Distress cost and corporate financing policy: evidence from the equity options market

This study examines the link between distress cost and corporate financing policy through the lens of the equity options market. Four features stand out. First, the cost of distress is comparable to the tax shield from debt financing. Second, the results provide evidence that ordinary least-squares estimates understate the impact of market leverage on default risk. Third, consistent with the information models of debt maturity, firms with higher default probability use more long-term debt. Finally, more distressed firms rely on secured debt to a greater extent. Overall, the results support the trade-off theory of capital structure.     

Mean reverting financial leverage: theory and evidence from Pakistan

Grounding concepts of the two competing theories of capital structure (trade-off theory, pecking order theory) are quite opposite to each other. Trade-off theory claims that there is an optimal (target) capital structure and firms try to achieve that optimal (target) point. Whereas pecking order theory argues that there is no optimal (target) capital structure but the firms follow a specific pattern of financing. Using the two competing theoretic frameworks, this study applies Fisher-type panel unit root test to an unbalanced panel data of 13 115 firm-year observations of nonfinancial firms listed on Karachi Stock Exchange Pakistan spread over 38 years (1973–2010). Overall panel test results, for short-term, long-term, as well as total leverage support trade-off financing behaviour while individual firm results do not. Individual firm results show that only 16% of the firms have short-term target, 25% of the firms have long-term target and 12% of the firms have total target leverage ratio. Further, industry results explain that most of the industries do have target leverage ratios and classification of data into profitable and lossmaking firm-year observations explains that profitable firms clearly follow trade-off financing behaviour while the results for lossmaking firms do not support trade-off financing behaviour. Our study indicates that it is important for the government to ensure policies to develop well-balanced financial markets and to improve accountability systems.     

The effects of China’s split-share reform on firms’ capital structure choice

China’s split-share structure reform in 2005–2006 mitigates agency conflicts between controlling shareholders and minority shareholders and thus may bring substantial changes to corporate financing behaviour. This article examines the impact of that reform on the capital structure decisions of firms by applying a variety of trade-off and pecking-order models. Using data from 1176 non-financial Chinese listed firms during the period 2000–2012, we present empirical evidence indicating that equity tracks the financing deficit better than debt in Chinese firms, a finding which is not consistent with pecking-order theory. This phenomenon is more prominent after 2006 as share reform increases trading activity in the secondary stock market and improves the transparency of financial markets. In addition, Chinese firms have an optimal leverage ratio and they adjust below-target leverage ratios faster than above-target leverage ratios after the implementation of share structure reform, although they make symmetric adjustments towards the target leverage ratio before 2007. Finally, recent share reform has prompted Chinese firms to more quickly address the divergence of actual leverage ratios from long-term target levels, but has slowed their response to short-term target leverage divergence.     

Determinants of Leverage in Slovenian Blue-Chip Firms and Stock Performance Following Substantial Debt Increases

Hypotheses concerning capital structures are some of the most frequently tested in the financial literature. Authors usually discuss different incentives for the use of leverage. Their views can be broadly classified in two main groups. The proponents of the first argue that leverage increases the cash flow available to investors. With the use of debt a firm gains because it uses a cheaper component of capital and since it pays less tax thanks to advantageous debt tax shields. On the other hand, the proponents of the second group stress the importance of minimising transaction costs, and information asymmetry. They point to a pecking order of finance sources. In this article, I explain the most frequently stated drivers that provide incentives for the more extensive use of debt with a focus on an emerging market environment and test whether they are relevant to Slovenian blue-chip firms that emerged from the transition of the last decade.

The second part introduces the owners' point of view. I test whether raised debt levels in fact improve the long-term return to the stockholders of Slovenian firms. This should be expected because of the institution-led capital structure conservatism that firms practised in the past. Three methods are employed to test the relationship between increased levels of debt and long-term stock return. All of them offer a similar conclusion that the expected long-term performance of firms which significantly increased their leverage is no better than the long-term performance of firms that did not. The results are useful for other emerging capital markets in Europe where firms and investors faced similar circumstances tied to their socialist past and transition process.     

Corruption and corporate leverage in an emerging economy: The role of economic freedom

This study investigated the effects of corruption and economic freedom on corporate leverage. We also evaluated how economic freedom shapes the effect of corruption on corporate leverage. Using a sample of Vietnamese firms covering a nine-year period from 2010 to 2018, we find evidence that increased control of corruption has a significant positive impact on firm leverage, whereas the opposite is true for economic freedom. This effect is robust to alternative measures of control of corruption as well as advanced estimation methods, such as firm-fixed effects and quantile regressions. Our results also reveal that the positive impact of corruption controls on corporate leverage is more pronounced for firms with high economic freedom. Econometrically, our findings indicate that firms with better control over corruption prefer debt financing, as demonstrated by their higher leverage ratio.     

Market timing and corporate capital structure: a transatlantic comparison

This article provides comparative international evidence on the effect of market timing on corporate capital structures using panel data for US, UK and continental European firms. We document that the empirical regularity found for US firms, that historical market-to-book ratios and corporate leverage correlate negatively does not extend to UK and continental European firms. The latter tend to raise debt rather than equity when stock prices are high, thus sticking more closely to a pecking order in which debt is preferred over external equity.     

Capital structure and institutional setting: a decompositional and international analysis

The legal and institutional setting is more and more influential in firms’ financial decisions. Our article analyses firms’ capital structure in an international framework in order to assess the different level of debt use across countries and to identify both common and differential explanatory factors. Although the level of financial leverage is quite different, the factors that have traditionally driven capital structure decisions have much in common in all the legal and institutional settings. The performance and size of the firm, the assets tangibility and the growth opportunities have a relevant but differential effect across the different institutional systems. Consequently, our results suggest that the legal and institutional system of each country does not only affect firms’ capital structure but also creates the conditions to explain a differential effect of the common determinants of firms’ financial choices.     

Corporate leverage and the terms of employment: evidence from French small businesses before and during the global crisis

Despite the particular importance of corporate leverage and human capital for small businesses, little is surprisingly known about the relationship between these two factors for this category of firms. Accordingly, this article tries to fill this gap by investigating the relationship between leverage and human capital examined through the investment in employee-related expenditure. The analysis focuses on a sample of French listed small businesses before and during the recent global crisis. The empirical findings show that leverage serves as a monitoring mechanism of corporate managers prone to over or underinvest in employee-related expenditure to obtain private benefits. Due notably to the availability of debt, this monitoring is more effective before the crisis period, especially for low growth firms. Overall, these results provide support to the theory that leverage has a disciplining role. Simultaneously, they lead to moderate the strength of this role according to the global crisis. Thus, they should provide useful insights for academics, regulators, managers and credit institutions.     

NONPARAMETRIC MODELS OF FINANCIAL LEVERAGE DECISIONS

This paper applies nonparametric decision tree models to the analysis of financial leverage decisions. This approach presents three appealing features: (i) the relationship between leverage and explanatory variables is not predetermined but is derived from information provided by the data, (ii) the models respect the fractional nature of leverage ratios, and (iii) each covariate is allowed to influence in different ways the financial leverage decisions of firms automatically assigned to different groups. Based on a data set of Portuguese firms, decision trees are used to tackle both classification (the decision to issue debt) and regression (the decision on the amount of debt to be issued, conditional on using debt) problems. It is found that: (i) two‐part models are the most appropriate specification for explaining the overall amount of debt used by firms, (ii) there are no drastic differences between the results produced by tree and parametric models, although some divergences may arise, and (iii) tree models suggest relationships between covariates and leverage that parametric models fail to capture, especially when the sample size is small.     

Debt maturity and firm productivity—The role of intangibles

Does the maturity of debt matter for productivity? Using data on Italian firms from 1997 to 2015, we study the relationship among debt maturity, productivity, and firm characteristics. We find that productivity is positively associated with short-term debt and negatively associated with long-term debt. This result supports the hypothesis that the less intense monitoring of firm performance and fewer liquidation fears stemming from the long maturity of debt causes a moral hazard, while short-term debt serves as a disciplinary device to improve firm performance in the short run. This effect is evident in small- and medium-sized enterprises and old firms. In contrast, large firms can utilize long-term financing to improve productivity through long-term investments. Firms improve productivity by purchasing intangible assets financed by short-term debt.     

政府控制、终极控制人与上市公司债务期限结构

本文在代理理论框架下,基于我国政府干预的制度背景,以2004-2006年A股上市公司为样本研究了终极控制人与其所控制的上市公司债务期限结构选择的关系.实证检验结果表明:国有企业性质的终极控制人所控制的上市公司长期负债比例偏高.进一步区分不同行政级别的政府终极控制人进行回归,发现政府终极控制人的行政级别越低,企业长期债务比例越高.另外,通过对不同控股方式的样本公司分别进行回归分析的结果表明,在终极控制人通过复杂组织结构方式间接控制的上市公司中,终极控制人的不同产权性质及不同行政级别对上市公司长期债务选择的影响更加显著.上述研究发现,为认识政府控制和干预对企业财务决策的影响提供了更深入的证据,进而为厘清中国转轨经济进程中的政企关系提供了新的补充证据,并对理解不同组织结构方式的上市公司债务期限结构的差异性提供了一个新的视角.     

Debt and corporate governance in emerging economiesEvidence from India1

We analyze the role of debt in corporate governance with respect to a large emerging economy, India, where debt has been an important source of external finance. Using cross‐sectional data on listed manufacturing firms we estimate, simultaneously, the relation between Tobin's Q and leverage for three years, 1996, 2000 and 2003. Our analysis indicates that while in the early years of institutional change, debt did not have any disciplinary effect on either standalone or group affiliated firms, the disciplinary effect appeared in the later years as institutions became more market oriented. We also find limited evidence of debt being used as an expropriation mechanism in group firms that are more vulnerable to such expropriation. In general, our results highlight the role of ownership structures and institutions in debt governance.     

Do cash flow imbalances facilitate leverage adjustments of Chinese listed firms? Evidence from a dynamic panel threshold model

This paper investigates the asymmetric impact of cash flow on firms’ leverage adjustments. We use a dynamic panel threshold model and estimate it with a newly-developed first-difference GMM approach, which allows endogeneity in both threshold variable and regressors. Employing data of 1054 Chinese listed firms during 2004–2016, we show that Chinese listed firms have leverage targets, towards which they adjust at an average speed of 25.9%. Moreover, firms with larger absolute cash flow adjust towards their leverage targets significantly faster than those with smaller absolute cash flow. This finding is robust to a post-financial crisis sample period, alternative measures of leverage and cash flow, and the incorporation of an additional control variable. We find evidence that cash flow imbalances facilitate leverage adjustments by reducing adjustment costs, and Chinese listed firms rely more on debt issues. These findings provide new insights on firms’ leverage adjustment and cash flow management.     

Corporate financial soundness and its impact on firm performance: implications for corporate debt restructuring in Slovenia

This article studies the extent of corporate leverage and range of excessive debt of Slovenian firms during the recent financial crisis. Half of all firms (of those with some non-zero debt and at least one employee) are found to face an unsustainable debt-to-EBITDA leverage ratio beyond 4, accounting for almost 80% of total outstanding debt. Moreover, a good quarter of all firms experience debt-to-EBITDA ratios exceeding 10 and hold almost half of total aggregate net debt. We then examine how this financial distress affects firm performance in terms of productivity, employment, exports, investment and survival. We find that, while less important during the good times (pre-recession period), lack of firms’ financial soundness during the period of financial distress becomes a critical factor constraining firm performance. The extent of financial leverage and ability to service the outstanding debt are shown to inhibit firms’ productivity growth as well as the dynamics of exports, employment and investment. Micro and small firms are found to suffer relatively more than larger firms from high leverage in terms of export and employment performance during the recession period.     

高科技企业R&D支出资本化的动机研究

文章以2007-2009年在深圳交易所上市的高科技企业为样本,实证研究了R&D支出资本化动机的影响因素。研究结果表明,高科技企业R&D支出资本化的比例受到债务契约和资本市场动机的影响,企业的财务杠杆越高,越倾向于把R&D支出进行资本化处理;在经营状况不好时,企业为保持上市资格、扭亏为盈而趋于把R&D支出进行资本化处理。薪酬契约和收益平滑尚不能很好地解释R&D支出资本化的选择动机。     

The dynamic specification of the modified pecking order theory: Its relevance to Italy

This paper proposes an empirical model for the modified pecking order theory (MPO) in which both trade-off (TO) and pecking order (PO) models are nested. The MPO model is specified as an error-correction mechanism and applied to a vast panel data-set. Unlike previously estimated financial models, it avoids a number of problems: the mis-specification of dynamics, the approximation of the target leverage using the historical mean, the constrained estimation of the free cash flow components in a unique parameter. The MPO model is particularly good at explaining “hybrid” systems (neither market-based nor bank-based) such as the Italian one, in which companies are a mixture of two types: TO-type firms with a long-term optimal debt ratio towards which they converge; PO-type firms for whom the short-term availability of internal funds for investment may interfere with the process of adjustment towards the target leverage. Finally, the MPO model enables us to separately test the individual relevance of each of the restricted (“pure”) TO and PO models: results confirm their mis-specification and clearly point towards the excellent empirical performance of the MPO model. First version received: May 2000/Final version received: September 2000     

Is executive compensation a substitute governance mechanism to debt financing and leasing?

This study examines whether and how CEO equity incentives relate to financing choices (i.e., debt and leases). Using manually collected CEO compensation and lease data for a sample of large UK firms, we found evidence of a negative relationship between CEO equity incentives and firm leverage. We also found that CEO equity incentives and leases are negatively related. The results are consistent with the theory introduced in this study on the substitutability of executive compensation and firm’s debt/lease financing. Our findings represent fresh empirical evidence and renewed interpretation regarding the relationship between executive equity-based incentives and firm’s financing choices. The substitutability theory we introduced here suggests that firms with greater use of debt and/or leases will implement less equity-based compensation in mitigating the agency cost of equity.     

Ownership, institutions, and capital structure: Evidence from China

We employ a unique data set to explore the role of ownership structure and institutional development in debt financing of non-publicly traded Chinese firms. We show that state ownership is positively associated with leverage and firms’ access to long-term debt, while foreign ownership is negatively associated with all measures of leverage. Surprisingly, firms in better developed regions are associated with reduced access to long-term debt, suggesting the availability of alternative financing channels and the tightening of the lending standards under the on-going banking reform. The combination of ownership structures and institutions explains up to 6% of the total variation in firms’ leverage decisions, while firm characteristics alone explain no more than 8% of the variation. Further, we show that non-state-owned firms tend to have lower total and short-term debt than their state-owned counterparts in less developed regions. Finally, we show that state-owned firms’ easy access to long-term debt is positively associated with long-term investment and negatively associated with firm performance.     

Is debt conservatism the solution to financial constraints? An empirical analysis of Japanese firms

ABSTRACT

This paper investigates why firms choose the conservative financing strategy known as non-positive net debt policy, which is a more recent prevalent trend among Japanese firms. The analysis reveals that Japanese firms are more likely to be financially conservative if they are smaller, older and more profitable and have fewer growth opportunities and tangibility. The survival analysis further investigates the duration of conservative debt policy and ordinary debt policy. The evidence shows that firms adopt/abandon the conservative policy with different motivations and preferences over debt conservatism. In particular, we argue that the more financially constrained firms abandon the conservative debt policy sooner than their counterparts, while less financially constrained firms abandon the ordinary (less conservative) debt policy sooner than their counterparts. The results suggest that a firm uses a conservative debt policy in terms of net leverage as a temporary buffer to mitigate financial constraints.     

债务杠杆与企业投资:双重预算软约束视角

文章以我国2000~2004年的上市公司为样本,在政府、银行和企业三方的预算软约束框架内实证检验了企业投资支出和债务杠杆之间的关系。研究发现,企业投资支出整体上同债务杠杆呈负相关。但在国有绝对控股的上市公司中,企业投资支出对于负债水平不敏感,并且,随着国有股权比例的上升,企业投资支出对债务杠杆的敏感度逐渐下降。基于此,文章认为,政府对国有企业和国有商业银行同时实施的双重预算软约束是导致国有企业投资行为扭曲和债务治理机制失效的重要原因。