The empirical determinants of target capital structure and adjustment to long-run target: evidence from Canadian firms

Nunkoo, Pravish Kumar; Boateng, Agyenim

doi:10.1080/17446540802599671

Cited by 61 publications

(72 citation statements)

References 38 publications

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“…The information asymmetry argument discussed earlier should plausibly explain the negative association. The negative association between size and leverage is confirmed in several other studies (Chen, 2004;Delcoure, 2007;Nunkoo & Boateng, 2010).…”

Section: Sizesupporting

confidence: 75%

Post IPO dynamics of capital structure on the Johannesburg Stock Exchange

Chipeta¹

2016

SAJBM

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This paper examines the dynamics of capital structure for firms engaging in initial public offerings (IPOs) on the Johannesburg Stock Exchange (JSE). Censored Tobit regressions are used to model capital structure targeting behaviour. The findings suggest evidence of targeting behaviour consistent with the static trade off theory of capital structure. On average, IPO firms adjust towards the capital structure target at a faster pace than seasoned firms; IPO firms take, on average, 0.77 years to cover half the financing gap, whereas seasoned firms take an average of 2.65 years. In the first year following the IPO, hot market IPOs significantly reduce their total debt, while cold market IPOs increase the total debt significantly. In terms of the total debt ratio, hot market IPOs adjust at a marginally faster pace than cold market IPOs. However, the opposite is true when the long term debt ratio is considered. In addition, hot market IPOs adjust faster than cold market IPOs in the first year following the IPO. The average first year adjustment speed of hot market IPO firms is 45.61 percent higher than the speed of adjustment for the average cold market IPO firm. Background and motivation

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Section: Sizesupporting

confidence: 75%

Post IPO dynamics of capital structure on the Johannesburg Stock Exchange

Chipeta¹

2016

SAJBM

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“…While Couto and Ferreira (2010) and Chadha and Sharma (2015) assert that tangibility is a determinant factor of capital structure, Nunkoo and Boateng (2010) argue that tangibility has a positive influence on leverage.…”

Section: Tangibilitymentioning

confidence: 99%

“…However, some studies have concluded otherwise, which might be a consequence of using different variables for growth, such as net assets growth rate (Couto & Ferreira 2010;Rebelo 2006), total assets growth rate (Chang et al 2009;Nunkoo & Boateng 2010) or speed of adjustment (Oinoa & Ukaegbu 2015). Sbeiti (2010) argues that growth needs to be defined through the following ratio: total assets book value minus net assets book value and the market value of equity over the total assets book value.…”

Section: Growthmentioning

confidence: 99%

“…This hierarchy mainly consists of financing investments with retained earnings, followed by new debt issues and, lastly, by the issuance of new equity. Consequently, firms' profitability has a negative impact on their use of debt (Chang, Lee & Lee 2009;Nunkoo & Boateng 2010). Rebelo (2006) also asserts that profitability has a negative impact on total debt, and Abor (2005) claims that profitability has a negative impact on short-term debt.…”

Section: Profitabilitymentioning

confidence: 99%

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Determinants of the capital structure of Portuguese firms with investments in Angola

Mota

Moreira

2017

SAJEMS

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Background: This article seeks to complement the previous literature and clarify the particularities of the capital structure policy of firms with foreign direct investment in Angola.Aim: This article seeks to identify the determinants of the capital structure of Portuguese firms with direct investment in Angola and to understand whether the determinants normally considered by standard finance theory are in line with those used by firms when structuring their capital structure policy to participate in the specific market of Angola.Setting: This article examines 26 large Portuguese firms with investments in Angola using econometric panel data for the period 2006–2010.Methods: The study applied fixed and random effects methods and panel-corrected standard errors that maintain efficiency and unbiased behaviour even in the presence of panel-level heteroscedasticity and contemporaneous correlation of observations among panels.Results: The results provide evidence that the determinants normally considered by standard finance theory are in fact – in terms of sign and coefficient dimension – those used by firms for structuring their capital structure policy when involved in the internationalisation process of entering Angola. Specifically, age, asset structure, return on assets and tangibility have a positive influence on the capital structure of Portuguese firms that have invested in Angola, while non-debt tax shields and liquidity have a negative influence on these companies’ leverage ratios. When comparing our results with studies that have analysed the capital structure determinants of listed Portuguese firms – firms belonging to the PSI 20 Index and large firms in the Portuguese corporate sector – we found similarities in the sign and coefficient dimension of the determinants of capital structure. However, the profitability coefficient sign is in line with the trade-off framework (i.e. profitability is positively related to debt) but not with pecking order theory (i.e. profitability is negatively related to debt).Conclusion: Our results suggest that the high-growth Angolan market is seen by larger Portuguese firms as a low-risk diversification process because of the economic hardship Portugal has gone through, as well as cultural and linguistic similarities to Portugal. As such, the Angolan market is seen as an extension of the Portuguese domestic market that has increased potential. This scenario potentially reduces the firm default probability and the cost of debt. Maintaining the tax shield benefits of debt and decreasing the cost of debt – through a reduction in the default probability – have induced profitable firms to use more debt.

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“…Flannery and Rangan (2006) showed that nonfinancial companies identify and tend to reach an indebtedness target ratio very quickly for the period 1966-2001. More recently, Nunkoo and Boateng (2010) established that long term leverage of Canadian firms would tend to an indebtedness target ratio event if the adjustment were relatively slow.…”

Section: From the Fundamentals Of Financial Behaviour To The Static Tmentioning

confidence: 99%

Pecking-Order or Static Trade-off Theory in Family Firms? Evidence from Belgium

Bauweraerts¹,

Colot²

2012

IBR

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The purpose of this paper is to investigate whether a difference can be stated in the family firms' financial choices. Using the Shyam-Sunder and Myers model, our research focus on the financial behaviour of family and non-family privately held firms in Belgium. Out of a sample of 210 privately held firms for the period 2002-2010, panel data methodology is employed to estimate Pecking-Order and Static Trade-off models. Our results show that although neither Pecking Order nor Static Trade-off Theory seems to apply to non-family firms, family firms are more likely to adopt an indebtedness target ratio. Moreover, the introduction of an allowance for corporate equity on the Belgian market is also taken into account. Our results indicate that such a mechanism seems to have an influence on the family firms funding choices.Keywords: family firm, debt, financial structure, capital structure, financial behavior, allowance for corporate equity IntroductionIn the literature relative to the financial structure of the firm, two theories are regularly confronted. The theory of Modigliani and Miller (1958) revealed the neutrality of the financial structure under the hypothesis of a perfect market. By introducing corporate income tax, Modigliani and Miller (1963) demonstrated the superiority of firms using debts, since the take advantage of the deductibility of interest expenses. Nevertheless, this model was criticized because it did not take into account the costs of distress within the firm. In order to fill this gap, Static Trade-off Theory was built to develop a model based on a costs-profits analysis resulting from the issuance of debt (Krauss & Litzenberger, 1973). This theory assumes the existence of a target indebtedness ratio equalling the profits of the deductibility of interest expenses and the costs of distress of the firm. Besides, an alternative theory was proposed by Myers and Majluf (1984): the Pecking-Order Theory. Under this theory, due to information asymmetry between managers and external investors, self-financing would be preferred to debts and stocks issuance by the managers.

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The empirical determinants of target capital structure and adjustment to long-run target: evidence from Canadian firms

Cited by 61 publications

References 38 publications

Post IPO dynamics of capital structure on the Johannesburg Stock Exchange

Post IPO dynamics of capital structure on the Johannesburg Stock Exchange

Determinants of the capital structure of Portuguese firms with investments in Angola

Pecking-Order or Static Trade-off Theory in Family Firms? Evidence from Belgium

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