The Capital Structure Puzzle: What Are We Missing?

An important piece of the capital structure puzzle has been missing, and it is not a contracting friction. It is recognition that managers do not have sufficient knowledge to optimize capital structure with any real precision. The literature critique in this paper i) identifies the conceptual sources of the main empirical failures of the leading models of capital structure and ii) shows how those failures can be repaired by taking into account imperfect managerial knowledge and several other factors. The analysis yields a compact set of principles for thinking about capital structure in an empirically supported way.

Bank Capital Structure Dynamics and Covid-19: Evidence from South Asia

The severity in terms of economic activity of the Covid-19 crisis was higher than the global financial crisis. Covid-19 has not only challenged the economic activity across the world but has put to test how the bank operates under the global crises. The objective of this paper is to identify the impact of the Covid-19 crisis on the South Asian banking sector. We investigate if South Asian banks have target leverage and how the Covid-19 crisis impacted their capital structure dynamics. To fulfill the objective, past data on all banks of South Asian countries listed in the Thomson Reuter Refinitiv were considered. The sample ended up including quarterly data of banks from India, Pakistan, Bangladesh, Sri Lanka, Bhutan Nepal and Afghanistan. Engle-Granger's two-step procedure for error correction and two-step GMM estimation was employed to measure the speed of adjustment and the impact of Covid-19 on bank capital. The study found that the capital structure determinants favor the static trade-off theory for South Asian banks. It is also observed that South Asian banks’ capital was negatively impacted by Covid-19. The analysis supports the view of leverage convergence for the capital structure. This study improves our understanding of the capital structure dynamics of banks in response to exogenous shocks in South Asia.

Capital Structure and Debt Maturity in Nonprofit Organizations

This article examines the capital structure and debt maturity in nonprofit organizations (NPOs). In particular, we analyze whether these financing decisions are made as expected according to the two main theories used to explain the capital structure, that is, the trade-off and pecking order theories. To do so, we study the associations between NPOs’ indebtedness and their size, age, tangibility, liquidity, profitability, risk, and growth. We use fixed effects, probit, and Heckman selection models with unbalanced panel data containing 8,721 charities in the United Kingdom for the period 2011–2018 (60,222 year-obs). Our results show that the financing patterns of NPOs are consistent with the arguments of the pecking order theory. We also find that less than half of our sample uses long-term debt. Moreover, debt maturity is longer in larger NPOs, those with more tangible assets, or those with higher liquidity.

Determinan Struktur Modal Pada Perusahaan Yang Terdaftar Di Jakarta Islamic Index

This study aimed to analyze the factors that influence the capital structure of companies listed on the Jakarta Islamic Index (JII). These factors consist of company size, return on assets (ROA), return on equity (ROE), inflation, and growth in the gross domestic product (GDP). This research is quantitative research with a purposive sampling method and obtained a sample of 9 companies. The data used is secondary data in financial reports on companies registered with JII in 2015-2019. Data analysis using the multiple linear regression method. The results showed that ROA had a significant adverse effect on the capital structure, ROE has a significant positive effect on the capital structure, firm size does not affect the capital structure, inflation does not affect the capital structure, GDP growth does not affect the capital structure. Simultaneously, firm size, ROA, ROE, inflation, and GDP growth significantly affect the capital structure.

Liquidity Risk and Capital Structure of Companies in Latin America

Objective. To explore the relationship between liquidity risk and the capital structure of Latin American companies. Methodology. With a sample of 135 companies (Brazil, Chile and Mexico), panel data were used to analyze various models that considered, among other variables, six liquidity risk indices, two of which included a new factor: the free-float. The study period covers from 2010 to 2019. Results. The level of indebtedness and capital risk in Latin America companies present a mixed relationship (direct and inverse). Conclusions. Latin American companies have their own characteristics for decision-makingabout capital structure.

EFFICIENCY EVALUATION OF ACTIVITY OF THE RUSSIAN PUBLIC COMPANIES IN THE CONDITIONS OF ACTIVE REGULATION OF OPERATING COSTS AND EXTERNAL EFFECTS (SHOCKS)

The author considers influences of active regulation of operating costs and negative effects (shocks) on financial policy of the Russian public companies. The Russian firms make the choice for benefit of internal financing for the purpose of increase in the corporate benefit in the conditions of external financial restrictions (sectoral sanctions). Growth of the corporate benefit leads to increment of company assets and respectively to welfare of the shareholder. The Russian public companies will review the capital structure in the conditions of growth of adjustment costs. The active policy of the Russian companies is connected with availability of sufficient size of assets which are source of mortgage providing for regulation of capital structure. Thereby, the organization solves problem of adverse selection – financing source selection taking into account its price. The companies are forced to regulate actively the capital structure in the conditions of growth of operating costs and negative shocks. Regulation of capital structure is connected with the aspiration of the company to keep part of debt for its use as financing source. Operating costs are the indicator estimating efficiency of management decisions. The Russian companies will finance the investments, first of all, by internal financing sources. Cash flows are the resource servicing the investment capital. The firms will be attracted the loan capital in the period of deficit of cash flow. The Russian companies will work in logic of precautionary motive, creating monetary stock in the conditions of shocks. The precautionary motive is the protective buffer from negative impacts from the capital markets. Low values of cash flows allow to limit the management concerning his illegal behavior – decision making in private interests.

The Examination of Trade Off Theory and Pecking Order Theory to Capital Structure on Plantation Companies Listed in Indonesia Stock Exchange

Plantation is a promising sector, but just like other firms, this sector will also face the financing problem. Capital structure determines the cost of capital and the risk assumed by the firm. Trade-off and Pecking order theory are the most common theory used to determine the capital structure. The objective of this research is to examine plantation companies tend to use trade-off theory or pecking order theory in determining the capital structure decision. This research used multiple linear regression analysis methods with capital structure as the dependent variable, and the asset structure, firm size, company growth, institutional ownership, effective tax rate, and non-debt tax shield as the independent variables.This is a quantitative research that uses secondary data from financial statements of plantation companies listed in the Indonesia Stock Exchange for 2014 to 2019. The sample was determined by using the purposive sampling technique and 5 out of 21 companies fulfill the sampling requirements. This study conducted observations for 6 years with a total of 30 research samples. The results of this research are both trade-off and pecking order theory are used and still relevant in the capital structure determination. Trade-off theory exerts more influence on capital structure decisions than pecking order theory. This is confirmed by the partial T-test where firm size, institutional ownership, effective tax rate, and non-debt tax shields suggest the use of trade-off theory, only asset structure indicates the tendency of pecking order theory.

DETERMINANTS OF THE CAPITAL STRUCTURE OF EUROPEAN FIRMS: THE MODERATING ROLE OF EFSF/ESM FINANCIAL ASSISTANCE PROGRAMS

The present study has investigated the moderating effect of the European Financial Stability Facility (EFSF) / European Stability Mechanism (ESM) support to the firms’ indebtness. Using dynamic panel data, three models were estimated and aimed at the determination of the way that EFSF/ESM financial assistance programs could influence the impact of five firm-specific characteristics, namely growth, profitability, size, tangibility and non-debt tax shield on the capital structure of European firms. Data from 2,086 firms for the period 2003 – 2016 were used, and two dummy variables; one for the EFSF/ESM support period and one for any kind of economic crisis period were formed. The results indicated that pecking order prevailed over trade-off theory. Economic crises did not affect severely the firm-characteristics’ effects, but the EFSF/ESM programs influence appeared in three cases. During the period of EFSF/ESM assistance, profitability’s negative effect on long-term debt ratio disappeared and on total debt ratio strengthened, growth’s positive impact on total debt ratio diminished and non-debt tax shield acquired positive influence on total debt ratio. These changes might be explained by the increased levels of tax rates and decreased levels of uncertainty that the EFSF/ ESM programs caused, as well as by the reluctance of lenders to provide new funds.

Testing the capital structure of Portuguese family businesses

ABSTRACT The main objective of this study is to empirically test capital structure decisions in Portuguese family-owned businesses under trade-off theory (TOT) and pecking order theory (POT) and attend to the relationships between family/business interaction and agency conflicts. Family-owned businesses are essential for the development of economies, but the financing logic they adopt is not yet adequately clarified by scientific research, especially as they are more exposed to the constraints of markets imperfections. The specific pattern of business ownership may affect the financing decision and the ability to obtain funds externally. This issue is more relevant in economies where family business initiatives and less sophisticated management strategies are expressive. The greater convergence of interests in family businesses and the consequent decrease in agency costs may lead to higher levels of recognized reputation and thus easier access to indebtedness. The empirical study uses static models and dynamic panel models in order to analyze data from 4,952 Portuguese family-owned firms over the period from 2009 to 2016: the TOT following the partial debt adjustment model, and the POT following the model of the impact of the deficit of funds on debt and the model of the relationship between debt and the determinants of financing. The results of the individual tests suggest that Portuguese family-owned businesses adjust debt at the target ratio, albeit influenced by adjustment costs that keep them distant from the optimal, as well as use sources other than debt when a financial deficit occurs. Although the impact of the financial deficit is greater in total debt ratio, the velocity of adjustment to the optimal level is higher in short-term debt. Evidence from a joint test confirms that both theories explain part of the capital structure of Portuguese family-owned businesses.