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1 – 10 of over 44000
Article
Publication date: 13 March 2009

Ann L.‐C. Chan, Stephen W.J. Lin and Norman Strong

The purpose of this paper is to investigate the economic consequences of different dimensions of accounting conservatism: ex ante (balance sheet or unconditional) conservatism and…

3478

Abstract

Purpose

The purpose of this paper is to investigate the economic consequences of different dimensions of accounting conservatism: ex ante (balance sheet or unconditional) conservatism and ex post (earnings or conditional) conservatism. It is argued that the two dimensions of conservatism convey different information to the market about the quality of accounting numbers and have different associations with equity investors' required rates of return.

Design/methodology/approach

The cost of equity capital estimates are based on the Ohlson and Juettner‐Nauroth model. The paper applies a regression model to examine the relationship between the cost of equity capital and accounting conservatism controlling for other risk factors.

Findings

The findings indicate that ex ante conservatism is associated with higher quality of accounting information and lower costs of equity capital and that ex post conservatism is associated with lower quality of accounting information and higher costs of equity capital.

Research limitations/implications

The firm‐level conservatism measures may suffer from measurement error. Future studies can be more specific in determining proxies for ex ante and ex post conservatism.

Practical implications

The results imply that conservative accounting signals information to investors about the quality of a firm's current and future earnings. Investors' required rates of returns may be higher for conservative reporting firms that are more susceptible to opportunistic management discretion.

Originality/value

The paper provides the first UK evidence on the effect of different dimensions of conservatism on equity investors' required rates of return.

Details

Managerial Finance, vol. 35 no. 4
Type: Research Article
ISSN: 0307-4358

Keywords

Abstract

Details

The Banking Sector Under Financial Stability
Type: Book
ISBN: 978-1-78769-681-5

Article
Publication date: 3 October 2016

Rainer Masera and Giancarlo Mazzoni

The paper aims to investigate whether the value of banks is affected by their financing policies. Higher capital requirements have been invoked by exploiting a renewed edition of…

Abstract

Purpose

The paper aims to investigate whether the value of banks is affected by their financing policies. Higher capital requirements have been invoked by exploiting a renewed edition of the Modigliani–Miller (M&M) theorem. This paper shows the limits of this claim by highlighting that the general statement that “bank equity is not expensive” can be misleading. The authors argue that market prices should play an important role in bank supervision. Expectations of future profits in prices supply timely information on the viability of a bank.

Design/methodology/approach

The authors use the Merton model to show the inapplicability of M&M theorem to banks. The long-run viability of a bank is analyzed with a dividend discount model which allows to compare a bank’s long-term profitability with its overall cost of capital implicit in market prices.

Findings

The authors show that the M&M framework cannot be applied to banks neither ex-ante nor ex-post. Ex-ante the authors focus on government guarantees, ex-post they emphasize the risk-shifting phenomena that may increase the overall risk of the bank. The authors show that a bank’s stability cannot be achieved if the market expectations of its future profits stay below the cost of funding.

Research limitations/implications

The authors use simple analytical models. In a future study, some key peculiarities of banks, such as the monetary nature of deposits, should be analytically modelled.

Practical implications

The paper contributes to the debate on capital regulation on the level of capital requirements and the instruments to assess the viability/stability of banks.

Originality/value

This paper uses simple models to assess analytically the key issues in the debate on banks’ capital regulation.

Details

Studies in Economics and Finance, vol. 33 no. 4
Type: Research Article
ISSN: 1086-7376

Keywords

Article
Publication date: 27 October 2020

Jeffrey Royer and Gregory McKee

This paper presents a model for determining the optimal capital structure for cooperatives and explores the relationship between financial leverage and the ability of cooperatives…

Abstract

Purpose

This paper presents a model for determining the optimal capital structure for cooperatives and explores the relationship between financial leverage and the ability of cooperatives to retire member equity.

Design/methodology/approach

A model is developed to determine the optimal capital structure and explore the relationship between capital structure and the rate at which a cooperative can retire member equity. Using data from cooperative financial statements, ordinary least-squares regressions are conducted to test two hypotheses on capital structure and equity retirement.

Findings

The model shows that the optimal capital structure is determined by the ratio of the rate of return on capital employed to the interest rate on borrowed capital and the required level of interest coverage. The regressions suggest that cooperatives choose their capital structure largely according to the rate of return on capital employed and the interest rate in a manner consistent with maximizing the rate of return on equity and that the rate at which cooperatives can retire member equity is directly related to leverage.

Research limitations/implications

The model does not consider unallocated earnings. Analysis of the relationship between leverage and equity retirement yields results contrary to the assumptions of earlier studies.

Practical implications

Cooperatives can use the model because the necessary parameters are easily understood and readily available from financial statements, lenders and industry sources.

Originality/value

The model is developed specifically for determining the capital structure of cooperatives and differs substantially from the corporate model. A theoretical basis is provided for the relationship between leverage and equity retirement.

Details

Agricultural Finance Review, vol. 81 no. 2
Type: Research Article
ISSN: 0002-1466

Keywords

Article
Publication date: 1 October 2008

C. Correia and P. Cramer

This study employs a sample survey to determine and analyse the corporate finance practices of South African listed companies in relation to cost of capital, capital structure and…

2944

Abstract

This study employs a sample survey to determine and analyse the corporate finance practices of South African listed companies in relation to cost of capital, capital structure and capital budgeting decisions.The results of the survey are mostly in line with financial theory and are generally consistent with a number of other studies. This study finds that companies always or almost always employ DCF methods such as NPV and IRR to evaluate projects. Companies almost always use CAPM to determine the cost of equity and most companies employ either a strict or flexible target debt‐equity ratio. Furthermore, most practices of the South African corporate sector are in line with practices employed by US companies. This reflects the relatively highly developed state of the South African economy which belies its status as an emerging market. However, the survey has also brought to the fore a number of puzzling results which may indicate some gaps in the application of finance theory. There is limited use of relatively new developments such as real options, APV, EVA and Monte Carlo simulation. Furthermore, the low target debt‐equity ratios reflected the exceptionally low use of debt by South African companies.

Article
Publication date: 18 January 2011

Stoyu I. Ivanov and Janis K. Zaima

The purpose of this study is to examine whether employee stock ownership plans (ESOPs) add or destroy value from a new perspective by examining the relation of the adoption of…

2939

Abstract

Purpose

The purpose of this study is to examine whether employee stock ownership plans (ESOPs) add or destroy value from a new perspective by examining the relation of the adoption of ESOP and the company cost of capital.

Design/methodology/approach

The capital asset pricing model is used to estimate the company's cost of equity capital, and the cost of debt is estimated using bond yield spreads. The weighted average cost of capital (WACC) is calculated as the weighted percentage of the firm funded by equity, preferred stock, and debt multiplied by the individual costs of capital. Univariate and multivariate analyses are conducted around the event of adoption to determine if the cost of capital changes after the adoption of ESOP.

Findings

Results from the univariate analysis show that firms adopting leveraged as well as non‐leveraged ESOP plans experience decreases in costs of equity and debt capital as well as decreases in their WACC. However, the multivariate analysis demonstrates that only the non‐leveraged common ESOPs are negatively correlated to cost of equity, cost of debt, and WACC. Robustness tests confirm that the reduction in the cost of equity capital drives the decline in WACC.

Originality/value

The findings contribute to the cost of capital literature and have implications for firms that decide to engage in ESOP plans. It is found that ESOPs benefit from decreased cost of capital related to the ability to increase debt capacity for the firm as well as the existing tax preferential treatments of ESOP plans.

Details

Managerial Finance, vol. 37 no. 2
Type: Research Article
ISSN: 0307-4358

Keywords

Open Access
Article
Publication date: 3 October 2023

Viktor Ström, Nima Sanandaji, Saeid Esmaeilzadeh and Mouna Esmaeilzadeh

The purpose of this paper is to investigate the potential link between Sweden’s high reliance on equity capital financing among small and medium-sized enterprises (SMEs) and its…

Abstract

Purpose

The purpose of this paper is to investigate the potential link between Sweden’s high reliance on equity capital financing among small and medium-sized enterprises (SMEs) and its recognition as the most innovative economy in Europe according to the European Innovation Scoreboard (EIS). This paper examines the idea that the high levels of trust within Swedish society can explain why private equity financing is more prevalent among Swedish SMEs.

Design/methodology/approach

To test these ideas, the authors use data from the Survey on Access to Finance for Enterprises to measure the private equity reliance of firms. The authors also use the EIS to measure the innovation capacity of nations and various aspects of SMEs’ innovation activities. Finally, societal levels of trust are measured through the World Value Survey.

Findings

First, the authors find that European countries with a higher proportion of SMEs relying on equity financing tend to be ranked as more innovative by the EIS. Second, the authors find that the correlation between a nation’s share of SMEs relying on equity financing and their level of innovation activities is marginally stronger for product innovations than for business process innovations. Third, the authors find that countries with higher levels of trust tend to have higher equity capital reliance among SMEs.

Originality/value

This study builds upon previous research on equity capital and SMEs’ innovation activity while introducing new insights into the relationship between societal trust and equity financing.

Details

International Journal of Innovation Science, vol. ahead-of-print no. ahead-of-print
Type: Research Article
ISSN: 1757-2223

Keywords

Article
Publication date: 22 August 2023

Mohammad Omar Farooq, Mohammad Dulal Miah, Md Nurul Kabir and M. Kabir Hassan

This paper aims to examine the impact of bank’s capital buffer on return on equity (ROE) in the context of Islamic and conventional banks in GCC countries.

Abstract

Purpose

This paper aims to examine the impact of bank’s capital buffer on return on equity (ROE) in the context of Islamic and conventional banks in GCC countries.

Design/methodology/approach

The authors collect data from 83 commercial banks comprising of 49 conventional banks and 34 Islamic banks for the period 2010–2019. The final data set comprises of 744 bank-year observations. The authors apply generalized methods of moments estimation technique and panel least square to analyze the data.

Findings

The authors document that Tier-1 capital, total regulatory capital (TRC) and equity to asset ratio (EAR) negatively affect banks’ ROE. However, the impact disappears for conventional banks and sustains for Islamic banks if these two clusters of banks are treated separately. Furthermore, the negative impact of equity capital on earning is more pronounced for large and listed commercial banks.

Practical implications

Findings of this research imply that Islamic banks in GCC countries has scope to manage equity capital more efficiently. Hence, they should concentrate on using banks equity wisely to successfully compete with the conventional banks.

Originality/value

Since the global financial crisis of 2009, Islamic banks of GCC countries have been reporting lower ROE compared to their conventional counterparts. On the other hand, Islamic banks maintain higher level of Tier-1 capital, TRC and EAR. This evidence hypothetically suggests that Islamic banks are overly cautious in managing their capital buffer that results in lower ROE. To the best of the author’s/authors’ knowledge, no other study in the literature tests this hypothesis in the GCC context.

Details

Journal of Islamic Accounting and Business Research, vol. ahead-of-print no. ahead-of-print
Type: Research Article
ISSN: 1759-0817

Keywords

Article
Publication date: 28 October 2013

Zhengwei Wang and Wuxiang Zhu

The “supply-side effect” brought about by the imperfection of the capital market has increasingly been concerned. The purpose of this paper is to study how will the uncertainty of…

4708

Abstract

Purpose

The “supply-side effect” brought about by the imperfection of the capital market has increasingly been concerned. The purpose of this paper is to study how will the uncertainty of equity financing brought about by the equity financing regulations in emerging capital market affect company's capital structure decisions.

Design/methodology/approach

This paper establishes a theoretical model and tries to introduce equity financing uncertainty into the company's capital structure decision-making. The paper uses mathematical derivation method to get some basic conclusions. Next, in order to characterize the quantitative impact of specific factor on capital structure, numerical solution methods are used.

Findings

The model shows that firm's value would decrease with the uncertainty of equity financing, because of the relationship between firm's future cash and their financing policies. The numerical solution of the model suggests that the uncertainty of equity financing is one of the important factors affecting the choice of optimal capital structure, the greater the uncertainty is, the lower optimal capital structure is.

Originality/value

The research of this paper has certain academic value for further understanding of the issues.

Details

China Finance Review International, vol. 3 no. 4
Type: Research Article
ISSN: 2044-1398

Keywords

Article
Publication date: 2 November 2010

Guy D. Fernando, Ahmed M. Abdel‐Meguid and Randal J. Elder

The purpose of this paper is to investigate the impact of certain audit quality attributes, namely auditor size, auditor industry specialization and auditor tenure on a client…

4546

Abstract

Purpose

The purpose of this paper is to investigate the impact of certain audit quality attributes, namely auditor size, auditor industry specialization and auditor tenure on a client firm's cost of equity capital.

Design/methodology/approach

The paper uses empirical data to construct a measure of ex ante cost of equity capital for each firm and year using analyst forecasts. Independent audit quality measures used are auditor size, auditor industry specialization and auditor tenure. Firm cost of equity capital is regressed against the three independent variables and appropriate control variables.

Findings

The paper finds that auditor size (auditor is a member of the BigX), auditor industry specialization and auditor tenure are negatively associated with the client firm's cost of equity capital. However, the paper finds that this effect is limited only to small client firms, potentially reflecting the poor information environment associated with such firms.

Practical implications

The study highlights the importance of audit quality attributes in determining the firm's cost of capital. It also highlights ways in which firms (especially small firms) can reduce the cost of equity capital by improving their information environment through the judicious selection of auditors.

Originality/value

This is believed to be the first paper to examine whether the effects of three audit quality attributes (auditor size, auditor industry specialization and auditor tenure) on a firm's cost of capital are dependent on the client's size. The paper empirically shows that such effects are more pronounced for smaller clients.

Details

Review of Accounting and Finance, vol. 9 no. 4
Type: Research Article
ISSN: 1475-7702

Keywords

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