Herding behavior and financing decisions in Romania

2019 ◽  
Vol 45 (6) ◽  
pp. 716-725 ◽  
Author(s):  
Gabriela Brendea ◽  
Fanuta Pop
Keyword(s):  
Capital Structure ◽  
Firm Value ◽  
Eastern European Country ◽  
Herding Behavior ◽  
Content Type ◽  
Listed Firms ◽  
Optimal Capital Structure ◽  
The Mean ◽  
Optimal Capital ◽  
Financing Behavior

Purpose The purpose of this paper is to investigate the financing behavior of Romanian listed firms with regard to their tendency to exhibit herding behavior, more specifically to follow the mean capital structure of the sector they belong to. Design/methodology/approach A panel data model was employed to examine the herding financing behavior of Romanian listed firms over the period 2007–2014. The dependent variable of the model is firms’ debt ratio (DR) and the independent variables are: the first lag of the mean DR in each sector of the analysis, firm-specific characteristics and the average characteristics of the firms from the sector they belong to. Findings The results of the study indicate that Romanian listed firms have a herding behavior and try to reach the mean DR of the sector they belong to, moving away from the optimal capital structure that maximizes firms’ value. In addition, the results of the model estimation suggest that Romanian firms’ capital structure depends on both firms’ characteristics (i.e. profitability, firm size and asset tangibility) and the average characteristics of the firms from the same sector they belong to (i.e. average profitability and average size). Practical implications Acting with the herd determines firms to move away from the optimal capital structure and to miss in this way the maximization of the firm value. Consequently, it is in managers’ best interest to avoid herding behavior and try to act rationally when they decide firms’ financing sources. Originality/value To the best of the knowledge, this is the first study in the literature that finds support for the herding financing behavior in an Eastern European country.

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.

Company performance and optimal capital structure: evidence of transition economy (Russia)

2020 ◽  
Vol ahead-of-print (ahead-of-print) ◽  
Author(s):  
Vladislav Spitsin ◽  
Darko Vukovic ◽  
Sergey Anokhin ◽  
Lubov Spitsina
Keyword(s):  
Capital Structure ◽  
Interest Rates ◽  
Transition Economies ◽  
Transition Economy ◽  
High Tech ◽  
Company Performance ◽  
Return On Assets ◽  
Content Type ◽  
Optimal Capital Structure ◽  
Optimal Capital

PurposeThe paper analyzes the effects of the capital structure on company performance (return on assets). The analysis is conducted in a large sample of high-tech manufacturing and service companies in the transition economy (Russian Federation). In addition to the aggregated analysis, separate investigations are conducted to scrutinize the impact of company age, size and location factors (the effects of agglomerations). This research postulates the existence and variability of the optimal capital structure and its dependence on economic crisis.Design/methodology/approachWe utilized a large sample that includes 1,826 enterprises over the period from 2013 to 2017. The estimation was performed using the panel-corrected standard error estimation technique (Prais–Winsten regression) to account for the panel nature and distributional properties of our data. The existence of the optimal capital structure was assessed based on a curvilinear (quadratic) function.FindingsThe results are consistent with the Static Trade-off Theory and show that this theory is applicable to countries with transition economy. They demonstrate that effective management of the capital structure can increase return on assets by 16–22%. The optimal share of borrowed capital is higher for small businesses compared to larger ones and for enterprises located in agglomerations compared to those located in other regions. A greater increase in profitability can be achieved by larger firm companies compared to smaller ones. High share of borrowed capital leads to negative profitability, i.e. to losses by enterprises. No significant differences in profitability growth were identified between young and mature enterprises. The optimal share of borrowed capital that maximizes return on assets is in the range of 0–21%.Research limitations/implicationsDue to the SPARK policies, our access to the data has been limited to a five-year window, which imposed certain limitations on the choice of econometric methods we could have employed and somewhat limited our ability to contrast the effect of the crisis period with the period of stability. In this sense, although our results pertaining to the effect of the crisis could be treated as conservative, future research should consider extending the panel to include more years into consideration.Practical implicationsWe identified significant differences between optimal capital structures and actual capital structures for high-tech enterprises. The contribution of this study is that the calculations were made for a country with a transition economy under crisis conditions. Countries with transition economies and developing countries tend to be characterized by a high level of interest rates on loans and a high proportion of borrowed capital in total assets. This poses difficulties for companies relying on borrowed capital to finance their operations. At the same time, our results demonstrate that in transition economies, enterprises in high-tech industries do have an optimal capital structure that allows maximizing firm performance. That is, Static Trade-off Theory is applicable to transition economies characterized by high interest rates on loans.Originality/valueThe novelty of this study lies in the detailed analysis of high-tech industries in Russian Federation. This analysis makes use of sophisticated econometric techniques for the first time in this context.

scholarly journals An Investigation Of The Determinants Of BTs Debt Levels From 1998-2002: What Does It Tell Us About The Optimal Capital Structure?

2011 ◽  
Vol 2 (5) ◽  
Author(s):  
Richard J. Fairchild
Keyword(s):  
Capital Structure ◽  
Firm Value ◽  
Share Price ◽  
Optimal Capital Structure ◽  
Trade Offs ◽  
Equity Ratio ◽  
Optimal Capital ◽  
British Telecom ◽  
Debt Levels

Over the period 1998-2001, British Telecom (BT) dramatically increased its debt levels, from 4.8bn in 1998 to 31bn in 2001. This was accompanied by a dramatic decrease in the firms share price. Subsequent pressure from analysts and investors induced BT to use a rights issue to substantially reduce debt in 2002 (from 31bn to 18.4bn). However, the share price has continued to fall, but not so dramatically. Hence, BT provides an ideal case study of the effects of capital structure on firm value. In this case study, we will consider such questions as:a) Why did BT take on so much debt? Why did it cause firm value to fall, when many capital structure theories suggest a positive relationship between leverage and firm value?b) Why has the reduction in debt not caused an increase in equity value?c) Was BT beyond its optimal debt/equity ratio from 1998-2001? Is it still beyond the optimum?d) Does BT have an optimal capital structure? What is it? Is it static? What are the trade-offs involved?e)Does BTs case hold lessons for other firms?

scholarly journals Optimal capital structure and the debtholder-manager conflicts of interests: a management decision model

2020 ◽  
Vol ahead-of-print (ahead-of-print) ◽  
Author(s):  
Olanike Akinwunmi Adeoye ◽  
Sardar MN Islam ◽  
Adeshina Israel Adekunle
Keyword(s):  
Corporate Governance ◽  
Capital Structure ◽  
Differential Game ◽  
Agency Problem ◽  
Dynamic Game ◽  
Cost Of Debt ◽  
Conflicts Of Interests ◽  
Content Type ◽  
Optimal Capital Structure ◽  
Optimal Capital

Purpose Determining the optimal capital structure becomes more complicated by the presence of an agency problem. The issuance of debt as a corporate governance mechanism introduces the asset substitution problem – the agency cost of debt. Thus, there is a recognized need for models that can resolve the agency problem between the debtholder and the manager who acts on behalf of the shareholder, leading to optimal capital structure choice, and enhanced firm value. The purpose of this paper is to model the debtholder-manager agency problem as a dynamic game, resolve the conflicts of interests and determine the optimal capital structure. Design/methodology/approach As there is no satisfactory model for dealing with the above issues, this paper uses a differential game framework to analyze the incongruity of interests between the debtholder and the manager as a non-cooperative dynamic game and further resolves the conflicts of interests as a cooperative game via a Pareto-efficient outcome. Findings The optimal capital structure required to minimize the marginal cost of the agency problem is a higher use of debt, lower cost of equity and withheld capital distributions. The debtholder is also able to enforce cooperation from the manager by providing a lower and stable cost of debt and a greater debt facility in the overtime framework. Originality/value The study develops a new dynamic contract theory model based on the integrated issues of capital structure, corporate governance and agency problems and applies the differential game approach to minimize the agency problem between the debtholder and the manager.

The optimal capital structure of Swiss dairy farms

2019 ◽  
Vol 79 (3) ◽  
pp. 323-337 ◽  
Author(s):  
Anke Schorr ◽  
Markus Lips
Keyword(s):  
Risk Aversion ◽  
Capital Structure ◽  
Performance Indicators ◽  
Value Added ◽  
Dairy Farms ◽  
Data Set ◽  
Content Type ◽  
Optimal Capital Structure ◽  
Optimal Values ◽  
Optimal Capital

PurposeThe purpose of this paper is to propose a novel way of determining optimal capital structure, applied to sub-groups of Swiss dairy farms from 2003 to 2014. Optimization of capital structure is carried out with respect to two performance indicators from an economic value added perspective.Design/methodology/approachOptimal values of capital structure are obtained based on a minimization of correlation between economic performance indicators and a distance function of the debt-to-asset ratio distribution to its quantiles. The approach differs from existing approaches in relying solely on empirical data and in using fewer external parameters, which are difficult to estimate, such as risk aversion coefficients. An unbalanced panel data set from the Swiss Farm Accounting Network with almost 14,000 dairy farm observations serves as input data to the model.FindingsConcise optimal values of capital structure result for regional and temporal sub-groups of Swiss dairy farms. Comparing the evolution of optimal values for these sub-groups with existing models of optimal capital structure, the authors infer that dairy farmers in the mountain region are less risk averse than their counterparts in the valley region and that falling interest rates increase the optimal value of debt-to-asset ratio.Originality/valueThe straightforward computation of optimal values for capital structure without intermediate parameters is useful and new. In addition, the authors’ model can be used as a tool for comparison and validation of previous models with the same aim, e.g. for comparison of risk aversion coefficients or qualitative behavior of optimal values for capital structure.

Optimal capital structure in agricultural cooperatives and implications for equity retirement

2020 ◽  
Vol ahead-of-print (ahead-of-print) ◽  
Author(s):  
Jeffrey Royer ◽  
Gregory McKee
Keyword(s):  
Interest Rate ◽  
Capital Structure ◽  
Financial Statements ◽  
Rate Of Return ◽  
Content Type ◽  
Optimal Capital Structure ◽  
Return On Capital ◽  
Optimal Capital ◽  
The Interest Rate ◽  
The Relationship

PurposeThis paper presents a model for determining the optimal capital structure for cooperatives and explores the relationship between financial leverage and the ability of cooperatives to retire member equity.Design/methodology/approachA model is developed to determine the optimal capital structure and explore the relationship between capital structure and the rate at which a cooperative can retire member equity. Using data from cooperative financial statements, ordinary least-squares regressions are conducted to test two hypotheses on capital structure and equity retirement.FindingsThe model shows that the optimal capital structure is determined by the ratio of the rate of return on capital employed to the interest rate on borrowed capital and the required level of interest coverage. The regressions suggest that cooperatives choose their capital structure largely according to the rate of return on capital employed and the interest rate in a manner consistent with maximizing the rate of return on equity and that the rate at which cooperatives can retire member equity is directly related to leverage.Research limitations/implicationsThe model does not consider unallocated earnings. Analysis of the relationship between leverage and equity retirement yields results contrary to the assumptions of earlier studies.Practical implicationsCooperatives can use the model because the necessary parameters are easily understood and readily available from financial statements, lenders and industry sources.Originality/valueThe model is developed specifically for determining the capital structure of cooperatives and differs substantially from the corporate model. A theoretical basis is provided for the relationship between leverage and equity retirement.

Dynamic Model of Optimal Capital Structure: Evidence from Nigerian Listed Firms

2017 ◽  
Vol 18 (3) ◽  
pp. 590-604 ◽  
Author(s):  
Rubi Ahmad ◽  
Oyebola Fatima Etudaiye-Muhtar
Keyword(s):  
Capital Structure ◽  
Stock Exchange ◽  
Adjustment Costs ◽  
Dynamic Adjustment ◽  
Listed Firms ◽  
Optimal Capital Structure ◽  
Developed Economies ◽  
Tax Shield ◽  
Financial Firms ◽  
Optimal Capital

Examination of optimal capital structure in financial markets with imperfections suggests that when deviations from optimal capital structure occur, adjustment costs may prevent firms from moving towards target capital structure. However, previous studies on the capital structure of non-financial firms in Nigeria did not consider these imperfections and adjustment costs. It is against this background that this study investigates the dynamic adjustment to target capital structure by non-financial firms listed on the Nigerian Stock Exchange. By utilizing a framework that provides for the determination of adjustment costs, the results reveal the existence of dynamic adjustment to optimal capital structure suggesting attempts made by the sampled firms to maximize shareholders wealth. A comparison of the adjustment costs with those of firms in more developed economies shows that Nigerian firms have higher costs of adjustment indicating that the level of development of the market is important in lowering transaction costs. In addition, tangibility of assets, non-debt tax shield, growth opportunity, firm size, profitability and inflation significantly influence Nigerian firms’ optimal capital structure.

scholarly journals DETERMINANTS OF CAPITAL STRUCTURING: AN EMPIRICAL STUDY OF GROWTH AND FINANCING BEHAVIOR OF FIRMS OF TEXTILE SECTOR IN PAKISTAN

2012 ◽  
Vol 8 (2) ◽  
Author(s):  
Imran Umer Chhapra ◽  
Keyword(s):  
Capital Structure ◽  
Sample Size ◽  
Financial Management ◽  
Negative Relationship ◽  
Positive Contribution ◽  
Optimal Capital Structure ◽  
Independent Variables ◽  
Optimal Capital ◽  
Financing Behavior ◽  
Textile Sector

Purpose- Purpose of this study is to investigate the determinants of optimal capital structuring that affect growth and financing behavior of textile sector firms in Pakistan keeping in view the important role capital structuring plays in any firm's financial management decisions and the positive contribution it makes to the creation of firms' value and profitability. Methodology/sample- Size of the firm (capital), profitability, fixed assets structure and taxes were used as control variables to investigate the determinants of optimal capital structuring of textiles companies. A sample size of 90 textile companies across the country were selected and their data for the 2005 - 2010 period was used. The determinants of optimal capital structure were examined using correlation and regression analyses. F-value was calculated to test the fitness of the overall model. Findings- Results of the study showed a negative relationship between dependent variable financial leverage and independent variables. The statistical analysis of spinning and composite unit also showed consistency of results with the overall textile sector but the outcome of weaving unit showed a significantly positive relationship between dependent and independent variables. Practical Implications- The findings enhance the knowledge base of determinants of optimal capital structure and are likely to help companies take effective decision related to capital structure needs. Furthermore, the study is likely to help the decision makers better adjust themselves towards adopting and considering proficient ways of managing capital structure of a firm.

Determine the optimal capital structure of BOT projects using interval numbers with Tianjin Binhai New District Metro Z4 line in China as an example

2019 ◽  
Vol 26 (7) ◽  
pp. 1348-1366
Author(s):  
Yuning Wang ◽  
Xiaohua Jin
Keyword(s):  
Capital Structure ◽  
Operating Cost ◽  
Interval Number ◽  
Risk Level ◽  
Public Infrastructure ◽  
Content Type ◽  
Optimal Capital Structure ◽  
Passenger Flow ◽  
Optimal Capital ◽  
The Impact

Purpose Various factors may influence project finance when a multi-sourced debt financing strategy is used for financing capital investments, in general, and public infrastructure investments, in particular. Traditional indicators lack comprehensive consideration of the influences of many internal and external factors, such as investment structure, financing mode and credit guarantee structure, which exist in the financing decision making of BOT projects. An effective approach is, thus, desired. The paper aims to discuss these issues. Design/methodology/approach This paper develops a financial model that uses an interval number to represent the uncertain factors and, subsequently, conducts a standardization of the interval number. Decision makers determine the weight of each objective through the analytic hierarchy process. Through the optimization procedure, project investors and sponsors are provided with a strategy regarding the optimal amount of debt to be raised and the insight on the risk level based on the net present value, as well as the probability of bankruptcy for each different period of debt service. Findings By using an example infrastructure project in China and based on the comprehensive evaluation, comparison and ranking of the capital structures of urban public infrastructure projects using the interval number method, the final ranking can help investors to choose the optimal capital structure for investment. The calculation using the interval number method shows that X2 is the optimal capital structure plan for the BOT project of the first stage of Tianjin Binhai Rail Transit Z4 line. Therefore, investors should give priority to selecting a capital contribution ratio of 45 per cent for this investment. Research limitations/implications In this paper, some parameters, such as depreciation life, construction period and concession period, are assumed to be deterministic parameters, although the interval number model has been introduced to analyze the uncertainty indicators, such as total investment and passenger flow, of BOT rail transport projects. Therefore, more of the above deterministic parameters can be taken as uncertainty parameters in future research so that calculation results fit actual projects more closely. Originality/value This model can be used to make the optimal investment decision for a project by determining the impact of uncertainty factors on the profitability of the project in its lifecycle during the project financial feasibility analysis. Project sponsors can determine the optimal capital structure of a project through an analysis of the irregular fluctuation of the unpredictable factors in project construction such as construction investment, operating cost and passenger flow. The model can also be used to examine the effects of different capital investment ratios on indicators so that appropriate measures can be taken to reduce risks and maximize profit.

scholarly journals MANAGING CORPORATE LIQUIDITY: STRATEGIES AND PRICING IMPLICATIONS

2011 ◽  
Vol 14 (03) ◽  
pp. 369-406 ◽  
Author(s):  
ATTAKRIT ASVANUNT ◽  
MARK BROADIE ◽  
SURESH SUNDARESAN
Keyword(s):  
Capital Structure ◽  
Financial Distress ◽  
Firm Value ◽  
Agency Costs ◽  
Equity Prices ◽  
Loan Commitments ◽  
Optimal Capital Structure ◽  
Trade Offs ◽  
Optimal Capital ◽  
The Impact

Defaults arising from illiquidity can lead to private workouts, formal bankruptcy proceedings or even liquidation. All these outcomes can result in deadweight losses. Corporate illiquidity in the presence of realistic capital market frictions can be managed by (a) equity dilution, (b) carrying positive cash balances, or (c) entering into loan commitments with a syndicate of lenders. An efficient way to manage illiquidity is to rely on mechanisms that transfer cash from "good states" into "bad states" (i.e., financial distress) without wasting liquidity in the process. In this paper, we first investigate the impact of costly equity dilution as a method to deal with illiquidity, and characterize its effects on corporate debt prices and optimal capital structure. We show that equity dilution produces lower firm value in general. Next, we consider two alternative mechanisms: cash balances and loan commitments. Abstracting from future investment opportunities and share re-purchases, which are strong reasons for corporate cash holdings, we show that carrying positive cash balances for managing illiquidity is in general inefficient relative to entering into loan commitments, since cash balances (a) may have agency costs, (b) reduce the riskiness of the firm thereby lowering the option value to default, (c) postpone or reduce dividends in good states, and (d) tend to inject liquidity in both good and bad states. Loan commitments, on the other hand, (a) reduce agency costs, and (b) permit injection of liquidity in bad states as and when needed. Then, we study the trade-offs between these alternative approaches to managing corporate illiquidity. We show that loan commitments can lead to an improvement in overall welfare and reduction in spreads on existing debt for a broad range of parameter values. We derive explicit pricing formulas for debt and equity prices. In addition, we characterize the optimal draw down strategy for loan commitments, and study its impact on optimal capital structure.

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