Debt Financing and Importance of Fixed Assets and Goodwill Assets as Collateral: Dynamic Panel Evidence

Abstract

This article analyses the effect of fixed assets and goodwill assets on South African firms’ debt ratios. The difference and system generalized method of moment estimation results reveal that fixed assets and goodwill assets have significant and positive relationship with firms’ debt ratios. To secure long-term debt, fixed assets and goodwill assets are required as collateral by creditors. Our results show firms’ adjust to long-run optimal debt level, but at a slow adjustment rate. Our results suggest there are costs preventing South African firms from adjusting faster to their long-run optimal debt level. The practical implication of the paper is that policy makers should promote policies that encourage further development of the capital market. Moreover, firms need both fixed assets and goodwill assets as collateral to raise the desired optimal debt that maximizes firm value.

Unobservable Effects and Speed of Adjustment to Target Capital Structure

“…Turning to size variables, our results reveal that size is related to firm debt ratios. The negative relationship between debt and size is inconsistent with Flannery and Hankins (2013) and Matemilola and Ahmad (2015) empirical results that size is positively related to firm debt in United States and South Africa, respectively. Conversely, the results support Lemmon et al (2008), Hanousek and Shamshur (2011) who report negative relationship between size and firm debt ratio in United States and Central & Eastern European countries, respectively.…”

“…In the partial adjustment model, the actual adjustment of debt should be between 0 and 1. The target debt or capital structure is unobservable, so, we proxy it with the fitted values from a regression of observed debt on a set of firms' specific determinant of the target capital structure (Lemmon et al 2008;Oztekin and Flannery, 2012;Matemilola and Ahmad, 2015).…”

Target Capital Structure and Speed of Adjustment : A Dynamic Evidence from Shariah Approved Firms in Malaysia

“…The positive signs are in favour of the TOT and thus, the H2 is supported. The same finding is also documented by Haron & Ibrahim (2012) and Matemilola & Ahmad (2015).…”

Does corporate social responsibility influence firm probability of default?

“…The trade‐off theory argued that firms that are large usually have more debt ratios due to the lower information asymmetry they have. Therefore, these firms have better access to capital markets because of their stable cash flows (Matemilola & Ahmad, 2015; Rizwan et al, 2017). Nevertheless, the trade‐off theory maintained that large firms are usually stable and less likely to default (Frank & Goyal, 2009).…”