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Article
Publication date: 2 October 2018

Twahir Khalfan and Jón Þór Sturluson

The purpose of this paper is to provide insights about corporate finance decision-making of Icelandic private firms that have experienced a dramatic financial crisis in 2008–2010…

Abstract

Purpose

The purpose of this paper is to provide insights about corporate finance decision-making of Icelandic private firms that have experienced a dramatic financial crisis in 2008–2010. It observes the capital budgeting methods and cost of capital techniques for private firms after a systemic financial crisis. Moreover, the paper identifies the main determinants of capital structure and capita rationing during this period.

Design/methodology/approach

This paper surveys corporate finance practices of 80 out of the 250 largest bank-centred private firms after the financial crisis.

Findings

Highly leveraged private firms that have experienced a dramatic financial crisis in 2008–2010 use payback and net present value techniques almost at a similar rate when assessing new investments. The sample firms largely rely on the cost of debt to determine the cost of invested capital. However, capital asset pricing model is the most popular method among the few sample firms that estimate the cost of equity. The need to maintain financial flexibility and cost associated with financial distress are the most influential factors regarding capital structures, whereas investment practices avoid capital rationing associated with the financial crisis.

Research limitations/implications

The limitations of the study are that it is country specific and absence of data over the period before the financial crisis that may have been applied to present more insight into this topic.

Practical implications

Sample firms fail to incorporate appropriate cost of capital methods and as the result they are likely to apply incorrect “hurdle rate” which could undervalue or overvalue new investments. This paper indicates that capital budgeting decisions by managers of the bank-centred Icelandic private firms who tend to be major shareholders do not reflect the tendency to expropriate outside and minority investors. Private firms that have emerged from the meltdown of the financial system highlighting the importance of “special” lending relationship in assisting bank-centred firms to avoid the severity of financial constraints.

Originality/value

This study employs a failure of the banking system to provide new knowledge about corporate finance practices of private firms after the financial crisis that have curtailed the access to both internal and external sources of capital.

Details

Managerial Finance, vol. 44 no. 11
Type: Research Article
ISSN: 0307-4358

Keywords

Article
Publication date: 20 December 2019

Twahir Khalfan and Stefan Wendt

The purpose of this paper is to provide empirical insight into the impact of a financial crisis on capital structure of private firms. Specifically, the authors use the example of…

Abstract

Purpose

The purpose of this paper is to provide empirical insight into the impact of a financial crisis on capital structure of private firms. Specifically, the authors use the example of the systemic Icelandic financial crisis from 2008 to 2010 and analyze the influence of internally generated funds on leverage during the financial crisis compared to the non-crisis period.

Design/methodology/approach

The authors use a fixed-effects dynamic model to examine the impact of internally generated funds – measured as cash flow – with a data set that includes non-listed Icelandic firms. In addition, generalized method of moments is used to address potential endogeneity issues.

Findings

The authors find that internally generated funds have a different effect on capital structure during the financial crisis compared to the non-crisis period. While cash flow has an overall negative association with leverage, a positive relationship appears to exist during the crisis. However, when analyzing changes in cash flow from one year to the other, the sample firms appear to rely more on internally generated funds to adjust leverage during the financial crisis than in the non-crisis period.

Originality/value

Analyzing the extreme case of the Icelandic financial crisis allows us to shed light on capital structure effects in situations when both debt financing and internal financing opportunities are heavily curtailed.

Details

International Journal of Managerial Finance, vol. 16 no. 3
Type: Research Article
ISSN: 1743-9132

Keywords

Article
Publication date: 4 November 2019

Yasin Mahmood, Abdul Rashid, Faisal Rizwan and Maqsood Ahmad

The purpose of this paper is to investigate the role of macroeconomic factors and the institutional environment on corporate financial flexibility (FF). Most studies focus on…

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Abstract

Purpose

The purpose of this paper is to investigate the role of macroeconomic factors and the institutional environment on corporate financial flexibility (FF). Most studies focus on well-developed financial markets and very little is known about corporate FF in less developed financial markets and emerging markets (Buvanendra et al., 2016). The present study contributes to filling this gap in the literature and provides a more practical and functional framework to assess the FF of firms located in emerging economies.

Design/methodology/approach

The study used annual data for the period from 1991 to 2018. To examine the relationship between macroeconomic indicators, institutional environment and corporate FF, hypotheses were tested using an unbalanced panel logistic regression model.

Findings

The paper provides empirical insights into the relationships between macroeconomic factors, institutional environment and corporate FF. The results suggest a substantial change in FF across firms. Inflation, institutional quality and banking sector development negatively affect FF, while equity market development has a significant positive impact. Gross domestic product growth was found to be an insignificant predictor of FF.

Practical implications

This study has practical implications for corporate finance managers, regulators and investors, who must consider the significant factors of this study when making economic decisions. Finance managers can thus make appropriate decisions regarding capital structure and FF. Regulators of the banking sector can take appropriate measures to enhance competition and increase the development of the banking sector. Further, regulators of the equity market can enhance the development of the market to enhance the supply of capital.

Originality/value

This study adds to the literature showing that not only firm-specific factors affect corporate FF, but country-specific macroeconomic and institutional factors also have a significant effect. It also adds to the literature in the area of corporate FF; this field is in its initial stage, even in developed countries, while, in developing countries, little work has been done.

Book part
Publication date: 20 August 2018

Audur Arna Arnardottir and Throstur Olaf Sigurjonsson

According to some key actors in Iceland’s financial sector, in the wake of the financial crisis, Icelandic financial institutions consciously tried to build trust and a positive…

Abstract

According to some key actors in Iceland’s financial sector, in the wake of the financial crisis, Icelandic financial institutions consciously tried to build trust and a positive new image through, among other things, the visible presence of women on their corporate boards and management teams. By strict adherence to gender quota legislation and through improved corporate governance practices and much stricter control and monitoring, the financial sector sent signals of change to various stakeholders. Now 10 years on, the re-establishment of trust is still a work in progress.

Details

The Return of Trust? Institutions and the Public after the Icelandic Financial Crisis
Type: Book
ISBN: 978-1-78743-348-9

Keywords

Article
Publication date: 23 February 2010

Throstur Olaf Sigurjonsson

The purpose of this paper is to examine the extreme case of the Icelandic banking crisis in relation to critical governance issues at governmental, industry and civil society

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Abstract

Purpose

The purpose of this paper is to examine the extreme case of the Icelandic banking crisis in relation to critical governance issues at governmental, industry and civil society levels.

Design/methodology/approach

This is a case study of the Icelandic banking collapse in 2008.

Findings

The examination of governance failures within the Icelandic banking system reveals that government institutions need to find a balance between entrepreneurial growth, risk exposure and sustainable societal development. A euphoric attitude of laissez‐faire, where risk issues and issues of balanced development are largely ignored, creates challenges for sustainable banking. The findings suggest that achieving the necessary balance requires stressing governance issues on three levels; at the government level; at the industry level; and at the civil society level.

Practical implications

The paper illustrates why some of the corporate governance challenges facing sustainable banking should be addressed at multiple levels. Government should strive for realistic information and evaluation of societal risks; government should implement adequate regulatory frameworks; the finance industry itself should have effective self‐regulatory procedures and mechanisms; and, from a civil society point of view, the public at large should have realistic expectations and be adequately alerted as to the potential risks of governance failure.

Originality/value

The paper examines interactions between governance failures at different levels and has important implications for governance and policy makers, particularly those faced with re‐structuring national financial industries.

Details

Corporate Governance: The international journal of business in society, vol. 10 no. 1
Type: Research Article
ISSN: 1472-0701

Keywords

Book part
Publication date: 18 October 2011

Lars Mjøset

This analysis attempts a comparative specification of certain aspects of the country studies contained in this volume. The point of departure is the banking crises of the early…

Abstract

This analysis attempts a comparative specification of certain aspects of the country studies contained in this volume. The point of departure is the banking crises of the early 1990s (deep in Finland, Norway and Sweden, mini-crisis in Denmark and absent in Iceland) and the contrast to Iceland's financial meltdown in 2007/2008 (no crisis in the three, a new mini-crisis in Denmark). Detailed process tracing of the Icelandic crisis is provided. The case account is then used to shed light on the different roles of neoliberalism, economics expert knowledge and populist right-wing party formation in the five Nordic political economies.

Details

The Nordic Varieties of Capitalism
Type: Book
ISBN: 978-0-85724-778-0

Book part
Publication date: 18 October 2011

Stefán Ólafsson

This chapter maps the political economy characteristics of Icelandic society in the post-war period. It shows how the period of statism from the early part of the 20th century…

Abstract

This chapter maps the political economy characteristics of Icelandic society in the post-war period. It shows how the period of statism from the early part of the 20th century, with a strong legacy of protectionism and clientelism, changed up to the present. A major turning point came with a shift towards more liberal mixed economy in 1960, which progressed through the 1980s. That was a period of very high growth rates in an egalitarian society. During the 1990s the political economy became significantly more influenced by neoliberal policies, which can be associated with the buildup of an excessive bubble economy in the 2000s. A new policy emphasis in a new environment of globalized finance, of which Iceland became an active part from 1995, in conjunction with a generally lax attitude of laissez faire in public administration, seems to have made possible rather unusual excesses in speculation and debt accumulation. That eventually led to the dramatic collapse of Iceland's financial system in October 2008. In the wake followed a deep recession. The chapter sets this long-term development into a broad societal context, taking account of political power constellations and changes in politics, the labour market and living conditions.

Details

The Nordic Varieties of Capitalism
Type: Book
ISBN: 978-0-85724-778-0

Abstract

Details

Corporate Governance and Business Ethics in Iceland: Studies on Contemporary Governance and Ethical Dilemmas
Type: Book
ISBN: 978-1-80382-533-5

Book part
Publication date: 28 May 2013

Hilmar Þór Hilmarsson

Purpose — Analyze and assess the actions taken by the government of Iceland prior to a banking crisis that resulted in the collapse of Iceland’s largest banks in October 2008. Was…

Abstract

Purpose — Analyze and assess the actions taken by the government of Iceland prior to a banking crisis that resulted in the collapse of Iceland’s largest banks in October 2008. Was the government’s behavior prior to the crisis dishonest in the sense that it deliberately tried to fake reality or was the government honest but incompetent in the sense that it did not see the problem coming, and was therefore not trustworthy?Design/methodology/approach — Review of the existing literature, analysis, and assessment of this literature. Case study of Iceland.Findings — The government showed negligence and made mistakes by not taking credible actions to manage risks following a rapid cross-border expansion of Iceland’s largest banks. This had severe consequences and resulted in the collapse of the largest banks in October 2008. Instead of addressing the problems in the economy the government launched a PR campaign and the analysis of various scholars may have helped to justify inaction. According to the Special Investigation Commission (SIC),1 the government did not address an obvious problem and could perhaps on that basis be charged with dishonesty, including faking reality with PR campaigns. As some scholars put it, the authorities gambled for resurrection, and failed. The analysis carried out by a number of other scholars who downplayed the problem may have confused the government and it may have been honest in its inaction. In that situation one can argue that the government was honest but incompetent and not trustworthy, as according to the SIC and several international scholars the problem was obvious.Research limitations/implications — This is a case study. The study does not present results that can be evaluated on the basis of statistical significance and generalized. Some of the lessons, however, can have a wider relevance than for Iceland only. This is especially true for small countries with a large banking sector, using its own currency, and with limited fiscal space to support the banks during a crisis.Practical implications — The combination of a risk seeking behavior of businesses, in this case in the banking sector, and inactive or negligent governments can result in the collapse of a country’s economy. The Icelandic government should encourage and enforce more risk mitigation via regulations, monitoring, and supervision of the private sector’s cross-border activities. This does not only apply to the banking sector but also to other sectors such as the energy sector.Social implications — Less risk seeking behavior and more risk mitigating actions can stabilize Iceland´s economic growth in the medium and long term, and reduce the risk of an economic collapse that typically has severe social consequences.Originality/value — The so-called Viking spirit of Icelandic business people accompanied with aggressive risk taking and bold business behavior can be very detrimental for a small economy especially when global economic and financial crisis hit.

Book part
Publication date: 20 August 2018

FriÐrik Már Baldursson and Richard Portes

During the banking crisis of October 2008, Iceland became the first developed country in decades to seek the assistance of the International Monetary Fund (IMF). Iceland’s IMF…

Abstract

During the banking crisis of October 2008, Iceland became the first developed country in decades to seek the assistance of the International Monetary Fund (IMF). Iceland’s IMF programme provided a measure of stability at a time of intense turbulence. The IMF’s credibility was helpful during this period of collapse not just of the banks but also of the public trust towards almost all Icelandic institutions. Importantly, the IMF implicitly supported Iceland’s policy of letting institutional creditors of the banks rather than Icelandic taxpayers bear the costs of their collapse; this provided credibility for the policy and limited repercussions. In a reversal of previous IMF policy, capital controls were imposed. The controls helped stabilise the exchange rate, and inflation subsided. The controls also helped recovery after the crisis by shielding the economy from international financial shocks. The direct fiscal cost of the Icelandic crisis was very high, but the considerable and painful fiscal tightening that was a part of the programme was needed to avoid a sovereign debt crisis. This helped in regaining trust from international markets. Mistakes were made in the design and implementation of the IMF programme, but overall, we judge that its contribution was positive. The programme provided one of the elements for restoring trust in Iceland when it was most needed, both domestically and internationally, during the depth of the crisis in 2009–2010.

Details

The Return of Trust? Institutions and the Public after the Icelandic Financial Crisis
Type: Book
ISBN: 978-1-78743-348-9

Keywords

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