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1 – 10 of over 10000Flávio Morais, Zélia Serrasqueiro and Joaquim J.S. Ramalho
The purpose of this paper is to investigate whether the effect of country and corporate governance mechanisms on zero leverage is heterogeneous across market- and bank-based…
Abstract
Purpose
The purpose of this paper is to investigate whether the effect of country and corporate governance mechanisms on zero leverage is heterogeneous across market- and bank-based financial systems.
Design/methodology/approach
Using logit regression methods and a sample of listed firms from 14 Western European countries for the 2002–2016 period, this study examines the propensity of firms having zero leverage in different financial systems.
Findings
Country governance mechanisms have a heterogeneous effect on zero leverage, with higher quality mechanisms increasing zero-leverage propensity in bank-based countries and decreasing it in market-based countries. Board dimension and independency have no impact on zero leverage. A higher ownership concentration decreases the propensity for zero-leverage policies in bank-based countries.
Research limitations/implications
This study’s findings show the importance of considering both country- and firm-level governance mechanisms when studying the zero-leverage phenomenon and that the effect of those mechanisms vary across financial and legal systems.
Practical implications
For managers, this study suggests that stronger national governance makes difficult (favours) zero-leverage policies in market (bank)-based countries. In bank-based countries, it also suggests that the presence of shareholders that own a large stake makes the adoption of zero-leverage policies difficult. This last implication is also important for small shareholders by suggesting that investing in firms with a concentrated ownership reduces the risk that zero-leverage policies are adopted by entrenched reasons.
Originality/value
To the best of the authors’ knowledge, this is the first study to consider simultaneously the effects of both country- and firm-level governance mechanisms on zero leverage and to allow such effects to vary across financial systems.
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Sijia Zhang and Andros Gregoriou
The purpose of this paper is to examine stock market reactions and liquidity effects following the first bank loan announcement of zero-leverage firms.
Abstract
Purpose
The purpose of this paper is to examine stock market reactions and liquidity effects following the first bank loan announcement of zero-leverage firms.
Design/methodology/approach
The authors use an event studies methodology in both a univariate and multivariate framework. The authors also use regression analysis.
Findings
Using a sample of 96 zero-leverage firms listed on the FTSE 350 index over the time period of 2000–2015, the authors find evidence of a significant and permanent stock price increase as a result of the initial debt announcement. The loan announcement results in a sustained increase in trading volume and liquidity. This improvement continues to persist once the authors control for stock price and trading volume effects in both the short and long run. Furthermore, the authors examine the spread decomposition around the same period, and discover the adverse selection of the bid–ask spread is significantly related to the initial bank loan announcement.
Research limitations/implications
The results can be attributed to the information cost/liquidity hypothesis, suggesting that investors demand a lower premium for trading stocks with more available information.
Originality/value
This is the first paper to look at multiple industries, more than one loan and information asymmetry effects.
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Joaquim Ferrão, José Dias Curto and Ana Paula Gama
The purpose of this paper is to provide new insights into the low-leverage phenomenon by analyzing the dynamics of firms’ financing policies. The authors explore three theoretical…
Abstract
Purpose
The purpose of this paper is to provide new insights into the low-leverage phenomenon by analyzing the dynamics of firms’ financing policies. The authors explore three theoretical explanations of firms’ motivations to switch among different levels of debt aversion: financial constraints, financial flexibility and financial distress.
Design/methodology/approach
The authors apply a multilevel mixed-effects model to a panel data sample of 9,005 US listed firms during 1987-2014. To use a multinomial ordered logit model, the authors break down the low-leverage firms into several levels of debt aversion.
Findings
The empirical analysis provides four main findings. First, there is a dynamic behavior regarding leverage policy: after five years, 39.4 per cent of initial zero debt firms remain all-equity firms, 14.2 per cent are leveraged firms and approximately 19.7 per cent still adopt a low-leverage policy. Second, greater asset volatility increases the expected likelihood that firms will be debt averse. Third, when firms grow bigger and older, they show a greater likelihood of moving toward a higher leverage level. Fourth, results derived from the investment variables of research and development, acquisitions, and capital expenditure provide strong evidence in favor of the financial flexibility hypothesis.
Practical implications
These findings suggest that conservative debt policy is integrated with corporate investment decisions.
Originality/value
This paper contributes to extant literature by emphasizing the dynamic process associated with a low-leverage policy, unlike prior studies that focus on the determinants and characteristics of low-leverage firms. It also applies an econometric methodology that is new to the field: multilevel models.
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Soumya G. Deb and Pradip Banerjee
This paper aims to explore whether following an apparently sub-optimal “almost zero leverage (AZL)” policy by some Indian firms actually creates incremental value for their…
Abstract
Purpose
This paper aims to explore whether following an apparently sub-optimal “almost zero leverage (AZL)” policy by some Indian firms actually creates incremental value for their shareholders or is detrimental for them.
Design/methodology/approach
The paper investigates the relative equity market and operating performance of a sample of Indian firms adopting an AZL policy between 1998 and 2014, vis-a-vis, their leveraged peers from the same industry. The authors also look at the dynamic time variability of patterns, if any, in such relative performance and explore whether such patterns are explained primarily by investor perceptions or there are other factors to it.
Findings
The study show that Indian firms following post AZL policy exhibit superior equity performance compared to their leveraged counterparts, particularly during market downturns. The authors also find that this superior equity market performance is not merely because of the positive investor perception about the potential benefits of a robust debt-free balance sheet. The authors’ results show that the AZL firms register higher business risk and significantly superior operating performance, post being low leverage. The results hold even after using several robustness checks.
Practical implications
The study concludes that the managers of AZL firms take full advantage of the increased financial flexibility available with them and venture into riskier but more rewarding avenues and actually create incremental value for their shareholders.
Originality/value
The study highlights an apparently counterintuitive pattern in Indian context, counterintuitive particularly because choosing an AZL policy leads to forgo the availability of significant tax shield for firms. The results, the authors believe, can have significant implications for lenders and investors in the Indian capital markets in particular and emerging markets in general.
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Pedram Fardnia, Maher Kooli and Sonal Kumar
The purpose of the study is to examine the zero-leverage (ZL) phenomenon in family and non-family firms.
Abstract
Purpose
The purpose of the study is to examine the zero-leverage (ZL) phenomenon in family and non-family firms.
Design/methodology/approach
The authors consider three hypotheses and empirically test them using a sample of the largest US firms over the 2001–2016 period.
Findings
The authors find that, on average, 19.20% of family firms have zero debt vs 10.42% for non-family firms. The authors also find that family firms strategically choose to be ZL to maintain financial flexibility for future investments and exercise control over the decision-making process, consistent with the hypotheses of financial flexibility and control considerations. However, non-family firms are more likely to have zero debt if they have financial constraints and the credit market does not lend them money at affordable credit rates, consistent with the financial constraint hypothesis.
Originality/value
This paper contributes to different strands of literature. First, the authors contribute to the literature examining family firms' financial decisions. Second, the authors complement previous studies by exploring the reasons for the ZL behavior of family firms compared to non-family firms. The authors also examine the previously unexplored impact of ownership concentration on the ZL question.
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Wilson Li, Tina He, Andrew Marshall and Gordon Tang
The purpose of this paper is to explore the demand for conditional accounting conservatism from equity shareholders in state-controlled firms.
Abstract
Purpose
The purpose of this paper is to explore the demand for conditional accounting conservatism from equity shareholders in state-controlled firms.
Design/methodology/approach
This study presents empirical investigation of firms listed on Hong Kong Stock Exchange from 1997 to 2013.
Findings
The first finding is the extent of conditional conservatism in state-controlled firms increases when the leverage ratio decreases. It is also found that the high control rights held by the government in state-controlled firms are associated with high conditional conservatism. In addition, further analyses document the an offsetting effect between high control rights and firm leverage; a reinforcing effect between high control rights and year of incorporation after 1992; and a substituting effect between high control rights and dividend payments.
Originality/value
These findings suggest that the demand from equity shareholders, in addition to the debt demand, can be an important determinant of conditional conservatism and examination of these differing sources of demand can enhance the understanding on accounting conservatism in state-controlled firms.
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Islam Abdeljawad and Fauzias Mat Nor
The purpose of this paper is to investigate how the timing behavior and the adjustment toward the target of capital structure interact with each other in the capital structure…
Abstract
Purpose
The purpose of this paper is to investigate how the timing behavior and the adjustment toward the target of capital structure interact with each other in the capital structure decisions. Past literature finds that both timing and targeting are significant in determining the leverage ratio which is inconsistent with any standalone framework. This study argues that the preference of the firm for timing behavior or targeting behavior depends on the cost of deviation from the target. Since the cost of deviation from the target is likely to be asymmetric between overleveraged and underleveraged firms, the direction of the deviation from the target leverage is expected to alter the preference toward timing or targeting in the capital structure decision.
Design/methodology/approach
This study used the GMM system estimators with the Malaysian data for the period of 1992-2009 to fit a standard partial adjustment model and to estimate the speed of adjustment (SOA) of capital structure.
Findings
This study finds that Malaysian firms, on average, adjust their leverage at a slow speed of 12.7 percent annually and this rate increased to 14.2 percent when the timing variable is accounted for. Moreover, the SOA is found to be significantly higher and the timing role is lower for overleveraged firms compared with underleveraged firms. Overleveraged firms seem to find less flexibility to time the market as more pressure is exerted on them to return to the target regardless the timing opportunities because of the higher costs of deviation from the target leverage. Underleveraged firms place lower priority to rebalance toward the target compared with overleveraged firms as the costs of being underleveraged are lower and hence, these firms have more flexibility to time the market.
Research limitations/implications
The findings of this study support that firms consider both targeting and timing in their financing decisions. No standalone theory can interpret the full spectrum of empirical results. The empirical work is based on partial adjustment model of leverage; however, this model has been criticized by inability to distinguish between active adjustment behavior and mechanical mean reversion. This is an avenue for future research.
Originality/value
This study investigates if targeting and timing behaviors are mutually exclusive as theoretically expected or they can coexist. A theoretical explanation and an empirical investigation support the conclusion that firms consider both targeting and timing in their financing decisions. This study provides evidence from Malaysian firms that are characterized by concentrated ownership structure and separation of cash flow rights and control rights of the firm due to pyramid ownership structure. Therefore, it provides evidence on how environmental characteristics may affect the capital structure determinants of the firm.
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Pankaj Sinha and Sandeep Vodwal
The subprime crisis (SPC) (2007–2008) has severely affected the economies across the globe. The Indian economy was also troubled because the SPC led to a sharp reduction in…
Abstract
Purpose
The subprime crisis (SPC) (2007–2008) has severely affected the economies across the globe. The Indian economy was also troubled because the SPC led to a sharp reduction in foreign trade and investment, a rise in the exchange rate volatility and disproportionate foreign-currency reserves. The present paper analyzes the financing pattern of Indian listed companies during the SPC. This study aims to ascertain the impacts of the SPC-2008 on the long-term and short-term financing decisions of Indian listed companies using novel data set and appropriate robust methodology.
Design/methodology/approach
The study uses fixed effect model autoregressive of order 1 (FEM AR (1)) and system generalised method of moments (GMM) methodology on a sample data of 1,032 Indian non-financial listed companies on the Bombay Stock Exchange (BSE) for the period 1999 to 2019 to analyze the financing pattern during the crisis.
Findings
The study finds that the Indian firms opted for de-leveraging, shortening the maturity of debt and short-term borrowing. This significant decline in the leverage and maturity of debt indicates that the companies in India generally followed the “rat race” model of the financing mix in the crisis. After the crisis, the firms have re-leveraged and expanded the maturity of debt up to 90%. This considerable expansion in leverage and maturity implies that the Indian firms are exposed to the “rollover risk.” This re-leverage risk is asymmetrically distributed for manufacturing and services firms. Manufacturing firms are found to be more exposed to this risk. Furthermore, tangibility, free cash flows and the liquidity available within the firms are the compelling elements of the financing decision during the crisis.
Research limitations/implications
The study has not included the private firms and unorganized sectors in India. Moreover, the study has not analyzed disasters such as the Asian liquidity crisis, the information technology (IT) bubble crisis, the euro bond crisis and coronavirus disease 2019 (COVID-19) pandemic.
Practical implications
The study finds that Indian firms are exposed to higher risk during the financial crisis and this risk is further aggravated by the rollover risk. Therefore, investors and creditors should consider these additional risks in the financial decisions and take more precautions. The study suggests that the regulators should make necessary adjustments in lending policy, corporate restructuring and tax policy to deal with the menace of a financial crisis.
Social implications
Indian firms should avoid following the rate race financing model.
Originality/value
This study aims to ascertain the impacts of the SPC-2008 on the long-term and short-term financing decisions of Indian listed companies using novel data set and appropriate robust methodology.
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Efstathios Magerakis and Dimitris Tzelepis
This paper aims to examine the impact of corruption on firm performance considering the interventional role of cash policy in the emerging market of Greece.
Abstract
Purpose
This paper aims to examine the impact of corruption on firm performance considering the interventional role of cash policy in the emerging market of Greece.
Design/methodology/approach
The current study utilizes a sample of 142,079 firm-year observations for the period 2006–2014. Descriptive statistics, multiple regression analyses and robustness checks are used to test the study's hypotheses.
Findings
The results reveal that firm performance is positively related to the control of institutional corruption, implying that firms perform better when operating in a low-corruption environment. All other things being equal, we also find that firm cash holding strengthens the positive association between control of corruption and corporate financial performance.
Research limitations/implications
This research paper takes a more holistic approach by considering institutional factors in conjunction with corporate financial policies and outcomes. In a pervasive corrupt environment, the article illustrates how firm-level mechanisms can preclude political rent-seeking to improve corporate performance. The study's main limitation is that it focuses exclusively on a single country setting, based on the extreme-critical case's logic.
Practical implications
The findings might be useful for business executives and regulators seeking a better understanding of the planning and implementation of firms' asset allocation strategies and anti-corruption policies.
Originality/value
The study augments the relevant literature on the firm-level implications of corruption by providing empirical evidence for the interventional role of cash management in the relation between corruption and firm performance, in the context of an emerging economy.
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Cuicui Luo, Luis A. Seco, Haofei Wang and Desheng Dash Wu
The purpose of this paper is to deal with the different phases of volatility behavior and the dependence of the variability of the time series on its own past, models allowing for…
Abstract
Purpose
The purpose of this paper is to deal with the different phases of volatility behavior and the dependence of the variability of the time series on its own past, models allowing for heteroscedasticity like autoregressive conditional heteroscedasticity (ARCH), generalized autoregressive conditional heteroscedasticity (GARCH), or regime‐switching models have been suggested by reserachers. Both types of models are widely used in practice.
Design/methodology/approach
Both regime‐switching models and GARCH are used in this paper to model and explain the behavior of crude oil prices in order to forecast their volatility. In regime‐switching models, the oil return volatility has a dynamic process whose mean is subject to shifts, which is governed by a two‐state first‐order Markov process.
Findings
The GARCH models are found to be very useful in modeling a unique stochastic process with conditional variance; regime‐switching models have the advantage of dividing the observed stochastic behavior of a time series into several separate phases with different underlying stochastic processes.
Originality/value
The regime‐switching models show similar goodness‐of‐fit result to GARCH modeling, while has the advantage of capturing major events affecting the oil market. Daily data of crude oil prices are used from NYMEX Crude Oil market for the period 13 February 2006 up to 21 July 2009.
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