitute debt for equity in order to maintain managerial equity shares. During expansions, risk-sharing improves, with increases in managerial wealth facilitating substitution of equity for debt. In calibrated simulations, (counter) cyclical variation in leverage is only exhibited by less constrained firms. All firms exhibit financial accelerator effects. However, the effect is decreasing in financial flexibility. The model's predictions regarding financing and investment are consistent with empirical evidence.     

A multilevel index of heterogeneous short-term and long-term debt dynamics

We have created a novel index that classifies U.S. public firms by their leverage choice. Our statistical approach to the construction of this index considers the interaction of all firm characteristics and unpredictable events that shapes the observed leverage choices. We have subsequently associated our estimates of the degree and persistence of short-term and long-term debt fluctuations with pecking-order, market-timing, and static and dynamic trade-off theories. Our index reveals that: (i) one-third of firms have a stationary leverage target, (ii) adjustments to targets are faster for short-term debt, and (iii) the persistence of long-term debt ratios is driven by investment constraints and market conditions.     

金融发展与企业债务融资

本文通过我国各地区金融发展的差距研究了金融发展对公司债务融资决策的影响,研究结果表明:①金融越发展,企业的短期债务比率越高;②金融发展有助于可抵押资产较少的企业获得债务融资;③金融发展有助于规模较小的企业获得债务融资和长期债务融资;④金融发展有助于那些依赖无形资产投资的企业获得债务融资和短期债务融资。这些研究结果不仅可以深化我们对金融发展如何影响公司融资决策的理解,而且可以使我们对金融发展促进经济增长的微观机理有更加深入的了解。