The influence of firm financial position and industry characteristics on capital structure adjustment

We extend Byoun's (2008) modelling of the relationship between deficits and surpluses and adjustment speed, to demonstrate how industry characteristics identified by Kayo and Kimura (2011), including industry concentration, industry munificence and industry dynamism, impact on speed of adjustment. Using New Zealand firms as a case study, we find significant evidence that, as well as firm financial position, industry characteristics also impact on adjustment speed. The firm financial position results are the most robust, and we recommend further research to confirm the nature of the relationship between industry characteristics and the speed at which firms adjust towards target capital structures.     

Risk structure of interest rates: an empirical analysis for Deutschemark‐denominated bonds

This paper empirically studies the risk structure of interest rates for Deutschemark‐denominated bonds. For this purpose, we estimate term structures of interest rates using the parsimonious fitting function of Nelson and Siegel (1987) for virtually risk free Government bonds and five different rating categories classified by Moody's ratings (Aaa, Aa, A, Baa, Ba). The sample period covers the time interval from July 1990 to December 1996. We investigate the pricing errors resulting from our estimation procedure and analyse credit spreads over the term structure of Government bonds.     

The capital structure of multinational corporations: Canadian versus U.S. evidence

Contrary to the U.S. evidence, we show that Canadian multinational corporations (MNCs) display higher leverage than domestic firms (DCs). This higher leverage is due to lower agency costs of debt associated with MNCs' U.S. operations. We also find that the Canadian firms with international bond market access have higher leverage than firms without such access. Comparison with a U.S. matched sample shows that the sensitivity of leverage to firm-specific factors differs between the two countries, especially for the MNCs samples. Our evidence indicates that capital structures of MNCs are a complex interaction of both home and host country factors and differences in leverage determinants across countries.     

Government ownership and the capital structure of firms: Analysis of an institutional context from China

Emerging economies provide interesting scenarios for examining how institutional context influences the financing behavior of firms. In this study, we examine the capital structure of Chinese listed firms following the Split-Share Structure Reform of 2005. This reform allowed a reduction of government ownership by making government shares tradable. We find that the impact of government ownership on leverage is dependent on whether the government is the largest shareholder in a firm and whether the government ownership is through a parent state-owned enterprise. In addition, we document that the largest non-government shareholder positively influences leverage. Overall, our results reveal that the largest controlling shareholder, either government or non-government, has a significant impact on the capital structure of Chinese firms.     

Effect of diversification on capital structure

Previous empirical financial studies have paid little attention to the role of diversification strategy on financial choices. This study analyses 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 important because they explain earlier contradictory results on capital‐structure determinants and offer an explanation of how the degree of product specialization/diversification and the direction of diversification (related or unrelated) translate into different corporate financial behaviours.     

The use of earnings and operations management to avoid credit rating downgrades

Firms placed on negative credit watch face the threat of a credit rating downgrade. At the same time, they are given the opportunity to put recovery efforts in place to retain their current credit rating. In this paper, we test to what extent firms use earnings management as a short-term recovery strategy. We find that both accruals-based and real earnings management are associated with firms avoiding credit rating downgrades, and that these alternative earnings management strategies tend to be complements rather than substitutes. However, following the passage of the Sarbanes–Oxley Act, only real earnings management is significantly associated with the credit watch outcome. We find evidence that firms which maintain their rating via earnings management are better able to afford the inevitable earnings reversals, and that in the year following the credit watch period, the credit rating performance of these firms is significantly better than firms which undergo a downgrade, with fewer downgrades and more upgrades in this period. Our results also imply that credit rating agencies are not misled by earnings management but rather allow for some discretion in reporting earnings that facilitates the dissemination of private information about future firm performance.     

The impact of changes in bank ownership structure on the allocation of capital: International evidence

A new wave of bank privatizations in the past decade has significantly changed the ownership structure of banking systems around the world. This paper explores how these changes affect the allocation of capital within countries. Increases in domestic blockholder ownership of banks adversely affect the allocation of capital through increased lending activity to less productive industries and to those with less dependence on external finance. This result is more pronounced in countries with higher levels of corruption. I find some evidence that foreign presence improves capital allocation efficiency by increasing lending to more productive industries, primarily in common law countries.     

金融危机前后国际信用衍生产品市场的发展及启示

信用衍生产品自问世以来在分散金融机构信用风险、完善信用风险定价机制、提高债券市场流动性等方面发挥了积极的作用。该文介绍了信用衍生产品的主要功能及其在本次金融危机前、中、后三个时期的发展特点,肯定了基础信用衍生产品对金融市场的重要作用,指出中国应推动金融创新,建立有中国特色的信用衍生产品市场。     

Credit ratings quality: The perceptions of market participants and other interested parties

The global credit crunch of 2008 and related sub-prime mortgage crisis of 2007 have made credit ratings agencies (CRAs) the focus of international attention. In particular, the quality of ratings information and the responsibilities CRAs owe to financial markets have come under intense scrutiny. Specifically, commentators, politicians, and regulators have expressed concern at the involvement CRAs might have had in creating global financial instability. However, the term ratings quality remains largely absent from the academic literature.This paper constructs a measurement instrument to capture ratings quality provided by CRAs, and assesses differences in perceptions of ratings quality amongst four stakeholder groups in public debt markets. Two macro-constructs of ratings quality are identified, labelled Technical Qualities and Relationship Qualities. The two macro-constructs are measured by ten micro-attributes, labelled: Cooperation; Independence; Internal Processes; Issuer Orientation; Methodology; Reputation; Service Quality; Shared Values and Norms; Transparency; and Trust. Each micro-attribute is operationalised into individual items, and then empirically tested using data obtained in the UK from 121 issuers, 75 non-debt issuing financial managers, 90 investors, and 120 other interested parties.The data suggest that ratings quality involves, in order of importance: the CRA's reputation; those values and norms of the CRA shared by users; the methodologies employed by the CRA; the independence of the CRA; and internal processes within the CRA. Multivariate analysis of variance finds no statistically significant variation between the groups for Technical Qualities factors. However, issuers rate Relationship Qualities and its micro-attributes of Trust, Issuer Orientation, and Service Quality higher than other market participants; a finding that reflects the dyadic relationship between the issuer's treasurer and lead analyst of the CRA. The paper concludes with a number of policy-relevant issues.     

Internal capital networks as a source of MNC competitive advantage: Evidence from foreign subsidiary capital structure decisions

This paper documents multinational company (MNC) strategic advantages arising from its internal financial network. Using data from US multinational company affiliates in 62 countries, we show that MNC affiliates in countries with low credit availability, poor creditor protections, high political risks, and high inflation are found to bear high interest costs and multinational affiliate debt ratios are high in high tax countries. In addition, affiliates in countries with high (low) credit availability, a high (low) corruption index, low (high) political risks and high (low) currency depreciation are found to carry high external (parent) debt ratios. We also find that currency depreciation, credit availability, and location in common law countries are negatively associated with the use of parent (relative to external) debt. Thus, our findings suggest that affiliates substitute external debt with parent debt using internal capital markets to overcome weak external financial markets and institutional environments. This is important evidence of the strategic competitive advantage based on financial networks enjoyed by MNCs.     

The cost of capital and optimal financing policy in a dynamic setting

This paper revisits the Modigliani–Miller propositions on the optimal financing policy and cost of capital in a dynamic setting. In an environment without taxes and bankruptcy costs, the results are generally consistent with the Modigliani–Miller Propositions 1 and 2. However, the first proposition should be presented and interpreted more carefully, as given firm characteristics, there is only one optimal capital structure. Thus, a firm’s capital structure is relevant. A relaxation of assumptions about either taxes or bankruptcy costs leads to conclusions that are generally different from those in Modigliani and Miller (1958). The model predicts that leverage and sales-to-capital ratios decrease but firm size and capital stock increase with the subjective discount factor of the firm’s manager if there are taxes and bankruptcy costs. The empirical analysis supports these predictions.     

Optimization of a firm's capital structure: A quantitative approach based on a probabilistic prognosis of risk and time of bankruptcy

This article develops a new probabilistic approach to the problem of optimization of a firm's capital structure. The main idea of the approach is straightforward. As a possible firm's bankruptcy is the principal factor restricting the amount of borrowed capital, we assess the probabilities of bankruptcy at various time horizons in the future dependent on the proportion of debt capital and other indices of a firm's current financial position and then calculate how these probabilities influence the firm's value.We identify a set of factors determining conditions of existence and the value of the optimal debt/equity ratio. These include the characteristics of a firm's debt (proportion of short-term component of the debt, cost of service, and maturity horizons of long-term component), characteristics of a firm's ability to pay the debt, and some macroeconomic factors.We represent dependencies of optimal debt/equity ratio and gains in a firm's value on the main influencing factors.The approach is based on real data of real firms and does not use superfluously formalized models. We believe it can be used in practical capital structure decisions although specific calculations must be fulfilled for each firm that needs such decision.     

Keeping up with the Joneses: Changing Rating Standards and the Buildup of Capital by U.S. Property-Liability Insurers

There has been a net propensity over the last decade for the dominant rating agency of the U.S. insurance industry, A.M. Best, to downgrade property-liability insurers. This could reflect a general deteriorating credit worthiness of the industry or an increase in the performance thresholds Best's has deemed necessary to achieve a given rating class. Consistent with a recent study of corporate bond ratings, we find evidence there has been an increase in rating stringency. Specifically, we show pressure for insurers to maintain their existing ratings provides a plausible explanation of the dramatic buildup of capital in the industry during the 1990s. In addition, our analysis suggests Best's raised the bar in terms of the capital required to maintain the highest ratings differentially relative to the increase in standards they required for lower rated categories. The actual pattern of capital buildup across firms in different rating categories is consistent with an attempt by high quality firms to defend these ratings.     

Modeling capital structure decisions in a transition market: empirical analysis of firms in Egypt

It has been realized that none of the three basic theories of capital structure presents a complete answer to the actual determinants of corporate financing decisions. This study attempts to model the practice of capital structure decisions according to the basic premises of each theory of capital structure: trade-off theory, pecking-order theory and free cash flow theory. The methodology addresses modeling long-term and short-term debt financing decisions based on ten different statistical criteria using data from Egypt stock market. The empirical evidence indicates that four models of corporate financing are influenced by the trade-off theory relatively. The contributions of this paper are as follows. First, this study offers a more refined and comprehensive methodology for modeling firms’ capital structure decisions. Second, the results of this study compare to those of previous studies of other developing countries and thus add an element of external validity. Mohamed A. Ismail is currently working as a consultant for the Information and Decision Support Center (IDSC), the Egyptian Cabinet-Egypt. He would like to acknowledge the financial support provided by the IDSC.     

资本流动对中国国际收支的影响

本文从分析中国国际收支失衡局面的形成原因入手,主要探讨了资本流动在国际收支失衡中的决定性作用,指出这种资本流动形式具有较大的潜在不稳定性,在目前人民币汇率弹性还不够充分时,资本项目尤其是对于资本流出的管制不宜过快放开。     

A model of dynamic compensation and capital structure

This paper studies the optimal compensation problem between shareholders and the agent in the Leland (1994) capital structure model, and finds that the debt-overhang effect on the endogenous managerial incentives lowers the optimal leverage. Consistent with data, our model delivers a negative relation between pay-performance sensitivity and firm size, and the interaction between debt-overhang and agency issue leads smaller firms to take less leverage relative to their larger peers. During financial distress, a firm's cash flow becomes more sensitive to underlying performance shocks due to debt-overhang. The implications on credit spreads and debt covenants are also considered.     

International financial integration through the law of one price: The role of liquidity and capital controls

This paper takes advantage of the fact that some stocks trade both in domestic and international markets to characterize the degree of international financial integration. The paper argues that the cross-market premium (the ratio between the domestic and the international market price of cross-listed stocks) provides a valuable measure of international financial integration and the effectiveness of capital controls. Using autoregressive (AR) models to estimate convergence speeds and non-linear threshold autoregressive (TAR) models to identify non-arbitrage bands, the paper shows that price deviations across markets are rapidly arbitraged away and bands are narrow, particularly so for liquid stocks. The paper also shows that regulations on cross-border capital flows effectively segment domestic markets. As expected, the effects of both types of capital controls are asymmetric but in the opposite direction: controls on outflows induce positive premia, while controls on inflows generate negative premia. Both vary with the intensity of capital controls.     

Switching to a poor business activity: optimal capital structure, agency costs and covenant rules

We address the issue of modeling and quantifying the asset substitution problem in a setting where equityholders decisions alter both the volatility and the return of the firm cash flows. Our results contrast with those obtained in models where the agency problem is reduced to a pure risk-shifting problem. We find larger agency costs and lower optimal leverages. We identify the bankruptcy trigger written in debt indenture, which maximizes ex-ante firm value, given that equityholders will ex-post be able to risk-shift. Our model highlights the tradeoff between ex-post inefficient behavior of equityholders and inefficient covenant restrictions.      

基于协调的保险市场与资本市场对接模式研究

本文通过比较美、英、日、德四国的对接模式发现,保险市场与资本市场的和谐对接是资金、产品和制度对接三方面的共融体,是金融市场自然演进与风险资本动态规制的最优范式结合。基于此,我国应在经济、金融微观制度基础变迁的基础上适时选择适合我国国情的可操作和可持续的对接模式。     

Implied liquidity risk premium in the term structure of sovereign credit default swap and bond spreads

In this study, we focus on the dynamic properties of the risk-neutral liquidity risk premium specific to the sovereign credit default swap (CDS) and bond markets. We show that liquidity risk has a non-trivial role and participates directly to the variation over time of the term structure of sovereign CDS and bond spreads for both the pre- and crisis periods. Secondly, our results indicate that the time-varying bond and CDS liquidity risk premium move in opposite directions which imply that when bond liquidity risk is high, CDS liquidity risk is low (and vice versa), which may in turn be consistent with the substitution effect between CDS and bond markets. Finally, our Granger causality analysis reveals that, although the magnitude of bond and CDS liquidity risk is substantially different, there is a strong liquidity flow between the CDS and the bond markets, however, no market seems to consistently lead the other.