capital structure berat başat
TRANSCRIPT
![Page 1: Capital structure berat başat](https://reader034.vdocument.in/reader034/viewer/2022051414/55a6c5eb1a28ab8b428b48c7/html5/thumbnails/1.jpg)
Berat BAŞAT
Marmara University
Institute of Social SciencesDepartment of Business Administration in English
Sub-Departent of Accounting and Finance
1
![Page 2: Capital structure berat başat](https://reader034.vdocument.in/reader034/viewer/2022051414/55a6c5eb1a28ab8b428b48c7/html5/thumbnails/2.jpg)
DefinitionsFactorsFeaturesEBIT – EPS AnalysisCosts and Benefits of DebtTheoriesEmpirical Evidences
2
![Page 3: Capital structure berat başat](https://reader034.vdocument.in/reader034/viewer/2022051414/55a6c5eb1a28ab8b428b48c7/html5/thumbnails/3.jpg)
BALANCE SHEET Current Current Assets Liabilities
Debt and Fixed Preferred Assets
Shareholders’ Equity
3
![Page 4: Capital structure berat başat](https://reader034.vdocument.in/reader034/viewer/2022051414/55a6c5eb1a28ab8b428b48c7/html5/thumbnails/4.jpg)
BALANCE SHEET Current Current Assets Liabilities
Debt and Fixed Preferred Assets
Shareholders’ Equity
4
![Page 5: Capital structure berat başat](https://reader034.vdocument.in/reader034/viewer/2022051414/55a6c5eb1a28ab8b428b48c7/html5/thumbnails/5.jpg)
BALANCE SHEET Current Current Assets Liabilities
Debt and Fixed Preferred Assets
Shareholders’ Equity
FinancialStructure
5
![Page 6: Capital structure berat başat](https://reader034.vdocument.in/reader034/viewer/2022051414/55a6c5eb1a28ab8b428b48c7/html5/thumbnails/6.jpg)
BALANCE SHEET Current Current Assets Liabilities
Debt and Fixed Preferred Assets
Shareholders’ Equity
6
![Page 7: Capital structure berat başat](https://reader034.vdocument.in/reader034/viewer/2022051414/55a6c5eb1a28ab8b428b48c7/html5/thumbnails/7.jpg)
BALANCE SHEET Current Current Assets Liabilities
Debt and Fixed Preferred Assets
Shareholders’ Equity
CapitalStructure
7
![Page 8: Capital structure berat başat](https://reader034.vdocument.in/reader034/viewer/2022051414/55a6c5eb1a28ab8b428b48c7/html5/thumbnails/8.jpg)
Capital Structure is a mix of a company's long-term debt, specific short-term debt, common equity and preferred equity.
The capital structure is how a firm finances its overall operations and growth by using different sources of funds.
8
![Page 9: Capital structure berat başat](https://reader034.vdocument.in/reader034/viewer/2022051414/55a6c5eb1a28ab8b428b48c7/html5/thumbnails/9.jpg)
Optimal Capital Structure is the combination of sources of capital that minimizes weighted average cost of capital and maximizes the value of firm.
9
![Page 10: Capital structure berat başat](https://reader034.vdocument.in/reader034/viewer/2022051414/55a6c5eb1a28ab8b428b48c7/html5/thumbnails/10.jpg)
Target Capital Structure is the mix of debt, preferred stock, and common equity with which the firm plans to finance its investments.
10
![Page 11: Capital structure berat başat](https://reader034.vdocument.in/reader034/viewer/2022051414/55a6c5eb1a28ab8b428b48c7/html5/thumbnails/11.jpg)
11
![Page 12: Capital structure berat başat](https://reader034.vdocument.in/reader034/viewer/2022051414/55a6c5eb1a28ab8b428b48c7/html5/thumbnails/12.jpg)
• Business Risk• Tax Position• Financial Flexibility• Managerial Attitude
12
![Page 13: Capital structure berat başat](https://reader034.vdocument.in/reader034/viewer/2022051414/55a6c5eb1a28ab8b428b48c7/html5/thumbnails/13.jpg)
The risk that a company will not have adequate cash flow to meet its operating expenses
Business risk is the uncertainty associated with projections of a firm’s future returns on equity
There is also Financial Risk as well as Busines Risk;
Additional business risk concentrated on common stockholders when financial leverage is used.
Depends on the amount of debt and preferred stock financing. 13
![Page 14: Capital structure berat başat](https://reader034.vdocument.in/reader034/viewer/2022051414/55a6c5eb1a28ab8b428b48c7/html5/thumbnails/14.jpg)
Suppose 10 people decide to form a corporation to manufacture disk drives.
If the firm is capitalized only with common stock – and if each person buys 10% - each investor shares equally in business risk
14
![Page 15: Capital structure berat başat](https://reader034.vdocument.in/reader034/viewer/2022051414/55a6c5eb1a28ab8b428b48c7/html5/thumbnails/15.jpg)
If the same firm is now capitalized with 50% debt and 50% equity – with five people investing in debt and five investing in equity
The 5 who put up the equity will have to bear all the business risk, so the common stock will be twice as risky as it would have been had the firm been all-equity (unlevered).
15
![Page 16: Capital structure berat başat](https://reader034.vdocument.in/reader034/viewer/2022051414/55a6c5eb1a28ab8b428b48c7/html5/thumbnails/16.jpg)
Business risk:Uncertainty in future EBIT.
Depends on business factors such as competition, operating leverage, etc.
Financial risk:Additional business risk concentrated on
common stockholders when financial leverage is used.
Depends on the amount of debt and preferred stock financing.
16
![Page 17: Capital structure berat başat](https://reader034.vdocument.in/reader034/viewer/2022051414/55a6c5eb1a28ab8b428b48c7/html5/thumbnails/17.jpg)
A major reason for using debt is that interest is tax deductible, which lowers the effective cost of debt.
However, if much of a firm’s income is already sheltered from taxes by accelerated depreciation or tax loss carryovers, its tax rate will be low, and debt will not be as advantageous as it would be to a firm with a higher effective tax rate.
17
![Page 18: Capital structure berat başat](https://reader034.vdocument.in/reader034/viewer/2022051414/55a6c5eb1a28ab8b428b48c7/html5/thumbnails/18.jpg)
Financial flexibility is an ability to raise capital on reasonable terms under adverse conditions.
Corporate treasures know that a steady supply of capital is necessary for stable operations, which in turn are vital for long-run success.
18
![Page 19: Capital structure berat başat](https://reader034.vdocument.in/reader034/viewer/2022051414/55a6c5eb1a28ab8b428b48c7/html5/thumbnails/19.jpg)
They also know that when money is tight in the economy, or when a firm is experiencing operating difficulties, a strong balance sheet is needed to obtain funds from suppliers of capital.
Thus, it might be advantageous to issue equity to strengthen the firm’s capital base and financial stability.
19
![Page 20: Capital structure berat başat](https://reader034.vdocument.in/reader034/viewer/2022051414/55a6c5eb1a28ab8b428b48c7/html5/thumbnails/20.jpg)
Some managers are more aggressive than others; hence, some firms are more inclined to use debt in an effort to boost profits.
This factor does not affect the optimal, or value-maximizing, capital structure, but it does influence the target capital structure a firm actually establishes.
20
![Page 21: Capital structure berat başat](https://reader034.vdocument.in/reader034/viewer/2022051414/55a6c5eb1a28ab8b428b48c7/html5/thumbnails/21.jpg)
1. Flexibility:
The consideration of flexibility gives the financial manager ability to alter the firm’s capital structure with a minimum cost and delay warranted by a changed situation.
It should also be possible for the company to provide funds whenever needed to finance its profitable activities.
21
![Page 22: Capital structure berat başat](https://reader034.vdocument.in/reader034/viewer/2022051414/55a6c5eb1a28ab8b428b48c7/html5/thumbnails/22.jpg)
2. Profitability:
It should permit the maximum use of leverage at a minimum cost with the constraints. Thus a sound capital structure tends to minimize ‘cost’ of financing and maximize earnings per share (EPS).
22
![Page 23: Capital structure berat başat](https://reader034.vdocument.in/reader034/viewer/2022051414/55a6c5eb1a28ab8b428b48c7/html5/thumbnails/23.jpg)
• Profits can be paid out as dividends to shareholders or reinvested in the firm.
• If a firm generates high profits and reinvests a large proportion back into the firm, then it has a continuous source of internal funding.
• This will reduce the use of debt in the firm’s capital structure.
23
![Page 24: Capital structure berat başat](https://reader034.vdocument.in/reader034/viewer/2022051414/55a6c5eb1a28ab8b428b48c7/html5/thumbnails/24.jpg)
3. Solvency:
It should use the debt capital only up to the point where significant risk it not added. As has been already observed the use of excessive debt threatens the solvency of the company.
24
![Page 25: Capital structure berat başat](https://reader034.vdocument.in/reader034/viewer/2022051414/55a6c5eb1a28ab8b428b48c7/html5/thumbnails/25.jpg)
4. Conservation:
The capital structure should be conservative in the sense that the debt capacity of the company should not exceed. The debt capacity of a company demands on its ability to generate future cash flows.
It should have enough cash to pay creditors fixed charges and principal amount. It should be remembered that cash insolvency might also lead to legal insolvency.
25
![Page 26: Capital structure berat başat](https://reader034.vdocument.in/reader034/viewer/2022051414/55a6c5eb1a28ab8b428b48c7/html5/thumbnails/26.jpg)
5. Control:
The capital structure should involve minimum risk of loss of control of the company. A careful consideration of these criteria points the conflicting nature.
For example the use of debt capital is more economical but the same capital adds to the financial risk of the company.
26
![Page 27: Capital structure berat başat](https://reader034.vdocument.in/reader034/viewer/2022051414/55a6c5eb1a28ab8b428b48c7/html5/thumbnails/27.jpg)
• Controlling owners may desire to issue debt instead of ordinary shares since debt does not grant ownership rights.
• Firms with little financial leverage are often considered excellent takeover targets.
• Issuing more debt may help to avoid a corporate takeover.
27
![Page 28: Capital structure berat başat](https://reader034.vdocument.in/reader034/viewer/2022051414/55a6c5eb1a28ab8b428b48c7/html5/thumbnails/28.jpg)
EBIT-EPS Analysis - used to help determine whether it would be better to finance a project with debt or equity.
EPS = (EBIT - I)(1 - t) - P S
I = interest expense, P = preferred dividends,S = number of shares of common stock outstanding.
28
![Page 29: Capital structure berat başat](https://reader034.vdocument.in/reader034/viewer/2022051414/55a6c5eb1a28ab8b428b48c7/html5/thumbnails/29.jpg)
Question: for different levels of EBIT, how does financial leverage affect EPS?
29
![Page 30: Capital structure berat başat](https://reader034.vdocument.in/reader034/viewer/2022051414/55a6c5eb1a28ab8b428b48c7/html5/thumbnails/30.jpg)
Our firm has 800,000 shares of common stock outstanding, no debt, and a marginal tax rate of 40%. We need $6,000,000 to finance a proposed project.
We are considering two options:
1. Sell 200,000 shares of common stock at $30 per share,
2. Borrow $6,000,000 by issuing 10% bonds.
30
![Page 31: Capital structure berat başat](https://reader034.vdocument.in/reader034/viewer/2022051414/55a6c5eb1a28ab8b428b48c7/html5/thumbnails/31.jpg)
Financing stock debt EBIT 2,000,000 2,000,000- interest 0 (600,000)EBT 2,000,000 1,400,000- taxes (40%) (800,000) (560,000)Net Income 1,200,000 840,000# shares outst. 1,000,000 800,000EPS $1.20 $1.05
31
![Page 32: Capital structure berat başat](https://reader034.vdocument.in/reader034/viewer/2022051414/55a6c5eb1a28ab8b428b48c7/html5/thumbnails/32.jpg)
Financing stock debt EBIT 4,000,000 4,000,000- interest 0 (600,000)EBT 4,000,000 3,400,000- taxes (40%) (1,600,000) (1,360,000)Net Income 2,400,000 2,040,000# shares outst. 1,000,000 800,000EPS $2.40 $2.55
32
![Page 33: Capital structure berat başat](https://reader034.vdocument.in/reader034/viewer/2022051414/55a6c5eb1a28ab8b428b48c7/html5/thumbnails/33.jpg)
EPS
EBIT$1m $2m $3m $4m
stock financing
0
3
2
1
33
![Page 34: Capital structure berat başat](https://reader034.vdocument.in/reader034/viewer/2022051414/55a6c5eb1a28ab8b428b48c7/html5/thumbnails/34.jpg)
EPS
EBIT$1m $2m $3m $4m
bond financing
0
3
2
1
34
![Page 35: Capital structure berat başat](https://reader034.vdocument.in/reader034/viewer/2022051414/55a6c5eb1a28ab8b428b48c7/html5/thumbnails/35.jpg)
If EBIT is $2,000,000, common stock financing is best.
If EBIT is $4,000,000, debt financing is best.
So, now we need to find a breakeven EBIT where neither is better than the other.
35
![Page 36: Capital structure berat başat](https://reader034.vdocument.in/reader034/viewer/2022051414/55a6c5eb1a28ab8b428b48c7/html5/thumbnails/36.jpg)
Formula:
Stock Financing Debt Financing(EBIT-I) (1-t) = (EBIT-I) (1-t) S S
36
![Page 37: Capital structure berat başat](https://reader034.vdocument.in/reader034/viewer/2022051414/55a6c5eb1a28ab8b428b48c7/html5/thumbnails/37.jpg)
Stock Financing Debt Financing(EBIT-I) (1-t) = (EBIT-I) (1-t) S S
(EBIT-0) (1-.40) = (EBIT-600,000) (1-.40) 800,000+200,000 800,000
37
![Page 38: Capital structure berat başat](https://reader034.vdocument.in/reader034/viewer/2022051414/55a6c5eb1a28ab8b428b48c7/html5/thumbnails/38.jpg)
Stock Financing Debt Financing (EBIT-0) x 0.6 = (EBIT - 600,000) x 0.6 1 0.8
.48 EBIT = .6 EBIT - 360,000
.12 EBIT = 360,000
EBIT = $3,000,000 38
![Page 39: Capital structure berat başat](https://reader034.vdocument.in/reader034/viewer/2022051414/55a6c5eb1a28ab8b428b48c7/html5/thumbnails/39.jpg)
EPS
EBIT$1m $2m $3m $4m
bond financing
stock financing
0
3
2
1
39
![Page 40: Capital structure berat başat](https://reader034.vdocument.in/reader034/viewer/2022051414/55a6c5eb1a28ab8b428b48c7/html5/thumbnails/40.jpg)
EPS
EBIT$1m $2m $3m $4m
bond financing
stock financing
0
3
2
1
For EBIT up to $3 million,stock financing is best.
40
![Page 41: Capital structure berat başat](https://reader034.vdocument.in/reader034/viewer/2022051414/55a6c5eb1a28ab8b428b48c7/html5/thumbnails/41.jpg)
EPS
EBIT$1m $2m $3m $4m
bond financing
stock financing
0
3
2
1
For EBIT up to $3 million,stock financing is best.
For EBIT greaterthan $3 million, debt financing is
best.
41
![Page 42: Capital structure berat başat](https://reader034.vdocument.in/reader034/viewer/2022051414/55a6c5eb1a28ab8b428b48c7/html5/thumbnails/42.jpg)
- Tax Benefits of Debt
- Debt-holders are limited to a fixed return
- Voting rights
- Discipline
42
![Page 43: Capital structure berat başat](https://reader034.vdocument.in/reader034/viewer/2022051414/55a6c5eb1a28ab8b428b48c7/html5/thumbnails/43.jpg)
Firm Unlevered Firm Levered
No debt $10,000 of 12% Debt$20,000 Equity $10,000 in Equity40% tax rate 40% tax rate
Tax benefit of debt
Both firms have same business risk and EBIT of $3,000.
They differ only with respect to use of debt.
U has $20.000 in Equity L has $10.000 in Equity
43
![Page 44: Capital structure berat başat](https://reader034.vdocument.in/reader034/viewer/2022051414/55a6c5eb1a28ab8b428b48c7/html5/thumbnails/44.jpg)
EBIT $3,000 $3,000Interest 0 1,200EBT $3,000 $1,800Taxes (40%) 1 ,200 720NI $1,800 $1,080ROE 9.0% 10.8%
Firm U Firm L
U; 1.8 / 20 = 9% L; 1.08 / 10K = 10.8%
Tax benefit of debt
![Page 45: Capital structure berat başat](https://reader034.vdocument.in/reader034/viewer/2022051414/55a6c5eb1a28ab8b428b48c7/html5/thumbnails/45.jpg)
The relation between amounts of debt and equity
![Page 46: Capital structure berat başat](https://reader034.vdocument.in/reader034/viewer/2022051414/55a6c5eb1a28ab8b428b48c7/html5/thumbnails/46.jpg)
- Bankruptcy Costs
- Agency Costs
46
![Page 47: Capital structure berat başat](https://reader034.vdocument.in/reader034/viewer/2022051414/55a6c5eb1a28ab8b428b48c7/html5/thumbnails/47.jpg)
Bankruptcy Costs or Costs of Financial Distress
Bankruptcy Costs are costs associated with financial difficulties that a firm might get into because it uses debt financing.
Financial distress occurs when a firm is not able to make all of the interest and principal payments that it owes its lender
As you borrow more, you increase the probability of bankruptcy and hence the expected bankruptcy cost.
47
![Page 48: Capital structure berat başat](https://reader034.vdocument.in/reader034/viewer/2022051414/55a6c5eb1a28ab8b428b48c7/html5/thumbnails/48.jpg)
Agency Costs
Agency costs result from conflicts of interest between principals and agents. In agency relationships, one party, known as the principal, delegates decision-making authority to another party, known as the agent.
The managers and stockholders of a firm also often behave in ways that reduce a firm's value when the firm becomes financially distressed. The resulting costs are a type of agency cost.
48
![Page 49: Capital structure berat başat](https://reader034.vdocument.in/reader034/viewer/2022051414/55a6c5eb1a28ab8b428b48c7/html5/thumbnails/49.jpg)
To better understand agency costs, consider the following example. Suppose that you have a newspaper route and you want to go out of town for a week. You offer a friend $100 to deliver your papers while you are gone. If your friend agrees to the arrangement, you will have entered into a principal-agent relationship. Now assume that you deliver the Wall Street Journal and that all papers are supposed to be on your customers' doorsteps by 6:00 A.M., before they leave home for work.
49
![Page 50: Capital structure berat başat](https://reader034.vdocument.in/reader034/viewer/2022051414/55a6c5eb1a28ab8b428b48c7/html5/thumbnails/50.jpg)
You tell this to your friend before you leave town, but he likes to sleep late in the morning, so he doesn't get all the papers delivered until 9:00 A.M. Because the papers are late for five days in a row, a few customers complain, and some don't give you a tip at the end of the year as they have in the past. Any problems that arise because of the complaints and the lost tips are examples of agency costs. These costs arose because you delegated decision-making authority to your friend and he acted in his best interest rather than yours.
50
![Page 51: Capital structure berat başat](https://reader034.vdocument.in/reader034/viewer/2022051414/55a6c5eb1a28ab8b428b48c7/html5/thumbnails/51.jpg)
51
![Page 52: Capital structure berat başat](https://reader034.vdocument.in/reader034/viewer/2022051414/55a6c5eb1a28ab8b428b48c7/html5/thumbnails/52.jpg)
Modigliani and Miller (1958) show that financing decisions don’t matter in perfect capital markets
-Firms can not change the total value of their securities
-Firm value is determined by real assets
-Capital structure is irrelevant
M&M Proposition 1: ZERO TAXES
52
![Page 53: Capital structure berat başat](https://reader034.vdocument.in/reader034/viewer/2022051414/55a6c5eb1a28ab8b428b48c7/html5/thumbnails/53.jpg)
When there are no taxes and capital markets function well, it makes no difference whether the firm borrows or individual shareholders borrow.
For example, it doesn't matter whether the debt is short- or long-term, callable or call-protected, straight or convertible, in dollars or euros, or some mixture of all of these or other types.
Therefore, the market value of a company does not depend on its capital structure. VL = VU 53
![Page 54: Capital structure berat başat](https://reader034.vdocument.in/reader034/viewer/2022051414/55a6c5eb1a28ab8b428b48c7/html5/thumbnails/54.jpg)
Capital Markets are perfect.
Individuals can borrow and lend at the risk-free rate
There are no bankruptcy costs
All firms are assumed to be in the same risk class (operating risk)
54
![Page 55: Capital structure berat başat](https://reader034.vdocument.in/reader034/viewer/2022051414/55a6c5eb1a28ab8b428b48c7/html5/thumbnails/55.jpg)
•Corporate insiders and outsiders have the same information. (Symmetric Information)
•Managers always maximize shareholders’ wealth (No agency costs)
•Operating cash flows are completely unaffected by changes in capital structure
55
![Page 56: Capital structure berat başat](https://reader034.vdocument.in/reader034/viewer/2022051414/55a6c5eb1a28ab8b428b48c7/html5/thumbnails/56.jpg)
Corporate tax laws favor debt financing over equity financing.
With corporate taxes, the benefits of financial leverage exceed the risks: More EBIT goes to investors and less to taxes when leverage is used.
MM show that: VL = VU + TD.
If T=40%, then every dollar of debt adds 40 cents of extra value to firm.
M&M Proposition 2: WITH CORPORATE TAXES
56
![Page 57: Capital structure berat başat](https://reader034.vdocument.in/reader034/viewer/2022051414/55a6c5eb1a28ab8b428b48c7/html5/thumbnails/57.jpg)
The tradeoff theory justifies moderate debt ratios.
Profitable firms will borrow up to the point where the marginal value of tax shields on additional debt is just offset by the increase in the present value of possible costs of financial distress.
Financial distress refers to the costs of bankruptcy or reorganization, and also to the agency costs that arise when the firm's creditworthiness is in doubt.
57
![Page 58: Capital structure berat başat](https://reader034.vdocument.in/reader034/viewer/2022051414/55a6c5eb1a28ab8b428b48c7/html5/thumbnails/58.jpg)
58
![Page 59: Capital structure berat başat](https://reader034.vdocument.in/reader034/viewer/2022051414/55a6c5eb1a28ab8b428b48c7/html5/thumbnails/59.jpg)
Theory states that why firms prefer to issue debt rather than equity. The reason of this is not requiring the external funds.
Companies finance investments by raising funds in this order:
(1)internal funds (retained earnings),
(2) debt,
(3) sale of new common stock (the most expensive form of financing).
Kraus and Litzenberg
59
![Page 60: Capital structure berat başat](https://reader034.vdocument.in/reader034/viewer/2022051414/55a6c5eb1a28ab8b428b48c7/html5/thumbnails/60.jpg)
The pecking-order theory is at odds with the trade-off theory:
1. There is no target D/E ratio.
2. Profitable firms use less debt.
3. Companies like financial slack
60
![Page 61: Capital structure berat başat](https://reader034.vdocument.in/reader034/viewer/2022051414/55a6c5eb1a28ab8b428b48c7/html5/thumbnails/61.jpg)
- MM assumes symmetric information.
- However, the existence of asymmetric information has important effect on decisions to use either debt or equity.
- A firm with very favorable prospects tries to avoid selling stock and raises new capital by other means including using debt beyond normal target capital structure.
. 61
![Page 62: Capital structure berat başat](https://reader034.vdocument.in/reader034/viewer/2022051414/55a6c5eb1a28ab8b428b48c7/html5/thumbnails/62.jpg)
- A firm with unfavorable prospects would want to sell stock, which would mean bringing in new investors to share losses.
- Announcement of a stock offering by a mature firm signals that future prospects are not bright. So, investors often perceive an additional issuance of stock as a negative signal, and the stock price falls.
- Therefore, firms should maintain a reserve borrowing capacity and use less debt than would be suggested by the trade-off theory
62
![Page 63: Capital structure berat başat](https://reader034.vdocument.in/reader034/viewer/2022051414/55a6c5eb1a28ab8b428b48c7/html5/thumbnails/63.jpg)
63
![Page 64: Capital structure berat başat](https://reader034.vdocument.in/reader034/viewer/2022051414/55a6c5eb1a28ab8b428b48c7/html5/thumbnails/64.jpg)
Frank and Goyal (2003) Assume that company operations and the associated accounting
structures are more complex than the standard pecking order representation
Data related to publicly traded American firms over the years 1971-1998
They find leverage to increase with Median industry leverage Firm size Intangibles Corporate income tax rate
They find leverage to decrease with Bankruptcy risk Market-to-book ratio Dividends Profitability
Small firms do not follow the Pecking Order64
![Page 65: Capital structure berat başat](https://reader034.vdocument.in/reader034/viewer/2022051414/55a6c5eb1a28ab8b428b48c7/html5/thumbnails/65.jpg)
Debt ratios of publicly traded firms in the US and economies undergoing rapid economic development (China, and India) are modeled using traditional capital structure specifications
This study seeks to test whether the determinants of debt ratios identified by leading researchers in this area also apply to both Chinese and Indian firms.
Dependent Variables: Liabilities to total assets Long-term debt issuance to total assets
Control Variables: Market-to-book ratio Asset tangibility: Profitability Firm size Product uniqueness
65
![Page 66: Capital structure berat başat](https://reader034.vdocument.in/reader034/viewer/2022051414/55a6c5eb1a28ab8b428b48c7/html5/thumbnails/66.jpg)
Sample4905 firmsYears 2000-2006
ResultsIndian firms tend to have higher debt ratios than US
FirmsChinese firms are less levered than US counterpartsChinese firms have issued more long-term debt relative to
assets Negative & significant sign of market to book ratio
supports financial signaling hypothesisPositive & significant on asset tangibility & firm size
supports trade-off theoryProduct uniqueness and profitability are negatively
associated with the debt ratio 66
![Page 67: Capital structure berat başat](https://reader034.vdocument.in/reader034/viewer/2022051414/55a6c5eb1a28ab8b428b48c7/html5/thumbnails/67.jpg)
Firms that are acquired in hostile takeovers are generally characterized by poor performance in both accounting profitability and stock returns.
There is evidence that increases in leverage are followed by improvements in operating efficiency, as measured by operating margins and returns on capital.
Palepu (1990) presents evidence of modest improvements in operating efficiency at firms involved in leveraged buyouts.
Kaplan(1989) and Smith (1990) also find that firms earn higher returns on capital following leveraged buyouts.
Denis and Denis (1993) study leveraged recapitalizations and report a median increase in the return on assets of 21.5%.
67
![Page 68: Capital structure berat başat](https://reader034.vdocument.in/reader034/viewer/2022051414/55a6c5eb1a28ab8b428b48c7/html5/thumbnails/68.jpg)
![Page 69: Capital structure berat başat](https://reader034.vdocument.in/reader034/viewer/2022051414/55a6c5eb1a28ab8b428b48c7/html5/thumbnails/69.jpg)
69