Do Capital Structure Models Square with the Dynamics of Payout?

2021 ◽  
Vol 13 (1) ◽  
Author(s):  
Shiqi Chen ◽  
Bart M. Lambrecht
Keyword(s):  
Capital Structure ◽  
Annual Review ◽  
Publication Date ◽  
Debt Ratio ◽  
Net Income ◽  
Income Shocks ◽  
Pecking Order ◽  
Negative Relation ◽  
Asset Volatility ◽  
Target Leverage

We explore whether theoretically the target leverage and pecking-order models can be reconciled with payout smoothing. Investment absorbs a significant part of income and asset volatility if the firm follows both a payout target and a net debt ratio (NDR) target. A positive (negative) NDR amplifies (dampens) shocks in assets. Slow adjustment toward the NDR target facilitates payout smoothing. Under strict pecking-order financing, income shocks are absorbed primarily by changes in net debt. More payout smoothing implies a stronger negative relation between debt and net income. Shocks to assets in place need not affect current payout. Expected final online publication date for the Annual Review of Financial Economics, Volume 13 is November 2021. Please see http://www.annualreviews.org/page/journal/pubdates for revised estimates.

scholarly journals What Drives Security Issuance Decisions Of Firms Listed On The Johannesburg Stock Exchange: Market Timing Or Dynamic Trade-Off Theory Or Both?

2015 ◽  
Vol 31 (6) ◽  
pp. 2047
Author(s):  
Vusani Moyo
Keyword(s):  
Capital Structure ◽  
Stock Exchange ◽  
Market Timing ◽  
Weighted Average ◽  
Debt Ratio ◽  
Pecking Order ◽  
Trade Off ◽  
Financial Firms ◽  
Johannesburg Stock Exchange ◽  
Target Leverage

This study used the random effects Tobit model to investigate the validity of the market timing, trade-off and pecking order hypotheses of capital structure in 143 non-financial firms listed on the Johannesburg Stock Exchange. The results show that leverage is positively correlated to the modified external finance weighted average market-to-book ratio (EFWAMB). Firm profitability and growth rate are negatively correlated to leverage whilst firm size and asset tangibility are positively correlated to leverage. The firms also have target leverage ratios towards which they actively adjust at an unbiased speed of 41.80% for the market-to-debt ratio and 52.82% for the book-to-debt ratio. EFWAMB has a negligible effect on the firms’ speeds of adjustment towards target leverage. The results are robust. These results reject the market timing hypothesis in support of the dynamic trade-off and pecking order hypotheses. They further confirm the fact that these two theories of capital structure are not mutual exclusive. 

scholarly journals Do DJIA Firms Reflect Stationary Debt Ratios?

Economies ◽  
2020 ◽  
Vol 8 (4) ◽  
pp. 76
Author(s):  
Feng-Li Lin
Keyword(s):  
Capital Structure ◽  
Stationary Processes ◽  
Debt Ratio ◽  
Pecking Order ◽  
Trade Off ◽  
Listed Firms ◽  
Growth Opportunity ◽  
Dow Jones Industrial Average ◽  
The Mean ◽  
The Stability

To form optimum firm capital structure strategies to face unanticipated economic events, firm managers should understand the stability of a firm’s capital structure. The aim of this research was to study whether the debt ratio is stationary in listed firms on the Dow Jones Industrial Average (DJIA). Two vital capital structure concepts regarding pecking order and trade-off theory are fairly contradictory. Using opposing theoretical contexts, the Sequential Panel Selection Method apparently categorizes which and how many series are stationary processes in the panel. This method was used to test the mean reverting properties of the 25 companies listed on Dow Jones Industrial Average between 2001 and 2017 in this study, which is expected to fill the current gap in the literature. The overall results show that stationary debt ratios exist in 10 of the 25 studied firms, supporting the trade-off theory. Moreover, the 10 firms utilizing trade-off theory are affected by firm size, profitability, growth opportunity, and dividend payout ratio. These results provide vital information for firms to certify strategies to optimize capital structure.

Capital Structure Dynamics and Financing Imbalance: Evidence from an Emerging Economy

2019 ◽  
Vol 5 (2) ◽  
pp. 103-124
Author(s):  
Biswajit Ghose ◽  
Kailash Chandra Kabra
Keyword(s):  
Capital Structure ◽  
Adverse Selection ◽  
Order Theory ◽  
Adjustment Process ◽  
Unified Framework ◽  
Pecking Order ◽  
Trade Off ◽  
Adverse Selection Costs ◽  
Adjustment Speed ◽  
Target Leverage

This paper considers the trade-off and pecking order theory in a unified framework and examines the influence of adverse selection costs on target adjustment process by investigating the relationship between firms’ financing imbalance and their target adjustment speed. Using a large dataset of 2718 non-financial and non-utility listed firms over a period of 2004–2005 to 2015–2016, the study observes that Indian firms adjust toward target leverage with a moderate adjustment speed of 32–36 percent. Moreover, firms with above-target debt make faster adjustment than firms with below-target debt, and firms with financing deficit make faster adjustment than firms with financing surplus. The extensions of target adjustment model by considering financing imbalance and direction of deviation together, and also by incorporating extent of deviation further reveal that firms try to avoid equity and prefer to deal in debt while making adjustments toward the target. In fact, firms deal in equity only when they are highly deviated from target leverage. All these findings suggest that adverse selection costs play significant role in the adjustment process. Therefore, though capital structure decisions of Indian firms are guided by trade-off theory, significance of pecking order arguments cannot be negated. This study makes important contributions to the existing literature as prior studies on impact of financing imbalance on adjustment speed are based on US which is very much different from emerging economies, particularly India.

Firm Profitability and Adjustment of Capital Structure: Indian Evidence

2019 ◽  
Vol 23 (3) ◽  
pp. 297-308
Author(s):  
Biswajit Ghose ◽  
Kailash Chandra Kabra
Keyword(s):  
Capital Structure ◽  
Order Theory ◽  
Adjustment Process ◽  
Pecking Order ◽  
Pecking Order Theory ◽  
Partial Adjustment ◽  
Listed Firms ◽  
Indian Context ◽  
Adjustment Speed ◽  
Target Leverage

The present study investigates the relevance of capital structure dynamics in Indian context by examining the speed at which firms adjust towards their target capital structure. Apart from symmetric adjustment speed, the study also investigates the asymmetries in adjustment speed based on profitability of firms. Using partial adjustment framework on an unbalanced panel of 28,532 firm-year observations comprising 2,718 listed firms over a period of 2004–2005 to 2015–2016, the study finds that Indian firms maintain target leverage and adjust towards the same with a moderate annual adjustment speed of around 32 per cent. The study further observes that high-profitability firms, in general, adjust significantly faster than low-profitability firms which possibly indicate better accessibility in the financial market, lesser costs of adjustments and ability to adjust payout ratio for the former than the latter. Further investigation reveals that high-profitability firms make more adjustment in case of over-leverage, whereas low-profitability firms make more adjustment in case of under-leverage. These results possibly indicate the implications of availability of internally generated funds. Overall, the study concludes that adverse selection cost plays important role in the target adjustment process and hence, both trade-off theory and pecking order theory have relevance in Indian context.

Determinants of capital structure: an empirical study of manufacturing firms in India

2017 ◽  
Vol 59 (6) ◽  
pp. 1029-1045 ◽  
Author(s):  
Rajni Sofat ◽  
Sukhdev Singh
Keyword(s):  
Capital Structure ◽  
Multiple Regression Model ◽  
Manufacturing Firms ◽  
Debt Ratio ◽  
Business Risk ◽  
Service Capacity ◽  
Pecking Order ◽  
Return On Assets ◽  
Risk And Return ◽  
Content Type

Purpose The purpose of this paper is to explore the most significant determinants of capital structure of manufacturing firms in India and to investigate whether the capital structure models derived from foreign research provide convincing explanations for capital structure decisions of Indian firms by using multiple regression model. Design/methodology/approach Different conditional theories of capital structure like trade off theory, pecking order theory and agency theory are reviewed to formulate testable propositions concerning determinants of capital structure of manufacturing firms. Multiple regression model and correlation matrix have been used as statistical tools to investigate the most significant determinants of capital structure of manufacturing firms in India with the help of SPSS Software for a sample of top 100 manufacturing firms listed in BSE. Findings The results suggest that variables like asset composition, business risk and return on assets are positively related to debt ratio whereas firm size and debt service capacity are negatively related to debt ratio. The asset composition, business risk and return on assets appear to be significant determinants of capital structure, while firm size and debt service capacity are insignificant determinants. Research limitations/implications The findings of this study are consistent with predictions of trade off, pecking order and agency theory of finance which helps in understanding financing behaviour of firms in India. Practical implications This study has laid some ground work to explore the determinants of capital structure of Indian firms upon which a more detailed evaluation could be based. Furthermore, empirical findings should help corporate managers to make optimal capital structure decisions. Originality/value To the authors’ knowledge, this study is the first that explores the most significant determinants of capital structure of manufacturing firms in India by using the most recent data. Moreover, this study also confirms that same factors affect the capital structure decisions of firms in developing countries as identified for firms in developed economies.

scholarly journals Pengaruh Defisit Pendanaan Internal Terhadap Struktur Modal

2020 ◽  
Vol 9 (1) ◽  
pp. 22-29
Author(s):  
Andik Susanto ◽  
Novy Rachma Herawati
Keyword(s):  
Capital Structure ◽  
Cash Flow ◽  
Order Theory ◽  
Debt Ratio ◽  
Working Capital ◽  
Pecking Order ◽  
Pecking Order Theory ◽  
Dividend Payments ◽  
Positive Effect ◽  
Internal Funding

Companies  manage its capital structure in order to provide benefits to the company so as to encourage management to manage the capital structure so that the composition of debt or equity can be adjusted with the aim of management in selecting the composition. This research focuses on the pecking order theory by taking a sample of 33 property, real estate, and building construction companies listed on the Indonesia Stock Exchange with the observation year 2015 to 2017. The purpose of this study is to see if there is consistency of research, as well as the previous studies to answer the research gap of extended pecking order theory model to see the effects of internal funding deficit and the debt ratio to the addition of forming internal funding deficit (dividends payment, additional working capital, investment and net cash flow) for additional debt ratio that can be used as a factor affecting changes in capital structure. The final results in this study support the hypothesis that the entire internal funding deficit has a positive effect on additional debt ratio. Dividend payments, additional working capital, net cash flow, and investment have a positive effect. So the company can be said to support the pecking order theory. Keywords—: capital structure; pecking order theory; internal funding deficit; dividend payments; additional working capital.

Determinants of capital structure: Empirical evidence from Shariah compliant plantation firms in Malaysia

2017 ◽  
Vol 5 (4) ◽  
pp. 1
Author(s):  
Mohamad Nizam Jaafar ◽  
Amirul Afif Muhamat ◽  
Ismail Ahmad ◽  
Sharifah Faigah Syed Alwi
Keyword(s):  
Capital Structure ◽  
Financial Management ◽  
Order Theory ◽  
Least Square ◽  
Debt Ratio ◽  
Pecking Order ◽  
Pecking Order Theory ◽  
Trade Off ◽  
Ordinary Least Square ◽  
Relationship Capital

Capital structure choice is vital in corporate financial management due to its effect on both return and risk to investors. As such, the objective of this research is to analyse the capital structure of listed shariah compliant plantation companies in Bursa Malaysia. The factors that influence the level of debt in this research are profitability, tangibility and liquidity respectively. The research is conducted by observing financial data of 34 listed shariah compliant plantation firms in Malaysia from period 2006 to 2016. The study has used panel data and the regression analysis is based on ordinary least square (OLS). Capital structure is the dependaple variable referring to debt ratio of the companies, decomposed into total debts over total assets. The independent variables are profitability, liquidity and tangibility. Three theories of capital structure have guided this study i.e. the Trade-Off Theory, Asymmetric Information and the Pecking Order Theory. The study shows that profitability and tangibility have significant positive relationship capital structure. Nevertheless, liquidity does not have any significant relationshipwith the debt ratio. It is most likely that liquidity is not taken into account by listed plantation companies in Malaysia in making their capital structure decision. Since profitability and tangibility have significant relationship with the level of debt, the Theory of Capital Structure such as Trade Off Theory is applicable to plantation shariah compliant firms listed in Bursa Malaysia.

Capital structure decisions: What Spanish CFOs think

2018 ◽  
Vol 31 (2) ◽  
pp. 306-325 ◽  
Author(s):  
Pablo de Andrés ◽  
Gabriel de la Fuente ◽  
Pablo San Martin
Keyword(s):  
Capital Structure ◽  
Design Methodology ◽  
Debt Ratio ◽  
Pecking Order ◽  
Academic World ◽  
Financial Flexibility ◽  
Content Type ◽  
Internal Funds ◽  
Internal Financing ◽  
Research Show

PurposeThe way business practice adjusts to the models proposed by financial theory has been under moderate yet constant scrutiny from the academic world. The purpose of this paper is to contribute to this line of research by showing CFOs’ perceptions of Spanish companies with regard to their capital structure decisions.Design/MethodologyThe empirical approach is examined using information gathered through a survey answered by 140 CFOs of Spanish companies during 2011. Results are obtained from mean difference tests and ordered probit estimations.FindingsThe results of the paper show that managers attach importance to establishing and monitoring a target debt ratio and the capacity to maintain additional debt in order to provide financial flexibility. In addition, CFOs prefer internal financing to external, using debt when internal funds do not allow investments to be funded.Originality/ValueOn the whole, the results of this research show that trade-off and pecking order theories are not alternative views of the same problem, but represent complementary approaches of how companies define their capital structures.

scholarly journals Trade-Off Or Pecking Order: Evidence From South African Manufacturing, Mining, And Retail Firms

2013 ◽  
Vol 12 (8) ◽  
pp. 927
Author(s):  
Vusani Moyo ◽  
Hendrik Wolmarans ◽  
Leon Brummer
Keyword(s):  
South African ◽  
Random Effects ◽  
Negative Correlation ◽  
Fixed Effects ◽  
Debt Ratio ◽  
Pecking Order ◽  
Trade Off ◽  
Speed Of Adjustment ◽  
Financing Decisions ◽  
Target Leverage

This study tests the trade-off and pecking order hypotheses of corporate financing decisions and estimates the speed of adjustment toward target leverage using a cross-section of 42 manufacturing, 24 mining and 21 retail firms listed on the Johannesburg Stock Exchange (JSE) for the period 2000-2010. It uses the generalised least squares (GLS) random effects, maximum likelihood (ML) random effects, fixed effects, time series regression, Arellano and Bond (1991), Blundell and Bond (1998) and random effects Tobit estimators to fit the two versions of the partial adjustment models. The study finds that leverage is positively correlated to profitability and this supports the trade-off theory. The trade-off theory is further supported by the negative correlation on non-debt tax shields. Consistent with the pecking order theory, capital expenditure and growth rate are positively correlated to leverage while asset tangibility is inversely related to leverage. The negative correlation on financial distress and the positive correlation on dividends paid support both the pecking order and trade-off theories. These results are consistent with the view that the pecking order and trade-off theories are non-mutual exclusive in explaining the financing decisions of firms. The results also show that South African manufacturing, mining and retail firms do have target leverage ratios and the true speed of adjustment towards target leverage is 57.64% for book-to-debt ratio and 42.44% for market-to-debt ratio.

scholarly journals Determinants of capital structure: evidence from Jordanian service companies

2020 ◽  
Vol 17 (2) ◽  
pp. 364-376
Author(s):  
Omar K. Gharaibeh ◽  
Saqer AL-Tahat
Keyword(s):  
Capital Structure ◽  
Secondary Data ◽  
Agency Cost ◽  
Debt Ratio ◽  
Business Risk ◽  
Pecking Order ◽  
Tax Shield ◽  
Service Companies ◽  
Tax Shields ◽  
The Capital Structure

This paper examines capital structure determinants for service companies in Jordan between 2014 and 2018. Secondary data from 45 companies were analyzed using the panel regression approach. The results show that the independent variables, suggested as capital structure determinants, have an effect on the debt ratio made by the service companies. Size and non-debt tax shield have a positive significant effect on the debt ratio, while profitability and business risk have a negative significant impact on the debt ratio. In general, the findings support the notion that the trade-off, bankruptcy cost, agency cost and pecking order theories are crucial in explaining the capital structure of Jordanian service companies except for non-debt tax shields and tangibility factors. Jordanian service companies do not use fixed assets as collateral or companies with higher collateral value tend to borrow less debt. Although the coefficient of institutional investors is statistically insignificant, it is still negative and economically significant. This paper concludes that size, profitability, business risk, non-debt tax shields and institutional ownership factors are fundamental in terms of shaping the capital structure in Jordanian service companies.

Sign in / Sign up

Export Citation Format

Share Document