Capital structure and market timing in the UK : empirical evidence from UK firms

This thesis studies capital structure of non-financial firm in the UK. It specifically examines the market timing theory of capital structure in the three different empirical chapters. Given that the market timing theory is new relative to the trade-off and pecking order explanations of firms‟ capital structure decisions; it provides an interesting discourse for the wider finance community. The thesis empirically tests the theory and provides evidence as well as theoretical implications for practising managers.The first empirical chapter looks at the timing of IPOs and SEOs in the UK as well as the reversal and persistence of timing attempts. Consistent with the findings in Barker and Wurgler (2002) we find that firms do time IPOs as well as SEOs. However, similar to Alti (2006), we do not find that the effect is persistent. In addition to that, we find that the motive for timing SEOs are distinctively different from the motive for IPO managers. Although timers in both markets are inferior (they are less profitable and have a smaller growth frontier), SEO firms appear to be over-levered and their timing attempts appear to be motivated by reaching a target level. The findings in this chapter lay out an interesting avenue that provides opportunities for future research work.The second empirical chapter studies the timing of issues as well as repurchases. Similar to Elliot et al. (2007) we use a direct measure of equity mispricing to measure how firms adjust security issues to reflect equity mispricing. Consistent with their findings in the US market, we find that firms increase debt issues during periods of undervaluation and equity issues during period of overvaluation to finance their deficit. We further investigate the impact of equity mispricing on repurchasing activities. The findings confirm those of Oswald and Young (2004) where firms repurchase activities are driven by equity mispricing and contradict Rau and Vermaelan (2002) where repurchases in the UK are tax driven. I further find that financial constraints play a critical role in timing of issues and repurchases. Constrained firms are more sensitive to equity mispricing and thus time the market more evidently. In addition to that, building from the work in Warr et al (2011) I find that firms are inclined to time security issues and repurchases to reach their target leverage levels.The third empirical chapter studies the probabilities of firms issuing and repurchasing securities to time periods of equity mispricing. I find that firms time issues and thus rely on debt issues during periods of undervaluation (and vice versa). This action leads them to deviate further from target levels. This is an intuitive finding and supports conclusions derived in Hovakimian (2006) where firms that set target leverage levels also engage in market timing. Similar to Huang and Ritter (2009) I find that equity mispricing drive the issue decision as well as the issue choice. Building on the work of Hovakimian et al. (2001) I also find that issue size is also driven by market timing considerations. Further to that I also find that equity mispricing similarly influences on the repurchasing decision, size and choice of repurchases. Contributing further, I find that firms decision to issue equity accompanied by reducing debt (or issue debt accompanied by repurchasing equity) are more likely to be driven by equity mispricing than pure issue or repurchase decisions, suggesting that managers do try to lower overall cost of capital by switching to a relatively cheaper source of financing.In brief this thesis provides empirical evidence that equity market timing influences capital structure decisions. In support of the market timing theory, I find that managers do indeed time security issues and repurchase securities to reflect equity mispricing. Their timing motivations seem to be driven by targeting behaviour and also financial capacity. I further find that managers substitute one form of financing with another due to market timing considerations. Further research into debt market timing such as Doukas et al. (2011) might shed further light into managerial timing decisions and its impact on capital structure of firms. Comparing both views simultaneously would also provide a more complete and insightful understanding of capital structure

Capital Structure of Malaysian Firms: Financing the Deficit and Shari’ah Compliance

Our paper evaluates the capital structure of Malaysian firms from a unique perspective by evaluating the impact of Shari’ah compliance on firms’ financing decision. We find that firms that are Shari’ah compliant tend to lean towards lower debt issues to finance their deficits, implying that the compliance status has an impact on their cost of equity which ultimately affects cost of capital

Asymmetric capital structure speed of adjustment, equity mispricing and Shari\u27ah compliance of Malaysian firms

© 2020 Elsevier Inc. Traditionally, equity mispricing has been documented as an important determinant of speed of adjustment to target leverage levels. More recently, the impact of Shari\u27ah compliance has been shown to significantly affect capital structure decisions. In this paper, we explore the effect of equity mispricing in Shari\u27ah compliant (vs. non-compliant) firms. We conduct our study on a comprehensive sample of Malaysian firms from year 1998–2016. We show that established findings in the dynamic trade-off theory do not hold for Shari\u27ah compliant firms. Shari\u27ah compliant firms increase their reliance on equity financing at greater levels than non-compliant firms when they are above target levels and equities are overpriced. In contrast, for Shari\u27ah compliant firms below target levels and where equity is under-priced, the rate of adjustment is slower than non-compliant firms. Our findings suggest that managers of Shari\u27ah compliant firms are inclined to time the equity market when above target levels to capture the impact of lower costs of equity during periods of over-valuation of equity. However, those managers tend to be reluctant to resort to debt financing when below target leverage even in the presence of equity under-pricing

Debt and financial performance of REITs in Malaysia: an optimal debt threshold analysis

The aim of this study is to estimate the optimal debt threshold of Real Estate Investment Trusts in Malaysia (MREITs). This study uses continuous sequential threshold regression approach adopted from Bai and Perron (1998; 2003) and Perron (2006) methodologies and collaborates the threshold regression by Hansen (2001; 2015) to estimate the MREITs optimal debt threshold. In this regard, although by regulation, MREITs are allowed to use debt up to 50% of their total assets, the result of this study indicates that MREITs need to maintain a debt level of between 14.33% and 21.40%, to balance the external funding needs and the optimal level of financial performance. Given the high dividend payout requirement, and the marginal tax rate of zero, if debt is chosen as the dominant approach of obtaining external financing needs, MREITs need to carefully monitor the optimal level of debt in order to maximize the shareholders return and to avoid debt overhang problem. The finding offers a useful guide to MREITs managers in strategizing their financing decision to support their external growth needs by investing in real property

Debt maturity and Shari’ah compliance : evidence from Malaysian panel data

This paper investigates the effect of firm-specific characteristics on debt maturity in Malaysia. We examine the impact of Shari’ah compliance on debt maturity structure by grouping companies based on compliance status as governed by the Securities Commission of Malaysia over the sample period of 2007 to 2016. The results indicate that Shari’ah compliant firms tend to have longer debt maturity structure indicating that the nature of compliance determines the maturity structure of companies in Malaysia as managers of these firms tend to focus on mitigating liquidity risks potentially faced. In addition, Shari’ah compliant firms also tend to have lower bankruptcy costs. Contrary to their non-compliant counterparts, managers of Shari’ah compliant firms tend to change debt maturity structure as a signaling tool whilst opting for longer structures in periods of positive share price performance. We also find that Shar’iah compliance has no impact on firms’ strategy of matching debt to asset maturity structure.peer-reviewe

Corporate governance characteristics and valuation: inferences from quantile regression

Prior literature on corporate governance and performance provides mixed evidence on the impact ofvarious corporate governance measures on performance indicators. However, most of literatures adoptthe Ordinary Least Square (OLS). This method is based on the central tendency, which may not appro-priately represent the reality in cases where the dependent variable ranges between upper and lowervalues and hence the relationship may not be homogenous across different percentiles of the dependentvariables. A variable having a positive impact based on the central tendency for firms may not be the casefor the firms in the upper or lower bounds. Thus, estimating the means using OLS may not reflect andrepresent the heterogeneity in the estimated relationship. Therefore, quantile regression estimates therelationship at any point conditional on the distribution of dependent variable. This would enable us togenerate various estimated coefficient at certain quantile of dependent variable. Therefore, the objectiveof the study is twofold. First, this study aims to investigate the relationship between corporate gover-nance and performance using OLS. Second, this work further explores the impact of corporate governancemechanisms on performance using quantile regression so as to compare and to shed light on whetherthere is heterogeneity in the influence of these variables on the performance of listed companies acrossquantiles. The results of the study provide evidence that quantile approach shows inconsistency in theresult with OLS and hence indicating the impact depends on the scale size. This theoretically providesfurther support that OLS may represent a poor estimation approach for the reality of firms.La literatura previa sobre gobierno corporativo y desempe ̃no aporta una evidencia mixta del impactode las diversas mediciones del mismo sobre los indicadores del desempe ̃no. Sin embargo, gran parte dela literatura adopta el método de los mínimos cuadrados ordinarios (MCO). Dicho método se basa en latendencia central, que puede no constituir una representación adecuada de la realidad en aquellos casosen los que la variable dependiente oscila entre los valores superior e inferior y, por tanto, la relaciónpuede no ser homogénea a lo largo de los diferentes percentiles de las variables dependientes. Unavariable que tenga un impacto positivo basado en la tendencia central para las empresas puede no serel caso para aquellas posicionadas en los límites superior o inferior. Entonces, el cálculo de las mediascon el uso del método MCO no reflejaría ni representaría la heterogeneidad en la relación estimada. Porello, la regresión de cuantiles calcula la relación en cualquier punto, supeditado a la distribución de la variable dependiente. Esto nos permitiría generar diversos coeficientes estimados en cualquier cuantil dela variable dependiente. En consecuencia, el objetivo de este estudio es doble: investiga la relación entre elgobierno corporativo y el desempe ̃no, utilizando el método MCO y explora el impacto de los mecanismosdel gobierno corporativo sobre el desempe ̃no, utilizando la regresión de cuantiles, a fin de comparar yarrojar luz sobre la posibilidad de que exista heterogeneidad en la influencia de dichas variables sobreel desempe ̃no de las empresas cotizadas, a lo largo de los cuantiles. Los resultados del estudio aportanevidencia acerca de que el enfoque de los cuantiles es inconsistente con el método MCO y, por tanto,indica que el impacto depende del tama ̃no de la escala. Esto respalda, además, el hecho de que el métodoMCO puede representar un enfoque de cálculo más débil para la realidad de las empresas

Non Linear Speed of Adjustment to Lead Leverage Levels and the Timing Element in Equity Issues: Empirical Evidence from the UK

The dynamic trade-off view of capital structure is based on partial adjustment models that find that firms adjust towards target levels. In this paper, we estimate the speed of adjustment based on the first difference of the lead leverage levels (actual lead) and lag leverage levels (actual lag) to the first difference of simulated lead (target) leverage levels and lag levels (actual lag leverage) for UK firms. Consistent with the literature we find that firms adjust the lag (current) leverage levels faster to lead levels when they are above lead levels relative to periods when they are below lead levels. This is due to managerial actions in minimizing present value of bankruptcy costs when firms are over-levered. Bringing in the market timing view of capital structure, we measure deviation of market prices to predicted theoretical values, and find that speed of adjustment is influenced by equity mispricing. We find that firms adjust faster to lead levels when lag levels are above lead levels and the extent of deviation above theoretical values is not excessive relative to when deviations of prices from theoretical levels are too high. Furthermore, looking at firms below lead levels, we find that firms adjust faster to lead levels when equities prices below theoretical values severely deviate; suggesting that firms increase debt issues when equity prices are acutely suppressed. This indicates managers are consistently looking at windows of opportunities when issuing or repurchasing to ensure successful timing attempts. Thus, our findings suggest that although market timing could also work within a trade-off framework where managers are timing based on the deviation from theoretical prices as well as moving towards simulated lead levels, the extent of the integration of both explanations of capital structure remains puzzling

Consumers Attitude Towards Organic Food

AbstractThe awareness on the harmful effects of chemicals present in food is increasing among the consumers. The trend towards purchasing organic food is growing among people. A study to identify what actually induces consumers to turn towards organic food is important. Some of the prominent motivating factors to purchase organic foods include environmental concern, health concern and lifestyle, product quality and subjective norms. This empirical study is aimed at identifying the purchase intention of consumers towards organic foods. The study predicts the purchase intention of consumers based on the influences of factors like environmental concern, health concern and lifestyle, product quality and subjective norms on the attitude towards organic foods. The results of the study show that quality of products, environmental concern, health concern and lifestyle are the most commonly stated motives for purchasing organic foods

Debt and financial performance of REITs in Malaysia: a moderating effect of financial flexibility

The use of debt by REITs entity seems to be a puzzle in numerous REITs literature, as REITs are tax-exempted business entities. The trade-off theory implies that the financing strategy of using debt provides no value in a REIT entity with a marginal tax rate of zero. However, high dividend pay-out requirement has limit REITs’ ability to retain its internal earnings, thus require REITs to use debt to undertake its growth strategies. This study aims to investigate the great curiosity about the debt financing decision of REITs in Malaysia (MREITs) at all given no tax shield benefit and to examine the moderating effect of financial flexibility in a relationship between debt financing and the financial performance. Using the unbalanced panel data from all MREITs for the time period between 2005 and 2014, the results of this study are consistent with the pecking order theory in explaining the MREITs debt financing decision but are less supportive of the trade-off theory on tax benefits and agency theory of free cash flow on disciplinary tools. This suggests that MREITs use debt to support the growth needs than tax motives and the high dividend pay-out requirement behaves as a “disciplinary tool,” not through the use of debt. The findings also reveal that financial flexibility plays an important role to alter the negative relationship between debt financing and financial performance to positive relationship. This study serves as a useful guide for MREITs’ managers in managing financial flexibility as it has important moderating effects on the relationship between debt financing and financial performance

Bank performance in MENA region: a perspective from bank efficiency, risk-taking behaviour and market competition

The present study was aimed at investigating the influence of risk-taking behavior on profitability for IBs in MENA region for a span of time covering 2005-19. The profitability of IBs were measured by ROA, ROE and NIM while the risk-taking behavior was identified with insolvency risk, capital risk, liquidity risk and credit risk. In addition, some controlling factors like efficiency; revenue, profit and cost efficiency and development indictors; stock market development, banking sector development and banking competition along-with macro indicators like inflation rate and GDP growth rate were used. The annual stream of data was formed in panel order by accessing the same from WDI and bank scope databases. The study uses panel data estimation like fixed, random and OLS as well as the dynamic panel estimations like GMM. The Hausman specification test and LM test were not significant which validate the use of OLS for panel estimation while Arellano-Bond, Sargan and Hansen test are not significant too which validates the GMM estimates for dynamic panel. The policy makers in IBs of MENA regions are recommended to consider ROA for measuring the profitability with greater R-square value by considering risk-taking behavior indicators like capital risk, liquidity risk and credit risk. These risk factors are taking positive capacity to strongly enhance the ROA for IBs in MENA region. The future researches may consider the comparative studies based on the variable setting of the present studies with fresh evidences. The estimated results of this study are generalizable to banking sectors only