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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

Book part
Publication date: 11 December 2006

Nadeem A. Siddiqi

Recent studies on the use of private, non-bank, debt have given conflicting results. Instead of a fixed order of preference between various choices of debt as suggested by…

Abstract

Recent studies on the use of private, non-bank, debt have given conflicting results. Instead of a fixed order of preference between various choices of debt as suggested by previous studies, this study postulates that there is a life cycle of debt choice, and as firms move through the cycle, their preferences change. For stable, mature firms, when given a choice, non-bank private debt would fall in between the two extremes of bank debt and public debt. We provide empirical as well as anecdotal evidence from the trade press to support this view. We jointly model the decision to choose a debt source as well as the amount of debt on data from a current database to focus on the “intentional” change in debt levels, rather than those due to unintentional changes. We find that there are significant interdependencies between the decision to borrow from a particular source, as well as the amount of loan, and that taxes, as well as lender reputation, degree of renegotiability and financial flexibility required by the borrower, are key factors that influence the choice of private debt source.

Details

Research in Finance
Type: Book
ISBN: 978-1-84950-441-6

Article
Publication date: 5 July 2011

Robert M. Hull

The purpose of this paper is to instruct upper level business students on the intricacies of the debt‐equity choice with the emphasis on showing the interrelation of this choice

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Abstract

Purpose

The purpose of this paper is to instruct upper level business students on the intricacies of the debt‐equity choice with the emphasis on showing the interrelation of this choice with the plowback‐payout choice.

Design/methodology/approach

The paper is designed around a pedagogical exercise that applies academic theories on the computation of the gain to leverage for an unleveraged nongrowth firm. A question and answer methodology is used within the exercise. The approach is instructional as it attempts to teach students about firm valuation and the variables that are important in the valuation process. The firm valuation method is based on perpetuity equations with and without growth.

Findings

Unlike an empirical study that concentrates on providing findings from a data analysis, this paper attempts to instill knowledge and skills to students when making debt‐equity and plowback‐payout choices.

Research limitations/implications

All gain to leverage equations used in this paper are limited by their derivational assumptions and the estimation of values for variables used in the equations.

Practical implications

Besides using the traditional Modigliani and Miller (MM)‐Miller gain to leverage equations, this paper also uses more recent gain to leverage equations that attempt to bridge the gap between theory and practice by applying new theory on the impact of the plowback‐payout choice on the debt‐equity choice. Students will be able to compare traditional and recent gain to leverage equations and form their own opinions as to their potential value in practice. In the process, they should get an idea of the practical complexities of financial decision‐making.

Social implications

Optimizing firm value through proper decision‐making implies there is a proper and efficient utilization of societal resources.

Originality/value

The paper builds on a prior pedagogical paper that incorporated discount rates (costs of borrowing) within the nongrowth MM‐Miller gain to leverage framework. This paper's originality and value lies in being the first pedagogical paper to incorporate growth as determined by the plowback‐payout decision within the nongrowth gain to leverage framework.

Details

Managerial Finance, vol. 37 no. 8
Type: Research Article
ISSN: 0307-4358

Keywords

Article
Publication date: 8 August 2023

Irfan Ahmed, Owais Mehmood, Zeshan Ghafoor, Syed Hassan Jamil and Afkar Majeed

This study aims to examine the impact of board characteristics on debt choice.

Abstract

Purpose

This study aims to examine the impact of board characteristics on debt choice.

Design/methodology/approach

The sample comprises of unique nonfinancial firms listed in the FTSE 350 over the period 2011–2018. This study uses Tobit and OLS regressions to check the impact of board characteristics on debt choice. The results are robust to the battery of robust checks.

Findings

This study finds that board size and board independence are positively associated with public debt. However, CEO duality and board meetings frequency are inversely associated with public debt. Overall, the findings are consistent with the “financial intermediation theory” that the firms with weak governance rely on bank financing, and firms with better corporate governance go for public debt.

Research limitations/implications

This study offers significant insights for investors and policymakers.

Originality/value

This study offers new insights regarding the role of board characteristics in firms’ debt choice by showing the significant impact of board characteristics on debt choice. The findings indicate that the board’s efficient internal monitoring may substitute external monitoring by the bank.

Details

Corporate Governance: The International Journal of Business in Society, vol. 24 no. 1
Type: Research Article
ISSN: 1472-0701

Keywords

Article
Publication date: 12 February 2018

Alberto Fuertes and Jose María Serena

This paper aims to investigate how firms from emerging economies choose among different international bond markets: global, US144A and Eurobond markets. The authors explore if the…

1009

Abstract

Purpose

This paper aims to investigate how firms from emerging economies choose among different international bond markets: global, US144A and Eurobond markets. The authors explore if the ranking in regulatory stringency –global bonds have the most stringent regulations and Eurobonds have the most lenient regulations – leads to a segmentation of borrowers.

Design/methodology/approach

The authors use a novel data set from emerging economy firms, treating them as consolidated entities. The authors also obtain descriptive evidence and perform univariate non-parametric analyses, conditional and multinomial logit analyses to study firms’ marginal debt choice decisions.

Findings

The authors show that firms with poorer credit quality, less ability to absorb flotation costs and more informational asymmetries issue debt in US144A and Eurobond markets. On the contrary, firms issuing global bonds – subject to full Securities and Exchange Commission requirements – are financially sounder and larger. This exercise also shows that following the global crisis, firms from emerging economies are more likely to tap less regulated debt markets.

Originality/value

This is, to the authors’ knowledge, the first study that examines if the ranking in stringency of regulation – global bonds have the most stringent regulations and Eurobonds have the most lenient regulations – is consistent with an ordinal choice by firms. The authors also explore if this ranking is monotonic in all determinants or there are firm-specific features which make firms unlikely to borrow in a given market. Finally, the authors analyze if there are any changes in the debt-choice behavior of firms after the global financial crisis.

Details

Journal of Financial Regulation and Compliance, vol. 26 no. 1
Type: Research Article
ISSN: 1358-1988

Keywords

Article
Publication date: 7 January 2014

Abdul Rashid

The main purpose of this paper is to empirically examine how firm-specific (idiosyncratic) and macroeconomic risks affect the external financing decisions of UK manufacturing…

3352

Abstract

Purpose

The main purpose of this paper is to empirically examine how firm-specific (idiosyncratic) and macroeconomic risks affect the external financing decisions of UK manufacturing firms. The paper also explores the effect of both types of risk on firms' debt versus equity choices.

Design/methodology/approach

The paper uses a firm-level panel data covering the period 1981-2009 drawn from the Datastream. Multinomial logit and probit models are estimated to quantify the impact of risks on the likelihood of firms' decisions to issue and retire external capital and debt versus equity choices, respectively.

Findings

The results suggest that firms considerably take into account both firm-specific and economic risk when making external financing decisions and debt-equity choices. Specifically, the results from multinomial logit regressions indicate that firms are more (less) likely to do external financing when firm-specific (macroeconomic) risk is high. The results of probit model reveal that the propensity to debt versus equity issues substantially declines in uncertain times. However, firms are more likely to pay back their outstanding debt rather than to repurchase existing equity when they face either type of risk. Of the two types of risk, firm-specific risk appears to be more important economically for firms' external financing decisions.

Practical implications

The findings of the paper are equally useful for corporate firms in making value-maximizing financing decisions and authorities in designing effective fiscal and monetary policies to stabilize macroeconomic conditions. Specifically, the findings emphasize on the stability of the overall macroeconomic environment and firms' sales/earnings, which would result stability in firms' capital structure that help smooth firms' investments and production.

Originality/value

Unlike prior empirical studies that mainly focus on examining the impact of risk on target leverage, this paper attempts to examine the influence of firm-specific and macroeconomic risk on firms' external financing decisions and debt-equity choices.

Details

Managerial Finance, vol. 40 no. 1
Type: Research Article
ISSN: 0307-4358

Keywords

Article
Publication date: 1 November 2004

Devrim Yaman

In this study we analyze the determinants of the type and structure of debt included in dual offerings of debt and equity. Our sample consists of 54 dual offerings of convertible…

1036

Abstract

In this study we analyze the determinants of the type and structure of debt included in dual offerings of debt and equity. Our sample consists of 54 dual offerings of convertible bond and common stock (CBCS) and 258 dual offerings of straight bond and common stock (SBCS). We find that firms with high asset substitution problems are more likely to issue CBCS offerings instead of SBCS offerings. These firms are also more likely to include convertible bonds with a high probability of conversion in the issue. The probability of CBCS offerings is higher for firms with low information asymmetry and during high interest rate periods. We also find that the announcement returns of CBCS offerings are lower than the returns of SBCS offerings.

Details

Management Research News, vol. 27 no. 11/12
Type: Research Article
ISSN: 0140-9174

Keywords

Article
Publication date: 16 April 2018

Leif Atle Beisland, Roy Mersland and Øystein Strøm

This study is motivated by recent research suggesting that the funding benefits of using Big Four auditors may not be as uniform as were previously assumed. The purpose of this…

Abstract

Purpose

This study is motivated by recent research suggesting that the funding benefits of using Big Four auditors may not be as uniform as were previously assumed. The purpose of this paper is to analyze the relationship between use of Big Four auditors and access to debt capital by applying data from microfinance institutions (MFIs) in emerging countries, a population typically not investigated in accounting research.

Design/methodology/approach

The authors apply a unique hand-collected data set from 60 emerging markets and empirically investigate whether access to various debt categories is related to the use of Big Four auditors.

Findings

The authors find that access to international commercial debt, international subsidized debt and government agency debt is positively related to the use of a Big Four auditor. For local commercial debt, the authors find no association between auditor type and access to debt capital. The association between auditor choice and access to debt capital is stronger for nonprofit than for-profit MFIs.

Originality/value

This is the first audit quality study to include a broad sample of emerging countries, which in itself is an important contribution. As far as general audit quality research is concerned, the authors take the literature one step further by showing that the benefits of using a Big Four auditor may be dependent on the specific source of debt financing a firm or organization seeks to use. Moreover, the authors demonstrate that the for-profit vs nonprofit dimension influences the relationship between auditor choice and access to capital.

Details

International Journal of Emerging Markets, vol. 13 no. 2
Type: Research Article
ISSN: 1746-8809

Keywords

Article
Publication date: 18 February 2022

Joseph Maxwell Asamoah, Cephas Simon Peter Dak-Adzaklo and Emmanuel Ofosu

This study aims to investigate the impact of institutional investors distraction on firms' choice between bank debt and public debt.

Abstract

Purpose

This study aims to investigate the impact of institutional investors distraction on firms' choice between bank debt and public debt.

Design/methodology/approach

The study employs the measure of institutional investors distraction from Kempf et al. (2017), which captures exogenous attention-grabbing events in other aspects of institutional investors' portfolios holdings to examine this research question. The study uses a sample of 16,047 firm-year observations comprising 2,521 US firms for the period of 2000–2016.

Findings

The result shows a significant positive association between institutional shareholder distraction and firms' bank ratio. Cross-sectional tests show that the positive association between institutional shareholders distraction and firms' bank ratio is stronger for firms in poorer information environments and for firms facing greater competitive threats from rivals.

Originality/value

This study underscores the important governance role played by institutional shareholders and the consequence when such a monitoring role is impaired. In particular, firms with distracted shareholders rely on expensive bank monitoring and scrutiny to supply their additional monitoring capacity.

Details

Managerial Finance, vol. 48 no. 5
Type: Research Article
ISSN: 0307-4358

Keywords

Article
Publication date: 1 December 2014

Robert M. Hull

The purpose of this paper is to instruct advanced business students on the debt-equity choice by showing how wealth transfers between security holders influence security values…

2029

Abstract

Purpose

The purpose of this paper is to instruct advanced business students on the debt-equity choice by showing how wealth transfers between security holders influence security values when a levered firm undergoes an incremental debt-to-equity approach.

Design/methodology/approach

The design involves a pedagogical exercise that applies gain to leverage (GL) formulas for a firm aspiring to increase its value by exchanging debt for equity. The valuation method includes perpetuity formulations including those with growth and wealth transfers. The instructional approach offers an understanding of the debt-equity decision.

Findings

Unlike studies that provide empirical findings or new theories, this paper provides knowledge and skills for students learning capital structure decision making.

Research limitations/implications

All GL equations in this paper are limited by derivational assumptions and estimation of values for variables.

Practical implications

This paper bridges the gap between theory and practice by illustrating the impact of the costs of borrowings, growth rates and risk shifts on debt-equity decision making. Students will learn and apply GL equations. They will get an appreciation for the practical complexities of financial decision making including the agency complication embodied in wealth transfers.

Social implications

Society can be enhanced to the extent this paper helps future financial managers make optimal capital structure decisions.

Originality/value

This paper adds to the Capital Structure Model (CSM) pedagogical research by using the new CSM equations that address a levered situation and incremental approach. As such, it is the first CMS instructional paper to incorporate wealth transfers between security holders.

Details

Managerial Finance, vol. 40 no. 12
Type: Research Article
ISSN: 0307-4358

Keywords

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