What are the Capital Structure Determinants for Tax‐Exempt Organizations?

I study the determinants of capital structure in the absence of tax incentives. I find that debt use is positively related to asset tangibility, growth, and size, and negatively related to age, liquidity, and profitability. Tax‐exempt sector‐specific findings indicate that debt is also positively related to the efficacy of state laws against the misuse of assets and to the percentage of decision makers that are paid and negatively related to decision‐maker compensation and to charitable contributions. Religious organizations most commonly borrow from internal sources, those in education use tax‐exempt bonds, while human services organizations use mortgages and notes payable.     

Corporate Financing Decisions: UK Survey Evidence

Abstract:  Despite theoretical developments in recent years, our understanding of corporate capital structure remains incomplete. Prior empirical research has been dominated by archival regression studies which are limited in their ability to fully reflect the diversity found in practice. The present paper reports on a comprehensive survey of corporate financing decision-making in UK listed companies. A key finding is that firms are heterogeneous in their capital structure policies. About half of the firms seek to maintain a target debt level, consistent with trade-off theory , but 60% claim to follow a financing hierarchy, consistent with pecking order theory . These two theories are not viewed by respondents as either mutually exclusive or exhaustive. Many of the theoretical determinants of debt levels are widely accepted by respondents, in particular the importance of interest tax shield, financial distress, agency costs and also, at least implicitly, information asymmetry. Results also indicate that cross-country institutional differences have a significant impact on financial decisions.     

Financing Preferences of Spanish Firms: Evidence on the Pecking Order Theory

This paper analyses some of the empirical implications of the pecking order theory in the Spanish market using a panel data analysis of 1,566 firms over 1994–2000. The results show that the pecking order theory holds for most subsamples analyzed, particularly for the small and medium-sized enterprises and for the high-growth and highly leveraged companies. It is also shown that both the more and the less leveraged firms tend to converge towards more balanced capital structures. Finally, we observe that firms finance their funds flow deficits with long term debt.     

Valuation and Cost of Capital Formulae with Corporate and Personal Taxes: A Synthesis Using the Dempsey Discounted Dividends Model

This paper advances expressions for the firm's valuation and cost of capital as a function of leverage. The framework is arrived at by introducing leverage in Dempsey's (1996 and 1998) cost of capital framework and is applicable in the context of both classical and imputation tax systems. The framework reveals that both the historical stability of corporate leverage and the firm's choice of financing structure as revealed by the Pecking Order hypothesis are consistent with a tax-based explanation.     

The Sustainable Growth Rate of Non–profit Organisations: The Effect of Efficiency, Profitability and Capital Structure

The activity growth of non–profit organisations is financially contrained by their efficiency, profitability and capital structure. In this paper, a very general expression relating these four organisational parameters is derived and its practical use is discussed.     

Determinants of Capital Structure and Adjustment to Long Run Target: Evidence From UK Company Panel Data

This paper examines the empirical determinants of borrowing decisions of firms and the role of adjustment process. A partial adjustment model is estimated by GMM estimation procedure using data for an unbalanced panel of 390 UK firms over the period of 1984–1996. Our results suggest that firms have long-term target borrowing ratios and they adjust to their target ratios relatively fast, which might suggest that the costs of being away from their target ratios are significant. The results also provide support for positive impact of size, and negative effects of growth opportunities, liquidity, profitability of firms and non-debt tax shields on the borrowing decisions of companies.     

Directors’ and Officers’ Liability Insurance and Aggressive Tax‐Reporting Activities: Evidence from Canada

This paper examines the relationship between directors’ and officers’ liability insurance (D&O insurance) and firms’ aggressive tax reporting. Using large Canadian public companies listed on the TSX300 and relying on several measures to capture aggressive tax‐reporting activities, including GAAP effective tax rates, cash effective tax rates, and the total and residual book‐tax differences, I find that D&O insurance exhibits a strong negative relationship with the GAAP effective tax rates and a strong positive relationship with both the total and residual book‐tax differences. However, there is generally no evidence showing that D&O insurance is associated with the cash effective tax rates. I interpret these results as indicating that D&O insurance reduces the tax expenses reported in the financial statements but not the actual tax paid. In other words, D&O insurance contributes to financial tax management but not to cash tax savings. Further tests in this study reveal that firms with fluctuating D&O coverage limits engage in more aggressive tax reporting than other firms, suggesting that managers may consider the level of D&O insurance that they purchase when they make aggressive tax‐reporting decisions.     

Capital gains tax,supply‐driven trading and ownership structure: direct evidence of the lock‐in effect

This study investigates the effect of differential capital gains tax rates on investor trading and share prices in a unique market setting that facilitates the resolution of conflicting prior evidence of holding period tax incentives. In particular, we examine whether the concessionary tax treatment of long‐term capital gains increases the supply of shares that qualify for long‐term status, thereby causing downward price pressure. We find evidence of abnormal seller‐initiated trading following the 12‐month anniversary of listing for IPO firms that appreciate in price (‘winners’) and report no such evidence for firms that decline in price (‘losers’). Consistent with the tax concessions being greater for individual than institutional investors, we report that abnormal seller‐initiated trading is mitigated by higher levels of ownership by institutional investors. We also report limited evidence, for winners, of declining share prices upon qualifying for long‐term tax status.     

Firm Internationalization and Capital Structure in Developing Countries: The Role of Financial Development

We investigate the relationship between internationalization and the level of debt financing for more than 18,000 firm/year observations from thirty-one developing countries in the period 1991-2006. We argue that this relationship can be affected by both country-level and firm-level factors. The results show that in developing countries with relatively higher financial development, firm internationalization corresponds with a greater level of debt when firms have more growth opportunities (which also indicate a higher level of asymmetric information). This evidence suggests that relatively developed financial markets in developing countries at least partially mitigate the effect of asymmetric information and decrease the agency cost of debt for firms with higher levels of internationalization.     

Quasi‐Nationalisation in the UK Banking Crisis: A Problematic Policy Option

The systemic banking crisis in 2008 led to the quasi‐nationalisation of two UK listed banks: The Royal Bank of Scotland and Lloyds Banking Group (National Audit Office, 2010). Using property rights and agency theory as the theoretical frameworks, this paper analyses whether the quasi‐nationalisation of these banks has been successful. It is argued that as a rescue mechanism, quasi‐nationalisation was a positive development. However, questions arise over its effect as an instrument of banking reform. The State's arm's length approach to management represents a lost opportunity to change the culture of profitability over people that contributed to the banking crisis.     

The Capital Structure of Firms Subject to Price Regulation: Evidence from the Insurance Industry

Automobile and workers' compensation insurance are relatively homogeneous products sold under varying regulatory systems among the states. This paper investigates how price regulation affects the capital structure decisions of profit-maximizing insurers who sell insurance in both competitive and/or regulated markets. Specifically, we test the hypothesis that insurers subject to price regulation will choose to hold less capital. In addition, we hypothesize insurers subject to more stringent regulatory pricing constraints will choose even higher degrees of leverage because the benefits of holding additional amounts of capital are suppressed. We conduct empirical tests using cross-sectional data on insurers and find evidence consistent with both hypotheses. These findings have important implications for insurance price and solvency regulation. Stricter price regulation increases the default risk (i.e., reduces the financial quality) of insurance contracts purchased by individuals and firms.     

公司所得税对资本结构的影响——基于中国上市公司的实证分析

国外大量的经验研究表明,税收是影响公司资本结构的重要因素。而我国具有自身特有的制度与经济背景,通过对我国上市公司财务数据进行检验,可以为我国税收是否影响公司资本结构,以及影响程度的大小提供实证方面的证据,并为进一步改善税收经济调节作用提供思路。     

R&D Intensity and Corporate Financial Policy: Some International Evidence

This paper presents evidence on the financial policies of firms strongly engaged in research and development activities. By referring to the under-investment paradox, the asset substitution problem, the asset specificity proposition and the information asymmetry literature, we postulate that R&D-intensive firms should adopt specific financial policies. In conformity with our hypotheses, empirical results based on a sample of R&D-intensive and non-R&D firms in four major industrialized countries (Europe, the UK, Japan and the US) show that R&D-intensive firms exhibit significant lower debt and dividend payment levels, but shorter debt maturities and higher cash levels than non-R&D ones.     

The Performance of the Foreign‐Owned Sector of UK Manufacturing: Some Evidence and Implications for UK Inward Investment Policy

This paper analyses the reported performance of foreign‐owned manufacturing subsidiaries in the UK between 1994 and 1998. The paper is set in the context of uncertainty about the performance of some foreign‐owned sectors of UK manufacturing and the implications of this performance for the beneficial spillover effects sought by policy‐makers from foreign‐owned capital. Japanese‐owned subsidiaries are the focus of particular attention, with reported profits and tax liabilities significantly below those of subsidiaries from other national sources. The wider ramifications of this finding are analysed for the UK case, particularly in terms of the need to take into account the wider exchequer effects of inward investment in the general evaluation of the financial assistance provided to foreign firms.     

Determinants of the variability in corporate effective tax rates and tax reform: Evidence from Australia

This study examines the determinants of the variability in corporate effective tax rates in Australia spanning the Ralph Review of Business Taxation reform. Our results indicate that corporate effective tax rates are associated with several major firm-specific characteristics, including firm size, capital structure (leverage) and asset mix (capital intensity, inventory intensity and R&D intensity). While the Ralph Review tax reform had a significant impact on many of these associations, corporate effective tax rates continue to be associated with firm size, capital structure and asset mix after the tax reform.     

The Theory-Practice Gap in Capital Budgeting: Evidence from the United Kingdom

We report the results of a survey of capital budgeting techniques used by United Kingdom firms. Where possible, the evidence is combined with data collected over a 22 year period to provide a basis for the discussion of causes of trends. We observe that there has been a substantial narrowing of the theory-practice gap in the use of project appraisal methods. The gap has also narrowed in other areas: the analysis of risk, inflation adjustment, capital budget preparation, WACC calculation and post-auditing. However, there are other elements of capital budgeting theory, e.g. probability and beta analysis which have been adopted by very few practising managers. We also discuss non-economic projects, capital rationing and hurdle rates.     

Regulatory Capital Charges for Too‐Connected‐to‐Fail Institutions: A Practical Proposal

The recent financial crisis has highlighted once more that interconnectedness in the financial system is a major source of systemic risk. I suggest a practical way to levy regulatory capital charges based on the degree of interconnectedness among financial institutions. Namely, the charges are based on the institution's incremental contribution to systemic risk based on a risk budgeting approach. The imposition of such capital charges could go a long way towards internalizing the negative externalities associated with too‐connected‐to‐fail institutions and providing managerial incentives to strengthen an institution's solvency position, and avoid too much homogeneity and excessive reliance on the same counterparties in the financial industry.     

Optimal Capital Utilization by Financial Firms: Evidence from the Property-Liability Insurance Industry

Capitalization levels in the property-liability insurance industry have increased dramatically in recent years—the capital-to-assets ratio rose from 25% in 1989 to 35% by 1999. This paper investigates the use of capital by insurers to provide evidence on whether the capital increase represents a legitimate response to changing market conditions or a true inefficiency that leads to performance penalties for insurers. We estimate best practice technical, cost, and revenue frontiers for a sample of insurers over the period 1993–1998, using data envelopment analysis, a non-parametric technique. The results indicate that most insurers significantly over-utilized equity capital during the sample period. Regression analysis provides evidence that capital over-utilization primarily represents an inefficiency for which insurers incur significant revenue penalties.     

资本结构的激励功能和投资者保护:来自沪港上市公司的比较证据

本文实证分析并比较了在上海和香港两地的上市公司资本结构激励功能的差异。分析表明，财务杠杆对大陆上市公司和香港上市公司的市场价值均具有显著的积极效应。而香港上市公司的资本结构激励功能显著地强于大陆上市公司，财务杠杆所产生的债务压力在香港上市，公司中能够发挥更有效的激励作用。研究结果显示，香港证券市场能够为投资者提供更有力的保护机制。     

Internal Funds Allocation and the Ownership Structure: Evidence from Korean Business Groups

We examine the relationship between the controlling shareholder’s cash flow rights and the funds transfer in the internal capital market within Korean business groups (chaebols) during the period from 1998 to 2001. We find that the funds allocation in the firms where controlling shareholders have high cash flow rights is better aligned with the investment opportunities and therefore, more efficient than in the firms where they have low cash flow rights. This effect is stronger when they have controlling powers large enough to expropriate minority shareholders. However, during the financial crisis period, funds simply move toward the firms where controlling shareholders have high cash flow rights. The results evidence the tunneling behavior in the internal capital market within a chaebol that the ownership structure distorts the allocation of internal funds in such a way as to benefit the controlling shareholders.JEL Classification: G31, G30