The sensitivity of payouts to corporate financing decisions

2015 ◽  
Vol 7 (4) ◽  
pp. 290-300 ◽  
Author(s):  
Edward C. Hoang ◽  
Indrit Hoxha
Keyword(s):  
Negative Relationship ◽  
Cash Flows ◽  
Stock Repurchases ◽  
Net Income ◽  
Financing Policy ◽  
Corporate Financing ◽  
Content Type ◽  
Public Firms ◽  
Financing Decisions ◽  
Panel Regressions

Purpose – The purpose of this article is to empirically explore the sensitivity of payouts to cash flows and the other financing decisions, such as debt and investment, of firms. Design/methodology/approach – Using panel regressions based on COMPUSTAT data for 7,544 public firms during the period 1973–2013, we estimate the sensitivity of total payouts. Specifically, following the theory presented in Lambrecht and Myers (2012), we test the interdependent financing decisions of the firm. First, we compute total payout as the sum of cash dividends and net stock repurchases; second, we examine the sensitivity of total payouts to changes in the firm’s net income, debt and investment. Furthermore, we present several tests to demonstrate the robustness of our results. Findings – We suggest evidence in support of the theory in Lambrecht and Myers (2012) showing that there is a negative relationship between total payouts and investment. Furthermore, we find that total payouts are positively associated with net income and debt of the firm. Originality/value – Previous research has shown how cash flows affect different financing decisions, but it is not clear how total payouts are sensitive to other financing decisions. The focus of this paper is the response of total payouts to investment policy, debt financing policy and changes in cash flows.

An international study of the response of corporate payout policy

2019 ◽  
Vol 15 (3) ◽  
pp. 335-349 ◽  
Author(s):  
Edward Hoang ◽  
Indrit Hoxha
Keyword(s):  
Large Scale ◽  
Payout Policy ◽  
Data Availability ◽  
Firm Level ◽  
Corporate Financing ◽  
Content Type ◽  
Public Firms ◽  
Financing Decisions ◽  
The World ◽  
Debt Policies

Purpose The purpose of this paper is to study the payout policy for public firms in different countries. The authors are interested to understand the similarities and differences in the behavior of firms across different countries. Design/methodology/approach The authors use firm-level data collected from Compustat Global for public firms across the world. The sample consists of more than 23,000 firms for the period 1990–2015 in 94 countries. The authors estimate the corporate payout in an empirical model that incorporates other corporate financing decisions, such as investment and debt policies. Findings The findings support recent corporate governance theory, which asserts that payout policy is influenced by investment and debt policies, and cannot be determined independently. Furthermore, the authors find that geographic/cultural/institutional variation influence the response of payout policy to other corporate financing decisions. Additional tests are presented to demonstrate the robustness of the main findings. Research limitations/implications The interpretation of the results for certain regions could be limited due to data availability. The authors believe the authors have a good coverage especially for countries in Asia, relative to the other regions. Originality/value To the best of our knowledge, this study is the first one to look at payout policy and its relationship with investment and debt policy in such a large scale of firms across the world with coverage of 94 countries and 16 years. The authors document differences in public firms’ attitudes toward payout policy according to geographic/cultural/institutional reasons.

The effect of auditor industry specialization and board independence on the cash flow reporting classification choices under IFRS: evidence from Taiwan

2020 ◽  
Vol ahead-of-print (ahead-of-print) ◽  
Author(s):  
Shuling Chiang ◽  
Gary Kleinman ◽  
Picheng Lee
Keyword(s):  
Cash Flow ◽  
Financial Reporting ◽  
Negative Relationship ◽  
Cash Flows ◽  
Board Independence ◽  
Firm Level ◽  
Industry Specialization ◽  
Content Type ◽  
Auditor Industry Specialization ◽  
Board Of Director

Purpose This study aims to explore the relationship between audit partner and firm industry specialization and board of director independence on the decision by Taiwanese firms to use International Financial Reporting Standards (IFRS) flexibility concerning reporting interest income and expense and dividends received in different sections of the statement of cash flows. This flexibility existed in Taiwan for the first time in 2013, the year that Taiwan switched from its own generally accepted accounting principle to IFRS. Design/methodology/approach Using 2013 data for a sample of 1,227 firms, 354 of whom changed their reporting classification, this study examined the interaction effect of board independence and partner-level and firm-level auditor industry specialization on the cash flow reporting decision using logistic regression. Findings The results show there is a substitute relationship between board independence and partner-level industry specialization on the change in cash flow reporting classification, but a complementary relationship between board independence and firm-level auditor specialization. Further, both partner-level and firm-level auditor industry specializations have a complementary (but negative) relationship with board independence as to whether the firm is likely to report interest expense paid in the operating or financing activities sections. Practical implications An important implication is that knowing the levels of audit firm and partner specialization and how independent the board is, is useful for researchers and regulators in investigating auditor-client relationships and understanding the influences of variables investigated here on the outcome(s) of accounting policy and regulatory changes. Originality/value This study improved the field’s understanding of the impacts of audit partner and firm specialization, board independence and relevant interactions on cash flow reporting choices.

Implications of Government Borrowing for Corporate Financing in Emerging Economies: A Crowding Out Kuznets Curve

2020 ◽  
Vol 23 (02) ◽  
pp. 2050017 ◽  
Author(s):  
Muhammad Ali Nasir ◽  
Toan Luu Duc Huynh ◽  
Quynh Thi Nhu Do ◽  
Cuc Thi Nguyen ◽  
Quynh Thi Tran
Keyword(s):  
Capital Structure ◽  
Stock Exchange ◽  
Generalized Method Of Moments ◽  
Negative Relationship ◽  
Kuznets Curve ◽  
Crowding Out ◽  
Macroeconomic Factors ◽  
Corporate Financing ◽  
Financing Decisions ◽  
The Government

This paper investigates the implications of government borrowing for corporate financing and capital structure of the firms. In doing so, we explore the effects of government debt, macroeconomic and firm-specific factors on firm’s choice of financing and capital structure. We draw on the 10-year data (2007–2017) of 225 non-financial firms listed on the Ho Chi Minh Stock Exchange (HoSE) and employ the system Generalized Method of Moments (system-GMM) for estimation. Our key findings suggest that the government borrowing and debt financing for the Vietnamese listed companies have a negative relationship. Specifically, the short-term corporate leverage structure is influenced more strongly than the long-term leverage structure. We also define the threshold for the association between government borrowing and corporate financing decisions by capturing a U-shaped relationship i.e., Crowding out Kuznets Curve (CKC). Furthermore, macroeconomic factors also show a statistically significant impact on corporate financing decisions. Our findings have profound implications for the fiscal and public policymakers, investors as well as corporate finance managers and firms.

CFOs’ views on corporate financing decisions

2016 ◽  
Vol 8 (4) ◽  
pp. 331-358
Author(s):  
Weerakoon Banda Yatiwelle Koralalage
Keyword(s):  
Sri Lanka ◽  
Interest Rates ◽  
Firm Value ◽  
Emerging Market ◽  
Foreign Debt ◽  
Cash Flows ◽  
Chief Financial Officers ◽  
Corporate Financing ◽  
Content Type ◽  
Developed Markets

Purpose The purpose of this paper is to examine the managerial views on the corporate financing practices of firms in the emerging market of Sri Lanka. Design/methodology/approach A survey approach was employed using chief financial officers (CFOs) from the top non-financial firms listed on the Colombo Stock Exchange. Findings CFOs’ views on corporate financing practices are not fully consistent with the theory: financial hierarchy appears to be more important and firms are less leveraged. Most Sri Lankan CFOs perceive some policy factors as important and theoretically support: volatility of earnings and cash flows, tax advantages of interest deductibility, transaction costs, timing of interest rates, low foreign interest rates and debt equity targets. These factors are high priority in emerging markets but either not important at all or less important in developed markets. Matching debt maturity with the life of assets is equally important in both markets. Most CFOs adhere their financing to the local debt market, while a few firms use foreign debt. CFOs are concerned about earnings per share (EPS) dilution, providing a natural hedge in foreign debt issues, credit ratings, under/overvaluation of stocks and corporate control, whereas they are significantly important in developed markets. Age and education mostly explain the differences. Research limitations/implications The study is restricted to large companies in a relatively smaller market. Hence, sample size is relatively small, even though it shows a higher response rate. Practical implications The study offers insights for corporate financing decision-makers that could impact on firm value through a shift in emphasis toward capital structure theories. Originality/value The paper focuses on corporate financing practices in Sri Lanka in search of emerging market features that could mitigate the gap in the emerging market literature through survey evidence.

Impact of firm characteristics on capital structure choice of Turkish SMEs

2015 ◽  
Vol 41 (3) ◽  
pp. 286-300 ◽  
Author(s):  
Ali Uyar ◽  
Mustafa Kemal Guzelyurt
Keyword(s):  
Financial Distress ◽  
Survey Methodology ◽  
Order Theory ◽  
Debt Ratio ◽  
Pecking Order ◽  
Financing Policy ◽  
Pecking Order Theory ◽  
Content Type ◽  
Financing Decisions ◽  
Structure Complexity

Purpose – The purpose of this paper is to investigate whether SMEs have a target debt ratio or not; who makes financing decisions for investments; the financing preferences; and which factors play a role in external financing policy of the firms. Design/methodology/approach – The authors adopted questionnaire survey methodology in the study. The questionnaire was administered to SMEs operating in Istanbul through e-mail, telephone, and fax in July 2011. For the analysis, the authors have adopted the non-parametric test of the Kruskal-Wallis. Findings – The study produced several important findings. Most of the surveyed firms do not follow a target debt ratio. Hence, the trade-off theory is not supported. Partners rather than professional managers are more likely to make financing choices in SMEs. The study has provided evidence regarding the implementation of the pecking order principle. Turkish SMEs primarily prefer internal funding sources over external ones and short-term debt over long-term debt. Thus, the pecking order theory is supported. General economic conditions, debt-paying ability of the firm, and financial distress risk play the most important role in outside financing decisions. Research limitations/implications – The study has got some limitations as all such studies have. First, it was conducted only on SMEs in Istanbul; hence it has a geographical limitation. Second, the findings may not be generalizable to large and publicly traded companies as the sample consists of only SMEs. For further study, similar research can be carried out across Turkey on a wider sample. Originality/value – The SMEs are different from large companies in a variety of ways, such as ownership structure, complexity of operations, financing sources, and so on. Hence, there is a need for empirical analysis conducted, particularly, on SMEs. The primary motivation for the study is the scarcity of such empirical works in general. Secondarily, SMEs make up a large proportion of companies in the Turkish economy. Therefore, the subject needs to be studied in Turkey.

Crossing the Tasman

2014 ◽  
Vol 26 (3) ◽  
pp. 177-195
Author(s):  
Bart Frijns ◽  
Aaron Gilbert ◽  
Alireza Tourani-Rad
Keyword(s):  
New Zealand ◽  
Price Discovery ◽  
Stock Exchange ◽  
Negative Relationship ◽  
Relative Volume ◽  
Early Years ◽  
Content Type ◽  
Cross Listing ◽  
Panel Regressions ◽  
Information Shares

Purpose – The purpose of this paper is to investigate price discovery for cross-listed stocks on the New Zealand Exchange (NZX) and the Australian Stock Exchange (ASX) and find out the determinants of price discovery between the two markets. Design/methodology/approach – Gonzalo Granger Component Shares and Hasbrouck Information Shares were estimated annually for a sample of 19 cross-listed stocks between 1998 and 2012. Then dynamic panel regressions were used to investigate the driving factors behind price discovery between the NZX and ASX. Findings – Strong downward trends were observed in the contribution to price discovery of the NZX, both for New Zealand firms cross-listing on the ASX and Australian firms cross-listing on the NZX. While in the early years in our sample period, price discovery is dominated by the home market, by 2012, 50 per cent of price discovery for New Zealand firms takes place on the ASX, and the NZX acts as a satellite market for Australian firms. It was also observed that the NZX share of trading activity has a strong positive effect on the NZX level of price discovery, while there is a negative relationship with relative bid–ask spreads. Practical implications – Results suggest that the importance of the NZX relative to the ASX with regards to price discovery is decreasing over time. Given the importance of price discovery for exchanges, such a finding is concerning for the NZX. The determinants of price discovery found in the paper, such as relative volume and spreads, do, however, offer some guidance on how the NZX could regain price discovery. Originality/value – This paper offers a longer and broader analysis of price discovery between the NZX and ASX, two highly integrated markets, and extends previous work by exploring the drivers of price discovery in a panel setting.

Unusual patterns in reported segment earnings of US firms

2015 ◽  
Vol 16 (2) ◽  
pp. 287-304 ◽  
Author(s):  
Xavier Garza-Gomez ◽  
Xiaobo Dong ◽  
Ziyun Yang
Keyword(s):  
Reference Points ◽  
Net Income ◽  
Firm Level ◽  
Content Type ◽  
Public Firms ◽  
External Auditors ◽  
Segment Reporting ◽  
Agency Conflict ◽  
Segment Data ◽  
Practical Implications

Purpose – The purpose of this paper is to extend prior findings on firms’ rounding up net income numbers to meet cognitive reference points and to examine whether segment-level earnings exhibit similar unusual patterns. Design/methodology/approach – This study is an archival research based on a sample of US public firms that report segment data between 1998 and 2011. The authors use Benford’s law to establish benchmarks for expected frequency of each number on the second digit of segment earnings and test whether the actual distributions deviate from expectations. Findings – The authors find more zeros and fewer nines than expected by chance in the second-from-the-left most digit for segment earnings numbers of US public firms, suggesting that segments round up earnings to meet cognitive reference points. The results complement the existing studies by showing that the rounding up of earnings not only exists at the firm level but also at the segment level, probably because subdivision managers have motivation to exceed certain reference points when reporting earnings. Research limitations/implications – As the authors cannot observe the contracts received by divisional managers, the authors rely on measures related to operating diversity to capture internal agency costs. Practical implications – The findings suggest internal and external auditors should pay close attention to segments that are suspected of earnings management, i.e. segments that report zeros on the second digit of revenues or earnings. Increased auditor attention is especially necessary for profitable segments operating in highly diversified multi-segment firms. Originality/value – The authors find that unusual patterns in segment reporting are more prominent in firms that operate in multiple and dissimilar segments, suggesting that higher internal agency conflict might lead to the rounding up of earnings.

scholarly journals The Crowd-Out Effect of Government Debt on Firm Leverage

2021 ◽  
Vol 235 ◽  
pp. 01023
Author(s):  
Xiaomiao Xia ◽  
Jingyue Liao ◽  
Zitang Shen
Keyword(s):  
Financial Crisis ◽  
Negative Correlation ◽  
Instrumental Variable ◽  
Negative Relationship ◽  
Government Debt ◽  
Corporate Financing ◽  
Financing Decisions ◽  
Division Point ◽  
The Government ◽  
The Impact

Based on the data of 21 provinces from 2000 to 2018, this paper empirically examines the impact of government debt on corporate financing decisions, and finds that there is a negative correlation between government debt and corporate leverage. In large enterprises, private enterprises and enterprises in economically developed areas, the negative relationship is stronger. In order to deal with the potential endogenous problems, we use the government debt excluding the province GDP as the instrumental variable, and take the financial crisis and the 4 trillion policy as the division point to divide two periods of time as the robustness test. The results show that government debt crowds out corporate debt.

Refinement of the FCF motive for stock repurchases

2019 ◽  
Vol 28 (2) ◽  
pp. 213-228
Author(s):  
Nan Liu
Keyword(s):  
Financial Crisis ◽  
Cash Flow ◽  
Positive Association ◽  
Cash Flows ◽  
Free Cash Flow ◽  
Stock Repurchases ◽  
Tobit Regression ◽  
Content Type ◽  
Crisis Period ◽  
Increased Risk

Purpose The purpose of this paper is to investigate factors that influence the free cash flow (FCF) motive for stock repurchases. Specifically, it examines whether the positive association between FCF and open-market repurchases is partially driven by abnormal cash flows, and whether external analyst monitor and financial crisis influence the association. Design/methodology/approach The study employs a tobit regression model to test the hypotheses. Findings First, the results suggest that the positive association between FCF and stock repurchases is partially driven by abnormal cash flows. Second, the association between pre-managed FCF and stock repurchases is strengthened as more analyst following the firms. Third, firms repurchase less when they report more negative abnormal cash flows, and that tendency is more pronounced during the 2008 financial crisis period. Further analysis shows that during the crisis period, the effect of negative abnormal cash flows on operating performance gets stronger. Originality/value The study makes several contributions to the literature. This paper is the first to show that managers use abnormal cash flows to fulfill the share buy-backs. In addition, it shows that analysts provide effective external monitoring by strengthening the association between pre-managed FCF and repurchases. Furthermore, it finds that firms adjust their strategy in times of financial crisis period in response to the increased risk. Finally, it contributes to the earnings management literature by showing the differential effects of accruals management and cash flow management on earnings performance.

A tale of two emerging market economies: evidence from payout smoothing in China and Taiwan

2020 ◽  
Vol ahead-of-print (ahead-of-print) ◽  
Author(s):  
Edward C. Hoang ◽  
Indrit Hoxha
Keyword(s):  
Emerging Markets ◽  
Emerging Market ◽  
Emerging Market Economies ◽  
Net Income ◽  
Firm Level ◽  
Investment Policies ◽  
Content Type ◽  
Market Economies ◽  
Public Firms ◽  
Global Database

PurposeThe purpose of this paper is to investigate payout smoothing in two emerging markets – China and Taiwan. The authors conduct a comparative study of two emerging market economies that have common cultural and historical characteristics but have experienced different government systems and different approach to the market-based system.Design/methodology/approachThe authors collect firm-level data from Standard and Poor's Compustat Global database, which covers 5,298 public firms in China and Taiwan during the period 1996–2015, and use a variance decomposition methodology to estimate the smoothness of corporate payout in a common empirical framework that includes net income, and debt and investment policies.FindingsOverall, the empirical findings support recently proposed theories of joint determination of corporate payout behavior with debt and investment policies. The authors find that debt and investment policies absorb the majority of shocks to net income, and that debt policy is the main shock absorber. Furthermore, the authors show that firms in China follow a similar strategy with their counterparts in United States and smooth their payout. In contrast to firms in China and US, the payout of the Taiwanese firms is relatively highly sensitive to net income shocks.Originality/valueTo the best of authors’ knowledge, this study is the first to use a joint model to empirically investigate the extent to which debt and investment policies are used to keep corporate payout smooth in emerging markets.

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