Testing for inconsistencies in the estimation of UK capital structure determinants

This article analyses the determinants of the capital structure of 1054 UK companies from 1991 to 1997, and the extent to which the influence of these determinants are affected by time-invariant firm-specific heterogeneity. Comparing the results of pooled OLS and fixed effects panel estimation, significant differences in the results are found. While the OLS results are generally consistent with prior literature, the results of our fixed effects panel estimation contradict many of the traditional theories of the determinants of corporate financial structure. This suggests that results of traditional studies may be biased owing to a failure to control for firm-specific, time-invariant heterogeneity. The results of the fixed effects panel estimation find larger companies to have higher levels of both long-term and short-term debt than do smaller firms, profitability to be negatively correlated with the level of gearing, although profitable firms tend to have more short-term bank borrowing than less profitable firms, and tangibility to positively influence the level of short-term bank borrowing, as well as all long-term debt elements. However, the level of growth opportunities appears to have little influence on the level of gearing, other than short-term bank borrowing, where a significant negative relationship is observed

Capital structure and its determinants in the United Kingdom – a decompositional analysis

Prior research on capital structure by Rajan and Zingales (1995) suggests that the level of gearing in UK companies is positively related to size and tangibility, and negatively correlated with profitability and the level of growth opportunities. However, as argued by Harris and Raviv (1991), 'The interpretation of results must be tempered by an awareness of the difficulties involved in measuring both leverage and the explanatory variables of interest'. In this study the focus is on the difficulties of measuring gearing, and the sensitivity of Rajan and Zingales' results to variations in gearing measures are tested. Based on an analysis of the capital structure of 822 UK companies, Rajan and Zingales' results are found to be highly definitional-dependent. The determinants of gearing appear to vary significantly, depending upon which component of debt is being analysed. In particular, significant differences are found in the determinants of long- and short-term forms of debt. Given that trade credit and equivalent, on average, accounts for more than 62% of total debt, the results are particularly sensitive to whether such debt is included in the gearing measure. It is argued, therefore, that analysis of capital structure is incomplete without a detailed examination of all forms of corporate debt

Cross-border acquisitions and financial leverage of UK acquirers

Based on a sample of 782 acquisitions by UK firms during 1982-2009, this paper examines the impact of cross-border acquisitions on financial leverage. The paper shows that cross-border acquisitions have a negative impact on the financial leverage of acquiring firms. However, the negative impact of cross-border acquisitions disappears when acquirers choose targets from developed countries, and also when the acquisitions are undertaken by multinational firms. Collectively, the findings imply that exposure to foreign markets reduces the borrowing ability of acquiring firms especially when they choose targets from developing countries, and when they have no previous experience in foreign markets

Corporate financing decisions: UK survey evidence

Despite theoretical developments in recent years, our understanding of corporate capital structure remains incomplete. Prior empirical research has been dominated by archival regression studies which are limited in their ability to fully reflect the diversity found in practice. The present paper reports on a comprehensive survey of corporate financing decision-making in UK listed companies. A key finding is that firms are heterogeneous in their capital structure policies. About half of the firms seek to maintain a target debt level, consistent with trade-off theory, but 60 per cent claim to follow a financing hierarchy, consistent with pecking order theory. These two theories are not viewed by respondents as either mutually exclusive or exhaustive. Many of the theoretical determinants of debt levels are widely accepted by respondents, in particular the importance of interest tax shield, financial distress, agency costs and also, at least implicitly, information asymmetry. Results also indicate that cross-country institutional differences have a significant impact on financial decisions

Making SPIFFI SPIFFIER: Upgrade of the SPIFFI instrument for use in ERIS and performance analysis from re-commissioning

SPIFFI is an AO-fed integral field spectrograph operating as part of SINFONI on the VLT, which will be upgraded and reused as SPIFFIER in the new VLT instrument ERIS. In January 2016, we used new technology developments to perform an early upgrade to optical subsystems in the SPIFFI instrument so ongoing scientific programs can make use of enhanced performance before ERIS arrives in 2020. We report on the upgraded components and the performance of SPIFFI after the upgrade, including gains in throughput and spatial and spectral resolution. We show results from re-commissioning, highlighting the potential for scientific programs to use the capabilities of the upgraded SPIFFI. Finally, we discuss the additional upgrades for SPIFFIER which will be implemented before it is integrated into ERIS.Comment: 20 pages, 12 figures. Proceedings from SPIE Astronomical Telescopes and Instrumentation 201

The role of credit ratings on capital structure and its speed of adjustment: an international study

Using an international dataset, we examine the role of issuers’ credit ratings in explaining corporate leverage and the speed with which firms adjust toward their optimal level of leverage. We find that, in countries with a more market-oriented financial system, the impact of credit ratings on firms’ capital structure is more significant and that firms with a poorer credit rating adjust more rapidly. Furthermore, our results show some striking differences in the speed of adjusting capital structure between firms rated as speculative and investment grade, with the former adjusting much more rapidly. As hypothesized, those differences are statistically significant only for firms based in a more market-oriented economy

Debt Policy and Economic Growth in a Small Open Economy Model with Productive Government Spending

In this paper, we examine the effects of introducing constraints on government borrowing using a continuous-time overlapping generations model of a small open economy. We consider government placing constraints on the amount of government bonds outstanding by establishing an upper limit, or target level, for the ratio of government bonds to gross domestic product. We first show that there exist multiple steady states in the model small open economy. One is a steady state with high growth, the other a steady state with low growth. We next examine how changes in the target level for bonds affect economic growth rates at the steady states. If the economy has a positive amount of asset holdings, we obtain the following results. When the government runs budget surpluses, an increase in the target level for government bonds reduces the growth rate of the low-growth economy, but raises the growth rate of the high-growth economy. However, when the government runs budget deficits, an increase in the target level for government bonds raises the growth rate of the low-growth economy, but reduces the growth rate of the high-growth economy. If the economy has a negative amount of asset holdings, the results are ambiguous

Gone with the Wind: Demographic Transitions and Domestic Saving

This study explores the relationship between demographic factors and saving rates using a panel dataset covering 110 countries between 1963 and 2012. In line with predictions from theory, this paper finds that lower dependency rates and greater longevity increase domestic saving rates. However, these effects are statistically robust only in Asia. In particular, Latin America, which is a region that has undergone a remarkably similar demographic transition, did not experience the same boost in saving rates as Asia. The paper highlights that the potential dividends arising from a favorable demographic transition are not automatically accrued. This is a sobering message at a time when the demographic tide is shifting in the world

Capital structure revisited. Do crisis and competition matter in a Keiretsu corporate structure?

The file attached to this record is the author's final peer reviewed version.open accessWe investigate firm-level determinants of capital structure using a large sample of 4,284 Japanese firms over a nineteen-year period (i.e., over 61,000 firm-year observations), a hitherto less examined sample for this purpose. We conduct our analysis and interpret our findings predominantly within the pecking order, the trade-off and the agency theoretical frameworks. We uncover three new findings. First, our evidence indicates that insights derived from the extant literature on capital structure are cross-national and are applicable in the context of Japan, despite the unique characteristics of Japanese firms. Second, financial crisis significantly impacts the relationship between leverage and firm-level determinants, particularly accentuating the effect of asset tangibility and growth. Third, product market competition significantly impacts the observed relationship between firm-level determinants and leverage. Our results are robust, controlling for the joint effects of competition and crisis