Shareholders' control rights,family ownership and the firm's leverage decisions

We investigate the association between controlling shareholders' ownership (CS_Own) and firms' leverage decisions in the Singaporean context. We examine whether the impact of ownership concentration on leverage differs across excess and lower control. We report that shareholders with excess control prefer leverage financing for an optimal capital structure and focus on value maximisation rather using leverage as a tool of minority shareholders' expropriation. Our analysis shows that firms capital structure significantly influences by the coalition of shareholders particularly decisions about leverage financing in addition to the firms' specific characteristics and institutional arrangements. Our empirical evidence shows that controlling shareholders with a lower fraction of equity are more concerned about limited holding thus prefer leverage over equity financing to inflate their equity stake to protect them from the potential takeovers and mergers. We report that capital structure decisions in Singapore are linked with the trade-off between the controlling shareholders' target of mitigating firm risk and their non-dilution entrenchment needs. Further, we found an inverted U-shaped association between control ownership and leverage financing. In terms of moderating effect of family-controlled ownership, our findings exhibit that leverage financing is less pronounced for family firms in Singapore due to the under-diversified investment portfolio.     

Investor sentiment and firm capital structure

We provide novel evidence of the role of investor sentiment in determining firms' capital structure decisions from three perspectives: leverage ratio, debt maturity and leverage target adjustment. We find that when investor sentiment is high, firms increase their leverage ratios, supporting our contention that high investor sentiment increases firms' debt capacity and facilitates the use of an aggressive leverage policy. Debt maturity is shorter in high sentiment periods, implying that firms are confident about future earnings and use shorter debt maturity to signal their financial solvency. Leverage target adjustment is slower in low sentiment periods, indicating higher costs of external finance. Furthermore, the sentiment-leverage relationship sensitivity is greater for financially constrained firms. Our extended analysis determines that leverage-increasing firms generate lower stock returns subsequent to a period of high sentiment, offering practical insights into the economic consequences of increasing leverage in high sentiment periods on corporate value for investors. Our research advances the understanding of the impact of investor sentiment on firms' financing decisions and stock returns.     

Foreign shareholders,relative foreign policy uncertainty and corporate cash holdings

Studies have shown that foreign investors hedge risks stemming from economic and political uncertainty in the home country through outward investment. This paper studies how foreign investors' home country risk affects their overseas investment and the host country firms' corporate cash holdings. We find that relative foreign EPU, defined as the difference between foreign investors' home country EPU and the host country of investment EPU, negatively impacts the host country firms' cash holdings through their influences on managerial decision-making. This negative relationship arises from firms' precautionary and transaction motives as foreign investors perceive lower corporate risk and better investment opportunities in the host country firms. Good corporate governance is also instrumental in yielding this negative relationship. The reduction in cash holdings due to high relative foreign EPU is more pronounced if foreign investors' home country legal environment is weaker, the two countries are further apart, and there is little trade partnership between them.     

Capital structure with risky foreign investment

Firms facing significant business risks have incentives to mitigate the costs of these risks by adjusting their capital structures. This paper investigates this link by analyzing the exposures of multinational firms to political risk. The evidence indicates that returns on investment in politically risky countries are more volatile than returns elsewhere. Multinational firms reduce their leverage in response to these political risks: a one standard deviation increase in foreign political risk is associated with 3.5% reduced leverage. The effect of foreign political risks on leverage is most pronounced for firms in industries whose returns are most susceptible to political influence.     

The Destination of Outward FDI and the Performance of South Korean Multinationals

This paper examines how the destination of outward foreign direct investment (FDI) affects South Korean multinational parent firms. We categorize host countries into those that are developed and those that are less developed. We find that destination matters for employment and capital intensity. FDI into less developed countries is negatively associated with a firm's employment and positively associated with its capital intensity. However, FDI into developed countries does not seem to matter: the parent firm's activities do not change significantly after FDI has been made. These results may indicate that Korean FDI into less developed countries is a relocation of production lines to overseas affiliates and FDI into developed countries is done to extend markets.     

The Relationship Between Equity-Based Compensation and Managerial Risk Taking: Evidence from China

The authors analyze the impact of equity-based compensation on managerial risk-taking behavior in Chinese listed firms from January 2006 to July 2011. They find that greater risk-taking incentives lead executives to invest more in research and development (R&D) projects and less in capital expenditures. Greater managerial risk-taking incentive increases firm focus. Managerial risk-taking incentives have positive effects on firms' leverage. Overall, increasing the sensitivity of chief executive officers' portfolio value to stock return volatility helps incentivize executives to work harder, as sharing gains and losses with shareholders aligns the interests of executives and shareholders. In addition, the results indicate that state control of firms has a negative effect on R&D investment, and this suggests that state-controlled firms should take more initiative to innovate.     

Effects of Foreign Presence in a Transition Economy: Regional and Industrywide Investments and Firm-Level Exports in Ukrainian Manufacturing

We investigate the effects of regional and industrywide foreign presence and foreign direct investment (FDI) on the export volumes of Ukrainian manufacturing firms using unpublished panel data from 1996-2000. Foreign presence through FDI may have negative competition effects on domestic firms' performance; at the same time, domestic firms' productivity may be increased by technology transfer or training and demonstration effects. From a Cournot competition model that includes negative competition and positive technology spillover effects, we hypothesize that foreign presence and FDI might positively affect domestic firms' output and exports. Our estimation results support these hypotheses, suggesting in particular that large firms and durable goods producers benefit most from foreign presence and investments.     

The impact of leverage on firm investment: Canadian evidence

This study examines the impact of financial leverage on the firms' investment decisions using information on Canadian publicly traded companies. It shows that leverage is negatively related to investment and that this negative effect is significantly stronger for firms with low growth opportunities than those with high growth opportunities. The paper tests the robustness of these results using alternative empirical models and, in addition, uses the instrumental variable approach to deal with the endogeneity problem inherent in the relationship between leverage and investment. The results provide support to agency theories of corporate leverage, and especially the theory that leverage has a disciplining role for firms with low growth opportunities.     

Agency costs,taxes and debt: The UK evidence

This paper provides an empirical examination of the impact of the corporation tax and agency costs on firms' capital structure decisions. Our evidence suggests that the agency costs are the main determinants of corporate borrowing. Consistent with the agency theory, we find that firms that have fewer growth options have more debt in their capital structure. Moreover, our results show that debt mitigates the free cash flow problem and that firms that are more likely to be diversified and less prone to bankruptcy are highly geared. the negative effect of insider shareholding on leverage disappears, however; when all the agency mechanisms are accounted for. In addition, we find that, in the long run, companies that are tax exhausted exhibit significantly lower debt ratios than tax-paying firms. However, in the short run, firms' capital structure decisions are not affected by taxation.     

Debt enforcement,financial leverage,and product failures: Evidence from China and the United States

Building on capital structure and product market interactions, and the role of debt enforcement in leveraged firms' investments, we examine whether cross-country debt enforcement can produce different associations between financial leverage and product failures. Results show that different debt enforcement systems can generate opposite leverage effects. In countries with weak/nearly ineffective debt enforcement, financial leverage shows an incentive investment effect due to low default costs, and thus highly leveraged firms tend to invest more and are less likely to have product failures. Conversely, in countries with strict/effective debt enforcement, distressed companies tend to have an underinvestment effect and more product failures.     

Investment policy in family controlled firms

We explore the relation between family ownership and corporate investment policy. Our analysis centers on two incentives, risk aversion and extended investment horizons, which potentially influence the level and type of investments that family firms undertake. We find that family firms devote less capital to long-term investments than firms with diffuse ownership structures. When dividing long-term investment into its two components of R&D and capital expenditures, we note that family firms, relative to nonfamily firms, prefer investing in physical assets relative to riskier R&D projects. Additional tests indicate that family firms receive fewer patent citations per dollar of R&D investment relative to nonfamily firms. Overall, all empirical results indicate that family preferences for lower firm risk, across all family sub-types, affects corporate R&D spending and capital expenditures.     

Do Peer Firms Affect Corporate Financial Policy?

We show that peer firms play an important role in determining corporate capital structures and financial policies. In large part, firms' financing decisions are responses to the financing decisions and, to a lesser extent, the characteristics of peer firms. These peer effects are more important for capital structure determination than most previously identified determinants. Furthermore, smaller, less successful firms are highly sensitive to their larger, more successful peers, but not vice versa. We also quantify the externalities generated by peer effects, which can amplify the impact of changes in exogenous determinants on leverage by over 70%.     

Corporate capital budgeting and CEO turnover

When a firm has minimal agency and informational asymmetry problems it should make efficient capital budgeting decisions. Many firms over-invest prior to CEO turnover, halt investments in the period surrounding the turnover, and then greatly increase their level of expenditures. Empirical analysis of the cross-sectional and inter-temporal variation in the quality of firms' corporate capital budgeting decision reveals that the impact of CEO turnover is asymmetric between under- and over-investing firms, and this complements the larger literature using average firm-wide performance measures. Firms are more likely to have forced turnovers when there is more over-investment prior to the turnover, and these firms make more efficient investment decisions subsequently. Board influence is largely insignificant prior to a CEO turnover but is consistently associated with higher levels of investment subsequently.     

Government intervention and firm investment: Evidence from international micro-data

Building on the important study by Beck et al. (2005), we examine how government intervention in firms' decision-making is related to their investment and sales growth. Using the unique World Bank dataset (WBES) covering 6500 firms in 70 countries, we find strong evidence that the extent of government intervention in firms' investment, employment, sales, pricing, dividend, and merger and acquisition decisions is negatively related to their investment and sales growth, with the effect being more profound in foreign owned firms and less significant in state-owned firms. The empirical results are robust to a series of robustness tests and instrumental variable regressions.     

Investor Protection,Investment Efficiency and Value: The Case of Cross‐Listed Firms

We examine the impact of improved investor protection due to cross‐listing on foreign firms’ investment decisions and firm value. While we find that cross‐listing increases firms’ capital expenditures and mergers and acquisitions activities, cross‐listed firms also invest more in research and development, make better acquisition decisions, and have higher profitability compared to non‐cross‐listed firms. Moreover, cross‐listing is associated with better cash utilization by foreign firms for investments. These improvements in investments and cash utilization are more pronounced for firms cross‐listed on US exchanges and for firms from countries with weak investor protection laws.     

Capital Structure and Political Risk in Asia-Pacific Real Estate Markets

This study investigates the determinants of capital structure decisions by real estate firms, with a specific focus on the impact of political risk on leverage. Using a sample of Asia-Pacific REITs and listed property trusts, we find those firms with properties located in countries characterized by relatively high degrees of political risk, such as political instability, and/or greater uncertainty in the ability to repatriate and monetize profits from international investment activities, employ less debt than their counterparts operating in more politically stable environments. This core finding remains robust to alternative sample selection criteria including the division of the sample into high versus low market-to-book value firms, and also holds within the subset of organizations that are active in raising additional capital in the secondary markets.     

Collateral and capital structure

We develop a dynamic model of investment, capital structure, leasing, and risk management based on firms' need to collateralize promises to pay with tangible assets. Both financing and risk management involve promises to pay subject to collateral constraints. Leasing is strongly collateralized costly financing and permits greater leverage. More constrained firms hedge less and lease more, both cross-sectionally and dynamically. Mature firms suffering adverse cash flow shocks may cut risk management and sell and lease back assets. Persistence of productivity reduces the benefits to hedging low cash flows and can lead firms not to hedge at all.     

Political rights and equity pricing

We examine the influence of political rights on the implied cost of equity capital using a sample of firms from 44 countries. We find that firms' equity financing costs are lower when political rights are stronger. We further find that political institutions' direct impact on the cost of equity capital is incremental to that of legal institutions. Economically, our results imply that a one standard deviation increase in political rights is associated with a 38 basis point decrease in corporate cost of equity capital. In additional analyses, we find that the effect of political rights on equity pricing is more pronounced in countries with weak legal institutions.     

The regulatory environment and financial constraints of private firms in the European Union

This study analyzes the influence of the institutional environment on firms' capital structure in the European Union (EU). Unlike other research, we focus on private firms and include data from all EU countries from 2010 to 2018. We split the sample into groups of small and large firms, which we consider financially constrained and unconstrained, respectively. Throughout the study, we posit that institutional effects on financing policies vary with size, with the effects being greater for constrained firms as they face more financing frictions. We also run regression models controlling for firm-level characteristics and relevant macroeconomic factors. Our findings reveal that a high-quality regulatory environment negatively affects firms' leverage, whereas social corruption has the opposite effect. Moreover, the efficiency of enforcing commercial contracts and developing the financial system positively influences firms' leverage.     

Inward FDI and Financial Constraints in Central and East European Countries

This study examines whether domestically owned firms in Central and Eastern European countries (CEECs) confronted higher financial constraints in their investments than did foreign-owned enterprises, and whether the domestic enterprises' financial constraints were caused by incoming foreign direct investment (FDI). In theory, foreign investment may be needed to bring in capital only initially; the subsequent investment can be financed locally. On the other hand, foreign-owned companies may be more attractive borrowers, crowding out domestic firms from imperfect host-country capital markets. Both hypotheses, however, are rejected, as the results are not consistent across different dependent variables and verification methods. There is some evidence that FDI reduced foreign subsidiaries' constraints without increasing the constraints suffered by the domestic enterprises. Tests are performed with regressions based on two alternative firm-level models, a direct one using perception-based assessment of the constraints, and an indirect one with financial indicators.