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.     

The dynamic adjustment towards target capital structures of firms in transition economies*

We examine the capital structure dynamics of Central and Eastern European firms to get a better understanding of the quantitative and qualitative development of the financial systems in this region. The dynamic model used endogenizes the target leverage as well as the adjustment speed. It is applied to microeconomic data for ten countries. We find that during the transition process, firms generally increased their leverage, lowering the gap between the actual and the target leverage. Profitability and age are the most robust determinants of capital structure targets. Although banking system development has in general enabled firms to get closer to their leverage targets, information asymmetries between firms and banks are still relatively large. As a result, firms prefer internal finance above bank debt and adjust leverage only slowly.     

Firm size and debt maturity as indirect determinants of capital structure: evidence form European panel data

The study aims at verifying whether the firm size and debt maturity affect the relationship between capital structure and its main determinants. Using panel data models, the impact of the primary factors on leverage is compared across three size groups of firms and for different measures of debt in order to identify the size effect and the debt maturity effect in these relationships. The study covers 11 EU countries during the period 2000–2013. Findings provide evidence that financing choices of small firms provide more support for the pecking-order theory, whereas medium and large-sized firms tend to follow the trade-off predictions on leverage. It also appears that the trade-off theory is more applicable for short-term debt, while pecking order – for long-term debt.     

High debt companies' leverage determinants in Spain: A quantile regression approach

With a severe debt overhang problem in Spain, either public or private, the analysis of the factors that influence companies' leverage in this country reveals essential, in particular for the high-indebted firms. This study benefits from the quantile regression approach advantages over the OLS method to analyze the leverage determinants for a large sample of companies for the 2001–2011 period depending on their level of indebtedness. This method reveals that for the highly-leveraged companies many factors are no longer significant and that cash flow variable is crucial if the companies would like to decrease their debt levels.     

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.     

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.     

Is the use of bank debt as a governance mechanism conditioned by the financial system? The cases of Chile and Spain

We test whether the use of bank debt as a governance mechanism is conditioned by the financial system in which firms operate. Our results indicate that the legal and institutional environment determines the use of bank debt to finance growth opportunities. Firms use bank debt to finance their growth opportunities when the country's banking system contributes to solving agency and asymmetric information problems and avoiding information monopoly costs. The evolutionary process of the financial systems in each country means that market imperfections such as information asymmetry or agency costs can have a diverse influence on firms’ bank debt decisions.     

Ownership Structure and Capital Structure: A Study of Vietnamese Listed Firms

This paper examines the relationships between ownership structure and capital structure for non‐financial listed firms in Vietnam during the period 2007–2012. Although different approaches are applied in this research, all results from those models are consistent. The study finds that while foreign ownership has a negative impact on leverage, state ownership has a positive influence. Managerial ownership has a positive relation with debt level, while the effect of large ownership on debt level is not conclusive.     

Some reflections on technical progress in financing small firms ∗

Starting from a comparison of Josef Steindl's observations on the problems of the financing of small firms, with the implications of the Modigiani – Miller approach to financial structure, this paper investigates relationships between financial leverage and operating leverage by the application of option pricing theory to the value of a firm's debt. Drawing on possible differences between the second-hand break-up value and the present value of the flow of earnings from a firm's assets, it suggests linkages between production structure and firm financial structure. It then extends these results to resolving the problems of providing market financing for the creation and evolution of small firms in industrialized and transforming economies.     

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.     

Regulation,renegotiation and capital structure: theory and evidence from Latin American transport concessions

We examine the capital structure of regulated infrastructure firms. We develop a model showing that leverage, the ratio of liabilities to assets, is lower under high-powered regulation and that firms operating under high-powered regulation make proportionally larger reductions in leverage when the cost of debt increases. We test the predictions of the model using an original panel dataset of 124 transport concessions in Brazil, Chile, Colombia and Peru over 1992–2011. For each concession we have data on the regulatory regime, annual financial performance and contract renegotiations. We begin by demonstrating that, although pervasive, contract renegotiations do not fundamentally alter the regulatory regime. Importantly, firms are not systematically able to renegotiate when in financial difficulty, implying that price cap contracts remain high-powered in practice. We use this result for our main empirical work, where we find broad support for our theoretical predictions: when the cost of debt increases, firms operating under high-powered regulation make proportionally larger reductions in leverage.     

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.     

The determinants of capital structure in transitional economies

This study investigates whether capital structure determinants in emerging Central and Eastern European (CEE) countries support traditional capital structure theory developed to explain western economies. The empirical evidence suggests that some traditional capital structure theories are portable to companies in CEE countries. However, neither the trade-off, pecking order, nor agency costs theories explain the capital structure choices. Companies do follow the modified “pecking order.” The factors that influence firms' leverage decisions are the differences and financial constraints of banking systems, disparity in legal systems governing firms' operations, shareholders, and bondholders rights protection, sophistication of equity and bond markets, and corporate governance.     

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.     

基于公司特征的财务困境成本影响因素研究

基于对财务困境的形成及解决机制分析,财务困境成本的影响因素应包括资产特征、债务特征、产品特征和成长性等公司特征。实证研究表明:资产流动性、债务融资能力与财务困境成本负相关;资产专用性程度、债务结构的复杂程度、成长性与财务困境成本正相关。上述研究结论对于企业调整财务政策,降低财务困境成本具有指导意义,同时对于监管部门也有参考价值,即监管部门应针对具有不同公司特征的上市公司实行分类管理,提高监管效率。     

The Determinants of Capital Structure： an Empirical Study of Publicly Listed Medicine Manufacturing Companies in China

This paper attempts to analyze the important determinants of capital structure in the medicine manufacturing industry of China. Two measures including the ratio of long-term debt to asset and the ratio of total debt to asset are used as the proxies of leverage, while dependent variables used are asset structure, growth, firm size, profitability and risk. The evidences presented here indicate that asset structure and size significantly influence the capital structure choice.     

Financing preferences: evidence from the Korean market

We investigate the financing decisions of Korean firms during the period of 1996–2015. Korean firms follow a matching strategy for funding their cash needs. Cash inflows from investing activities are the primary source of funding for capital expenditures, and cash inflows from financing activities are the major means of covering cash outflows from financing activities. We also find that Korean firms’ financing practice of handling cash deficits can be described by the pecking order model modified and augmented by cash flow variables. Cash inflows from investing activities account for the major portion of financing to make up for cash deficits, followed by short- and long-term debt, and then equity financing.     

Capital control, debt financing and innovative activity

The present paper discusses the effects of dispersed versus concentrated capital ownership on investment into innovative activity. While the market for equity capital might exert insufficient control on top managements’ behavior, this weakness may be mitigated by a suitable degree of debt financing. We report the results of an empirical study on the determinants of innovative activity measured by patent applications. Using a large sample of German manufacturing firms, we find that companies with widely held capital stock are more active in innovation, i.e. weakly controlled managers show a higher innovation propensity. However, the higher the leverage the more disciplined the managers behave.     

Size and Determinants of Capital Structure in the Greek Manufacturing Sector

Increasing competition in the European Union (EU) and world markets affects the Greek manufacturing sector. Capital structure is essential for the survival, growth and performance of a firm. There has been a growing interest worldwide in identifying the factors associated with debt leverage. However, nothing has been done so far in contrasting small and medium sized enterprises (SMEs) and large sized enterprises (LSEs) on these aspects. SMEs are very important in the Greek manufacturing sector for employment and growth. Empirical studies show that capital structure and the factors affecting it vary with firm size. In this paper we investigate the determinants of capital structure of Greek manufacturing firms and formulate some policy implications that may improve the financial performance of the sector. Our study utilizes panel data of two random samples, one for SMEs and another for LSEs. The findings show that profitability is a major determinant of capital structure for both size groups. However, efficient assets management and assets growth are found essential for the debt structure of LSEs as opposed to efficiency of current assets, size, sales growth and high fixed assets, which were found to affect substantially the credibility of SMEs. In an era of increasing globalization, the findings imply that Greek SMEs should focus their efforts on (a) increasing their cash flow capacity through better assets management and achievement of higher exports and (b) ensuring good bank relations, but at the same time, turn to alternative forms of financing. Greek LSEs should adopt strategies that will lead to the improvement of their competitiveness and securing new forms of financing. Government policy measures aiming at structural changes and economic efficiency should be designed clearly depending upon its targets: SMEs need policies that will encourage information exchange and co‐operation in local and foreign markets and use of e‐business, as well as, financial assistance. On the other hand, LSEs should be supported by policies aimed at new high‐technology investments, entrance of new firms and foreign investments in the country, tax alleviation and increase of R&D and training expenditures. The upgrading and transparency of the capital market in Greece is expected to improve the capital structure of Greek manufacturing firms.     

WHAT DETERMINANTS AFFECT THE CAPITAL STRUCTURE OF CONSUMER CO‐OPERATIVES? THE CASE OF iCOOP KOREA

The capital structure of co‐operatives can differ from that of IOB (Investor‐Owned Businesses) since the two organizations differ in their aims, governance structures and decision‐making principles. This paper examines whether the determinants verified in IOB affect the leverage ratio of consumer co‐operatives. Consumer co‐operatives in South Korea have been rapidly growing during the last decade. There are two leading theories in finance that explain capital structure: the trade‐off and pecking order theories. Focusing on consumer co‐operatives in South Korea, the paper aims to analyze empirically what determinants have effect on the capital structure of consumer co‐operatives and which of the two theories is more plausible. This study reveals that profitability and firm size have a significantly negative effect on leverage while tangibility and growth have a significantly positive effect on it. In conclusion, it seems that neither of the theories above perfectly accounts for the capital structure of consumer co‐operatives because of the differences in governance characteristics between consumer co‐operatives and IOB as well as in the costs of bankruptcy, agency, informational asymmetry and securities issuance.