Determinants of Capital Structure and Speed of Adjustment in Nigerian Non-financial Firms

The study aims to examine the capital structure determinants and SOA of all listed, non-financial firms in Nigeria. The objectives are; to investigate the relationship between firms’ characteristics and the capital structure choice among non-financial firms listed in the Nigerian Stock exchange, to examine whether the financial crisis affected capital structure determinants. The study also examines the speed of leverage adjustment (SOA) of Nigeria non-financial firms and the impact of the financial crisis on the SOA. The trade-off and pecking order theories are employed as the main theories to explain firms’ financing decisions in Nigeria. Other theories used are signalling, agency and market-timing theories due to their contribution to the capital structure debate. This study used three different types of leverage as dependent variables, which are scaled against total assets. The explanatory variables are profitability, asset tangibility, firm size, firm growth, firm age, business risk and liquidity. It also uses dynamic capital models to identify capital structure determinants and SOA. The current study applied the two-step GMM system estimation. The result shows 63% SOA for listed non-financial firms in Nigeria. SOA is also faster after the financial crisis when compared to the pre-crisis situation. Furthermore, the study shows the impact of the financial crisis on SOA of long-term and short-term leverage. Firm characteristics are found to be capital structure determinants of non-financial firms in Nigeria. Asset tangibility and firm growth are positively related with both long-term and short-term leverage and highlight the importance of collateral in financing decisions of Nigerian non-financial firms. Profitability shows a negative and significant relationship with short-term leverage but is positively related with long-term leverage. Firm size and age show a negative and significant relationship with the long-term and short-term leverage. The coefficient signs of most independent variables confirm the dominance of the pecking order theory in Nigerian firms’ financing behaviour. This study contributes to knowledge by providing evidence of a moderate speed of adjustment among Nigerian non-financial firms. It shows also that firm characteristics are determinants of long-term and short-term leverage in Nigeria

The impact of audit characteristics, audit fees on classification shifting : evidence from Germany

Purpose: This paper aims to examine the relationship between audit characteristics (ACs) and audit fees on classification shifting (CS) among German-listed non-financial firms. Design/methodology/approach: Using a sample of 130 German-listed (Deutscher Aktienindex, Mid Cap dax and Small caps Index) firms from 2010 until 2019, this study investigated the impact of audit committee size, audit committee meetings, audit committee financial expertise and audit fees on CS. Findings: This study found the evidence of CS, meaning that managers misclassify recurring expenses in the income statement into non-recurring expenses to inflate core earnings. This study also found that the audit fee ratio, audit committee financial expertise and frequency of audit meetings are negatively associated with CS among German-listed firms. However, the audit committee size does not influence CS. Research limitations/implications: This study will help the board improve its internal auditing practices and provide essential information to investors to assess how ACs affect the quality of financial reporting. Originality/value: This study focused on a bank-oriented economy, i.e. Germany, with lower investor protection and low transparency. This paper documents new evidence on how ACs and audit fees impact CS among German firms, as most of the previous studies on CS mainly focused on market-oriented economies such as the UK and the USA

The relationship between religiosity and voluntary disclosure quality: a cross-country evidence from the banking sector

This study examines whether there is a relationship between religiosity and voluntary disclosure quality (VD_Q). We utilise a three-dimensional approach to capture the VD_Q on an international sample of 1,484 bank-year observations in 12 countries of the Middle East and North Africa (MENA) region over 14 years period from 2006 to 2019. Our findings indicate that religiosity is positively associated with banks' VD_Q. Our findings also show that the association between religiosity and VD_Q is more noticeable in banks operating in countries with a low level of legal protection, low level of control of corruption and during the crisis period. We further illustrate that the influence of religiosity is more intense on the spread and usefulness of information dimensions than the quantity dimension. These empirical findings are robust to alternative proxies of religiosity and sample specification. This result supports the notion that religiosity enhances corporate disclosure quality and reduces the asymmetric information gap between managers and outside users of information

Management Earnings Forecast and Technical Innovation: The Mediating Effects of Cost of Debt

Purpose - This study examines whether a firm's management earnings forecasts affect its technical innovation activities. Our study also examines whether the cost of debt plays a mediating role between the management earnings forecasts and the innovation nexus. Design/methodology/approach - We obtained data from 1032 Chinese non-financial firms listed on the Shanghai and Shenzhen stock markets from 2005 to 2022 (i.e., 18576 firm-year observations). We used various econometrics techniques, such as Heckman's (1979) two-stage selection method and two-stage least square, to examine the relationship between management earnings forecasts and the firm's technical innovation activities. Findings - We find a positive relationship between management earnings forecasts and the firms' technical innovation. We also find that the cost of debt mediates the relationship between management earnings forecast and technical innovation. Further analysis indicates that frequent earnings forecasts provide incremental information regarding a firm's future value and cash flows, thus reducing the volatility and uncertainty in cash flow calculations. Our findings are robust to several tests. Research Implications - Our study has implications for policymakers, practitioners, and high-level management of Chinese firms, enabling them to understand the relationship between management earnings forecasts and firms' innovation activities

Board monitoring and capital structure dynamics: evidence from bank-based economies

We examine the impact of board characteristics on the speed of adjustment and the capital structure dynamics of firms in bank-based economies. Using 3927 firm-year observations over a 10-year (2009–2019), we find that board characteristic influences firms' speed of adjustment in a bank-based (stakeholder-oriented) system. We also find some evidence that board characteristics have varying impacts on the capital structure of Japanese, French and German firms. We conclude that firms' capital structure reflects the corporate governance environment they operate. Our results are robust to accounting for endogeneity and alternative leverage measure

Economic policy uncertainty and cost of capital: the mediating effects of foreign equity portfolio flow

We investigate whether economic policy uncertainty and the interaction of foreign equity portfolio flow and economic policy uncertainty impact the cost of capital. Using panel data of 20 countries from 2001 to 2018, we find economic policy uncertainty to exert a positive effect on the cost of capital. However, the interaction between foreign equity portfolio flow and economic policy uncertainty has a negative effect on the cost of capital, demonstrating that, the combined effect of foreign equity portfolio flow and economic policy uncertainty has the opposite effect (i.e., reduces the cost of capital). Our results are robust to alternative specifications and endogeneity

Audit Quality and Classification Shifting: Evidence from UK and Germany

Purpose – We examine the impact of audit quality (AQ) on Classification Shifting (CS) among non-financial firms operating in the UK and Germany. Methodology – This paper used various audit committee variables (size, meetings, gender diversity, and financial expertise) to measure AQ and its impact on CS. We used a total of 2110 firm-year observations from 2010 to 2019. Findings - We found that the presence of female members on the audit committee and audit committee financial expertise deter the UK and German managers from shifting core expenses and revenue items into special items to inflate core earnings. However, audit committee size is positively related to CS among German firms but has no impact on UK firms. We also document evidence that audit committee meetings restrain UK managers from engaging in CS. However, we found no impact on CS among German firms. Our results hold even after employing several tests. Originality - Most CS studies used market-oriented economies such as the USA and UK and ignored bank-based economies such as Germany, France, and Japan. We provide a comparison among bank and market-oriented economies on whether the AQ has a similar impact on CS or not among them. Implications - Overall, our findings provide broad support in an international setting for the board to improve its auditing practices and offer essential information to investors to assess how AQ affects the financial reporting process

Corporate board and dynamics of capital structure: Evidence from UK, France and Germany

Abstract: Theoretical arguments suggest that capital structure will adjust to the dynamics of the corporate governance environment. In line with this prediction, we examine the impact of board characteristics on capital structure dynamics and the speed of adjustment. Using 2690 firm‐year observations for 2009–2018, we find that firms in a stakeholder‐oriented corporate governance environment adjust their leverage faster than those in a shareholder‐oriented environment. We also find that corporate board characteristics influence firms' capital structure and speed of adjustment towards target leverage. Our findings are robust to alternative measures of leverage and endogeneity. The overall evidence supports the relevance of the corporate board's composition in both shareholder‐oriented and stakeholder‐oriented corporate governanc (CG) environments. We conclude that board composition mitigates agency conflict