Horses and Rabbits? Trade-Off Theory and Optimal Capital Structure

2005 ◽  
Vol 40 (2) ◽  
pp. 259-281 ◽  
Author(s):  
Nengjiu Ju ◽  
Robert Parrino ◽  
Allen M. Poteshman ◽  
Michael S. Weisbach
Keyword(s):  
Capital Structure ◽  
Firm Characteristics ◽  
Trade Off ◽  
Optimal Capital Structure ◽  
Long Run ◽  
Total Capital ◽  
Realistic Representation ◽  
Optimal Target ◽  
Optimal Capital ◽  
Structure Choice

AbstractThis paper examines optimal capital structure choice using a dynamic capital structure model that is calibrated to reflect actual firm characteristics. The model uses contingent claim methods to value interest tax shields, allows for reorganization in bankruptcy, and maintains a long-run target debt to total capital ratio by refinancing maturing debt. Using this model, we calculate optimal capital structures in a realistic representation of the traditional trade-off model. In contrast to previous research, the calculated optimal capital structures do not imply that firms tend to use too little leverage in practice. We also estimate the costs borne by a firm whose capital structure deviates from its optimal target debt to total capital ratio. The costs of moderate deviations are relatively small, suggesting that a policy of adjusting leverage infrequently is likely to be reasonable for many firms.

scholarly journals Does corporate ownership affect capital structures and adjustment of capital structures — evidences from Chinese listed companies

2009 ◽  
Vol 6 (4) ◽  
pp. 532-541 ◽  
Author(s):  
Zhengwei Wang ◽  
Wei Lin ◽  
Michael Keefe
Keyword(s):  
Capital Structure ◽  
Transition Economy ◽  
Structural Difference ◽  
Firm Characteristics ◽  
Financial Friction ◽  
Listed Firms ◽  
Optimal Capital Structure ◽  
Study Results ◽  
Optimal Capital ◽  
The Difference

In Chinese transition economy, compared with state-owned firms, private firms face higher financial friction in financing activities, but have more incentive to adjust toward optimal capital structure to maximize the shareholders‟ benefit. Based on panel data of China’s listed firms from 1998 to 2007, we compare the capital structures of state-owned and privately-owned listed firms. The empirical results show that there is structural difference in static capital structure between state-owned and private listed firms while controlling for firm characteristics. We then investigate the difference in dynamics of the capital structure between these two groups of firms. Further study results tell us that the adjustment to an optimal capital structure to be faster for the private firm than for the state-owned firm.

How Do Banks Use Bailout Money? Optimal Capital Structure, New Equity, and the TARP

2021 ◽  
pp. 2150008
Author(s):  
Ryan Taliaferro
Keyword(s):  
Capital Structure ◽  
The United States ◽  
United States Government ◽  
Regulatory Capital ◽  
Holding Companies ◽  
Optimal Capital Structure ◽  
States Government ◽  
Capital Ratios ◽  
Optimal Target ◽  
Optimal Capital

Between October 28, 2008 and June 30, 2009 over 600 banks and bank holding companies accepted money from the United States government in exchange for preferred shares and warrants. Based on a matched sample of banks participating and not participating in this Capital Purchase Program (CPP), of each dollar of new government equity, on average participants levered roughly 13 cents to support increased lending while they used roughly 60 cents to increase their regulatory capital ratios. Over the previous business cycle, 2000–2008, allocation of new capital to support lending was higher than in 2008–2009 by nearly 30 cents per dollar of new capital. Moreover, in the previous downturn, 2000–2001, allocation to new lending was higher by an even greater amount. Banks’ exposure to past-due loans, which was higher in 2008 than in 2000 or in any other sample year, negatively predicts allocation of new capital to new lending. Characteristics of CPP participants suggest they were of two types: those with high commitments and opportunities for new lending, and those with exposures to certain troubled loan classes. Banks with high leverage and high expected costs of regulatory downgrades also were more likely participants. All of these results are consistent with banks having an optimal, target capital structure based on some form of tradeoff theory.

scholarly journals Optimum Capital Structure Adjustment Speed on Companies Listed in Indonesia Stock Exchange

2019 ◽  
Vol 15 (1) ◽  
pp. 60-68
Author(s):  
Suramaya Suci Kewal
Keyword(s):  
Capital Structure ◽  
Firm Size ◽  
Stock Exchange ◽  
Business Risk ◽  
Trade Off ◽  
Significance Level ◽  
Optimal Capital Structure ◽  
Structure Adjustment ◽  
Adjustment Speed ◽  
Optimal Capital

AbstractThis study examines the existence of adjustments in the speed of the company's capital structure to achieve an optimal capital structure in accordance with the dynamics of trade-off and other factors affecting the company's capital structure adjustment.   The optimal capital structure is estimated by using several variables, namely tangibility, firm size, profitability, liquidity, asset utilization, and business risk. The factors used to predict the optimal capital structure adjustment speed in this study are the distance between the capital structure and the optimal capital structure and financial deficit. The data analysis technique in this study is multiple linear regression with a significance level of 5%. The obtained results indicate that companies on the IDX are adjusting towards the optimal capital structure. The speed of adjustment is 0.128 so it can be concluded that the company's adjustment remains below its optimal debt level. The test results also prove that distance and financial deficit/surplus have no influence on the company's capital structure adjustment speed. Keywords: capital structure, dynamics trade offKecepatan Penyesuaian Struktur Modal Optimal Perusahaan di Bursa Efek IndonesiaAbstrakPenelitian ini menguji keberadaan penyesuaian kecepatan struktur modal perusahaan menuju ke struktur modal optimal sesuai dengan dynamics trade off dan faktor-faktor yang mempengaruhi kecepatan penyesuaian struktur modal optimal perusahaan. Struktur modal optimal diestimasi dengan menggunakan beberapa variabel yaitu tangibility, firm size, profitability, liquidity, asset utilization, dan business risk. Faktor-faktor yang digunakan untuk menduga kecepatan penyesuaian struktur modal optimal pada penelitian ini adalah jarak antara struktur modal dengan struktur modal optimal (distance) dan financial deficit/surplus. Teknik analisis data yang digunakan pada penelitian ini adalah regresi linier berganda dengan tingkat signifikansi sebesar 5%. Hasil yang diperoleh menunjukkan perusahaan-perusahaan di BEI melakukan penyesuaian menuju struktur modal optimal. Kecepatan penyesuaian sebesar 0,128 sehingga dapat disimpulkan bahwa perusahaan-perusahaan melakukan penyesuaian masih di bawah tingkat hutang optimalnya. Hasil pengujian juga membuktikan bahwa tidak terdapat pengaruh distance dan financial deficit/surplus terhadap kecepatan penyesuaian struktur modal perusahaan. Kata Kunci: struktur modal, dynamics trade off

scholarly journals STRUKTUR MODAL OPTIMAL DAN KECEPATAN PENYESUAIAN: STUDI EMPIRIS DI BURSA EFEK INDONESIA

2017 ◽  
Vol 20 (3) ◽  
pp. 305
Author(s):  
Firda Nosita
Keyword(s):  
Capital Structure ◽  
Stock Exchange ◽  
Practical Implication ◽  
Trade Off ◽  
Optimal Capital Structure ◽  
Financial Firms ◽  
Structure Adjustment ◽  
Adjustment Speed ◽  
Optimal Capital ◽  
Target Leverage

The research investigate whether non-financial firms listed on the Indonesian Stock Exchange made capital structure adjustment towards optimal capital structure and the determinants of adjustment speed in context of trade-off theory for 2009-2014 period. Existence of tax benefit that generates by debt interest payment causing firms arranged their capital structure in order to maximize debt utilizing. Debt utilizing would be make default problem and bankruptcy if it excess firm’s capacity that determine by some firm’s characteristic. Because of optimal capital structure unobservable, so they will be estimate by using some variable which are influencing in capital structure arrangement such tangibility. profitability, size and growth opportunities. The results indicate that non-financial firms in Indonesia follows dynamic trade-off theory with make capital structure adjustment towards optimal capital structure but still underleveraged and need 2,45 years to adjust their capital structure. Distance between actual capital structure and optimal capital structure and financial surplus/deficit are influenced speed of adjustments, while current liabilities is not influenced speed of adjustment. Thus, the practical implication is the companies must be consider and compare their actual capital structure and their optimal capital structure in order to get the benefit from the adjustment by not adding the posibility of bankruptcy due to these adjustment. Capital structure decision also related with various external policy, for instance, accesability to external funding such as creditors, investor and government which influence their adjustment. This research has some limitation, proxies are used in determining the target leverage was only four variables and this study did not addres macroeconomic variables that may affect the adjustment and adjustment speed.

scholarly journals Corporate Debt Policy—Pre- and Post-financial Market Reforms: The Case of the Textile Industry of Pakistan

2007 ◽  
Vol 46 (4II) ◽  
pp. 465-478 ◽  
Author(s):  
S. M. Amir Shah
Keyword(s):  
Capital Structure ◽  
Research Work ◽  
Agency Cost ◽  
Bank Loan ◽  
Trade Off ◽  
Optimal Capital Structure ◽  
Tax Shield ◽  
Optimal Capital ◽  
Retained Earnings ◽  
The Capital Structure

The literature provides evidence that the capital structure of a firm is often a combination of several securities; it can arrange (1) Bank loan (2) issue debentures/bonds, (3) issue shares (4) lease financing, or (5) utilise its retained earnings. Eventually number of ideas and theories has been developed to discuss the optimal capital structure. Optimum is the trade-off between the benefit of tax and costs of financial distress; a firm faces due to the borrowed money. Although extensive research work has been done on the capital structure but still it remains one of the unsettled topics in finance. Optimal capital structure has an impact on corporate profits. Debt is considered as the cheapest source of financing due to tax shield, higher the firm’s tax bracket more the debt is advantageous to a firm. The trade off theory states that higher debt is associated with higher profitability. Three reasons support this theory; one debt allow tax shield. Second, more trust is built on profitable companies considering more sustainable and less prone to bankruptcy; hence high profitable companies are able to seek more debt. Third, agency cost, for the profitable firms, lenders/creditors give relaxation in monitoring charges, which reduces the debt cost. This motivates profitable firms to go for more debt.

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