Determinant factors of leverage

Abstract

PurposeTo contrast the different factors that can determine the level of debt of firms by means of panel data methodology.Design/methodology/approachThe variables used in the study are: size, generated resources, level of warrants, debt cost, growth opportunities, and reputation. Six hypotheses are considered.FindingsThe results obtained suggest that the stated variables, other than reputation, can be considered to be explanatory variables of firm debt level. Using within‐groups estimation and generalized least squares, the results suggest that the behavior of the sample throughout the study period is consistent with the fixed effects approach, in which the specific characteristics of each firm remain constant throughout time. Moreover, with respect to the six considered hypotheses, the analysis shows the influence of all stated variables except reputation on the leverage.Originality/valueAdds to the body of research that has focused on the analysis of the financial decisions of the firm, with the level of debt appearing as a relevant factor in explaining the relationship between investment and financing decisions.

The Effect of Changes in The Ownership and Board of Directors of Companies Due to Foreign Direct Investments on the Cost of Debt: Application on BIST Manufacturing

“…This situation can be explained by the reasons such as the better corporate governance of large companies and the lower risk of bankruptcy compared to smaller ones (Demirhan, 2009:682). Moreover, this result is in compliance with the results of many studies in the literature (Anderson et al, 2004;Padron et al, 2005;Piot & Piera, 2007;Roberts & Yuan, 2010;Ata & Ağ, 2010;Lorca et al, 2011;Kılıç, 2014;Öztürk, 2018).…”

“…Upon calculating the cost of debt of companies, not only the interest offered but also other expenses (such as commission expenses) incurred due to the borrowing should be included to the cost of debt (Padron et al, 2005:62). Therefore, the cost of debt of the company is calculated as financial expenses/total debts, same as in Padron et al (2005), Piot & Piera (2007), Lorca et al (2011), , and Öztürk (2018). Here, the financing expenses are calculated as net financing expenses (financing expenses -financing income) as suggested by Parlakkaya and Çürük (2011).…”

Factors That Determine Capital Structure in Building Material and Construction Listed Firms: Egypt Case

“…In line with the trade-off theory view, a number of studies have admitted that firm size is positively related to the use of debt as a financing source (Padron et al, 2005). Whereas, Titman and Wessels (1988), Ooi (1999) and Chen ( 2003) stated an opposite negative relationship between debt ratios and firm size.…”

“…The trade-off theory and the agency cost theory suggest a positive relationship between the firm's size and its debt ratio based on the assumption of that large firms are expected to have a relatively higher debt capacity and have the ability to borrow more since these firms are better diversified and less prone to financial distress and bankruptcy costs, and lower bankruptcy costs give large firms the opportunity to use better the debt financing (Padron et al, 2005;Sheikh and Wang, 2011). Moreover, large firms have a bigger debt capacity because they can access easily to credit markets and can borrow under better conditions comparing with the smaller firms (Sayılgan et al, 2006).…”

“…The tax shield benefit of financing with debt is not the only method to reduce the firm's tax load (Schulman et al, 1999), Deangelo and Masulis (1980) considered that non-debt tax shields are the alternatives of the tax shields on debt financing, and actually there are several non-debt tax shields, such as accelerated depreciation and investment tax credits (Padron et al, 2005).…”