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Article
Publication date: 28 August 2019

Sri Mangesti Rahayu, Suhadak and Muhammad Saifi

The purpose of this paper is to investigate the reciprocal relationship between profitability and capital structure and its impacts on the corporate values of manufacturing…

3907

Abstract

Purpose

The purpose of this paper is to investigate the reciprocal relationship between profitability and capital structure and its impacts on the corporate values of manufacturing companies in Indonesia.

Design/methodology/approach

This research is a quantitative research using the general structural component analysis as the analysis tool. This research involved a number of manufacturing companies registered in the Indonesia Stock Exchange in 2008‒2015 period.

Findings

Profitability has a negative significant influence on capital structure, indicating that profitability is a determining factor upon the corporate capital structure. This finding also implies that the improvement in profitability in the forms of return on investment, return on equity and net profit margin triggers decrease in the proportion of debt within the capital structures of manufacturing companies registered in BEI or Indonesia Stock Exchange.

Originality/value

Previous research only addressed the one-way correlation between profitability and capital structure, whereas this research measured the two-way correlation and reciprocal relationship at the same time. This research measured the influences of profitability and capital structure on the corporate value, in order to find a consistent finding that has not been yet obtained in previous research. This research also attempted to find out whether the use of the same variables within different time and setting (in Indonesia) leads to different results. The inconsistent findings also motivate the researcher to re-explore the reciprocal influence of corporate profitability on corporate capital structure and its effect toward the corporate value.

Details

International Journal of Productivity and Performance Management, vol. 69 no. 2
Type: Research Article
ISSN: 1741-0401

Keywords

Article
Publication date: 8 April 2019

Shahbaz Sheikh

The purpose of this paper is to investigate the effect of market competition on the relation between CEO inside debt and corporate risk-taking.

Abstract

Purpose

The purpose of this paper is to investigate the effect of market competition on the relation between CEO inside debt and corporate risk-taking.

Design/methodology/approach

Ordinary least squares regressions are used to estimate the relation between CEO inside debt and firm risk. Additionally, instrumental variable (IV-GMM) regressions are used to check the robustness of the results.

Findings

The results of this paper indicate that CEO inside debt is negatively associated with the measures of future risk. However, this negative association is influenced by market competition. Specifically, CEO inside debt results in lower levels of firm risk when market competition is high. When market competition is low, inside debt has no effect on firm risk. Additional results show that CEOs with large inside debt tend to decrease R&D investments and financial leverage and increase firm cash holdings and working capital only when market competition is high. Overall, these results suggest that market competition significantly influences the effect of CEO inside debt on corporate risk-taking by changing the strength of incentives from inside debt.

Practical implications

CEO inside debt could be used to provide incentives to CEOs to manage corporate risk-taking.

Social implications

The empirical results in this paper provide a practical tool to the boards of corporations to manage corporate risk-taking. The results suggest that boards can reduce excessive risk-taking by increasing the level of debt type compensation incentives. However, this strategy is effective only when market competition is high because in such markets inside debt provides the strongest incentives to reduce corporate risk. When competition is low, incentives from inside debt are ineffective in managing corporate risk-taking.

Originality/value

This is the first study that shows that the negative association between CEO inside debt and corporate risk-taking critically depends on the intensity of market competition.

Details

International Journal of Managerial Finance, vol. 15 no. 4
Type: Research Article
ISSN: 1743-9132

Keywords

Article
Publication date: 2 January 2024

Yige Xiao and Albert Tsang

The authors examine how the major board reforms recently implemented by countries around the world affect firms' choice of debt.

Abstract

Purpose

The authors examine how the major board reforms recently implemented by countries around the world affect firms' choice of debt.

Design/methodology/approach

Using a quasi-experimental setting of major board reforms around the world that aim to improve board-related governance practices in various areas, this study investigates the impact of effective board monitoring on corporate debt choice. The authors employ difference-in-differences-type quasi-natural experiment method and path analysis for hypotheses testing.

Findings

The authors find that the implementation of board reforms is positively associated with firms' preference for public debt financing over bank debt. However, this effect tends to weaken after the fourth year following the implementation of board reforms. In additional analyses, the authors find that “rule-based” reforms have a more pronounced effect on firms' choice of debt than do “comply-or-explain” reforms. Both (1) strengthened firm-level internal governance practices that address concerns about the agency cost of debt and (2) reduced information asymmetries play important roles in facilitating firms' debt choice, but the evidence suggests that the former is the economic mechanism through which country-level reforms affect corporate debt choice.

Research limitations/implications

The study extends the literature examining the heterogeneity of corporate debt choices in a global setting and the literature on the consequences of corporate governance reforms.

Practical implications

The findings demonstrate the effectiveness of the corporate board reforms implemented in countries around the world, addressing concerns from critics about their potential harm or ineffectiveness.

Originality/value

The results indicate that country-level board reforms reduce the extent to which shareholder–creditor conflicts harm shareholders.

Details

Management Decision, vol. 62 no. 1
Type: Research Article
ISSN: 0025-1747

Keywords

Abstract

Details

The Corporate, Real Estate, Household, Government and Non-Bank Financial Sectors Under Financial Stability
Type: Book
ISBN: 978-1-78756-837-2

Book part
Publication date: 14 December 2018

Syed Munawar Shah and Mariani Abdul-Majid

This study analyses the threshold for debt of corporations under the debt-bias corporate tax system. We adopt a contingent claim model of the corporation to reflect the incentive…

Abstract

This study analyses the threshold for debt of corporations under the debt-bias corporate tax system. We adopt a contingent claim model of the corporation to reflect the incentive effect of the debt-bias corporate tax system. This framework is based on aspiration level theory and the required probability for the successful completion of a project that is identical to decision weight probability in prospect theory. The proposed framework incorporates the debt-bias tax regulations prevailing in Organization for Economic Co-operation and Development (OECD) countries. When the OECD countries’ financial and non-financial corporation data were applied into framework, we observe that the government achieve equilibrium by employing contradictory corporate tax regulations. Moreover, we observe that corporations are intrinsically equity-loving, although the debt-bias corporate tax system stimulates corporations toward debt. This situation makes the government corporate revenue sensitive by placing it at the disposal of corporations’ financing choice instead of corporate profitability. The corporations’ threshold for debt assists in distinguishing between debt and equity-loving corporations. Moreover, corporations’ threshold for debt assists policy makers in deciding the appropriate combination of such reform policies as the Allowance on Corporate Equity and Comprehensive Business Income Tax. A transition from debt-oriented capital structure to equity-oriented capital structure may play an important role in promoting Islamic finance.

Article
Publication date: 12 April 2019

Celia Álvarez-Botas and Víctor M. González-Méndez

The purpose of this paper is to analyse the effect of economic development on the influence of country-level determinants on corporate debt maturity, bearing in mind firm size and…

Abstract

Purpose

The purpose of this paper is to analyse the effect of economic development on the influence of country-level determinants on corporate debt maturity, bearing in mind firm size and the period of financial crisis.

Design/methodology/approach

The authors employ panel data estimation with fixed effects to examine the role of economic development in influencing the relationship between country-level determinants on corporate debt maturity. The paper uses a sample of 30,727 listed firms, belonging to 39 countries, over the period 2005–2012.

Findings

Corporate debt maturity increases with the efficiency of the legal system and bank concentration and decreases with the weight of banks in the economy. However, the importance of these country determinants is greater in developing than in developed countries. The authors also show that firm size in developed and developing countries influences country determinants of corporate debt maturity. Finally, the results reveal that the financial crisis has affected the debt maturity of firms differently in developed and developing countries, with the effect of bank concentration lengthening debt maturity, this effect being more pronounced in developing countries.

Practical implications

The findings provide useful insights to guide policy decisions providing access to long-term financing, as corporate debt maturity depends on economic development, institutional environment, banking structure and firm size.

Originality/value

This study incorporates economic development in explaining the relationship between country-level determinants and corporate debt maturity.

Details

International Journal of Managerial Finance, vol. 15 no. 5
Type: Research Article
ISSN: 1743-9132

Keywords

Article
Publication date: 16 April 2020

Tesfaye Taddese Lemma, Mehrzad Azmi Shabestari, Martin Freedman, Ayalew Lulseged and Mthokozisi Mlilo

This study aims to investigate the association between corporate carbon risk and debt maturity and the moderating role of voluntary disclosure, within the context of South Africa…

Abstract

Purpose

This study aims to investigate the association between corporate carbon risk and debt maturity and the moderating role of voluntary disclosure, within the context of South Africa, an emerging player in the climate policy debate.

Design/methodology/approach

Based on the insights drawn from agency as well as information asymmetry theories, the authors develop models that link debt maturity with corporate carbon risk and voluntary disclosure and examine data obtained from companies listed on the Johannesburg Securities Exchange (JSE), for the period 2011-2015.

Findings

The findings document that, other things being equal, debt maturity is significantly higher, both statistically and economically, for companies with lower carbon intensity (risk). In addition, high-quality carbon disclosure accentuates the positive association between debt maturity and the inverse of carbon intensity. The results are robust to alternative measures of corporate carbon risk and issues of endogeneity. The findings are consistent with the view that lenders in South Africa use debt maturity as a non-price mechanism to address borrower risk and grant lower carbon risk companies that voluntarily provide higher quality carbon disclosures an even higher access to longer maturity debts; JSE-listed companies could use voluntary carbon disclosure to ease their access to debt with longer maturity.

Practical implications

The findings of this study have important implications to borrowers, pressure groups, policymakers and other stakeholders.

Originality/value

To the best of the authors’ knowledge, this study is the first to document evidence suggesting that lenders in South Africa use debt maturity as a non-price mechanism to address borrower risk.

Details

International Journal of Accounting & Information Management, vol. 28 no. 4
Type: Research Article
ISSN: 1834-7649

Keywords

Article
Publication date: 19 May 2020

Hongling Guo and Keping Wu

This study aims to investigate how opening high-speed railways affects the cost of debt financing based on China's background.

Abstract

Purpose

This study aims to investigate how opening high-speed railways affects the cost of debt financing based on China's background.

Design/methodology/approach

Using panel data on Chinese listed firms from 2008 to 2017, this study constructs a quasi-natural experiment and adopts a difference-in-difference model with multiple time periods to empirically examine the relation between the high-speed railway openings and debt financing cost.

Findings

Our results show that opening high-speed railways reduces the cost of debt financing, and this negative correlation is more significant in non-state firms, firms with weaker internal control, and firms that hire non-Big Four auditors. Besides, we explore the impact mechanisms and find that opening high-speed railways improves analyst attention, institutional investor participation, and information disclosure quality, which in turn lowers the cost of debt financing.

Research limitations/implications

The results imply that the opening of high-speed railways helps to alleviate the information asymmetry and adverse selection between firms and creditors and ultimately reduces the cost of corporate debt financing.

Practical implications

This paper can inform firms and stakeholders about the impact of opening high-speed railways on debt financing cost: it improves the information environment, reduces the geographical location restrictions of debt financing, ensures the reasonable pricing of corporate debt, and thus promotes the healthy and sound development of the debt market.

Originality/value

This paper provides theoretical support and empirical evidence for the impact of infrastructure construction on the information environment of the debt market in China, which enriches the research on the “high-speed railway economy.” In addition, as an exogenous event, the opening of high-speed railways instantly shortens the time distance between firms and external stakeholders, which gives us a natural environment to conduct empirical research, thus providing a new perspective for financial research on firms' geographical location.

Details

China Finance Review International, vol. 10 no. 4
Type: Research Article
ISSN: 2044-1398

Keywords

Book part
Publication date: 18 January 2022

Gareth Anderson and Mehdi Raissi

Productivity growth in Italy has been persistently anemic and lagged that of the euro area over the period 1999–2015, while the indebtedness of its corporate sector increased…

Abstract

Productivity growth in Italy has been persistently anemic and lagged that of the euro area over the period 1999–2015, while the indebtedness of its corporate sector increased. Using the ORBIS firm-level database, this chapter studies the long-term impact of persistent corporate-debt accumulation on the productivity growth of Italian firms, and investigates whether total factor productivity (TFP) growth varies with the level of corporate indebtedness. The authors employ a novel estimation technique proposed by Chudik, Mohaddes, Pesaran, & Raissi (2017) to account for dynamics, bi-directional feedback effects, cross-firm heterogeneity, and cross-sectional dependence arising from unobserved common factors (e.g., oil price shocks, labor and product market frictions, and the stance of the global financial cycle). Filtering out the effects of unobserved common factors and controlling for firm-specific characteristics, the authors find significant negative effects of persistent corporate-debt build-up on firms’ TFP growth on average, and weak evidence of a threshold level of corporate debt, beyond which productivity growth drops off significantly. The results have strong policy implications, for example the design of the tax system should discourage persistent corporate-debt accumulation, and effective and timely frameworks to reduce corporate-debt overhangs are essential.

Details

Essays in Honor of M. Hashem Pesaran: Panel Modeling, Micro Applications, and Econometric Methodology
Type: Book
ISBN: 978-1-80262-065-8

Keywords

Article
Publication date: 1 March 1987

E.A. Evans

Considerable debate centres around the use of debt finance as opposed to new equity and internally generated funds for the financing of new investment projects. The favourable…

1703

Abstract

Considerable debate centres around the use of debt finance as opposed to new equity and internally generated funds for the financing of new investment projects. The favourable corporate tax treatment of debt interest payments compared to equity returns appears to be a government incentive to debt finance. In addition, the differential tax treatment of financial institutions' income and individual investors' income under the tax code, all leads to the idea, that debt financing may increase the market value of a firm beyond the expected value of its operational cash flows.

Details

Managerial Finance, vol. 13 no. 3/4
Type: Research Article
ISSN: 0307-4358

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