Three Essays on Capital Structure

<p>This thesis consists of three self-contained essays about the relationship between cash flow and investment volatility and firm capital structure and cash holdings. Capital structure measures sources of financing that allow a firm to operate, invest, and grow. The first essay reviews the theoretical relationship between firm capital structure and cash flow volatility, develops testable hypotheses, constructs a data set, and then tests the hypotheses using several measures of firm cash flow volatility and econometric methods that account for the non-linear relationship of proportional variables. Overall, the evidence indicates that ceteris paribus, a one standard deviation increase from the mean of cash flow volatility, implies approximately by 24% decrease in the long-term debt ratio, a 26% decrease in probability of holding debt with over 10 years to maturity, and a 39% increase in the probability of not holding either short or long term debt. These findings are novel in the empirical capital structure literature and show the importance of cash flow volatility in firm financial policies. The second essay studies the financing behaviour of Hospital Corporation of America (HCA) from 1990 to 2013 and demonstrates variation in HCA’s market and book leverage ratios due to 1) mergers and acquisitions and divestitures that change the firm’s total assets, 2) share buybacks, and 3) leveraged buyouts and public offerings that change the firm’s ownership. The paper scrutinizes variation in HCA’s market and book leverage ratios independently as well as relative to each other. Our evidence shows that i) HCA’s management team used HCA’s excess cash from divestitures to repurchase HCA’s stock rather than pay off HCA’s debt, ii) HCA’s market leverage ratio tends to stay in a target leverage zone, and iii) in some years HCA’s management team used the book leverage ratio as a tool to keep the market leverage ratio inside a target leverage zone. In the third essay, we investigate the influence of investment volatility on capital structure and cash holdings using a broad definition of investment. Despite theoretical motivation, the relationship between investment volatility and capital structure has not been studied in the empirical literature. All in all, our evidence suggests that i) firms with relatively high capital expenditure and acquisition investment volatility hold relatively higher levels of debt and lower levels of cash, ii) firms fund large capital expenditures and/or acquisition by increasing debt or decreasing cash, and iii) immediately after funding large investment firms reduce debt levels and increase cash holdings. Research and development investment volatility is related to lower debt levels and higher cash levels, and does not exhibit similar investment spike funding. Overall, our results are consistent with parts, but not all, of the DeAngelo, DeAngelo and Whited (2011) model.</p>

Three Essays on Capital Structure

<p>This thesis consists of three self-contained essays about the relationship between cash flow and investment volatility and firm capital structure and cash holdings. Capital structure measures sources of financing that allow a firm to operate, invest, and grow. The first essay reviews the theoretical relationship between firm capital structure and cash flow volatility, develops testable hypotheses, constructs a data set, and then tests the hypotheses using several measures of firm cash flow volatility and econometric methods that account for the non-linear relationship of proportional variables. Overall, the evidence indicates that ceteris paribus, a one standard deviation increase from the mean of cash flow volatility, implies approximately by 24% decrease in the long-term debt ratio, a 26% decrease in probability of holding debt with over 10 years to maturity, and a 39% increase in the probability of not holding either short or long term debt. These findings are novel in the empirical capital structure literature and show the importance of cash flow volatility in firm financial policies. The second essay studies the financing behaviour of Hospital Corporation of America (HCA) from 1990 to 2013 and demonstrates variation in HCA’s market and book leverage ratios due to 1) mergers and acquisitions and divestitures that change the firm’s total assets, 2) share buybacks, and 3) leveraged buyouts and public offerings that change the firm’s ownership. The paper scrutinizes variation in HCA’s market and book leverage ratios independently as well as relative to each other. Our evidence shows that i) HCA’s management team used HCA’s excess cash from divestitures to repurchase HCA’s stock rather than pay off HCA’s debt, ii) HCA’s market leverage ratio tends to stay in a target leverage zone, and iii) in some years HCA’s management team used the book leverage ratio as a tool to keep the market leverage ratio inside a target leverage zone. In the third essay, we investigate the influence of investment volatility on capital structure and cash holdings using a broad definition of investment. Despite theoretical motivation, the relationship between investment volatility and capital structure has not been studied in the empirical literature. All in all, our evidence suggests that i) firms with relatively high capital expenditure and acquisition investment volatility hold relatively higher levels of debt and lower levels of cash, ii) firms fund large capital expenditures and/or acquisition by increasing debt or decreasing cash, and iii) immediately after funding large investment firms reduce debt levels and increase cash holdings. Research and development investment volatility is related to lower debt levels and higher cash levels, and does not exhibit similar investment spike funding. Overall, our results are consistent with parts, but not all, of the DeAngelo, DeAngelo and Whited (2011) model.</p>

Information Resolution, Information Content, and City Debt

This chapter furthers an understanding of how information resolution relates to borrowing and debt composition at the city level. The study examines the role of credit ratings, as well as the key informational components of credit quality, for city borrowing levels and debt structure. The informational components of credit quality include economic, fiscal, debt and financial, and governance factors. This chapter evaluates city debt for the largest cities in select countries with SNG market activity across the globe by asking: What debt levels do cities have, and what is the composition of that debt? How does information resolution, both information resolution institutions and the underlying components of credit quality information assessment, influence subnational-level borrowing?

Determinants of debt financing in South African state-owned entities

Using debt to finance investments is a common feature in the balance sheets of state-owned entities (SOEs). The greater the degree of financial leverage, the higher the proportion of debt resulting in greater interest payments that negatively affect the earnings attributable to shareholders. This paper considers the determinants of debt financing in light of the debt crisis that the South African economy faces and, more so, the public sector and its validity under capital structure theories. The data set was analyzed for the financial period from 1995 to 2020 of thirty-three commercial SOEs in South Africa. Multiple regression models were tested using the Generalized Method of Moments estimator. The results highlighted that significant variables affecting state-owned entities’ debt levels are profitability, age, growth opportunities, liquidity, probability of bankruptcy, and non-debt tax shield. The policy recommendations are that the government prioritizes reducing debt levels for South Africa to develop and achieve sustainable development. The changes in firm-specific factors that affect the optimal capital structure and the entity’s value must be considered.

The China Influence of COVID-19 and the Fiscal Policy Measures Riposte in India - An Analytical Global Study

Coronavirus 2019 (COVID-19’s) impact has gone far beyond its direct effect on morbidity and mortality. In addition to adversely impacting non-COVID health care utilization, the pandemic has resulted in a deep global economic contraction due to lockdown policies and declining demand and supply of goods and services. As a result, most countries are experiencing lower levels of gross domestic product (GDP), rising unemployment, higher levels of impoverishment, and increasing income inequality. Some countries are more vulnerable to the economic contagion resulting from COVID-19, including those implementing more stringent lockdowns and those that are more globally integrated due to their dependence on trade, tourism, and remittances. In addition, countries with pre-existing conditions of fiscal weakness due to higher dependence on external grant financing, low tax revenues, and large pre-crisis debt levels are struggling to implement countercyclical mitigative fiscal and monetary policies. In addition to declining economic activity, government revenues have declined, government borrowing is increasing, and public debt levels are projected to skyrocket globally.

UJI BEDA PENGARUH ARUS KAS OPERASI DAN TINGKAT HUTANG TERHADAP PERSISTENSI LABA PERUSAHAAN FOOD AND BAVERAGE DI BEI DAN BURSA EFEK FILIPINA

This study aims to analyze and obtain empirical evidence of the difference in the influence of operating cash flow and debt levels on earnings persistence in 2017-2019. The dependent variable of this study is earnings persistence, while the independent variable of this study consists of operating cash flow and debt levels. The population of this study is the food and beverage sub-sector manufacturing companies in the Indonesia Stock Exchange and the Philippines Stock Exchange. The sample selection was done by using purposive sampling technique and resulted 81 samples. The data analysis technique in this research is using descriptive statistical analysis, classical assumption test and hypothesis The classical assumption test includes normality test, multicollinearity test, heteroscedicity test and autocorrelation test. While the hypothesis test includes multiple linear regression analysis, partial test (t test) and difference test. The results of the hypothesis test show that the operating cash flow of companies on the IDX has a significant effect on earnings persistence, while the level of debt has no significant effect on earnings persistence. Companies in the Philippine Stock Exchange show that operating cash flow and debt levels have no significant effect on earnings persistence. Operating cash flow and debt levels show a negative effect on earnings persistence. In addition, the different test shows that there is a difference in the magnitude of the influence of operating cash flow and debt levels on earnings persistence in companies on the IDX and the Philippine Stock Exchange.

The analysis of debt levels in public firms: an international evidence

PurposeThis study investigates if the widely held predictors of corporate leverage exhibit predictive consistency through times and across countries amidst country heterogeneities such as legal principles, state of economic development and protection of investors’ rights.Design/methodology/approachWe employ financial data for 3,197 unique firms from eight emerging and ten developed countries during the years 2001–2017 and use Tobit regression models, a two-step Fama−MacBeth(1973) regression and panel data regression techniques in order to ensure the robustness of estimates.FindingsWe find that firms in the civil French law system exhibit the highest average of a debt (around 27%), whereas firms based in high investors’ protection environment and in developed nations borrow significantly less than their counterparts. Furthermore, among predictors, including a firm's payout ratio, it returns on equity and the cash ratio except the P/B ratio have varying predictability for a corporate debt when firms are classified based on law systems, investors’ rights and the economic scenarios. The crisis period significantly affects the relationship of debt levels with legal systems, investors’ rights and economic development scenario. The author’s estimates are robust to alternate analysis.Originality/valueThis study is unique in its methodological approach and involves a considerably large number of countries and a longer study period for the results to be more generalizable compared to other existing studies.

PENGARUH BOOK TAX DIFFERENCES DAN TINGKAT HUTANG TERHADAP PERSINTENSI LABA PADA PERUSAHAAN MANUFAKTUR YANG TERDAFTAR DI BURSA EFEK INDONESIA 2016-2019

ABSTRAK Persistensi laba ialah laba pada periode sekarang yang bisa dijadikan parameter untuk laba mendatang yang dapat dilihat dari perubahan laba setiap tahun. Riset ini dilaksanakan dengan tujuan guna mendapatkan bukti empiris terkait pengaruh book tax differences dan tingkat hutang terhadap persistensi laba pada entitas manufaktur yang tercatat di Bursa Efek Indonesia masa 2016-2019. Variabel book tax differences diproksikan dengan variabel perbedaan permanen dan perbedaan temporer. Riset ini menggunakan metode penelitian kuantitatif. Teknik purposive sampling dipakai untuk menentukan sampel dalam riset ini, maka didapat 64 sampel dari 16 perusahaan. Metode analisis yang dipakai dalam riset ini ialah regresi data panel dengan memakai peranti lunak eviews 10. Hasil riset menemukan bahwa variabel perbedaan permanen dan tingkat hutang tidak berpengaruh pada persistensi laba, sedangkan variabel perbedaan temporer berpengaruh pada persistensi laba. ketiga variabel mempunyai pengaruh secara serempak pada persistensi laba sebesar 9.78%. Kata kunci: permanen, temporer, tingkat hutang, persistensi. ABSTRACT Profit persistence is the profit in the current period that can be a parameter for potential gains which can be seen from next year by the improvements in earnings. The purpose of this research was to obtain empirical evidence concerning the effect of book-tax differences and debt levels on the persistence of earnings in manufacturing entities listed on the Indonesian Stock Exchange for the period 2016-2019. The variable for book-tax differences is proxied by the variable for permanent difference and the temporary difference. This research used quantitative research methods. In this study, the purposeful sampling technique used to determine the sample and then obtained 64 samples from 16 firms. Panel data regression using Eviews 10 software is the analytical method used in this research. The results show that the permanent difference variable and the sum of the loan have no impact on earnings persistence, while the immediate difference variable does not affect earnings persistence. The three factors have a 9.78 percent simultaneous effect on earnings persistence. Keywords: permanent, temporary, debt levels, persistence.

Drought Shocks and Gearing Impacts on the Profitability of Sheep Farming

The resilience and profitability of livestock production in many countries can be impacted by shocks, such as drought and market shifts, especially under high debt levels. For farmers to remain profitable through such uncertainty, there is a need to understand and predict a farming business’s ability to withstand and recover from such shocks. This research demonstrates the use of biophysical modelling linked with copula and Monte Carlo simulation techniques to predict the risks faced by a typical wool and meat lamb enterprise in South-Eastern Australia, given the financial impacts of different debt levels on a farming business’s profitability and growth in net wealth. The study tested five starting gearing scenarios, i.e., debt to equity (D:E) ratios to define a farm’s financial risk profiles, given weather and price variations over time. Farms with higher gearing are increasingly worse off, highlighting the implications of debt accumulating over time due to drought shocks. In addition to business risk, financial risk should be included in the analyses and planning of farm production to identify optimal management strategies better. The methods described in this paper enable the extension of production simulation to include the farmer’s management information to determine financial risk profiles and guide decision making for improved business resilience.

Does a Clarke-Groves type tax prevent free riding when implementing Eurobonds?

Purpose The purpose of this paper is to propose a Clarke-Groves Tax (CGT) type as a remedy to the criticism that the implementation of Eurobonds has raised regarding the risk of undermining fiscal discipline. In this model, a government minimizes its sovereign debt-to-GDP ratio in a given period and decides whether to join a common sovereign debt club. In doing so, it exposes itself to a positive or negative tax burden while benefiting from the liquidity premium involved in creating a secure asset. The authors found that the introduction of this tax may prevent free riding behaviours if Eurobonds were to be implemented. To illustrate this, the authors provide some numerical simulations for the Eurozone. Design/methodology/approach In the model presented, a government which optimizes a social utility function decides whether to join the common debt club. Findings The adoption of the proposed tax could prevent free-riding behaviours and, therefore, encourages participation by those countries with lower debt levels that would have not otherwise taken part in this common debt mechanism. Under certain circumstances, we can expect the utility of all members of this club to improve. The bias in the distribution of gains might be mitigated by regulating the tax rule determining the magnitude of payment/reward. The proportion of the liquidity premium, arising from the implementation of a sovereign safe asset, has a decisive impact on the degree of the governments’ utility enhancement. Research limitations/implications The adoption of a CGT would require Eurobonds club members to reach an agreement on “the” theoretical model for determining the sovereign debt yield. One of the limitations of this model is considering the debt-to-GDP ratio as the sole determinant of public debt yields. Moreover, the authors assumed the relationship between the debt-to-GDP ratio and funding costs to be identical for all countries. Any progress in the implementation of the proposed transfer scheme would require a more realistic and in-depth analysis. Practical implications A new fiscal rule based on compensating countries with lower public debt levels could be a way to mitigate free-riding problems if a Eurobond mechanism is to be established. Originality/value This fiscal rule has not been proposed or analysed before in a context such as that considered by this paper.