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1 – 10 of over 27000Tatiana Albanez and Gerlando Augusto Sampaio Franco de Lima
According to the market timing theory, firms try to take advantage of windows of opportunity to raise capital by exploiting temporary cost fluctuations of alternative financing…
Abstract
Purpose
According to the market timing theory, firms try to take advantage of windows of opportunity to raise capital by exploiting temporary cost fluctuations of alternative financing sources. In this context, the main objective of this paper is to examine the influence and persistence of market timing in the financing decisions of Brazilian firms that launched IPOs in the period from 2001 to 2011.
Methodology/approach
We analyze the influence of past market values on the capital structure of these firms, based on the main models proposed by Baker and Wurgler (2002), adapted to reflect the characteristics of Brazilian firms’ financial statements.
Findings
We find evidence of market timing, but this behavior is not sufficiently persistent in the period studied to the point of determining these firms’ capital structure. We believe the fact that Brazilian companies rarely carried out follow-on primary equity issues after floating their capital in the period analyzed, due to the presence of more advantageous financing sources (particularly from the national development bank, BNDES), explains the results. Therefore, Brazilian firms appear to be pay heed to different funding sources, in search of windows of opportunity, to guide their financing decisions and determine their capital structures.
Originality/value
The Brazilian capital market has been developing intensely in recent years, making it increasingly relevant to analyze the financing and investment decisions of the country’s listed companies. The Brazilian literature on capital structure is extensive, but few works have addressed the issue of market timing.
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Kamran Ahmed, A. John Goodwin and Kim R. Sawyer
This study examines the value relevance of recognised and disclosed revaluations of land and buildings for a large sample of Australian firms from 1993 through 1997. In contrast…
Abstract
This study examines the value relevance of recognised and disclosed revaluations of land and buildings for a large sample of Australian firms from 1993 through 1997. In contrast to prior research, we control for risk and cyclical effects and find no difference between recognised and disclosed revaluations, using yearly‐cross‐sectional and pooled regressions and using both market and non‐market dependent variables. We also find only weak evidence that revaluations of recognised and disclosed land and buildings are value relevant.
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Liang-Wei Kuo, Hsin-Yu Liang and Yung-Jang Wang
Building upon the framework of the tradeoff model of capital structure and motivated by the equity market timing theory, we examine whether equity misvaluation is a source of…
Abstract
Building upon the framework of the tradeoff model of capital structure and motivated by the equity market timing theory, we examine whether equity misvaluation is a source of adjustment “costs” that will affect a firm’s leverage adjustment speed toward target. We also investigate whether the quality of a firm’s long-term growth options will influence the decisions of managers to exploit the mispriced equity to converge to the optimum. Using a sample of listed Taiwanese firms during 1992–2014 and employing the market-to-book decomposition as developed by Rhodes-Kropf, Robinson, and Viswanathan (2005), we find that overleveraged and overvalued firms demonstrate faster adjustment speed than overleveraged but undervalued firms. Furthermore, controlling for the misvaluation status, high-growth firms converge to target faster than their low-growth counterparts. The effect of growth options on the relation between equity mispricing and adjustment speed does not mirror the effect of financing deficits. With the detailed financial information of the local companies across a rather long time series, this study provides incremental inputs to the literature of capital structure from the determinants of target leverage, the estimation of leverage adjustment speeds, to the identification of the sources of adjustment costs in an emerging market where institutional environment is strikingly different from the US.
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Songhee Kim, Jaeuk Khil and Yu Kyung Lee
This paper aims to investigate the impact of corporate dividend policy on the capital structure in the Korean stock market. To distinctly discern the voluntariness of changes in…
Abstract
This paper aims to investigate the impact of corporate dividend policy on the capital structure in the Korean stock market. To distinctly discern the voluntariness of changes in corporate dividend policy, we analyze companies that, following a substantial increase, do not reduce dividends for the subsequent two years or, after a significant decrease, do not raise dividends for the following two years. Our empirical findings indicate that companies that increase dividends experience a significant decrease in both book and market leverage, even after controlling for variables such as target leverage ratios. This result suggests that a large increase in dividends can effectively reduce information asymmetry, leading to a lower cost of equity. On the contrary, after a decrease in dividends, both book leverage and market leverage significantly increase, revealing a symmetric relationship between dividend policy and capital structure. In conclusion, large dividend increases in Korean companies not only reduce information asymmetry but also lower the cost of equity capital, resulting in observable changes in the leverage ratio.
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The purpose of this paper is to investigate whether investors value the future growth from acquisitions and the subsequent realisations thereof accurately.
Abstract
Purpose
The purpose of this paper is to investigate whether investors value the future growth from acquisitions and the subsequent realisations thereof accurately.
Design/methodology/approach
The paper calculates conventional and adjusted market-to-book ratios and investigates abnormal cumulative returns over 20 quarters after portfolio formation for a sample of Standard & Poor’s 500 firms using a hedge portfolio and regression approach.
Findings
Hedge portfolios formed using adjusted market-to-book ratios underperform conventional hedge portfolios over a five-year period. Dividing the hedge into its comprising elements reveals that the underperformance of the adjusted hedge is mainly caused by weaker returns from value firms.
Research Limitations/implications
Findings are specific to large firms in a specific setting, and future research is needed to determine if findings are equally applicable to other situations. Findings imply that investors underrate the growth from new acquisitions and overrate the extent to which this has materialised.
Practical Implications
The paper highlights that the extrapolation of future growth rates should be carefully considered in any equity valuation of a firm with current or past acquisitions.
Originality/value
This paper shows that inaccurate valuation of the growth of new acquisitions and the realisation thereof is at least partially responsible for the value versus growth phenomenon. It shows that the accounting information could be improved and highlights the importance of extrapolating past growth rates with care.
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Muhammad Fuad Farooqi and John O’Brien
This paper aims to provide a comparative study of the Islamic versus conventional banking sector risk by using market data generated from the sample of publicly listed Islamic and…
Abstract
Purpose
This paper aims to provide a comparative study of the Islamic versus conventional banking sector risk by using market data generated from the sample of publicly listed Islamic and conventional banks in the Gulf Cooperation Council (GCC) region.
Design/methodology/approach
The authors introduce a market-based measure of bank stress and test this indicator against the Tier 1 Capital Ratio using Granger causality tests.
Findings
The authors find that the market-based measure is a leading indicator of banking stress when compared to the accounting-based Tier 1 ratio and thus is relevant to the Basel regulation’s Pillar 3.
Research limitations/implications
This paper only looks at Islamic vs conventional banks in the Gulf region, and the authors would like to extend this analysis to a broader range of financial institutions, especially in the European and North American markets.
Social implications
Developing a measure that signals bank stress ahead of typically used measures can help regulators, bank management and investors identify oncoming problems and issues before these become too big to manage.
Originality/value
The results from this analysis provides insight into the offsetting impact from two drivers (beta and book-to-market ratio) of the cost of equity capital for the conventional vs Islamic banking sectors.
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Sulagna Mukherjee and Jitendra Mahakud
The purpose of this paper is to study the dynamics of capital structure in the context of Indian manufacturing companies in a partial‐adjustment framework during the period…
Abstract
Purpose
The purpose of this paper is to study the dynamics of capital structure in the context of Indian manufacturing companies in a partial‐adjustment framework during the period 1993‐1994 to 2007‐2008.
Design/methodology/approach
This paper specifies a partial‐adjustment model and uses the generalized method of moments technique to determine the variables which affect the target capital structure and to find out the factors affecting the adjustment speed to target capital structure.
Findings
Firm‐specific variables like size, tangibility, profitability and market‐to‐book ratio were found to be the most important variables which determine the target capital structure across the book and market leverage and the factors like size of the company, growth opportunity and the distance between the target and observed leverage determine the speed of adjustment to target leverage for the Indian manufacturing companies.
Research limitations/implications
The behavioural variables like managers' confidence and attitude towards raising the external finance have not been incorporated in the model to determine the target capital structure due to the data constraint.
Practical implications
This paper has implications for corporate managers in India, for example, to consider the various adjustment costs while altering the financing decisions of the company with other variables like flexibility of the manager, direct cost of debt and equity.
Originality/value
This paper is first of its kind to study both the determination of target capital structure and the speed of adjustment to target capital structure in the context of Indian companies.
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Quang-Ngoc Nguyen, Thomas A. Fetherston and Jonathan A. Batten
This paper explores the relationship between size, book-to-market, beta, and expected stock returns in the U.S. Information Technology sector over the July 1990–June 2001 period…
Abstract
This paper explores the relationship between size, book-to-market, beta, and expected stock returns in the U.S. Information Technology sector over the July 1990–June 2001 period. Two models, the multivariate model and the three-factor model, are employed to test these relationships. The risk-return tests confirm the relationship between size, book-to-market, beta and stock returns in IT stocks is different from that in other non-financial stocks. However, the sub-period results (the periods before and after the technology crash in April 2000) show that the nature of the relationship between stock returns, size, book-to-market, and market factors, or the magnitude of the size, book-to-market, and market premiums, is on average unchanged for both sub-periods. This result suggests the technology stock crash in April 2000 was not a correction of stock prices.
Marcelo Bianconi and Joe Akira Yoshino
This paper aims to empirically investigate the market-to-book/return on equity valuation model.
Abstract
Purpose
This paper aims to empirically investigate the market-to-book/return on equity valuation model.
Design/methodology/approach
The authors use a worldwide commodities sector panel of 6,323 firms from 69 countries with annual observations from 1999 to 2010 to estimate panel ordinary least squares (OLS), instrumental variables (IV) and quantile regressions. They also measure the impact of return on equity on market-to-book uncovering value versus growth and positive versus negative profitability dimensions.
Findings
The new evidence is that the impact of return on equity on market-to-book is time-varying and declining across the years in the sample. There is positive and strong persistence in the market-to-book of companies in this sector worldwide, but value stocks are more persistent than growth stocks. The coefficient of return on equity is positive at the 10th percentile of the market-to-book, but it becomes negative for growth stocks at 90th percentiles. Conditional on negative profitability, the coefficient of return on equity on market-to-book is negative for growth stocks. The effect of the S&P500 volatility index (VIX) is negative, significant and large in magnitude, but declines in absolute value, as the quantiles increase toward the upper 90th percentile.
Practical implications
The commodities sector is important for countries that depend on it for development.
Originality/value
The paper provides a rich panel data approach, and the market-to-book/return on equity valuation model is naturally applied to the commodities sector, as this sector tends to have more tangibles relative to intangibles.
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Michael Crockett and Muhammad Jahangir Ali
The purpose of this paper is to examine the efficacy of the current legislative provisions that protect auditor independence in Australia. The collapses of several high-profile…
Abstract
Purpose
The purpose of this paper is to examine the efficacy of the current legislative provisions that protect auditor independence in Australia. The collapses of several high-profile companies (Enron and WorldCom in the USA, HIH insurance and OneTel in Australia) in the early 2000s has raised questions about audit quality and independence. In response, regulators have introduced new regulations and guidance to improve audit quality. In Australia, the Corporations Act 2001 (2001) was amended via the Corporate Law Economic Reform Program Act 2004. This study poses the question: do non-audit service fees influence the level of accounting conservatism?
Design/methodology/approach
The sample used in this analysis consists of all available Australian listed companies from the years 2006 till 2010.
Findings
Using multiple measures of accounting conservatism and the auditor-client economic bond, our results suggest that the level of the economic bond between the auditor and the client does not significantly influence the level of accounting conservatism.
Originality/value
Our results demonstrate that the combination of intrinsic market mechanisms and regulation in Australia sufficiently protect auditor independence.
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