Does dynamic trade-off theory explain Portuguese SME capital structure decisions?

2017 ◽  
Vol 24 (3) ◽  
pp. 485-502 ◽  
Author(s):  
Filipe Sardo ◽  
Zelia Serrasqueiro
Keyword(s):  
Capital Structure ◽  
High Speed ◽  
Small Firms ◽  
Trade Off ◽  
Content Type ◽  
Speed Of Adjustment ◽  
Two Samples ◽  
Structure Adjustment ◽  
Negative Effect ◽  
Target Ratio

Purpose The purpose of this paper is to analyse if capital structure decisions of small- and medium-sized Portuguese firms are in accordance with the predictions of dynamic trade-off theory, more precisely, the speed of adjustment of short-term debt (STD) and long-term debt (LTD) towards the respective target debt ratios. Design/methodology/approach Based on two samples of Portuguese firms, 1,377 small-sized firms and 811 medium-sized firms, dynamic estimators were used for the treatment of data obtained from the Amadeus database for the period 2007-2011. Findings The results indicate that small- and medium-sized firms adjust their STD and LTD ratios towards the respective target ratios. Small- and medium-sized firms present a high-speed adjustment towards the target STD ratio, suggesting that both types of firm face costs of deviating from the target capital structure, which are, probably, greater than the costs of adjustment associated with STD. However, considering the distance from the target ratio as a determinant of the adjustment speed, the results show the predominance of the negative effect of the costs of adjustment on capital structure adjustment speeds. Originality/value The results obtained for the speed of adjustment of STD and LTD, in a recession context, show that for small firms and medium-sized firms, mainly for the former, the costs of external market transactions are prohibitively high, slowing the speed of adjustment towards the target capital structure.

Factors affecting speed of adjustment under different economic conditions

2015 ◽  
Vol 8 (3) ◽  
pp. 165-182 ◽  
Author(s):  
Muhammad Naveed ◽  
Suresh Ramakrishnan ◽  
Melati Ahmad Anuar ◽  
Maryam Mirzaei
Keyword(s):  
Sensitivity Analysis ◽  
Capital Structure ◽  
Developing Economies ◽  
Future Research ◽  
Adjustment Process ◽  
Method Of Moment ◽  
Trade Off ◽  
Content Type ◽  
Speed Of Adjustment ◽  
Structure Dynamics

Purpose – This study aims to examine the existence of capital structure dynamics and speed of adjustment during different economic periods. This study adds to the existing body of literature by investigating the factors influencing adjustment process toward target debt in developing economies. Design/methodology/approach – By employing two-step generalized method of moment (GMM) and sensitivity analysis, the study highlights critical factors which affect firms’ adjustment mechanism for target debt. Findings – Dynamic GMM estimations confirm the substance of past leverage on current debt, which recognizes the existence of dynamic capital structure. The findings corroborate that adjustment process is subject to trade-off between convergence rate and cost of being off-target. The fraction of financing of Pakistani firms confirms the pattern of pecking order hypothesis. The outcome of study clearly validates the significance of dynamic trade-off modeling for optimal capital structure. Research limitations/implications – As more data become available, the authors would extend this study to investigate the sectoral analysis to find how capital structure dynamics are different across sectors and how distinctive behavior of each sector differently affects the adjustment process toward target debt across each sector. In addition, sector-level and macro-economic factors could be incorporated to examine how external factors affect the firm’s speed of adjustment across sectors. Practical implications – The present study provides valuable insights for banking and corporate sector, mainly in Pakistan. The companies could take into consideration the firm-level factors which affect the adjustment process toward target debt. Likewise, the borrowing and lending procedures could be advanced by complying with dynamic mechanism of speed of adjustment. Furthermore, the findings of this research provide obstinate grounds for future research. Originality/value – Both the use of dynamic GMM adjustment model and sensitivity analysis along with Sargan test validate the health of instruments and values.

Capital structure decisions in a period of economic intervention

2020 ◽  
Vol 28 (3) ◽  
pp. 465-495 ◽  
Author(s):  
Maria Elisabete Neves ◽  
Zélia Serrasqueiro ◽  
António Dias ◽  
Cristina Hermano
Keyword(s):  
Capital Structure ◽  
Debt Crisis ◽  
Dynamic Panel Data ◽  
Debt Maturity ◽  
Economic Adjustment ◽  
Adjustment Programme ◽  
Content Type ◽  
Two Samples ◽  
The Impact ◽  
The Capital Structure

Purpose This paper aims to analyse the Portuguese companies’ determinants of capital structure. To reach this objective, the authors used data from 37 non-financial Portuguese large enterprises and from 4,233 non-financial small and medium enterprises for the period 2010-2016. Additionally, the authors selected a sub-period from 2010 to 2014 for a deeper understanding of the impact of the sovereign debt crisis and the Economic Adjustment Programme of Troika on the capital structure of those companies. Design/methodology/approach Three dependent variables were tested according to debt maturity, and a dynamic panel data model, namely, the generalised method of moments system estimator, was used to test the formulated research hypotheses following Arellano and Bover (1995) and Blundell and Bond (1998) to capture the dynamic nature of the firm’s capital structure decisions. Findings In general, the results point out that the capital structure decisions depend on a set of firm-specific factors, and that the effects of the determinants of the debt maturity ratios differ according to the type of firm, i.e. large/small firms, and the economic cycle. Originality/value To the best of the authors’ knowledge, this is the first study that has been carried out in Portugal by using two samples of large and small companies for analysing the effects of the Economic Adjustment Programme of Troika on the capital structure of companies. The authors seek to understand which type of companies suffered more because of the effects of the Economic Adjustment Programme of Troika during this period, and which are the capital structure determinants that present greater change. Contrary to what might be expected, large companies are the firms that suffer most from the Economic Adjustment Programme. Probably, because these companies are the most immediate, most scrutinised and those that must show abroad that the bank did not fund them in the long term, because of the imposition and limits to grant credit faced by the banks themselves.

The Speed of Adjustment to the Target Market Value Leverage Is Slower Than You Think

2019 ◽  
Vol 55 (6) ◽  
pp. 1946-1977 ◽  
Author(s):  
Qie Ellie Yin ◽  
Jay R. Ritter
Keyword(s):  
Capital Structure ◽  
Empirical Evidence ◽  
Stock Price ◽  
Market Value ◽  
Target Market ◽  
Price Changes ◽  
Trade Off ◽  
Price Fluctuations ◽  
Speed Of Adjustment ◽  
The Capital Structure

In the capital structure literature, speed of adjustment (SOA) estimates are similar whether book or market leverage is used. This robustness is suspect, given the survey evidence that firms target their book leverage and the empirical evidence that they don’t issue securities to offset market leverage changes caused by stock price changes. We show that existing market SOA estimates are substantially upward biased due to the passive influence of stock price fluctuations. Controlling for this bias, the SOA estimate is 16% for book leverage and 10% for market leverage, implying that the trade-off theory is less important than previously thought.

Corporate real estate, capital structure and value creation

2017 ◽  
Vol 10 (3) ◽  
pp. 384-404 ◽  
Author(s):  
Maria-Teresa Bosch-Badia ◽  
Joan Montllor-Serrats ◽  
Anna-Maria Panosa-Gubau ◽  
Maria-Antonia Tarrazon-Rodon
Keyword(s):  
Real Estate ◽  
Capital Structure ◽  
Structure Theory ◽  
Trade Off ◽  
Content Type ◽  
Default Option ◽  
Bankruptcy Costs ◽  
Corporate Real Estate ◽  
Tax Savings ◽  
The Impact

Purpose This paper aims to analyse the corporate rent-vs-buy decision on real estate through the trade-off theory and default option in the framework of a corporation that aims to optimise its capital structure. Design/methodology/approach The methodological core of this paper comprises the trade-off theory that approaches the optimal capital structure by counterbalancing debt tax savings with bankruptcy costs. Impacts on the default option and the default barrier are made explicit. The paper also explores the practical applicability of the renting scenarios in the European context by examining the regimes of real estate investment trusts in different countries from the demand-side of commercial renting. Findings Analytical relationships with tax savings, bankruptcy costs, default option and default barrier are identified for the renting-vs-buying real estate decisions. Research limitations/implications The theoretical model assumes simplifications, such as constant debt, to make it operational. The paper centres exclusively on the trade-off capital structure theory. Practical implications This paper is an analysis of corporate real estate decisions together with capital structure. Applications are not only quantitative but also conceptual and strategic. Originality/value Identifying the main variables that govern the impact of corporate real estate decisions on capital structure and interweaving different approaches generates a conceptual framework that enlightens strategic thinking in this field.

scholarly journals Barriers to bank customers’ intention to fully adopt digital payment methods

2021 ◽  
Vol ahead-of-print (ahead-of-print) ◽  
Author(s):  
Irina Dimitrova ◽  
Peter Öhman ◽  
Darush Yazdanfar
Keyword(s):  
Financial Services ◽  
Social Psychological ◽  
Online Questionnaire ◽  
Extensive Experience ◽  
Content Type ◽  
Payment Methods ◽  
Two Samples ◽  
Ordinal Regression Model ◽  
Negative Effect ◽  
The Relationship

Purpose The purpose of this study is to empirically investigate the relationship between a set of functional and social–psychological barriers and bank customers’ intention to fully adopt digital payment methods (DPMs). Design/methodology/approach The data were collected via an online questionnaire sent to two samples of Swedish bank customers, namely, adopters-accepters (i.e. young bank customers) and adopters-resisters (i.e. a group opposing a cashless society). Hypotheses were tested by applying an ordinal regression model. Findings Regarding the adopters-accepters, privacy and access barriers can be obstacles to the full adoption of DPMs. The adopters-resisters perceived all five studied barriers as significant, though only the impersonalisation barrier seemed to matter when the barriers were related to their intention to fully adopt DPMs. Moreover, the results suggest that barriers have a stronger negative effect on the intention to fully adopt among those with extensive experience of DPMs. Practical implications Based on the barriers affecting the intention of particular groups of bank customers to adopt DPMs, banks could implement customised measures to promote the ongoing development of digital financial services. Originality/value In this under-researched area, this study provides empirical knowledge of the influence of various barriers on the intention of bank customers characterised as adopters-accepters and adopters-resisters to fully adopt DPMs.

Split-share reforms and capital structure adjustment in China: a dynamic panel fractional estimation

2020 ◽  
Vol 47 (6) ◽  
pp. 1265-1280
Author(s):  
Tanveer Ahsan ◽  
Sultan Sikandar Mirza ◽  
Bakr Al-Gamrh ◽  
Muhammad Zubair Tauni
Keyword(s):  
Capital Structure ◽  
Positive Impact ◽  
Easy Access ◽  
Dynamic Panel ◽  
Chinese Firms ◽  
Data Set ◽  
Content Type ◽  
Structure Adjustment ◽  
The Government ◽  
Nonfinancial Firms

PurposeThe purpose of this study is to explain the adjustment rate toward the target capital structure of Chinese nonfinancial listed firms and to investigate the impacts of the split-share reforms (2005–2006) on the capital structure adjustment rate.Design/methodology/approachThe authors control for the unobserved heterogeneity and the fractional nature of the adjustment rate by applying an unbiased dynamic panel fractional estimator on the unbalanced panel data of 27,545 firm-year observations of Chinese nonfinancial firms listed during 1998–2015.FindingsThe authors find that Chinese firms adjust at an annual rate of 19–27% to reach their capital structure targets. The authors also find a positive impact of the split-share reforms on the adjustment rates of Chinese nonfinancial firms toward their target capital structure. Split-share reforms also helped Chinese firms to increase the use of equity financing in their capital structure.Practical implicationsThe authors argue that the government should strengthen capital markets to enable easy access to more financing options so that Chinese firms can acquire cheaper external financing.Originality/valueTo the best of authors' knowledge, this is the first study that applies an unbiased dynamic panel fractional estimator on an extended data set of 27,545 firm-year observations of Chinese nonfinancial firms listed during 1998–2015.

scholarly journals Affiliation of local audit firms with Big4 auditors and capital structure: evidence from Indonesia

2020 ◽  
Vol 35 (6) ◽  
pp. 731-757
Author(s):  
Heny Kurniawati ◽  
Philippe Van Cauwenberge ◽  
Heidi Vander Bauwhede
Keyword(s):  
Capital Structure ◽  
Information Asymmetry ◽  
Listed Companies ◽  
Ordinary Least Squares ◽  
Litigation Risk ◽  
Content Type ◽  
Audit Firm ◽  
Audit Firms ◽  
Negative Effect ◽  
Second Tier

Purpose This paper aims to investigate whether the choice for a Big4-affiliated local audit firm affects the capital structure of listed companies in Indonesia, a fast-growing emerging country that is characterized by high information asymmetry and low litigation risk. A unique characteristic of the Indonesian audit environment is that Big4 auditors can only enter the market indirectly through affiliation with a local audit firm. Design/methodology/approach A sample of Indonesian listed companies between 2008 and 2015 is used to investigate this relation using ordinary least squares (OLS). To address the concern that the choice for Big4-affiliated auditors might reflect client characteristics, the authors also perform OLS on a matched sample, using both propensity-score and entropy-balance matching. Findings Across all three samples, the authors document that companies audited by a Big4-affiliated local audit firm display lower debt ratios. The authors find no such effect for affiliation with second-tier audit firms. Surprisingly, they find that the negative effect of Big4 affiliation is increasing in client size. Research limitations/implications This study provides evidence of the consequences of hiring Big4 auditors on the perceived information asymmetry by financial markets under extreme conditions: in an environment characterized by low litigation risk and where Big4 auditors can operate only indirectly through affiliation. Practical implications The results of this study are of interest to policymakers, managers and financial stakeholders in emerging countries where external financing is important yet difficult to obtain because of severe information asymmetry. Hiring a Big4 auditor, even only through affiliation, might reduce perceived information asymmetry and increase the access to external equity financing. Originality/value To the best of the authors’ knowledge, this study is the first to provide evidence of the effect of Big4 auditors on their clients’ capital structure when they can operate only indirectly through affiliation with a local auditor.

How do Spanish unlisted family firms rebalance their capital structures?

2020 ◽  
Vol ahead-of-print (ahead-of-print) ◽  
Author(s):  
Zélia Serrasqueiro ◽  
Fernanda Matias ◽  
Julio Diéguez-Soto
Keyword(s):  
Capital Structure ◽  
Transaction Costs ◽  
Family Firms ◽  
Adjustment Costs ◽  
Dynamic Panel Data ◽  
Future Research ◽  
Short Term ◽  
Content Type ◽  
Speed Of Adjustment

PurposeThis paper seeks to analyze the family firm's capital structure decisions, focusing on the speed of adjustment (SOA) as well as on the effect of distance from the target capital structure on the SOA towards target short-term and long-term debt ratios in unlisted small and medium-sized family firms.Design/methodology/approachMethodologically, we use dynamic panel data estimators to estimate the effects of distance on the speeds of adjustment towards those targets. Data for the period 2006–2014 were collected for two research sub-samples: one sub-sample with 398 family firms; the other sub-sample contains 217 non-family firms.FindingsThe results show that the deviation from the target debt ratios impacts negatively on the speeds of adjustment towards target short-term and long-term debt ratios in unlisted family firms. These results suggest that family firms, deviating from target debt ratios, face deviation costs, i.e. insolvency costs, inferior to the adjustment costs, i.e. transaction costs. Therefore, family firms stay away from the target debt ratios for a long time than do non-family firms.Research limitations/implicationsThe research sample comprises a low number of family firms, therefore for future research we suggest increasing the size of the sample of family firms to get a deeper understanding of family firms' SOA towards capital structure. Additionally, we suggest the analysis of other potential determinants of the speed of adjustment towards target capital structure.Practical implicationsThe results obtained suggest that the distance from the target short-term and long-term debt ratios can be avoided if these firms do not depend almost exclusively on internal finance to adjust towards target capital structure. Moreover, for policymakers, we suggest the creation/promotion of alternative external finance sources, allowing reduced transaction costs that contribute to a faster adjustment of small family firms towards target capital structure.Originality/valueThe most previous research focusing on capital structure decisions have focused on listed family firms. To fill this gap, this study examines the speed of adjustment towards target debt ratios in the context of unlisted family firms. Moreover, transaction costs are a function of debt maturity, therefore this study examines separately the speeds of adjustment towards target short-term and long-term debt ratios. This paper shows that the adjustment costs (i.e. transaction costs) could hold back family firms from rebalancing its capital structure.

Beyond market timing theory

2018 ◽  
Vol 35 (4) ◽  
pp. 458-480
Author(s):  
Subramanian Iyer ◽  
Siamak Javadi
Keyword(s):  
Capital Market ◽  
Small Firms ◽  
Market Timing ◽  
Financial Policy ◽  
Managerial Ability ◽  
Cash Balance ◽  
Content Type ◽  
Speed Of Adjustment ◽  
A Value ◽  
Significant Difference

PurposeThis study aims to examine the behavior of cash raised through market timing efforts and the success of such efforts in creating value to shareholders.Design/methodology/approachIt is shown that in two quarters, subsequent to raising equity, cash balance of market timers is higher but after that, there is no significant difference between timers and non-timers. Results of speed of adjustment regressions indicate that market timers move faster toward their target cash levels.FindingsMarket timers are small firms that suffer from asymmetric information. They have limited access to capital market, and raising external capital is an opportunity that should be timed. The results suggest that, on average, these firms are managed by more able executives, who are 10 per cent more likely to time the market; however, it is found that timing efforts are unsuccessful in creating value to shareholders even after controlling for the mitigating effect of managerial ability. Subsequent to market timing, on average, market timers earn significantly lower abnormal return over different holding periods relative to their comparable non-timer counterparts.Originality/valueOverall, the results undermine the validity of market timing as a value-maximizing financial policy.

scholarly journals Dynamic Capital Structure Adjustment and the Impact of Fractional Dependent Variables

2015 ◽  
Vol 50 (5) ◽  
pp. 1105-1133 ◽  
Author(s):  
Ralf Elsas ◽  
David Florysiak
Keyword(s):  
Capital Structure ◽  
Corporate Finance ◽  
Unobserved Heterogeneity ◽  
Speed Of Adjustment ◽  
Structure Adjustment ◽  
Dependent Variables ◽  
Target Leverage ◽  
The Impact ◽  
Biased Estimates ◽  
Structure Research

AbstractResearchers in empirical corporate finance often use bounded ratios (e.g., debt ratios) as dependent variables in their regressions. Using the example of estimating the speed of adjustment toward target leverage, we show by Monte Carlo and resampling experiments that commonly applied estimators yield severely biased estimates, as they ignore that debt ratios are fractional (i.e., bounded between 0 and 1). We propose a new unbiased estimator for adjustment speed in the presence of fractional dependent variables that also controls for unobserved heterogeneity and unbalanced panel data. This new estimator is suitable for corporate finance applications beyond capital structure research.

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