Korean economy undergoes pre-modernized corporate governance. Financial-market imperfections assumed to be incorporated in equity ratio affect the sensitivity of internal funds to physical investment. Empirical analyses show that the effects of asymmetric information are significant. Theories predict that internal finance is less costly than borrowing or issuing equity. Higher cash flow from higher profits affects investment ratio. But, this marginal effect is decreased by equity ratio. If we assume that more imperfect financial market requires more equity than borrowing, we can see that agency costs change the way economic variables like cash flow affect physical investment. Cash flow plays two opposite roles for implementing investment. In the case of financial-imperfections, we can expect that firms with higher profits invest more. But, according to free cash flow hypothesis by Jensen (1986), managers with only a small ownership interest have an incentive for wasteful management. We can expect to see more wasteful activity in a firm with large cash flows. Our regression result shows that the former dominates the latter, so we get positive coefficient for cash flow variable on the physical investment.
Determinants of capital_structure_an_empR Ehan Raja
This document summarizes a research paper that investigates the determinants of capital structure for manufacturing firms in Pakistan. The paper reviews various capital structure theories and identifies firm-specific factors that may influence a firm's debt ratio. An empirical analysis is then conducted using data from 160 Pakistani manufacturing firms to determine which factors, such as profitability, size, liquidity, etc., are significantly related to the debt ratios of these firms. The findings indicate several factors predicted by trade-off theory, pecking order theory, and agency theory help explain the financing behavior of Pakistani firms, suggesting some universal applicability of capital structure models from Western settings.
07. the determinants of capital structurenguyenviet30
This document summarizes a research paper that investigates how firms in capital market-oriented economies (UK, US) and bank-oriented economies (France, Germany, Japan) determine their capital structures. Using panel data and regression analysis, the paper finds that firm size and tangibility of assets increase leverage, while profitability, growth opportunities, and share price performance decrease leverage in both types of economies. However, the impacts of some determinants vary between countries depending on differences in institutions and traditions. The paper also finds that firms have target leverage ratios but adjust to them at different speeds across countries.
This research investigates the determinants of the capital structure of firms listed service sector on BIST(Borsa Istanbul) and the adjustment process towards this target. The econometric analysis employs the Generalized Method of Moments estimators (GMM-Sys, GMM difference) techniques that controls for unobserved firm-specific effects and the endogeneity problem. The findings of the paper suggest that firms have target leverage ratios and they adjust to them relatively fast. Consistent with the predictions of capital structure theories and the findings of the empirical literature, the results of this paper suggest that size, assets tangibility, profitability, growth opportunity except earnings volatility have significant effects on the capital structure choice of hotels and restaurants.The capital structure or leverage is measured by total debt ratio. Analysis results indicates that firms with high profits, sizable, high fixed assets ratio and high total sales and more growth opportunities tend to have relatively less debt in their capital structures.
DETERMINANTS OF THE CAPITAL STRUCTURE OF THE COMPANIES OF THE FOOD AND BEVERA...Heily Machuca Marín
This document examines the determinants of capital structure for companies in the food and beverage industry on the Lima Stock Exchange from 2012-2015. An analysis was conducted using financial data from 18 Peruvian companies, looking at factors like cost of debt, tax rates, liquidity, dividend rates, company size, and their influence on leverage ratios. Ordinary least squares models were used to analyze the relationships between capital structure and its determinants.
This document summarizes several studies on theories of capital structure and factors that influence a firm's capital structure decisions. It discusses Modigliani and Miller's capital structure irrelevance theory and its assumptions. It also reviews the pecking order theory, trade-off theory, and agency cost theory. Several empirical studies are summarized that examine the impact of firm-specific factors like profitability, size, growth, risk, and tangibility on capital structure. The studies reviewed different countries and time periods and generally found that profitability and tangibility influence debt levels while growth opportunities do not.
This paper scrutinizes Determinants of Capital Structure: A study on some selected corporate firms in Bangladesh. We have taken 10 out of 37 listed companies of DSE dividing into two sectors i.e. Pharmaceuticals and chemicals and Tannery sector, five years data from 2013 to 2017 has been collected from respective annual reports. Total number of observations was 50. There are different factors that affect a firm's capital structure decision. We use leverage (D/E ratio) as dependent variable and independent variables are profitability, tangibility, tax, size, growth, non-debt tax shield (NDTS) and financial costs. By using Descriptive Statistical Analysis, Correlation Analysis and Regression Analysis tools we find that Tangibility, size, NDTS, and financial costs are positively related with leverage and Profitability, tax, and growth are negatively related with leverage. In our analysis we see profitability, tangibility of asset, growth and non-debt tax shield have significant association. So when we take capital structure decision of the above firms we should consider profitability, tangibility of asset, growth and non-debt tax shield because other independent variables are insignificant in the context of Bangladesh economy.
This document discusses a study on the active adjustment of capital structure in consumer goods firms in Indonesia. It begins with an introduction to capital structure and how it is an important financial decision for firms. The consumer goods industry in Indonesia is growing rapidly and firms may seek external financing like debt or equity that can influence their capital structure.
The study aims to explore if consumer goods firms have an optimal target capital structure and whether managers actively adjust towards this target. The literature review covers various capital structure theories including Modigliani-Miller, trade-off theory, and how factors like taxes, financial distress, and adjustment costs influence a firm's capital structure decisions. There is still uncertainty around whether managers in consumer goods firms use active or
1. The document analyzes how retained earnings and growth rates impact 149 Indian companies over 1996-2010.
2. It finds that cash flow and dividends are the most influential variables on retained earnings. Companies with low future growth opportunities prefer to pay more in dividends.
3. Past studies on various countries also generally found that profits, cash flow, dividends and investment opportunities influence retained earnings levels. Internally generated funds are important for financing corporate growth.
Determinants of capital_structure_an_empR Ehan Raja
This document summarizes a research paper that investigates the determinants of capital structure for manufacturing firms in Pakistan. The paper reviews various capital structure theories and identifies firm-specific factors that may influence a firm's debt ratio. An empirical analysis is then conducted using data from 160 Pakistani manufacturing firms to determine which factors, such as profitability, size, liquidity, etc., are significantly related to the debt ratios of these firms. The findings indicate several factors predicted by trade-off theory, pecking order theory, and agency theory help explain the financing behavior of Pakistani firms, suggesting some universal applicability of capital structure models from Western settings.
07. the determinants of capital structurenguyenviet30
This document summarizes a research paper that investigates how firms in capital market-oriented economies (UK, US) and bank-oriented economies (France, Germany, Japan) determine their capital structures. Using panel data and regression analysis, the paper finds that firm size and tangibility of assets increase leverage, while profitability, growth opportunities, and share price performance decrease leverage in both types of economies. However, the impacts of some determinants vary between countries depending on differences in institutions and traditions. The paper also finds that firms have target leverage ratios but adjust to them at different speeds across countries.
This research investigates the determinants of the capital structure of firms listed service sector on BIST(Borsa Istanbul) and the adjustment process towards this target. The econometric analysis employs the Generalized Method of Moments estimators (GMM-Sys, GMM difference) techniques that controls for unobserved firm-specific effects and the endogeneity problem. The findings of the paper suggest that firms have target leverage ratios and they adjust to them relatively fast. Consistent with the predictions of capital structure theories and the findings of the empirical literature, the results of this paper suggest that size, assets tangibility, profitability, growth opportunity except earnings volatility have significant effects on the capital structure choice of hotels and restaurants.The capital structure or leverage is measured by total debt ratio. Analysis results indicates that firms with high profits, sizable, high fixed assets ratio and high total sales and more growth opportunities tend to have relatively less debt in their capital structures.
DETERMINANTS OF THE CAPITAL STRUCTURE OF THE COMPANIES OF THE FOOD AND BEVERA...Heily Machuca Marín
This document examines the determinants of capital structure for companies in the food and beverage industry on the Lima Stock Exchange from 2012-2015. An analysis was conducted using financial data from 18 Peruvian companies, looking at factors like cost of debt, tax rates, liquidity, dividend rates, company size, and their influence on leverage ratios. Ordinary least squares models were used to analyze the relationships between capital structure and its determinants.
This document summarizes several studies on theories of capital structure and factors that influence a firm's capital structure decisions. It discusses Modigliani and Miller's capital structure irrelevance theory and its assumptions. It also reviews the pecking order theory, trade-off theory, and agency cost theory. Several empirical studies are summarized that examine the impact of firm-specific factors like profitability, size, growth, risk, and tangibility on capital structure. The studies reviewed different countries and time periods and generally found that profitability and tangibility influence debt levels while growth opportunities do not.
This paper scrutinizes Determinants of Capital Structure: A study on some selected corporate firms in Bangladesh. We have taken 10 out of 37 listed companies of DSE dividing into two sectors i.e. Pharmaceuticals and chemicals and Tannery sector, five years data from 2013 to 2017 has been collected from respective annual reports. Total number of observations was 50. There are different factors that affect a firm's capital structure decision. We use leverage (D/E ratio) as dependent variable and independent variables are profitability, tangibility, tax, size, growth, non-debt tax shield (NDTS) and financial costs. By using Descriptive Statistical Analysis, Correlation Analysis and Regression Analysis tools we find that Tangibility, size, NDTS, and financial costs are positively related with leverage and Profitability, tax, and growth are negatively related with leverage. In our analysis we see profitability, tangibility of asset, growth and non-debt tax shield have significant association. So when we take capital structure decision of the above firms we should consider profitability, tangibility of asset, growth and non-debt tax shield because other independent variables are insignificant in the context of Bangladesh economy.
This document discusses a study on the active adjustment of capital structure in consumer goods firms in Indonesia. It begins with an introduction to capital structure and how it is an important financial decision for firms. The consumer goods industry in Indonesia is growing rapidly and firms may seek external financing like debt or equity that can influence their capital structure.
The study aims to explore if consumer goods firms have an optimal target capital structure and whether managers actively adjust towards this target. The literature review covers various capital structure theories including Modigliani-Miller, trade-off theory, and how factors like taxes, financial distress, and adjustment costs influence a firm's capital structure decisions. There is still uncertainty around whether managers in consumer goods firms use active or
1. The document analyzes how retained earnings and growth rates impact 149 Indian companies over 1996-2010.
2. It finds that cash flow and dividends are the most influential variables on retained earnings. Companies with low future growth opportunities prefer to pay more in dividends.
3. Past studies on various countries also generally found that profits, cash flow, dividends and investment opportunities influence retained earnings levels. Internally generated funds are important for financing corporate growth.
International Journal of Business and Management Invention (IJBMI) is an international journal intended for professionals and researchers in all fields of Business and Management. IJBMI publishes research articles and reviews within the whole field Business and Management, new teaching methods, assessment, validation and the impact of new technologies and it will continue to provide information on the latest trends and developments in this ever-expanding subject. The publications of papers are selected through double peer reviewed to ensure originality, relevance, and readability. The articles published in our journal can be accessed online.
Contoh Penelitian Tentang Pengaruh Profitabilitas Terhadap Nilai PerusahaanTrisnadi Wijaya
1) The study examines how profitability influences firm value, with capital structure (leverage) as a mediator, and industry type and firm size as moderators.
2) The authors hypothesize that profitability has a positive effect on firm value but a negative effect on leverage. Leverage, in turn, is expected to negatively impact firm value.
3) Industry type and firm size are expected to moderate the relationships between profitability, leverage, and firm value. The study uses data from Taiwanese listed companies to test these hypotheses.
34 internal controls and financial statement analysis smile790243
This document discusses internal controls over financial reporting (ICFR) and their relationship to firm profitability and financial statement analysis. It provides background on ICFR and how they are intended to mitigate risks and ensure reliable financial reporting. The document reviews prior research that found effective ICFR is associated with improved profitability. It discusses how financial statement analysis separates return on equity into operating and non-operating components to analyze core operations and financing/investing activities. The document presents hypotheses about the differential relationship between ICFR and operating vs. non-operating returns and how changes in ICFR may impact returns.
Relationship between capital structure and firm’s performance theoretical reviewAlexander Decker
This document provides a theoretical review of the relationship between capital structure and firm performance. It begins by defining capital structure as the combination of debt and equity used to finance a firm's operations. The document then discusses the main determinants of capital structure, including both internal factors like firm size, growth, and profitability, as well as external macroeconomic variables. Finally, it outlines the major theories around capital structure and their views on the relationship with firm performance and value.
There will likely be continued consolidation in the banking industry in the coming years for three key reasons:
1) Increased regulation has made larger banks more efficient but also increased scrutiny of mergers, especially for large firms.
2) Compliance costs have become disproportionately burdensome for small banks, incentivizing mergers.
3) Markets have become more concentrated as deposits have shifted to large banks, raising anti-competitive concerns for future mergers.
The successful management of the regulatory approval process, which takes longer for larger deals, will provide firms a strategic advantage going forward.
This document discusses sources of finance for small businesses and entrepreneurs. It begins by outlining learning outcomes related to understanding different sources of finance and issues around obtaining financing. It then provides an overview of internal and external sources of financing for small businesses. The document focuses on debt financing and discusses theoretical issues small businesses face in obtaining external financing, such as potential finance gaps. It also notes initiatives by governments and organizations to help address financing difficulties for small businesses.
This document provides an overview of agency theory and transaction cost theory from an economic perspective. It discusses the principal-agent problem, where the interests of the principal and agent may diverge due to information asymmetry or differing risk preferences. This can lead to issues like moral hazard or adverse selection. The document also examines how transaction costs relate to the costs involved in economic exchanges. It explores how agency theory and transaction costs can help explain organizational structures and governance.
International Journal of Business and Management Invention (IJBMI)inventionjournals
This document summarizes a research paper that studied the impact of capital structure on the performance of listed public sector banks in India from 2008 to 2012. The paper seeks to establish a relationship between capital structure and profitability measures like return on equity, return on assets, and earnings per share. Regression analysis was used to analyze the data from the national stock exchange. The findings revealed a positive relationship between short-term debt and the profitability measures. The purpose is to provide empirical evidence on the relationship between capital structure and banking performance to help public sector banks in India select an optimal capital structure to improve profitability.
Advantages and disadvantages of going public and becoming a listed companysurrenderyourthrone
This document discusses the advantages and disadvantages of companies going public and becoming listed companies. Some key advantages of going public mentioned include gaining access to public capital markets for funding, enhanced ability to borrow and raise equity in the future, increased liquidity and valuation of shares, and increased prestige. However, the document also notes several disadvantages such as high costs of the IPO process, increased disclosure and reporting requirements, loss of some control, and pressure to maintain growth. Empirical evidence presented finds that post-IPO financial performance often declines for companies in countries like Italy, the UK, and Saudi Arabia. Alternatives to IPOs discussed include private placements, debt instruments, and stock buybacks.
This document provides an overview of transaction cost economics (TCE) and its application to the boundaries of the firm. It discusses how TCE, pioneered by Oliver Williamson, explains why firms vertically integrate to bring production stages in-house in order to reduce transaction costs, especially when asset specificity is present. The document also briefly describes alternative formal approaches to firm boundaries based on incomplete contracts, like the property rights theory of Grossman, Hart, and Moore, and relational contract theories.
Problem 16 13 current asset usage policypayne products had $1.6POLY33
This credit report summary provides an overview of Samantha Charron's credit history and accounts. It shows that she has a credit history of 3 years and 6 months with an average account age of 1 year and 6 months. She has a total of 4 accounts (2 revolving, 2 installment) with a balance of $8,473 and available credit of $2,458, resulting in an overall debt-to-credit utilization of 78%. No negative information or fraud indicators were reported.
Determinates of capital structure in the retailing sectorAisha Dalmouk
This document summarizes a study examining the determinants of capital structure in UK firms. Section 1 introduces the topic and outlines the subsequent sections. Section 2 discusses theoretical perspectives on capital structure. Section 3 describes the database and variables. Section 4 details the results of regressing various measures of gearing on determinants like size, profitability and tangibility. Section 5 further decomposes the debt components and Section 6 concludes.
This document discusses a study on the determinants of capital structure for Pakistani textile companies. Specifically, it analyzes 30 spinning sector companies listed on the Karachi Stock Exchange from 2004-2009. Size, growth, financing costs, profitability, and tangibility are examined as independent variables influencing leverage, the dependent variable. The results found that smaller Pakistani spinning companies prefer internal financing over external financing due to their size and capitalization.
Capital structure and market values of companiesAlexander Decker
1) The document discusses the relationship between capital structure and market values of companies. It notes that an optimal capital structure is important for maximizing shareholder wealth and market value.
2) The author reviews theories on how capital structure can impact firm value. While the Modigliani-Miller theory suggests capital structure is irrelevant, other research has found relationships between capital structure, growth opportunities, and firm value.
3) Debt financing can increase firm value through tax benefits and lower costs than equity, but it also increases financial risk which may offset these benefits. An optimal capital structure balances these costs and benefits.
The document discusses corporate governance in India, highlighting several key points:
1. Corporate governance issues are universal but particularly important in India due to features like family-run businesses, weak legal enforcement, and high ownership concentration.
2. Effective corporate governance promotes strong financial systems and economic growth by enhancing access to financing and investment while reducing risks.
3. The main challenges are ensuring managers serve shareholder interests and protecting minority shareholder rights in contexts like family businesses where interests may not align.
Determinants of capital structure of listed textile enterprises of bangladeshAlexander Decker
This document summarizes a research study on the determinants of capital structure for listed textile enterprises in Bangladesh. The study uses panel data and a fixed-effect model to examine the relationship between leverage and firm-specific factors like profitability, tangibility, size, and growth. The results found that profitability and tangibility were statistically significant determinants of leverage. This finding is consistent with both the trade-off theory and agency cost theory of capital structure. The document also reviews various capital structure theories and how they relate to different firm-specific determinants.
The Business,Tex,and financial environmentsZubair Arshad
Here are the likely effects of the occurrences on money and capital markets:
1. The saving rate of individuals in the country declines:
- This would decrease the supply of funds available in financial markets.
- Interest rates would likely rise as demand for funds exceeds reduced supply.
- Investment levels may fall as fewer funds are available for businesses and projects.
2. Individuals increases their savings at saving and loan associations and decreases their savings at banks:
- This would decrease the supply of funds available to banks while increasing the supply available to saving and loan associations.
- Interest rates at banks may rise as their funding decreases. Rates at saving and loan associations may fall as their funding increases.
- Banks would
International Journal of Business and Management Invention (IJBMI) is an international journal intended for professionals and researchers in all fields of Business and Management. IJBMI publishes research articles and reviews within the whole field Business and Management, new teaching methods, assessment, validation and the impact of new technologies and it will continue to provide information on the latest trends and developments in this ever-expanding subject. The publications of papers are selected through double peer reviewed to ensure originality, relevance, and readability. The articles published in our journal can be accessed online
This paper analyzes the relationship between financial leverage and investment in the
Cameroonian context. To this end, using a sample of 1362 firms observed over the period 2015-2017, a
fixed-effect panel data instrumental variable regression model is estimated using the G2SLS method. The
results show that leverage positively influences investment. However, in the sample as a whole, and in the
individual SMEs, this relationship is not linear. It takes the form of an inverted "U". Specifically, at a low
level of debt, the relationship between financial leverage and corporate investment is positive. It becomes
negative at higher levels of leverage. Moreover, in turn, financial leverage is positively and significantly
determined by investment.
The Impact of Capital Structure on the Performance of Industrial Commodity an...IJEAB
This paper investigates the impact of capital structure on the performance of commodity and service firms listed on the Vietnamese Stock Exchange. Data used in the paper were collected from the 142 firms listed on Ho Chi Minh and Ha Noi Stock Exchange during time 2009-2015. By using the descriptive statistics and linear regression model, the findings shows that there is negative relationship between capital structure (e.i. STD. LTD and DA) and peformance of the firms (i.e. ROE) for the commodity and services firms listed on two given Stock Exchange Market of Vietnam. Following are possible implications for the study.
International Journal of Business and Management Invention (IJBMI) is an international journal intended for professionals and researchers in all fields of Business and Management. IJBMI publishes research articles and reviews within the whole field Business and Management, new teaching methods, assessment, validation and the impact of new technologies and it will continue to provide information on the latest trends and developments in this ever-expanding subject. The publications of papers are selected through double peer reviewed to ensure originality, relevance, and readability. The articles published in our journal can be accessed online.
Contoh Penelitian Tentang Pengaruh Profitabilitas Terhadap Nilai PerusahaanTrisnadi Wijaya
1) The study examines how profitability influences firm value, with capital structure (leverage) as a mediator, and industry type and firm size as moderators.
2) The authors hypothesize that profitability has a positive effect on firm value but a negative effect on leverage. Leverage, in turn, is expected to negatively impact firm value.
3) Industry type and firm size are expected to moderate the relationships between profitability, leverage, and firm value. The study uses data from Taiwanese listed companies to test these hypotheses.
34 internal controls and financial statement analysis smile790243
This document discusses internal controls over financial reporting (ICFR) and their relationship to firm profitability and financial statement analysis. It provides background on ICFR and how they are intended to mitigate risks and ensure reliable financial reporting. The document reviews prior research that found effective ICFR is associated with improved profitability. It discusses how financial statement analysis separates return on equity into operating and non-operating components to analyze core operations and financing/investing activities. The document presents hypotheses about the differential relationship between ICFR and operating vs. non-operating returns and how changes in ICFR may impact returns.
Relationship between capital structure and firm’s performance theoretical reviewAlexander Decker
This document provides a theoretical review of the relationship between capital structure and firm performance. It begins by defining capital structure as the combination of debt and equity used to finance a firm's operations. The document then discusses the main determinants of capital structure, including both internal factors like firm size, growth, and profitability, as well as external macroeconomic variables. Finally, it outlines the major theories around capital structure and their views on the relationship with firm performance and value.
There will likely be continued consolidation in the banking industry in the coming years for three key reasons:
1) Increased regulation has made larger banks more efficient but also increased scrutiny of mergers, especially for large firms.
2) Compliance costs have become disproportionately burdensome for small banks, incentivizing mergers.
3) Markets have become more concentrated as deposits have shifted to large banks, raising anti-competitive concerns for future mergers.
The successful management of the regulatory approval process, which takes longer for larger deals, will provide firms a strategic advantage going forward.
This document discusses sources of finance for small businesses and entrepreneurs. It begins by outlining learning outcomes related to understanding different sources of finance and issues around obtaining financing. It then provides an overview of internal and external sources of financing for small businesses. The document focuses on debt financing and discusses theoretical issues small businesses face in obtaining external financing, such as potential finance gaps. It also notes initiatives by governments and organizations to help address financing difficulties for small businesses.
This document provides an overview of agency theory and transaction cost theory from an economic perspective. It discusses the principal-agent problem, where the interests of the principal and agent may diverge due to information asymmetry or differing risk preferences. This can lead to issues like moral hazard or adverse selection. The document also examines how transaction costs relate to the costs involved in economic exchanges. It explores how agency theory and transaction costs can help explain organizational structures and governance.
International Journal of Business and Management Invention (IJBMI)inventionjournals
This document summarizes a research paper that studied the impact of capital structure on the performance of listed public sector banks in India from 2008 to 2012. The paper seeks to establish a relationship between capital structure and profitability measures like return on equity, return on assets, and earnings per share. Regression analysis was used to analyze the data from the national stock exchange. The findings revealed a positive relationship between short-term debt and the profitability measures. The purpose is to provide empirical evidence on the relationship between capital structure and banking performance to help public sector banks in India select an optimal capital structure to improve profitability.
Advantages and disadvantages of going public and becoming a listed companysurrenderyourthrone
This document discusses the advantages and disadvantages of companies going public and becoming listed companies. Some key advantages of going public mentioned include gaining access to public capital markets for funding, enhanced ability to borrow and raise equity in the future, increased liquidity and valuation of shares, and increased prestige. However, the document also notes several disadvantages such as high costs of the IPO process, increased disclosure and reporting requirements, loss of some control, and pressure to maintain growth. Empirical evidence presented finds that post-IPO financial performance often declines for companies in countries like Italy, the UK, and Saudi Arabia. Alternatives to IPOs discussed include private placements, debt instruments, and stock buybacks.
This document provides an overview of transaction cost economics (TCE) and its application to the boundaries of the firm. It discusses how TCE, pioneered by Oliver Williamson, explains why firms vertically integrate to bring production stages in-house in order to reduce transaction costs, especially when asset specificity is present. The document also briefly describes alternative formal approaches to firm boundaries based on incomplete contracts, like the property rights theory of Grossman, Hart, and Moore, and relational contract theories.
Problem 16 13 current asset usage policypayne products had $1.6POLY33
This credit report summary provides an overview of Samantha Charron's credit history and accounts. It shows that she has a credit history of 3 years and 6 months with an average account age of 1 year and 6 months. She has a total of 4 accounts (2 revolving, 2 installment) with a balance of $8,473 and available credit of $2,458, resulting in an overall debt-to-credit utilization of 78%. No negative information or fraud indicators were reported.
Determinates of capital structure in the retailing sectorAisha Dalmouk
This document summarizes a study examining the determinants of capital structure in UK firms. Section 1 introduces the topic and outlines the subsequent sections. Section 2 discusses theoretical perspectives on capital structure. Section 3 describes the database and variables. Section 4 details the results of regressing various measures of gearing on determinants like size, profitability and tangibility. Section 5 further decomposes the debt components and Section 6 concludes.
This document discusses a study on the determinants of capital structure for Pakistani textile companies. Specifically, it analyzes 30 spinning sector companies listed on the Karachi Stock Exchange from 2004-2009. Size, growth, financing costs, profitability, and tangibility are examined as independent variables influencing leverage, the dependent variable. The results found that smaller Pakistani spinning companies prefer internal financing over external financing due to their size and capitalization.
Capital structure and market values of companiesAlexander Decker
1) The document discusses the relationship between capital structure and market values of companies. It notes that an optimal capital structure is important for maximizing shareholder wealth and market value.
2) The author reviews theories on how capital structure can impact firm value. While the Modigliani-Miller theory suggests capital structure is irrelevant, other research has found relationships between capital structure, growth opportunities, and firm value.
3) Debt financing can increase firm value through tax benefits and lower costs than equity, but it also increases financial risk which may offset these benefits. An optimal capital structure balances these costs and benefits.
The document discusses corporate governance in India, highlighting several key points:
1. Corporate governance issues are universal but particularly important in India due to features like family-run businesses, weak legal enforcement, and high ownership concentration.
2. Effective corporate governance promotes strong financial systems and economic growth by enhancing access to financing and investment while reducing risks.
3. The main challenges are ensuring managers serve shareholder interests and protecting minority shareholder rights in contexts like family businesses where interests may not align.
Determinants of capital structure of listed textile enterprises of bangladeshAlexander Decker
This document summarizes a research study on the determinants of capital structure for listed textile enterprises in Bangladesh. The study uses panel data and a fixed-effect model to examine the relationship between leverage and firm-specific factors like profitability, tangibility, size, and growth. The results found that profitability and tangibility were statistically significant determinants of leverage. This finding is consistent with both the trade-off theory and agency cost theory of capital structure. The document also reviews various capital structure theories and how they relate to different firm-specific determinants.
The Business,Tex,and financial environmentsZubair Arshad
Here are the likely effects of the occurrences on money and capital markets:
1. The saving rate of individuals in the country declines:
- This would decrease the supply of funds available in financial markets.
- Interest rates would likely rise as demand for funds exceeds reduced supply.
- Investment levels may fall as fewer funds are available for businesses and projects.
2. Individuals increases their savings at saving and loan associations and decreases their savings at banks:
- This would decrease the supply of funds available to banks while increasing the supply available to saving and loan associations.
- Interest rates at banks may rise as their funding decreases. Rates at saving and loan associations may fall as their funding increases.
- Banks would
International Journal of Business and Management Invention (IJBMI) is an international journal intended for professionals and researchers in all fields of Business and Management. IJBMI publishes research articles and reviews within the whole field Business and Management, new teaching methods, assessment, validation and the impact of new technologies and it will continue to provide information on the latest trends and developments in this ever-expanding subject. The publications of papers are selected through double peer reviewed to ensure originality, relevance, and readability. The articles published in our journal can be accessed online
This paper analyzes the relationship between financial leverage and investment in the
Cameroonian context. To this end, using a sample of 1362 firms observed over the period 2015-2017, a
fixed-effect panel data instrumental variable regression model is estimated using the G2SLS method. The
results show that leverage positively influences investment. However, in the sample as a whole, and in the
individual SMEs, this relationship is not linear. It takes the form of an inverted "U". Specifically, at a low
level of debt, the relationship between financial leverage and corporate investment is positive. It becomes
negative at higher levels of leverage. Moreover, in turn, financial leverage is positively and significantly
determined by investment.
The Impact of Capital Structure on the Performance of Industrial Commodity an...IJEAB
This paper investigates the impact of capital structure on the performance of commodity and service firms listed on the Vietnamese Stock Exchange. Data used in the paper were collected from the 142 firms listed on Ho Chi Minh and Ha Noi Stock Exchange during time 2009-2015. By using the descriptive statistics and linear regression model, the findings shows that there is negative relationship between capital structure (e.i. STD. LTD and DA) and peformance of the firms (i.e. ROE) for the commodity and services firms listed on two given Stock Exchange Market of Vietnam. Following are possible implications for the study.
Determinants of Cash holding in German MarketIOSR Journals
Cash is usually known as the blood of any business entity that is why it is very important policy matter in the modern corporate financial decision and policy matters. An appropriate level of cash is required within the firm for the good and smooth operations of any sort of business entity. This research report investigates the determinants of cash holding in non-financial firms of Germany across different firm sizes and industries. Furthermore the data set for the period of 2000 to 2010 for the firm size, log of total assets, EBIT, Capital expenditure percentage of sales, working capital, liquidity (current ratio), and leverage has been taken to study the impact of these on level of corporate cash holdings. It is shown that cash holdings must be analysed from a dynamic point of view: A strong empirical support was found for the hypothesis of implicit cash targets. Financial determinants influence the corporate cash holdings, but it’s not clear which model, the transaction cost model or the managerial opportunism, thesis supports best the empirical findings. The findings of this study are consistent with the predictions of the trade-off theory, pecking order theory, and agency cost theory. The result gave strong evidence that firm size, working capital, and leverage significantly affect the cash holdings decisions of non-financial firms and that are in conformity with the existing literature on the determinants of corporate cash holdings
This study examined the relationship between capital structure and firm performance of listed companies in Ghana from 2004 to 2008. Capital structure was represented by short term debt, long term debt, and total equity. Firm performance was measured using return on equity, return on assets, and return on total capital.
Regression analysis was conducted using these variables. The analysis found that short term debt, long term debt, and total equity accounted for a small percentage of the variations in return on equity, return on assets, and return on total capital. Specifically, short term debt and total equity had a positive relationship with performance measures, while long term debt had a negative relationship.
The study observed that listed Ghanaian companies rely heavily on short term debt
Testing the pecking order theory of capital structure佑嘉 孫
The paper examines the empirical validity of the pecking order theory of capital structure. It finds mixed support for the theory. While the pecking order works reasonably well for large, established firms in earlier decades, it receives weaker support among smaller, high-growth firms and in later periods like the 1980s-1990s. Equity issues, rather than debt issues, are more closely correlated with financing deficits, contrary to what the theory predicts. Overall, the pecking order theory provides only a partial description of corporate financing behavior.
Study of the Static Trade-Off Theory determinants vis-à-vis Capital Structure...inventionjournals
This paper investigates the application of the Static Trade-Off theory regarding the capital structure of the Pakistani Chemical Industry. We have used panel data analysis for the sample of 31 listed chemical firms from the period 2005 to 2013. The study is unique in its type as unlike to Shah & Hijazi (2005) who studied many industrial sections, this study only focuses on the listed Chemical Firms. We used five independent variables such as Profitability (P), Tangibility (T), Liquidity (L), Firm Size (FS) and Total Assets Growth (TAG) to study the effect on independent variable Financial Leverage (FG). The results confirmed the relationship of Profitability, Liquidity and Firm Size. However the results were not confirmed for Tangibility and Firm Assets Growth. Even though the results for Tangibility were positive, however the significance of the coefficients failed to support the hypothesis. This study hold a unique position for researchers for future research and also has significance for the investors helping them to make wise investment decisions when investing in Pakistani Chemical Industry since this industry holds a major portion of industrial GDP of the country
This document provides an overview of capital structure and agency theory. It discusses several key topics:
1. Capital structure decisions play an important role in maximizing firm value and returns while reducing costs. An optimal capital structure balances equity and debt.
2. Agency theory examines conflicts that can arise between managers, shareholders, and debt holders. Mechanisms like monitoring and restrictive covenants aim to align their interests.
3. The trade-off and pecking order theories provide different perspectives on capital structure decisions. Trade-off theory balances costs and benefits, while pecking order posits that firms prioritize internal over external financing.
4. Financial leverage, or the use of debt versus equity,
Plan sponsors hire and fire investment management firms to manage retirement plan assets totaling $6.3 trillion. The study examines the hiring and firing decisions of 3,400 plan sponsors between 1994-2003. It finds that plan sponsors hire managers after periods of strong excess returns, but these returns do not continue afterward. Managers are terminated for various reasons, including but not limited to underperformance, and excess returns after firings are indistinguishable from zero. When comparing returns from fired vs. newly hired managers, staying with fired managers would have yielded similar returns. Hiring and firing patterns vary based on plan sponsor characteristics.
This document summarizes a research paper that examines "hot" debt markets and their impact on corporate capital structure. The paper finds that:
1) Perceived favorable capital market conditions and information asymmetry costs are important factors that lead firms to issue more debt during hot debt market periods.
2) Firms with high information asymmetry costs issue significantly more debt when debt market conditions are hot compared to when markets are cold.
3) Hot debt market issuance has a persistent effect on the capital structure of issuing firms, which do not actively rebalance their leverage levels over the long-term as capital structure theories would predict.
The relationship between free cash flows and agency costs levels evidence fro...Alexander Decker
This document summarizes previous research on the relationship between free cash flows and agency costs. It discusses how high levels of free cash flow can lead to agency problems as managers may invest in negative NPV projects. Previous studies found support for Jensen's free cash flow theory and showed that mechanisms like debt and dividends can help control agency costs by reducing excess cash under managers' discretion. The purpose of the current study is to examine how Iranian firms use dividends and leverage to address agency problems from free cash flows.
This document summarizes a study that analyzes the impact of dividend announcements on stock prices of private commercial banks listed on the Dhaka Stock Exchange (DSE) in Bangladesh. The study examines stock price movements of 25 banks surrounding 44 days of dividend announcement dates. Based on prior literature and theories, the study hypothesizes that dividend announcements either do or do not contain price sensitive information that would impact stock prices. Using an event study methodology, the study analyzes daily stock price movements relative to dividend announcement dates to test this hypothesis. Preliminary results found stock price declines for some banks, rises for others, and no changes for some, with no statistically significant overall impact. This suggests that dividend announcements in this market may not contain
This document examines factors that determine capital structure decisions of publicly traded U.S. firms. It finds that the most reliable factors positively associated with leverage are median industry leverage, firm size, intangible assets, and collateral, while the most reliable negative factors are bankruptcy risk, dividend paying status, market-to-book ratio. Less reliably but still generally supported are positive relationships with growth, tax rates, and interest rates, and negative relationships with stock return volatility, net operating losses, profits, and financial constraints.
High dividend payouts can reduce agency costs by mitigating conflicts between managers and shareholders. Agency costs arise when managers make decisions that benefit themselves rather than shareholders, such as wasteful spending. Dividends reduce free cash flow that managers could waste, and force firms to raise external financing, bringing greater monitoring of managers. Dividends also signal that managers are not expropriating shareholder wealth, protecting their reputation. While dividend payouts are an important tool, other mechanisms like ownership structure and corporate governance also help address the agency problem.
This document summarizes a study on the relationship between capital structure and economic performance of firms in Italy from 2007-2011. The study found:
1) A positive correlation between debt and performance measures (ROE, ROA, ROI) for medium manufacturing, large service, and small service firms.
2) A negative correlation for large manufacturing, small manufacturing, and some measures for large/small service firms.
3) No correlation for medium service firms.
The results indicate the relationship between capital structure and performance is complex and varies between different sizes and sectors of Italian firms.
Effect of Leverage on Expected Stock Returns and Size of the FirmAakash Kumar
This document presents a study on the effect of leverage on expected stock returns and firm size for companies listed on the KSE100 index in Pakistan. It reviews previous literature that has found mixed results on the relationship between leverage and various performance measures. The study uses linear regression to analyze the impact of leverage on earnings-to-price ratio as a proxy for expected stock returns and market value as a proxy for firm size. Preliminary results are presented along with conclusions and recommendations for further study.
1) The document summarizes a research paper that examines the determinants of capital structure for Chinese listed companies using market and accounting data up to 2000.
2) The findings show that leverage is negatively correlated with profitability but positively correlated with firm size, volatility, tangibility, growth, and dividends. Leverage is also negatively correlated with non-debt tax shields and intangibility.
3) These results are consistent with predictions from both the tradeoff theory and pecking order theory of capital structure. Larger, more tangible firms with growth opportunities tend to have higher leverage, while more profitable firms with non-debt tax shields tend to have lower leverage.
Running head business management research aryan532920
This document is a research report submitted by Allan A Lusenji to Masinde Muliro University in partial fulfillment of the requirements for a Bachelor of Commerce degree. The report examines the relationship between capital structure and financial performance of banks listed on the Nairobi Securities Exchange. It provides background information on capital structure and financial performance. It also reviews various studies that have found both positive and negative relationships between leverage/debt and profitability/performance. The report will analyze the capital structure and financial performance of banks listed in Nairobi and determine the nature of the relationship between the two factors.
Similar to An Empirical Study: Financial-Market Imperfections and Investment (20)
This study examined the influence of the characteristics of the audit committee on Palestinian firms’ value. The research explores precisely the effect on the Audit Committee characteristics’ efficiency, namely, independence, expertise, evaluating the relationship among dependent and independent variables. Secondary data collected from a list of companies were registered in the Palestine Stock Exchange from 2011 to 2018. Individual variables considered are the independence & expertise of the audit committee, whereas the ROA is employed as the dependent variable as an indicator of a firm’s value. The results showed that the Audit Committee’s independence & expertise substantially positive with ROA. The study concluded that the audit committee’s characteristics are enhancing firm performance. The implications of this study’s findings can be used by decisions and policymakers, the firm’s management, and other stockholders’ interests to create reliable ties between agents and the principals.
There is increasing acceptability of emotional intelligence as a major factor in personality assessment and effective human resource management. Emotional intelligence as the ability to build capacity, empathize, co-operate, motivate and develop others cannot be divorced from both effective performance and human resource management systems. The human person is crucial in defining organizational leadership and fortunes in terms of challenges and opportunities and walking across both multinational and bilateral relationships. The growing complexity of the business world requires a great deal of self-confidence, integrity, communication, conflict, and diversity management to keep the global enterprise within the paths of productivity and sustainability. Using the exploratory research design and 255 participants the result of this original study indicates a strong positive correlation between emotional intelligence and effective human resource management. The paper offers suggestions on further studies between emotional intelligence and human capital development and recommends conflict management as an integral part of effective human resource management.
This paper examines the role of loan characteristics in mortgage default probability for different mortgage lenders in the UK. The accuracy of default prediction is tested with two statistical methods, a probit model and linear discriminant analysis, using a unique dataset of defaulted commercial loan portfolios provided by sixty-six financial institutions. Both models establish that the attributes of the underlying real estate asset and the lender are significant factors in determining default probability for commercial mortgages. In addition to traditional risk factors such as loan-to-value and debt servicing coverage ratio lenders and regulators should consider loan characteristics to assess more accurately probabilities of default.
This study examined the impact of financial innovation on money demand in Nigeria, using quarterly time series for the period 2009-2019. The dependent variable was money demand, represented by broad money, while the independent variable was financial innovation represented by modern payment channels such as volume of Automated Teller Machines (ATMs) transactions, volume of Point of Sales (POS) transactions, volume of Internet banking transactions, and volume of Mobile banking transactions. The study employed the ordinary least squares (OLS) regression technique as the estimation method within the cointegration, granger causality, and error correction modeling. The result obtained showed that financial innovation has mixed impact on money demand in Nigeria during the period of analysis. For instance, financial innovation has positive impact on money demand through volume of ATM transactions in the current period, two periods lagged of volume of mobile banking transactions, current period and one period lagged of volume of internet banking transactions, and current period’s volume of Point of Sales (POS) transactions in Nigeria. On the other hand, financial innovation has negative impact on money demand through one period lagged of volume of point of sales in Nigeria. On the stability of the demand for money function, the result of the stability tests based on the CUSUM test and CUSUM of squares test showed that the demand for money function was stable during the evaluation period. The study recommended that monetary policy strategy of the central bank of Nigeria (CBN) should be fine-tuned to ensure it is well suited to deal with the challenges posed by financial innovation by way of proliferation of sophisticated payment channels.
Equity financing is one of the sources of funding available to non-bank financial institutions which is quite prevalent in developed financial markets for small or start-up firms. This study empirically determined the effect of the Equity Financing Scheme on a sustainable increase in productivity of agro-allied small businesses in Nigeria. Data for this study were elicited through the use of a questionnaire structured in a five-point likert scale. The evaluation of the relationship between the dependent and independent variables was performed using the Ordinary Least Square regression technique. The study revealed that the equity financing scheme had a positive and significant effect on the sustainable productivity of agro-allied small businesses in South-South Nigeria. The study recommended that efforts should be made to educate the small business entrepreneurs on the benefits of equity financing as a viable option towards business growth and expansion and that the government through the various intervention agencies should restructure the long-term loan policies to give access to more growth-oriented agro-allied businesses, to increase their presently low capacity to procure heavy-duty technology to increase productivity and achieve food security in Nigeria. Small business owners should take advantage of the membership of cooperative societies and as well maintain good business relationships with suppliers; this will guarantee a continuous supply of needed materials and uninterrupted operations of the business.
This study seeks to evaluate the impact of public borrowing on economic growth in Nigeria using time series data from 1980 to 2018. Specifically, the study seeks to analyze the effect of domestic debt (proxy by Federal Government Bonds-FGB) and external debt (proxy by International Monetary Fund Loan-IMFL) on Nigerian’s Gross Domestic Product (GDP). To achieve this objective, secondary data was collected from the Central Bank of Nigeria Statistical bulleting and the Debt Management Office of Nigeria. A multiple regression model involving the dependent variable (GDP) and the independent variables (FGB and IMFL) was formulated and subjected to econometric analysis. These variables were adjusted with the Jarque-bera test of normality while the correlation result was used to check the possibility of multi-collinearity among the variables. The t-test was used to answer the research questions and test the formulated hypotheses at the 5percent statistical level. Results from the analysis show that a positive relationship exists between IMF Loan and Nigeria’s gross domestic product, while a negative relationship exists between FG Bonds and Nigeria’s gross domestic product, which violates the Keynesian theory of public debt. The study concludes that both domestic and external debt significantly affect economic growth in Nigeria. Therefore, it was recommended that public borrowing should be efficiently used and contracted solely for economic reasons and not for social or political reasons as this will help to avoid accumulation of debt stock over time.
Equity investment financing is an innovative way of financing the real sector which has considerable developmental potential. The study empirically determined the effect of Equity investment financing on sustainable increase in productivity among agro-allied small businesses in South-South Nigeria. The instrument of data collection is the research questions structured in a five-point likert scale. The evaluation of the relationship between the dependent and independent variables was performed using the Ordinary Least Square regression technique. The study revealed that equity investment financing has a positive and significant effect on the sustainable productivity of businesses in Nigeria. The study recommended educating small business entrepreneurs on the benefits of equity financing as a viable option towards business growth and expansion and that the government through the various intervention agencies should restructure the long-term loan policies to give access to more growth-oriented agro-allied businesses, to increase their presently low capacity to procure heavy-duty technology to increase productivity and achieve food security in Nigeria. Small business owners should take advantage of the membership of cooperative societies and as well maintain good business relationships with suppliers; this will guarantee a continuous supply of needed materials and uninterrupted operations of the business.
This document summarizes research on extended producer responsibility (EPR) programs for waste oil, e-waste, and end-of-life vehicles (ELVs) in Spain from 2007-2019. The main findings are:
1) Waste oil (SIG) production and e-waste (EEE) were found to be cointegrated variables, with a positive elasticity of 2.4166 for SIG with respect to EEE.
2) SIG and vehicle production (VP) were not found to be cointegrated, indicating an unstable relationship between these variables.
3) Differences in results may be due to EPR for e-waste including deposit refund systems, while EPR for ELVs
In the process of R&D globalization, due to market demand and preferential policies, many multinational companies choose to invest in R&D in China. With the increase of labor costs in coastal areas and the rapid economic development of the central and western regions, multinational companies have already shifted from coastal areas to central and western regions when choosing R&D regions in China, especially in Shaanxi Province. Therefore, studying the character of R&D investment and operating performance of Multinational Corporation in Shaanxi Province has important practical significance. This article uses the data of the R&D investment of multinational corporation in the joint annual inspection of Shaanxi Province in 2018 as the sample and uses EXCEL software to conduct data analysis to gain an in-depth understanding of the character of R&D and investment of multinational corporation in Shaanxi Province, business characteristics and business performance. And it is concluded that the R&D investment of multinational corporation in Shaanxi Province has a series of characteristics such as concentration of distribution, concentration of enterprise scale, and overall good performance of operating performance.
In Bangladesh, migrant worker’s remittances constitute one of the most significant sources of external finance. This paper investigates the existence of relation between remittance inflow and GDP and the causal link between them in Bangladesh by employing the Granger causality test under a VECM framework. Using time series data over a 38 year period, we found that growth in remittances does lead to economic growth in Bangladesh. In addition to the relationship, this paper also points out some issues that are working as impediments in getting remittance and give some recommendations to overcome those impediments.
In the context of the 4.0 revolution, technology applications, especially cloud computing will have strong impacts on all areas, including accounting systems of enterprises. Cloud computing contributes to helping the enterprise accounting apparatus become compact, help automate the input process, improve the accuracy of the input data. Besides, the issur of accounting, reporting, risk control and information security also became better, contributing to improving the effectiveness of accounting. However, besides the positive impacts, businesses also face many difficulties in deploying and applying cloud computing. However, this application requirement will become an inevitable trend contributing to improving the operational efficiency of enterprises. To promote this process requires from the State as well as businesses themselves must have awareness and appropriate decisions. Breakthroughs in information technology have dramatically changed the accounting industry and the creation of financial statements. The Internet and the technologies that use the power of the Internet are playing an important role in the management and accounting activities of businesses - who always tend to be ready to receive and use public innovations technology in collecting, storing, processing and reporting information.
In recent years, Vietnam has joined international intergration by strong export agreements of bilateral and multilateral; Vietnam’s merchandise export in 1995 was only US $5.4 billion, in 2018 Vietnam’s merchandise export increased by 45 times compared to 1995 with US $244 billion. Vietnam’s imports increased by 29 times in 2018 compared to 1995. This study is an attempt to test a method of estimating the influence of exports on several Supply-sidefactors such as production value, value added and imports through the expansion of the standard system W. Leontief I.O and Miyazawa-style economic-demographic relations. This study also tries to make an experiment in the “Leontief Paradox”.The result is that Vietnam’s export value spread to production and imports but spread low to added value, especially in the processing industry group’s fabrication. The study is based on the non-competitive I.O table in 2012 and 2018 with 16 sectors.
The profitability of commercial banks is influenced by a number of internal and external factors. This paper attempts to identify the internal factors which significantly influence the profitability of commercial banks in Bangladesh. In this study, profitability is measured by ROA and ROE which may be significantly influenced by the internal factors such as IRS, NIM, CAR, CR, DG, LD, CTI and SIZE of the bank. Data are collected from published annual reports during 2014--2018 of 23 commercial banks. Using simple regression model, it is found that CR has significant effect on the profitability and CAR has significant influence on ROA only. In addition to this, DG has significant effects on PCBs’ profitability (ROE only) where as IRS and CTI have significant influence on profitability (ROA only) of ICBs. Further, none of these variables have significant effects on the profitability of SCBs but CAR and CR are correlated with profitability (ROA only) and the causes may be the nature of services provided by SCBs to its clients. The internal policy makers should manage the influential internal factors of the banks in order to increase their profitability so that they can meet stakeholders’ expectations.
Using a series of econometric techniques, the study analysed interaction between monetary policy and private sector credit in Ghana. This study made use of monthly dataset spanning January 1999 to December 2019 of credit to the private sector (PSC) and broad money supply (M2). The results reveal that there exists cointegration, a long run stationary relation between monetary policy and private sector credit. This implies, increases in credit should prompt long-term increases in monetary policy. It is not surprising that growth in the private sector might have a stronger effect on monetary policy. The Error Correction Test is statistically significant and that all the variables demonstrate similar adjustment speeds. This implies that in the short run, both money supply and credit are somewhat equally responsive to their last period’s equilibrium error. There is unidirectional causation from private sector credit to monetary policy. It can be said that, there is an interaction between money supply and private sector credit. Thus, credit to private sector holds great potential in promoting economic growth. It can be recommended to the government to increase the credit flow to the private sector because of its strategic importance in creating and generating growth of the economy.
This paper investigates if forecasting models based on Machine Learning (ML) Algorithms are capable to predict intraday prices in the small, frontier stock market of Romania. The results show that this is indeed the case. Moreover, the prediction accuracy of the various models improves as the forecasting horizon increases. Overall, ML forecasting models are superior to the passive buy and hold strategy, as well as to a naïve strategy that always predicts the last known price action will continue. However, we also show that this superior predictive ability cannot be converted into “abnormal”, economically significant profits after considering transaction costs. This implies that intraday stock prices incorporate information within the accepted bounds of weak-form market efficiency, and cannot be “timed” even by sophisticated investors equipped with state of the art ML prediction models.
Applying the Arrow-Debreu-Mundell-Fleming model as an economic standard model, with combining axiological framework and epistemological model, it is proposed to analyze economic policies with using a synthetic model, where interest, exchange and tax rates are integrated together. Except normal monetary and fiscal policies mainly via interest and tax rates, there are feasible ways to utilize modified strategies via exchange and tax rates. When ones need to simulate national local market, ones can raise the exchange rate. Otherwise, when ones need to promote international global trade, ones may lower the exchange rate. It is found that tax reduction is good policy when tax rate is higher than normal and that tax increase is good social policy when tax rate is lower than normal, during economic depression. Also it is revealed that tax reduction is good social policy when tax rate is lower than normal, and that tax increase is good policy when tax rate is higher than normal, during economic overheat. While economic system seeks efficiency and social system pursues equality, common interest modifications with elastic exchange and tax rates could be applied for balancing efficiency and equality.
In recent times, agricultural sector has returned to the forefront of development issues in Nigeria given its contribution to employment creation, sustainable food supply and provision of raw materials to other sectors of the economy. In lieu of that, this study examines the impact of agriculture on the economic growth in Nigeria using annual time series data covering the sample period of 1981 to 2018. To analyse the data collected, Autoregression Distributed Lag (ARDL) model through the bounds testing framework is employed to measure the presence of cointegrating relations between real GDP, agricultural productivity, labour force, and agricultural export. Results show the presence of both short-run and long-run relationship among the variables, and that agriculture has a positive and significant impact on economic growth in Nigeria. These findings inform the Nigerian government on the need to expedite labour force (human capital) and agricultural export (non-oil) development with the view to achieving sustainable growth and development. In addition, developing skills and competencies of labour force through capacity building in the agricultural sector will encourage research and development thereby increase the export size, hence essential for long-term growth.
The article illustrates the results of the economic development of the first fifteen years of the XXI century under the conditions of unprecedented economic freedom, globalization and the appearance of new informational sectors up to and including the first attempts at revising liberalism. The analysis of statistical data demonstrates an obvious increase in the percentage of well-off people in many countries as well as the increased economic capabilities of small, medium and large businesses, whose assets are distributed among an ever-increasing number of owners. This provides the impetus to review our collective approach to liberalization and globalization, as well as to view its unexpected strong sides that make human progress possible.
This paper investigates the relationship between working capital management and financial performance of Pharmaceuticals and Textile firms listed at the Dhaka Securities Exchange in Bangladesh. The data analysis was carried on ten Pharmaceuticals and Textile firms for a period of 2013 to 2017. Secondary Data was analyzed by applying Descriptive Statistics, Regression and Correlation analysis to findthe relationship of current ratio, inventory conversion period and average payment period with Return on Asset. The findings indicate that the Pharmaceuticals and Textile firms’ performance is influenced by the variables relating to working capital. There is a positive relationship between profitability and current ratioand Inventory Turnover period shows a negative relationship with profitability but Average payment period shows insignificant impact on profitability. The study concludes that there exists a relationship between working capital managementand financial performance of Pharmaceuticals and Textile firms in Bangladesh. The study recommends that for the Pharmaceuticals and Textile firms to remain profitable, they should employ working capital management practice that will help in making decisions about investment mix and policy, matching investment to objective, asset allocation for institution and balancing risk against profitability.
Organizational behaviour involves the design of work as well as the psychological, emotional and interpersonal behavioural dynamics that influence organizational performance. Management as a discipline concerned with the study of overseeing activities and supervising people to perform specific tasks is crucial in organizational behaviour and corporate effectiveness. Management emphasizes the design, implementation and arrangement of various administrative and organizational systems for corporate effectiveness. While the individuals, and groups bring their skills, knowledge, values, motives, and attitudes into the organization, and thereby influencing it, the organization, on the other hand, modifies or restructures the individuals and groups through its structure, culture, policies, politics, power, and procedures, and the roles expected to be played by the people in the organization. This study conducted through the exploratory research design involved 125 participants, and result showed strong positive relationship between the variables of interest. The study was never exhaustive due to limitations in terms of time and current relevant literature, therefore, further study could examine the relationship between personality characteristics and performance in the public sector, where productivity is not outstanding, when compared with the private sector. Based on the result of this investigation it was recommended that organizations should provide emotional intelligence programmes for their membership as an important pattern of increasing co-operative behaviours and corporate effectiveness.
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A toxic combination of 15 years of low growth, and four decades of high inequality, has left Britain poorer and falling behind its peers. Productivity growth is weak and public investment is low, while wages today are no higher than they were before the financial crisis. Britain needs a new economic strategy to lift itself out of stagnation.
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Understanding Ponzi Schemes
A Ponzi scheme is an investment scam where returns are paid to earlier investors using the capital from newer investors, rather than from legitimate profit earned. The scheme relies on a constant influx of new investments to continue paying the promised returns. Eventually, when the flow of new money slows down or stops, the scheme collapses, leaving the majority of investors with substantial financial losses.
Historical Context: Charles Ponzi and His Legacy
Charles Ponzi is the namesake of this deceptive practice. In the 1920s, Ponzi promised investors in Boston a 50% return within 45 days or 100% return in 90 days through arbitrage of international reply coupons. Initially, he paid returns as promised, not from profits, but from the investments of new participants. When his scheme unraveled, it resulted in losses exceeding $20 million (equivalent to about $270 million today).
Notable American Ponzi Schemes
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An Empirical Study: Financial-Market Imperfections and Investment
1. International Journal of Economics
and Financial Research
ISSN(e): 2411-9407, ISSN(p): 2413-8533
Vol. 3, No. 9, pp: 173-181, 2017
URL: http://arpgweb.com/?ic=journal&journal=5&info=aims
173
Academic Research Publishing Group
An Empirical Study: Financial-Market Imperfections and
Investment
ByungWoo Kim Associate Professor, Korea National Univ. of Transportation, Chungju, South Korea
1. Introduction
1.1. Backgrounds
The traditional explanation for the goal of the corporation is the argument that managers make decisions for the
shareholders. Agency problem is one element of contractual views of the firm(separation of management control and
finance) (Schleifer and Vishny, 1997). Managerial discretion (opportunism) means the fact that managers behave
against the interests of investors(shareholders). The set-of-contracts theory of the firm states that the firm may be
viewed as a set of contracts (Jensen and Meckling, 1976).
One of the contracts is a residual claim (equity). This theory focuses on conflict between shareholders and
entrepreneurs (managers). The costs of resolving the conflicts are agency costs. He presents one imaginery situation
with regard to an investment projects. Project gives manager $10 of personal benefits, and costs investors $20 in
foregone wealth. Jensen and Meckling (1976) says that manager undertakes that project resulting in ex post
inefficiency.(Coase, 1960)1
Issues of ownership structure of firm discussed in academic field are: social responsibility of corporations,
separation of ownership and control, and property rights (Alchian, 1968; Machlup, 1967). They also include the
theory of how costs and rewards are allocated among participants in organization.(Coase, 1960)2
Firm theory discusses the effect of creation and issuance of debt and equity claims. This also analyze legal
fictions, nexus for contracting relationships among individuals, and existence of divisible residual claims on assets
and cash flows of organization which can be sold without permission. Coase (1937) emphasizes bounds of firm, and
Alchian and Demsetz (1972) role of contracts as a vehicle for voluntary exchange.
In this study, we examine several hypotheses about the relationship between financial market and firm behavior
empirically. We use panel data constructed from BOK (Bank of Korea) data from 2009 to 2014.
1
Coase theorem (1960) does not apply in this case. Managers’ threats would violate legal “duty of loyalty” to shareholders.
Incentive contracts coming from this problem take the forms of share ownership, stock options, and threat of dismissal.
2
By Cause (1960) and Alchian and Demsetz(1972), numerous issues are treated; bearing agency costs, separation and control,
debt and outside equity, and pareto optimality. Principal(shareholder) limits divergences from his interest by establishing
incentives. Principal pays agent to expend resources(bonding costs) to guarantee. Agency costs include monitoring expenditures
by principal, bonding expenditures by agent(residual loss). In addition, agency costs include those of both equity and debt.
Therefore, agency costs occur from outside finance- equity and debt.
Abstract: Korean economy undergoes pre-modernized corporate governance. Financial-market imperfections
assumed to be incorporated in equity ratio affect the sensitivity of internal funds to physical investment.
Empirical analyses show that the effects of asymmetric information are significant. Theories predict that internal
finance is less costly than borrowing or issuing equity. Higher cash flow from higher profits affects investment
ratio. But, this marginal effect is decreased by equity ratio. If we assume that more imperfect financial market
requires more equity than borrowing, we can see that agency costs change the way economic variables like cash
flow affect physical investment. Cash flow plays two opposite roles for implementing investment. In the case of
financial-imperfections, we can expect that firms with higher profits invest more. But, according to free cash
flow hypothesis by Jensen (1986), managers with only a small ownership interest have an incentive for wasteful
management. We can expect to see more wasteful activity in a firm with large cash flows. Our regression result
shows that the former dominates the latter, so we get positive coefficient for cash flow variable on the physical
investment.
Keywords: Financial-market imperfections; Cash flow; Physical investment.
JEL Classification: O51; J63
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Fig 1 shows the trends of financial variables representing the decision of corporate finance in manufacturing
sector of Korea.(BO: borrowing ratio, BOR: interest rate of borrowing, TR: growth rate of revenue, AS: growth rate
of asset) Financial-market imperfections due to asymmetric information are detected by many ratios of variables in
balance sheet. Fig 1 shows that, in boom period, retained earnings increase. We can expect that then firms can
accumulate equity and this again reduce agency costs. This positive signal may affect investment decision of
managers(entrepreneurs).
Table-A. Variables Used in Panel Regression
EquityRatio CurrentAssetRatio DebtRatio
EQ CASH DB
StockPriceIndex SalesGrowth Investment(Ratio)
KOSPI GROW I(IRATIO)
EQ IRATIO DB
Mean 49.39 30.45 102.91
Fig-1. Index for Financial Market
1.2. Motivation and Previous Literature
We can summarize issues related with physical investment effects of asymmetric information as follows.
Table-B. Index for Financial Market
(1) Financial-market Imperfections
Asymmetric information- Agency Costs-Agency Problems
(2) B/S Effect(Financial Accelerator)
Debt/Equity Composition Effect
Boom(or Recession)
– Retained Earnings – Equity(Debt) – Agency Costs – Physical Investment
(3) Asset Price Effect
Boom (or Recession)
– Price for Fixed Asset – Value of Collateralization – Physical Investment
We focus on several aspects of firms’ behavior.
First, there occurs a principal-agent problem between investors(creditors) and firms(managers) due to
asymmetric information. In this case, creditors request managers to increase the amount of equity. In special, in
booms when retained earnings increase, firms increase investment expenditures since agency costs are declined. So,
the magnitude (or ratio) of equity in B/C sheet plays a role as propagation mechanism, that is, financial accelerator.
-5
0
5
10
15
20
2009 2010 2011 2012 2013 2014
bor tr as
0
50
100
150
2009 2010 2011 2012 2013 2014
db eq bo
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175
(Bernanke and Gertler, 1989) Balance sheet effect can be divided into debt/capital effect (credit) and asset price
change effect.(debit) With incomplete financial market, firms have constraints for outside finance due to asymmetric
information. So, investment projects with positive net present value (NPV) may be discarded (Myers, 1977). The
variations in B/C sheet items affect the investment behavior of firms under borrowing constraint. The optimal debt-
equity ratio would be higher in a world with agency problem of equity than in one without.
Second, in reality, firms provide fixed assets such as realty as collateral, and borrows from financial
intermediaries as much as loan to value (LTV) incorporating price risk of the assets. If the asset prices decrease due
to quick freezing from recessions, firms reduce newly borrowing and the scale of investment. In this way, the change
in asset prices affects business fluctuations and this mechanism is called- asset price change effect.
Third, cash flow plays two opposite roles for implementing investment. In the case of financial-imperfections,
firms with higher profits imply less cost in internal finance. So, we can expect that these firms invest more. But,
according to free cash flow hypothesis by Jensen (1986), managers with only a small ownership interest have an
incentive for wasteful management. Grossman and Hart (1986) also model the role of debt in committing the payout
of free cash flows to investors(creditors). We can expect to see more wasteful activity in a firm with large cash
flows.
We test whether cash flow related with market imperfections increase physical investment or not.
Gordon and Malkiel (1981) performed an empirical study for the relevance of Modigliani-Miller (MM)
theorem. MM argue that a firm can’t change the total value of securities by changing capital structure. They used
time-series data for average debt-equity ratio of the U.S. firms from 1957 to 1978. They interpreted the trend of
stable ratio in the late 1970s as the positive correlation with the nominal interest rate. They also estimated welfare
loss of the U.S. from taxation in 1975. The amount was about $ 3.2bilion, and this corresponds to 10% of corporate
income tax revenue in 1975. Gordon and Lee (2001) argue that corporations with lower tax rates should use less
debt. This is because the advantage of deducting interest from corporate taxable income is less when the tax rate is
lower. Givoly et al. (1992) performed empirical study for the effects of tax on capital structure of firms. In 1986 Tax
Reform, corporate tax rate was reduced, and incentives such as invest tax credit and discounting income tax rate for
capital gains of retained earnings were reduced.
Fazzari et al. (1988) regressed investment on measures of the cost of capital and on cash flow- current revenues
minus expenses and taxes. Their basic regression is a pooled time series-cross section of investment on the cash flow
to the capital stock, an estimate of q, and dummy variables. Fama and French (2002) found the fact that empirical
results are coincided with pecking order theory of Jensen and Meckling (1976). More profitable firms are less
levered. Short term variation in investment and earnings is absorbed in debt.
2. Basic Model
2.1. Theoretical Model, Data and Estimation
Agency problem is element of a contractual view of the firm (separation of management from ownership).
During the time period of 2008 financial crisis, we observed that the problem of asymmetric information became
worse in recession. We can examine how this problem is related with behavior the macroeconomic variables.
Fazzari et al. (1988) present identifying the effect of financial constraint on differential sensitivity of physical
investment to cash flow. But, Kaplan and Zingales (1997) argue that the theory makes no correct predictions about
second derivatives of value and cost functions in using external funds, thus that the theory does not make predictions
about differences in the sensitivity of investment. But, this is basically an empirical question that is tried in this
study.
They consider a firm that has internal funds W. External funds have costs C(E). (E=I-W) F(I) is firm’s value
increasing with investment I. Costs function satisfies C’( )>r and C’’( )>0. Firm value function satisfies F’ ( )>0 and
F’’( )<0.
The firm chooses invest:
Max(I): F(I) –rW –C(I-W)
Fazzari, Hubbard and Peterson (1988) argue that investment is increasing in internal resources:
dC/dW < 0 , dI/dW > 0
Theories of financial-market imperfections imply that external finance is costly. They therefore imply that firms
with higher debt ratio facing financial restraints invest less.
If we assume an alternative specification C (I-W, α), where α is index of financial-market imperfections, we can
ask how (dI/dW) varies with α. (Romer, 2006).This yields similar results with that of E(=I-W) theoretically. If we
derive second derivative by second-order condition for (I, IRATIO) and implicit differentiation, we encounter F’’’ ( )
and C’’’( ) that theory makes no clear predictions. For predicting about differences in the sensitivity of investment to
financial-market imperfections, we can regress investment on interaction terms between external resources (eg. cash
flow) and index of financial market. That is, we can test empirically by regressing investment (IN) on measures of
market condition and use the interaction term between continuous variables. Financial market imperfections
incorporated in debt ratio (DB) and equity ratio (EQ) create agency costs. So, they alter the impact of output growth
and interest-rate movements on investment.
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= + (1)
(I = IN, IRATIO)
In our regression, the effects of determinants of investment (X = profitability GROWTH, interest rate R) on
investment are affected by financial market circumstances (DB, EQ, etc.). GROWTH denotes sales growth of each
industry. Financial market imperfections imply that internal finance is less costly. Therefore, they imply that firms
with higher profits invest more. We perform simple test for the effects of asymmetric information and the resulting
agency problems. Romer (2006) find that when there is asymmetric information, investment depends on more than
just interest rates and profitability. Investor’s ability to monitor firms and firms’ ability to finance also matter. We
test whether asymmetric information changes how these factors affect investment.
Fazzari et al. (1988) regressed investment on cash flow (current revenues – expenses and taxes). In this study,
such regression is based on industry-level panel data. We test the hypothesis that asymmetric information changes
how interest rates and profitability affect investment. The interaction terms give information about how one
quantitative(continuous) variable affects the magnitude of marginal effect of another quantitative variable.
= + (2)
= β DB + δ
If we assume that the estimate of β significant, these can support the significant effect of financial-market
imperfections on the relationship between economic variables (eg. nominal interest R) and the behavior of physical
investment.
2.2. Estimation Results and Discussion
We use panel data from BOK (Bank of Korea) from 2009 to 2014. The individual unit consists of 30 industries.
We use least squares dummy variables (fixed effects) model, if the F-test rejects the null hypothsis that there is no
behavioral differences for investment between industries. We use “wide and short” data sets so that we can account
for industrial differences or heterogeneity.
The goals of the corporate firm from the contractual view of the firm (focusing on the separation of management
from ownership) is to maximize shareholders’ wealth. The costs of resolving the conflicts between managers and
shareholders are called agency costs. Main motivation in this study is to analyze the effects of agency problem
through financial-market imperfections on real sector such as physical investment.
Hypothesis 1: Financial-market imperfections incorporated in equity ratio increase the marginal sensitivity of
internal funds to physical investment.
> 0, > 0, (α=EQ)
According to pecking order theory of Jensen (1984), firms behave to the rule that they use internal funds. That
is, profitable firms generate cash internally, and they use less debts. Two empirical papers find that in the real world,
more profitable firms use less debt and more internal funds(cash). (Fama and French, 2002; Hovakimian et al.,
2001; Sunder and Myers, 1999).
Table 1 shows that the effects of asymmetric information are significantly negative. Theories predict that
internal finance is less costly than borrowing or issuing equity. Higher cash flow from higher profits increases
investment ratio (IRATIO). But, this marginal effect is decreased by equity ratio. If we assume that more imperfect
financial market requires more equity than borrowing, we can see that agency costs change the way economic
variables like cash flow affect physical investment. As we saw earlier, cash flow plays two opposite roles for
implementing investment. In the case of financial-imperfections, firms with higher profits imply less cost in internal
finance. So, we can expect that these firms invest more. But, according to free cash flow hypothesis by Jensen
(1986) and Grossman and Hart (1986), managers with only a small ownership interest have an incentive for wasteful
management. We can expect to see more wasteful activity in a firm with large cash flows. The former effect
dominates the latter, so we get positive coefficient for cash flow variable. Table 2 shows similar effects of debt ratio.
If there occur agency costs of equity (eg. shirking, perquisites, bad investments; Jensen and Meckling (1976), the
optimal debt-equity ratio tends to be higher than not if there occur. This effect also reduces the sensitivity of the
availability of internal funds.
It would be worth to note that the relationship between cash and investment is spurious. If there is a (third)
confounding factor, the regression may show a relationship even if financial markets are perfect. That is, the
regression does not control for the future profitability (of capital). Fazzari et al. (1988) addresses this problem
dividing firms into those confronting significant costs of obtaining outside funds and those that are not (Hoshi and
Scharfstein, 1991). Main criterion is whether dividend ratio is high or low. In this study, we use proxy variable by
sales growth by industry (GROW). Table 1 shows that controlling future profitability reduces similar results.
Finally, if we use GMM (general method of moment) method considering endogeneity and measurement error,
the estimated coefficient is negative, which supports free cash hypothesis.
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Table-1. Panel Regression: Internal Fund and Equity Ratio
Dependent Variable: IRATIO
Method: Pooled Least Squares
Total pool (balanced) observations: 180
Variable Coefficient Std. Error t-Statistic Prob.
C 29.92240 0.619473 48.30298 0.0000**
CASH? 0.591838 0.118385 4.999273 0.0000**
(EQ)*(CASH?) -0.013980 0.002161 -6.469370 0.0000**
GROW 0.644660 0.048735 13.22789 0.0000**
Fixed Effects (Cross)
Method: Pooled IV/Two-stage Least Squares
Total pool (balanced) observations: 180
Instrument specification: C R
Variable Coefficient Std. Error t-Statistic Prob.
C 229926.7 38967.11 5.900532** 0.0000
CASH -6880.959 2480.058 -2.774516** 0.0062
Fixed Effects (Cross)
Table-2. Panel Regression: Internal Fund and Debt Ratio
Dependent Variable: I
Method: Pooled Least Squares
Cross-sections included: 30
Total pool (balanced) observations: 180
Variable Coefficient Std. Error t-Statistic Prob.
C 133119.7 3836.659 34.69678 0.0000**
(CASH)*(DB) -33.39332 3.384967 -9.865183 0.0000**
CASH 2716.253 395.1163 6.874565 0.0000**
Fixed Effects (Cross)
Hypothesis 2: When there is asymmetric information, such factors as firms’ ability to finance their investment
using internal funds changes how interest rates and profitability affect investment.
≠ 0, ≠ 0, (α=W)
Hypothesis 3: When there are agency costs (of equity), optimal debt-equity ratio would be higher. Then, this
again increases the sensitivity of investment to availability of internal fund(cash flow) and interest rates.
> 0, > 0, (α=DB)
Table 3 shows significant result that supports the hypothesis that financial-market imperfections affect the way
interest rates (and profitability) affect investment. Higher nominal interest rate increases physical investment.
According to Fisher hypothesis, interest rate incorporates inflation rate. We are interested in whether financial-
market imperfections incorporated in equity ratio changes the way investment is determined. Marginal effect of
interest rate from debt financing due to agency costs of equity decreases by (-39.7*DB). That of sales
growth(GROW) being proxy for future profitability also decreases by (12.07*DB). It implies that debt ratio does not
reinforce the effect of profitability on physical investment. That is, financial-market imperfections lessen the
magnitude of effects of macroeconomic variables on physical investment.
The optimal debt-equity ratio would be higher in a world with agency problem of equity than in one without it.
Method: Pooled Least Squares
Sample: 2009 2014
Cross-sections included: 30
Total pool (balanced) observations: 180
Variable Coefficient Std. Error t-Statistic Prob.
C 32.07828 0.881511 36.39009 0.0000**
(CASH)*(EQ) -0.011588 0.003176 -3.648640 0.0004**
CASH 0.469089 0.174076 2.694736 0.0079**
Fixed Effects (Cross)
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Table-3. Panel Regression: Future Profitability and Interest Rates
Method: Pooled Least Squares
Cross-sections included: 17
Total pool (balanced) observations: 9690
Variable Coefficient Std. Error t-Statistic Prob.
C 100302.3 1939.124 51.72555 0.0000**
DB -56.95831 15.39431 -3.699960 0.0002**
(DB)*(R) -39.70130 5.889657 -6.740851 0.0000**
R 14750.57 729.3259 20.22494 0.0000**
Fixed Effects (Cross)
Dependent Variable: IRATIO
Method: Pooled Least Squares
Total pool (balanced) observations: 180
Variable Coefficient Std. Error t-Statistic Prob.
C 29.09756 0.156704 185.6848 0.0000**
GROW*EQ -0.119119 0.010623 -11.21323 0.0000**
GROW 6.314671 0.509603 12.39135 0.0000**
Dependent Variable: I
Method: Pooled Least Squares
Included observations: 570
Variable Coefficient Std. Error t-Statistic Prob.
C 114258.6 160.8877 710.1762 0.0000**
(DB)*(GROW) -12.07042 0.955720 -12.62966 0.0000**
GROW 3815.600 126.3101 30.20820 0.0000**
Fixed Effects (Cross)
Due to asymmetric information, creditors request managers to increase the amount of equity. In booms when
retained earnings increase, firms increase investment expenditures since the ratio of equity increases. So, the
magnitude(or ratio) of equity in B/C sheet plays a role as propagation mechanism, that is, financial accelerator.
(Bernanke and Gertler, 1989) Table 3 also shows that the sensitivity of profitability represented by sales
growth(GROW) on investment does not increase by high equity ratio.
Hypothesis 4: According to free cash flow hypothesis, debt reduces the opportunity for managers to waste
resources, and increases to invest in productive activities. Hence, such factors as firms’ ability to finance their
investment using internal funds changes how interest rates affect investment.
< 0, ≠ 0, (α=DB)
Table 4 shows that debt reduces investment, which is contrary to the implications of Jensen (1984). If we use
proxy variable GROW(sales growth) for future profitability, the negative marginal effect is reduced by debt ratio
which may affect the opportunity for managers to perform moral hazard.
Table-4. Panel Regression: Debt and Investment
Dependent Variable: I
Method: Pooled Least Squares
Variable Coefficient Std. Error t-Statistic Prob.
C 137813.5 522.2718 263.8731 0.0000**
DB -179.2577 4.129673 -43.40725 0.0000**
(DB)*(GROW) 15.14816 0.316458 47.86788 0.0000**
Fixed Effects (Cross)
Table 5 shows that internal funds(CASH) reduce the marginal effects of LONGR(long-run interest rate),
INFLA(inflation rate) and KOSPI(stock price index), and increase that of GROW(sales growth) on investment. We
also can see that profitable firms may generate cash internally, and internal funds (CASH) that increase the marginal
effect of profitability(GROW) on physical investment. This result supports the proposition that more profitable firms
make more cash flow, and this reinforces the effects on investment.
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Table-5. Panel Regression: Changing How Interest Rates, Stock Index and
Profitability Affect Investment
Dependent Variable: IRATIO
Method: Pooled Least Squares
Total pool (balanced) observations: 180
Variable Coefficient Std. Error t-Statistic Prob.
C 27.25693 0.803198 33.93552 0.0000**
(CASH)*(LONGR) -0.034725 0.016238 -2.138484 0.0341**
LONGR 1.507483 0.339605 4.438934 0.0000**
Fixed Effects (Cross)
Dependent Variable: I
Method: Pooled Least Squares
Variable Coefficient Std. Error t-Statistic Prob.
C 81394.68 4449.437 18.29325 0.0000**
(CASH)*(GROW) 16.65344 48.74017 0.341678 0.7331
R 11368.16 1485.789 7.651264 0.0000**
GROW 2151.838 827.6304 2.599999 0.0103**
Fixed Effects (Cross)
Dependent Variable: I
Method: Pooled Least Squares
Total pool (balanced) observations: 180
Variable Coefficient Std. Error t-Statistic Prob.
C 45663.63 1747.152 26.13604 0.0000
(CASH)*(KOSPI) -0.099188 0.043650 -2.272329 0.0245
KOSPI 42.93956 1.140425 37.65225 0.0000
Fixed Effects (Cross)
Dependent Variable: I
Method: Pooled Least Squares
Total pool (balanced) observations: 180
Variable Coefficient Std. Error t-Statistic Prob.
C 125144.4 1899.222 65.89247 0.0000
(CASH)*(INFLA) -188.8276 107.5113 -1.756351 0.0811
INFLA 1594.882 1733.641 0.919961 0.3591
Fixed Effects (Cross)
The economic model of investment without market imperfections predicts that a rise in output(current
profitability) raises investment. The reason is that higher future output implies capital is more valuable. Because of
potential correlation, the regression may show significance even if financial markets are perfect. Confounding
factor(output growth) is correlated with both cash flow and investment.
Table 3 shows significant result that supports the mechanism by which finance affects investment through
growth(future profitability). High debt ratio reinforces the effect of profitability(GROWTH) on physical investment.
Panel regression result for cash flow shows opposite effect for implementing investment to that of Fazzari et
al. (1988). It supports the free-cash flow hypothesis that argues moral hazards of management. According to free
cash flow hypothesis by Jensen (1986), managers with only a small ownership interest have an incentive for
wasteful management. We test whether cash flow with financial-market imperfections change the way other
economic variables(interest rate) affect physical investment or not. Table 2 shows that cash flow decreases the
marginal effect of long-run (nominal) interest rate on investment ratio(relative to output). This shows that cash flow
plays role of incentive of managerial discretion rather than reducing costs of internal finance. Another regression
result for cash flow shows insignificant effect for changing how profitability(GROW, growth rate) affect
investment. We test whether cash flow with financial-market imperfections change the way other variables affect
investment or not. Table 3 shows that cash flow do not affect the marginal effect of profitability. We find a strong
link between cash flow and investment. But, there is a problem. The regression does not consider the future
profitability of capital. And cash flow may be correlated with omitted variable- future profitability. The model of
8. International Journal of Economics and Financial Research, 2017, 3(9): 173-181
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investment without market imperfections argues that a rise in output raises investment. Because of potential
correlation between cash flow and current profitability, the regression may show a relationship even if financial
markets are perfect. Our 2 stage LS result shows that if we use nominal interest rate as instrumental variable, the
relationship disappears. The fact that market imperfections cause manager’s wealth to affect investment implies
that imperfections magnify the effects of shocks outside the finance. Increases in nominal interest rate act to
increase physical investment. These increases in output from investment thus increase inflation rate, and nominal
interest rate. This is financial accelerator of Bernanke and Gertler (1989).
Hypothesis 5: When firms can finance more from internal funds, it will tend to make physical investment less
sensitive to cash flow.
> 0, < 0
Fazzari et al. (2000) criticized that economic theory does plausibly make predictions about second derivatives
of firm value and costs. The firm starts to be severely constrained in access to external funds. This tends to make
investment less sensitive when firms finance ore investment from internal funds(cash flow). That is, this makes
This second derivative is a function of second and third derivatives of value and cost function. Firms with
fewer internal funds are more affected by agency costs from market imperfections. We can test how (dI/dW) varies
with W empirically.
In this study, we omit the analytical expression for this second derivative function. Table 6 shows that the
estimated coefficient for quadratic term of cash flow is negative significantly. This implies that C’’(I-W) changes
from rising slowly to rising rapidly. Fazzari et al. (2000) argue that these results stem from an extreme case where
financial constraints reduce the cash flow-investment link.
Table-6. Panel Regression: Sensitivity to Cash Flow
Dependent Variable: IRATIO
Method: Pooled Least Squares
Total pool (balanced) observations: 180
Variable Coefficient Std. Error t-Statistic Prob.
C 29.57959 1.712750 17.27023 0.0000**
CASH 0.246890 0.195358 1.263785 0.2083
(CASH)*(CASH) -0.010862 0.005339 -2.034706 0.0437**
Fixed Effects (Cross)
3. Conclusion
We use fixed effects model to estimate the relationship between the magnitude of internal funds and physical
investment by industry. This has the advantage of controlling for industry specific differences of investment
behavior. Our study focused on trying to test empirically the hypotheses about financial-market imperfections.
There are some limits of our discussion in this study.
First, inferring the extent of financial constraints is problematic. This is necessary in explaining the determinants
of physical investment. Under financial-market imperfections coming from agency costs, the investment-cash flow
sensitivities are changed. As Kaplan and Zingales (2000) argue, we don’t know what causes the sensitivity of
investment. They conjecture that it is caused by excessive conservatism by managers as suggested by behavioral
economics of Hines and Thaler (1995).
We can summarize several issues studied for future research.
First, in information economics, asymmetric information makes participants to signal information or make
screening. In special, finance theory argues that investors view debt as a signal of firm value. Managers signal their
forecast of value by increasing debt. We can test this hypothesis empirically. We need sophisticated transactions data
in KSE (Korean Stock Exchange).
Second, If there are agency costs such as shirking, perquisites and bad investments (Jensen and Meckling,
1976), the optimal debt-equity ratio would be higher. We can test this hypothesis by state-space model by Hamilton
(1984) and Kim and Nelson (1999).
Third, like Gertler and Gilchrist (1994), we need to investigate the behavior of small firms. They argue that
small firms are likely to face large barriers to outside finance. It is necessary to know whether imperfect financial
markets are important to explain the differences between the movement in sales, inventories (investment) and debt
across the magnitude of firms.
Acknowledgement
The research was supported by a grant from 2016 program for visiting professors overseas in Korea National
University of Transportation.
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