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.     

Debt vs. Equity and Asymmetric Information: A Review

Recent Nobel Prizes to Akerlof, Spence, and Stiglitz motivate this review of basic concepts and empirical evidence on information asymmetry and the choice of debt vs. equity. We first review the literature that holds investment fixed. Then we review capital structure issues related to the adverse investment selection problem of Myers–Majluf. Finally, we discuss the timing hypothesis of capital structure. Empirical studies do not consistently support one theory of capital structure under information asymmetry over the others. Thus, the review suggests that additional theoretical contributions are needed to help understand and explain findings in the empirical literature.     

Small and Medium Size Enterprise Financing: A Note on Some of the Empirical Implications of a Pecking Order

Asymmetric information models predict a 'pecking order' which reflects a combination of owner-manager preferences and external capital supply constraints whenever insiders know more about the true value of the firm's prospects than outsiders. The pecking order results in retained earnings being the most preferred source of finance, then debt and finally the issue of new shares to outsiders. Using a sample of 629 UK SMEs over the five-year period from 1990 to 1995 we find evidence consistent with a pecking order in which retained equity is preferred over debt. As expected, the evidence of a pecking order was particularly strong in respect of the closely-held firms in our sample.     

Do Portuguese private firms follow pecking order financing?

This paper tests for pecking order behavior in medium-sized private Portuguese firms. In contrast to the usual split between internal funds, debt, and external equity, we separate debt into four components – cheap trade credits (CTC), bank loans (BL), other loans, and expensive credits (EC). We use breakpoint tests to identify when firms switch between funding sources by examining the change in each funding source based on the financing deficit remaining after the previous pecking order funding source has been used. Our tests indicate that Portuguese companies generally move from lower cost to higher cost financing sources, but they do not exhaust each type of debt before moving on to the next funding source in the pecking order. Such behavior is consistent with a loose interpretation of pecking order financing, but not a strict interpretation of the theory. Instead, Portuguese firms may be balancing pecking order financing with a need to maintain some degree of financing flexibility.     

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.     

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.     

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.     

DETERMINANTS OF CAPITAL STRUCTURE IN THE UK RETAIL INDUSTRY: A COMPARISON OF MULTIPLE REGRESSION AND GENERALIZED REGRESSION NEURAL NETWORK

Firms need to rely on different financing sources, but the question is how capital structure is determined for a particular industry. Our aim is to undertake an investigation into the factors which determine capital structure in the UK retail industry. Our initial sample consists of 163 (final sample: 100) UK retail companies, using data from 2000 in order to analyse capital structure from 2002 to 2006. Nonlinear models tend to be unduly neglected in capital structure research, and so we apply generalized regression neural networks (GRNNs), which are compared with conventional multiple regressions. We utilize a hold‐out sample for the multiple regressions to make them comparable with the GRNNs. Stability of the data is also confirmed. Our main findings are: net profitability and the depreciation‐to‐sales ratio are key determinants of capital structure based on GRNNs, while two more variables are added in the multiple regressions, namely size and quick ratio; there is strong support for the pecking‐order theory; both root‐mean‐square errors and mean absolute errors are much lower for the GRNNs than those for the multiple regressions for overall, training and testing datasets. The potential benefit of this research to financial managers and investors in the UK retail sector is the identification of the overriding role of net profitability in reducing the financial risk from high levels of gearing. Copyright © 2012 John Wiley & Sons, Ltd.     

公司治理和融资政策的关系研究综述

公司治理在融资政策选择中起着重要作用。公司治理作为减少代理成本的激励机制，能抑制内部人机会主义行为，使其不能按自身利益调整公司融资政策。同时，公司治理通过减低信息不对称水平、减少小股东受掠夺的风险进而降低资本成本。本文对国内外公司治理与融资政策之间关系的研究进行了全面、系统的回顾，评价了现有文献存在的问题和不足之处，为中国上市公司治理结构和公司融资问题的研究提供了依据。具体而言，本文回顾了公司治理和资本结构、公司治理和债务期限结构、公司治理和资本成本之间的关系。     

Capital Structure Determinants for Tax‐Exempt Organisations: Evidence from the UK

Abstract: This study looks into the determinants of capital structure in the absence of tax incentives. I find that attributes normally associated with debt use for taxable corporations are likewise correlated with debt use in the tax‐exempt sector. These include the organisation's age, asset tangibility, governance structure, industry grouping, liquidity, profitability, and size. Tax‐exempt sector‐specific findings indicate that debt use is also related to the size of the organisation's endowment and the amount of voluntary income. This study also demonstrates the portability of the theory of capital structure by extending the findings in Smith (2010) beyond the United States.     

公司战略、大股东持股与财务欺诈

以2001-2015年我国A股上市公司为样本,考察企业公司战略定位对财务欺诈行为的影响,研究发现:公司战略对财务欺诈行为有显著影响,公司战略定位越激进,越可能导致财务欺诈行为的发生;经过稳健性测试后,结果依然成立.进一步研究发现:提高大股东持股比例,可以增强大股东对管理者的"监督效用",从而提升企业内部监督效率,进而抑制公司战略对财务欺诈行为的影响.     

Belgian Intragroup Relations and the Determinants of Corporate Liquid Reserves

The determinants of liquid reserves are investigated for a sample of 1038 large Belgian non‐financial firms in the 1992–94 period. The results confirm the hypothesis that the terms of payment of intragroup claims can be adjusted to the firm's liquidity needs, thereby reducing the need for liquid reserves. Furthermore, the results confirm the transaction motive for holding liquid reserves, but only partially confirm the precautionary motive. Finally, the results indicate that liquid reserves play a significant role in the financing of new investments, as predicted by the pecking order model of Myers and Majluf (1984).     

Ownership Structure, Firm Performance and Top Executive Change: An Analysis of UK Firms

The results of this paper reveal a significantly negative relationship between the equity stake owned by a senior executive and the likelihood that this executive will be removed from office. We also establish the existence of a strong positive relationship between poor company performance and the likelihood that the top managers responsible will be forced out of their firms; this forced departure only tends to occur when the managers' stake in the firm is less than 1%; as the level of ownership rises, managers become increasingly entrenched in their posts. The stock market reaction to management change is greatest (a) when the departure is unexpected and (b) when the dismissed executive owns more than 5% of the equity of his company. This study also examines the influence of other aspects of ownership structure and board composition upon the likelihood of a top executive dismissal.     

The Disciplining Role of Leverage in Dutch Firms

In this study we investigate the role of leverage indisciplining overinvestment problems. We measure the relationships between leverage, Tobin's qand corporate governance characteristics for Dutch listed firms. Besides, ourempirical analysis tests for determinants of leverage from tax and bankruptcy theories. Representinggrowth opportunities, q is expected to be an agency-based determinant of leverage.Simultaneously, q represents firm value, which is determined by leverage and governancestructures. We test a structural equations model in which we deal with this simultaneousnature of the relation between leverage and q. Our results indicate that Dutch managersavoid the disciplining role of debt, when they are most likely to overinvest. Leverage is mainlydetermined by tax advantages and bankruptcy costs. In addition, we test the impact ofleverage on excess investment. We do not find a difference in the influence of leverage oninvestment between potential overinvestors and other firms. This confirms that the disciplinary roleof leverage in Dutch firms is absent.     

Performance and Policy of Foundation‐owned Firms in Germany

This paper compares performance and policy of foundation‐owned firms and of listed corporations in Germany. Foundations have no owners so that there exist no individuals with financial ownership claims on firms which are wholly owned by foundations. This suggests weaker outside control of foundation‐owned firms implying lower profitability. The empirical findings show a slightly better performance of foundation‐owned firms compared to corporations. Foundation‐owned firms display higher labour intensity, lower labour productivity, and lower salary levels. This policy promotes job security without endangering the viability of foundation‐owned firms.     

Why and How UK Firms Hedge

This paper attempts to differentiate among the theories of hedging by using disclosures in the annual reports of 400 UK companies and data collected via a survey. I find, unlike many previous US studies, strong evidence linking the decision to hedge and the expected costs of financial distress. The tests show that this is mainly because my definition of hedging includes all hedgers and not just derivative users. However, when the tests employ the same hedging definition as previous US studies, financial distress cost factors still appear to be more important for this sample than samples of US firms. Therefore, a secondary explanation for the strong financial distress results might be due to differences in the bankruptcy codes in the two countries, which result in higher expected costs of financial distress for UK firms. The paper also examines the determinants of the choice of hedging method distinguishing between non‐derivative and derivatives hedging. My evidence shows that larger firms, firms with more cash, firms with a greater probability of financial distress, firms with exports or imports and firms with more short‐term debt are more likely to hedge with derivatives. Thus, differences in opportunities, in incentives for reducing risk and in the types of financial price exposure play an important role in how firms hedge their risks.     

Companies' Financial Decisions Under the Distributed Profit Taxation Regime of Estonia

This paper empirically analyzes companies' capital structure and dividend decisions under distributed profit taxation (DPT), Estonia's corporate taxation regime since 2000. The sample covers 26,000 observations of Estonian companies from 1995 to 2004. The results show that the DPT system has led companies to pay less in dividends and retain more profits. Simultaneously, the importance of external financing in companies' total capital has decreased. The undistributed profits appear to be partially retained as surplus cash, instead of being reinvested into long-term productive assets. DPT seems to support companies' liquidity and sustainability; however, the allocation of funds is potentially inefficient.     

The Inverted-U hypothesis for the effect of uncertainty on investment: Evidence from UK firms

Abstract

This paper offers the first attempt to test the inverted-U hypothesis for the effect of uncertainty on investment, implied by a number of recent theoretical studies, using a panel of UK firms. It is found that the effect of uncertainty on corporate investment is indeed approximated by an inverted-U shaped relationship: at low levels of uncertainty the effect is positive, but it becomes negative at high levels of uncertainty. This result represents the first empirical verification of the hypothesis with respect to UK firms.     

Corporate Finance, Incentives, and Strategy

This study reviews papers from the Eastern Finance Association's Symposium on Corporate Finance, Incentives, and Strategy. I identify the common themes underlying these papers and place the studies in the broader context of contemporary academic finance research. Further, I discuss new directions for future research in corporate finance that are suggested in these studies.     

UK IPO underpricing and venture capitalists

We analyze the nature and causes of short-run underpricing for a unique sample of 591 Initial Public Offers (IPOs) issued on the London Stock Exchange for the period 1985–2003. We find significant differences between the 1998–2000 bubble years and the rest of the sample. Venture capitalists and reputable underwriters played a certification role in the latter period but not during the bubble years. These years featured significant increases in underpricing, money left on the table, and a decline in operating quality. The combination of venture capitalists and prestigious underwriters was increasingly associated with the highest underpricing witnessed during 1998–2000, which provides indirect support for the spinning hypothesis.