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Capital Structure Decisions: Which factors are reliabiy important? GVHD: SV: !"# $%&'() *+,-.. Capital Structure Decisions: WhichFactors Are Reliabiy important? #/ ++0 01#0/ 0 02#30 #+)0 4 4)/ # 0 )+#2 /)050)#/#/4+62#)250570#)8/49:;;; <5# <+#2)00#0/50#05#)#/ <<--0/)#+# <<<=+##)2=3#50)0>)020)# <?00=/#0/400030'0@502 ?)2/# Capital Structure Decisions: WhichFactors Are Reliabiy important? < << <<< <? ? A#)0#0//22B0C0/0#/2D 0E50FG0H,#B#)1#5505B0#'6C+))//0 C0I)+08)0016C/J 0 E+0)C#' 500E #B#) 00#/8)#'#0)40#05 0#'/K506K500L#I@0/K9M$J 0#508/0''0#EC0##'E/60)0++2 >#22K'0)02C/#06)C'54)00#)25#/)//# $ INTRODUTION 8105//0/ 5061/#025/ 'B++##0/ 8/#N0 : INTRODUTION leverage Harris and Raviv (1991, p. 334) 030'0 030'0 Titman and Wessel ( 1988, p. 17): H0/2/5+3#50/++40G0)506#/#/#'45061 /#025/K32#2#K)2202320K40'BO #/#//#/4)5#//5#/02+0/230#/0+##)2+620 P INTRODUTION #/++0)#60/50/5#'4)+#2/)0#/0302B/K • >#/KB001#0B#)4)/002#62/#'05K502#62#+K4 +05#)#'2030'0 • 0)5K##/2#C02+0/4)+08)#'50)#/#/30)'05 30050)50/ • >#22K#/600'055#G000#0/++28/505#G00 )#)/)0/ A0 5 85 02#620 0+##)2 +0/ )) 4 ) 4 0 3## # C02030'0)//8//#'/+204+62#)2505Q8/49:; ;; R INTRODUTION 8 / < 5 / 0 5# 20 3 0 ' 0 @ C 0 F F 6 C / / 0 / # SRT With a market-based de%nition of leverage, E)04)/H50E)050242030'0E M INTRODUTION '#6#2# >#/#N0 =1+0)05#U# E)0 4)/E remaining factors T #//04)04)/#/0//0302#+L0/#/, IJ 702240/00G0)/0L2202#620D IJ B00+2)0/040)04)/B#0)4)/5/#22 50L02)240CB4)/D IJ B#+0001)25054)/D I$J B50/#//04)04)/0200++20#0/42030'0D 9 INTRODUTION 1. Trade-O% Theory: +#2/)0#/500#05650FG60B0006008/450650 )//4506 0E1F6C+)50FGV+0/+0)#30#/8/62)0016008/ 4506'#/0505B0#')//46C+) 0 E'0)E +0/+0)#30 #/ 506 5#/)#+2#0/ '0/ 5 ##'0/ '0) +620/ 4 400 )/ UB /#)0 506 / 60 0+#5 3#5 6C+)(Jensen and Meckling, 1976; Jensen, 1986). 72' 506 ##'0/ /0250'0 )U#)/K # 01)060/ /0250F506250)U#)/(Stulz, 1990). ; <+#2)00#0/50#05#)#/, 7+#2)00#0/, [...]...I Capital Structure Theories and Their Predictions: A Capital Structure Theories: 2 Pecking Order Theory: Consider three sources of funds available to firms-retained earnings, debt, and equity: st 1 , Retained earnings are a better source of funds than outside financing Retained earnings are thus used when possible 2 3 nd, rd If retained earnings are inadequate, debt financing... for funds currently While this idea seems plausible, it has nothing to say about most of the factors traditionally considered in studies of corporate leverage However, it does suggest that stock returns and debt market conditions will play an important role in capital structure decisions 12 B Predictions List of factors claimed to have some influence on corporate leverage: + Measures of profitability,... Although the pecking order theory is almost always framed in terms of asymmetric information, it can also be generated from tax, agency, or behavioral considerations.^ 11 I Capital Structure Theories and Their Predictions: A Capital Structure Theories: 3 Market Timing Theory: The basic idea is that managers look at current conditions in both debt and equity markets: If they need financing, they use... predictions on profitability are more complex than those based on static models (see Strebulaev, 2007) Empirically, the response has been to argue that leverage and profitability are negatively related because firms passively accumulate profits (see Kayhan and Titman, 2007) The pecking order theory argues that firms prefer internal finance over external funds If investments and dividends are fixed, then more... reduces leverage The pecking order theory -> growth opportunities, and leverage are positively related The market-to-book asset ratio -> proxy for growth opportunities Capital expenditures and the change in log assets -> proxies for growth, represent outflows => Measures: 1) Market-to-book ratio, 2) Change in log assets, and 3) Capital- expenditure-to assets ratio 4 Leverage and Industry Conditions Leverage... The market timing theory, the industry should matter only if valuations are correlated across firms in an industry Measures: I ) Median industry leverage, 2) Median industry growth, and 3) Regulated dummy 5 Leverage and Nature of Assets Tangible assets are easier for outsiders to value than intangibles, makes it difficult for shareholders to substitute highrisk assets for low-risk ones The lower... have higher leverage Also, firms with volatile cash flows might need to periodically access the external capital markets Measure: Variance of stock returns 8 Leverage and Supply-Side Factors • The proxy they use for access to debt markets is whether the firm has rated debt Firms with a debt rating are expected to have more debt, ceteris paribus • From a pecking order perspective, however, possessing... go down, taxable income goes up and cash increases Thus, firms borrow more during expansions • However, agency problems are likely to be more severe during downturns as manager’s wealth is reduced relative to that of shareholders If debt aligns managers incentives with those of shareholders, leverage should be countercyclical • If pecking order theory holds, leverage should decline during expansions... recent past, agency problems between shareholders and managers are less severe Consequently, firms should issue less debt Measures: I) Growth in profit after tax and 2) Growth in GDP II DATA DESCRIPTION Data source: US firm Period from 1950-2003 Data converted to US dollar in 2003 using GDP deflator Finalcial firm, merger firm, missing book value asset are excluded 0,5% level of both tail... High tax rates increase the interest tax benefits of debt • The trade-off theory predicts that to take advantage of higher interest tax shields, firms will issue more debt when tax rates are higher • Nondebt tax shields are a substitute for the tax benefits of debt financing Nondebt tax shield proxies—that is, net operating loss carryforwards, depreciation expense, and investment tax credits—should be . Capital Structure Decisions: Which factors are reliabiy important? GVHD: SV: . !"# $%&'() *+,-.. Capital Structure Decisions: Which Factors Are Reliabiy important? #/ ++0 01#0/ 0 02#30 #+)0 4 . )+#2 /)050)#/#/4+62#)250570#)8/49:;;; <5# <+#2)00#0/50#05#)#/ <<--0/)#+# <<<=+##)2=3#50)0>)020)# <?00=/#0/400030'0@502 ?)2/# Capital Structure Decisions: Which Factors Are Reliabiy important? < << <<< <? ? A#)0#0//22B0C0/0#/2D 0E50FG0H,#B#)1#5505B0#'6C+))//0 C0I)+08)0016C/J 0
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