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Article
Publication date: 20 July 2022

Daniel Tut

This paper addresses the following questions: Why do some firms employ multiple debt types? What explains debt heterogeneity? Is the choice of the source of debt a function of…

Abstract

Purpose

This paper addresses the following questions: Why do some firms employ multiple debt types? What explains debt heterogeneity? Is the choice of the source of debt a function of corporate governance?

Design/methodology/approach

The author's paper is empirical and uses multiple regression analysis.

Findings

Firms under weak corporate governance have a higher propensity to use multiple debt types and have a dispersed debt structure. Contrastingly, firms that are well-managed tend to concentrate debt and borrow predominantly from a few creditors. The author also found that while bank debt is negatively associated with debt concentration, market debt is positively associated with debt concentration.

Research limitations/implications

Firms under weak corporate governance have a higher propensity to use multiple debt types and have a dispersed debt structure. Well-managed firms tend to concentrate debt and borrow predominantly from a few creditors. Bank debt is negatively associated with debt concentration and market debt is positively associated with debt concentration.

Practical implications

Policymakers and practitioners need to account not only for changes in the firm’s total debt level but also for changes within the firm’s debt composition. Understanding a manager’s choice of debt structure can incentivize creditors to effectively monitor and use debt concentration as a form of commitment device that transfers some control rights from the manager to creditors.

Originality/value

While a vast body of corporate finance literature examines the conflict between shareholders and management, there is little empirical work on the conflict between creditors and management. In this paper, the author examines how managerial entrenchment affects debt structure. The results provide a comprehensive picture of how corporate governance influences debt choice(s).

Details

International Journal of Managerial Finance, vol. 19 no. 4
Type: Research Article
ISSN: 1743-9132

Keywords

Article
Publication date: 17 February 2012

Bing Yu

This paper examines relationship between bargaining powers of creditors as well as employees and financial leverage across countries. The purpose of this paper is to explore roles…

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Abstract

Purpose

This paper examines relationship between bargaining powers of creditors as well as employees and financial leverage across countries. The purpose of this paper is to explore roles of creditors and employees in capital structure decisions under different legal and political regimes across countries.

Design/methodology/approach

Using country‐level creditor rights index and labor rights index as a proxy for bargaining powers of creditors and employees, respectively, the author addresses the interaction between creditors as well as employees and shareholders. The paper tests the impact of employee rights and creditor rights on capital structure across countries.

Findings

The author finds a positive relationship between employee rights and firms' use of debt and a negative relationship between creditor rights and firm debt ratio.

Social implications

The paper provides a new perspective to interpret international variation in financial leverage in the world. The results obtained from this paper help us to understand financial leverage in different countries with various corporate governance mechanisms.

Originality/value

This paper takes all stakeholders into account when studying agency problems; it explores the role of creditors and employees in financing decision making under various corporate governance patterns and political and legal systems across countries.

Details

Managerial Finance, vol. 38 no. 3
Type: Research Article
ISSN: 0307-4358

Keywords

Article
Publication date: 17 February 2022

Vishnu K. Ramesh, Reshma K. Ramesh and Jithesh T.

The demand-side view of creditor rights posits a negative association between creditor rights and corporate borrowings. The purpose of this paper is as follows: first, the author…

Abstract

Purpose

The demand-side view of creditor rights posits a negative association between creditor rights and corporate borrowings. The purpose of this paper is as follows: first, the author examines whether the demand-side effect is more pronounced amongst firms with excess promoter shareholding. Subsequently, the authors analyze the impact of high promoter holdings on investment decisions owing to bankruptcy reforms.

Design/methodology/approach

To answer the above questions, the authors exploit the passage of the Insolvency and Bankruptcy Code (IBC) (2016) that strengthens the creditor rights of lenders, which impacts the borrowings and financing activities of Indian corporates. Using a panel of listed Indian firms over the period of 2012–2019, the authors analyze how the IBC affects firms’ borrowings and financing decisions with excess promoter holdings.

Findings

The authors find that bankruptcy reforms led to a statistically significant decline in the use of borrowed funds (primarily secured and long-term debt) by firms with high concentrated holdings. The analysis also indicates that firms with excess promoter ownership face an increased cost of debt due to bankruptcy reforms. As a result, firms with excess promoter holdings curtail their investments. Overall, the results indicate that India’s bankruptcy reforms significantly affect the firms’ financing and investment decisions with highly concentrated ownership.

Originality/value

While past research has explored the relationship between bankruptcy reforms and demand for/supply of debt, the authors provide novel empirical evidence on the role of promoter holdings that affects the relationship between bankruptcy law and financing and investment decisions. To the best of the author’s knowledge, this study is the first to investigate the role of ownership structure in the context of bankruptcy reforms by using a quasi-natural experiment.

Details

Indian Growth and Development Review, vol. 15 no. 1
Type: Research Article
ISSN: 1753-8254

Keywords

Article
Publication date: 28 January 2011

Zélia Serrasqueiro

The purpose of this paper is to analyze the importance of information asymmetry in the relationships between Portuguese SME's capital structure decisions and creditors, comparing…

2570

Abstract

Purpose

The purpose of this paper is to analyze the importance of information asymmetry in the relationships between Portuguese SME's capital structure decisions and creditors, comparing the results of service SME with those found in manufacturing SMEs.

Design/methodology/approach

Two samples of Portuguese SMEs are considered: one sample is composed by 610 unlisted service SMEs; and, the other sample is made up by 381 unlisted SMEs in manufacturing industry, for the period 1999‐2006. To estimate the results, the two‐step estimation method is used, to control possible bias arising from data selection. In the first step, probit regression is used. In the second step, after the control for possible data bias, dynamic panel estimators are used.

Findings

The results obtained suggest that information asymmetry in the relationships between SMEs and creditors has a greater relative influence on capital structure decisions of service SMEs than on those of manufacturing SMEs.

Practical implications

Given the increasing importance of service SMEs in the Portuguese economy for stimulating employment, business volume, and consequently economic growth, it would be advisable for policy makers to create special long‐term lines of credit, with advantageous terms, so that Portuguese service SMEs, when internal finance is insufficient, can finance more efficiently the growth opportunities and the strategies for diversification. In addition, since SMEs' capital structure decisions present differences, both concerning the sector of industry and over time, the measures adopted by policy makers should differentiate their measures between industry sectors and over time.

Originality/value

First, this paper is pioneering in comparing the adjustment of actual short‐ and long‐term debts, in service and manufacturing SMEs, towards the respective target ratios. Second, it is pioneering in using dynamic estimators and in using the two‐step estimation method, in studies of determinants of capital structure decisions of service and manufacturing SMEs.

Details

Management Research Review, vol. 34 no. 1
Type: Research Article
ISSN: 2040-8269

Keywords

Article
Publication date: 29 May 2019

Mohamed A. Ayadi, Skander Lazrak and Dan Xing

The purpose of this paper is to investigate the determinants of bankruptcy protection duration of Canadian public firms, and also investigate the duration for various bankruptcy…

Abstract

Purpose

The purpose of this paper is to investigate the determinants of bankruptcy protection duration of Canadian public firms, and also investigate the duration for various bankruptcy outcomes including the liquidation and re-emergence of bankrupt firms.

Design/methodology/approach

This study uses data on all Canadian public firms that applied for bankruptcy protection over the period 1992–2014. The authors mainly apply duration and survival analyses to draw the main conclusions.

Findings

The authors find that larger and older firms with more complicated structures and issues to settle tend to remain under protection from creditors longer, and also ascertain that the fate of relatively successful companies is determined faster. Moreover, the authors report that it takes less time to achieve a final solution for firms under bankruptcy protection when interest rates are increasing and the term spread is high. Finally, firms that file for protection under the Companies’ Creditors Arrangement Act (CCAA) spend longer restructuring than firms that file under the Bankruptcy and Insolvency Act.

Research limitations/implications

The paper investigates only publicly listed firms. The data on private firms that are required to conduct the research are not available.

Practical implications

Various stakeholders including regulators can predict the bankruptcy protection period using the paper’s findings. Depending on the desired outcomes (reduce uncertainly, safeguard jobs or protect creditors’ rights), specific rules can be followed.

Originality/value

To the authors; knowledge, this is the first paper that investigates the Canadian bankruptcy protection duration. It uses the unique Canadian framework to infer the determinants of bankruptcy protection duration and bankrupt firms’ outcomes.

Details

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

Keywords

Article
Publication date: 22 February 2022

João Paulo Augusto Eça, Wilson Tarantin Júnior and Maurício Ribeiro do Valle

This paper aims to analyze whether a relationship exists between the debt structure concentration and investment–cash flow sensitivity of Brazilian companies.

Abstract

Purpose

This paper aims to analyze whether a relationship exists between the debt structure concentration and investment–cash flow sensitivity of Brazilian companies.

Design/methodology/approach

The study is based on a sample of 500 Brazilian firms (337 unlisted and 163 listed) in the 10-year period from 2010 to 2019 analyzed according to the investment–cash flow sensitivity model.

Findings

The results show evidence that companies with more concentrated debt structures tend to have lower investment sensitivity to internal cash flow. In other words, firms with a greater concentration of debts tend to have less investment–cash flow sensitivity. In general, the results are robust to (1) variation of the debt concentration proxy and the independent variable; (2) the control of fixed effects in different dimensions and (3) use of estimator for endogeneity treatment, i.e. two-stage least squares (2SLS) and generalized method of moments (GMM).

Originality/value

Various studies have investigated whether specific financing sources reduce financial constraints, but few have addressed the relationship between debt concentration and these constraints. Besides this, to the best of the authors’ knowledge, no previous study has investigated the mentioned relationship in a sample of unlisted firms. This analysis is relevant since the effects of financial constraints tend to be stronger on companies that have restricted access to the capital market.

Details

International Journal of Managerial Finance, vol. 19 no. 2
Type: Research Article
ISSN: 1743-9132

Keywords

Article
Publication date: 12 June 2020

Nemiraja Jadiyappa, Garima Sisodia, Anto Joseph, Santosh Shrivastsava and Pavana Jyothi

The governing role of bank-appointed directors (BADs) on the boards of non-financial firms has a potential to reduce information asymmetry between the firm and non-bank lenders…

Abstract

Purpose

The governing role of bank-appointed directors (BADs) on the boards of non-financial firms has a potential to reduce information asymmetry between the firm and non-bank lenders. This should increase the confidence of other creditors in firm activities, thus performing the certification role. Therefore, the purpose of this paper is to empirically examine the certification role of BADs.

Design/methodology/approach

The authors test their hypotheses by using a panel of Indian non-financial firms. Our approach involves examining whether there is a significant difference in the number of different debt sources, the dispersion of debt among different debt sources, and leverage for BAD and Non_BAD Firms. The authors use univariate analysis and multivariate regression models to test the difference.

Findings

The authors find that firms with BADs on their board have (1) access to a higher number of different debt sources, (2) debt distributed evenly among different sources and (3) a higher debt ratio. Overall, our study provides supporting evidence for the certification role that BADs play on the boards of non-financial firms.

Originality/value

The authors contribute to the literature in two aspects. First, to the best of our knowledge, this is the only study that examines the effect of the governing role of banks on the lending decisions of non-bank lenders. Second, our study is associated with the growing body of the governance literature in the emerging markets context by examining the interaction of financial policies and governance in an institutional framework, which is very different from that of the developed world.

Details

International Journal of Managerial Finance, vol. 17 no. 2
Type: Research Article
ISSN: 1743-9132

Keywords

Article
Publication date: 5 October 2020

Zélia Serrasqueiro, Fernanda Matias and Julio Diéguez-Soto

This 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…

Abstract

Purpose

This 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/approach

Methodologically, 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.

Findings

The 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/implications

The 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 implications

The 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/value

The 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.

Details

Journal of Family Business Management, vol. 12 no. 1
Type: Research Article
ISSN: 2043-6238

Keywords

Article
Publication date: 5 December 2022

Hsin-I Chou, Xiaofei Pan and Jing Zhao

This paper aims to examine the relationship between executive pay disparity and the cost of debt.

Abstract

Purpose

This paper aims to examine the relationship between executive pay disparity and the cost of debt.

Design/methodology/approach

The authors use a sample of syndicated bank loans granted to United States (US) listed firms from 1992 to 2014 and adopt the loan yield spread (Chief Executive Officer (CEO) pay slice) as the main proxy for the cost of debt (executive pay disparity). The authors also use the Heckman two-stage model to address the sample selection bias and the two-stage least squares and propensity score matching methods to control the potential endogeneity issues. To test different views about executive pay disparity, the authors adopt the cash-to-stock ratio to proxy for managerial risk-shifting incentives.

Findings

The authors find that the cost of debt is significantly higher for firms with larger executive pay disparity, which is robust to sample selection bias, endogeneity concerns, alternative measures and various controls. This positive relationship increases with the risk-shifting incentives of CEOs instead of other top executives, which supports the managerial power view, and is stronger for firms with higher levels of financial distress. The findings suggest that creditors view executive pay disparity are associated with higher credit risk and CEO entrenchment.

Originality/value

This paper reveals one “dark” side of executive pay disparity: it increases the cost of debt and identifies a significant role played by CEOs' risk-shifting incentives. The authors provide direct evidence of the relevance of pay differential to corporate credit analysis.

Details

International Journal of Managerial Finance, vol. 19 no. 5
Type: Research Article
ISSN: 1743-9132

Keywords

Article
Publication date: 20 June 2008

Z. Jun Lin, Jason Z. Xiao and Qingliang Tang

The purpose of this paper is to investigate the perceptions of the roles, responsibilities and basic characteristics of audit committees (ACs) in the current business environment…

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Abstract

Purpose

The purpose of this paper is to investigate the perceptions of the roles, responsibilities and basic characteristics of audit committees (ACs) in the current business environment in China, from the perspectives of investors/creditors, independent directors (AC members), company officers and auditors.

Design/methodology/approach

The study is conducted through a questionnaire survey of the four groups of stakeholders with two forms of survey instruments being distributed to randomly selected survey subjects. The data collected from the returned questionnaires are analyzed at both the aggregate and sub‐sample levels.

Findings

The study finds that various groups of stakeholders have generally accepted the ceremonial roles and responsibilities of ACs in terms of lifting the image of good corporate governance, enhancing communication between board of directors (BoD) and auditors, and mediating conflict between management and auditors. However, the more concrete AC oversight roles and responsibilities for improving internal control, rules compliance, sound corporate financial reporting and auditing processes have not been fully recognized at present, particularly by company management and independent directors. In addition, the study reveals that actual AC operations in practice are ineffective even though a large portion of Chinese listed companies have set up ACs.

Originality/value

The paper should assist readers to understand the recent development of corporate governance and stock market reforms in China and generate some policy implications that can be applied to other countries as well, emerging economies in particular.

Details

Accounting, Auditing & Accountability Journal, vol. 21 no. 5
Type: Research Article
ISSN: 0951-3574

Keywords

1 – 10 of over 4000