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XI International Academic Conference on Economic and Social Development

XI International Academic Conference on Economic and Social Development. Do Firms Move towards Target Capital Structure? Empirical Analysis of Dynamic Trade-Off Theory’s Application for BRIC Companies. Irina Ivashkovskaya Maria Kokoreva www.cfcenter.ru http://en.cfcenter.ru/

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XI International Academic Conference on Economic and Social Development

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  1. XI International Academic Conference on Economic and Social Development Do Firms Move towards Target Capital Structure? Empirical Analysis of Dynamic Trade-Off Theory’s Application for BRIC Companies Irina Ivashkovskaya Maria Kokoreva www.cfcenter.ru http://en.cfcenter.ru/ www.cfjournal.ru Basic Research Programme   of the Higher School of Economics in 2009

  2. Corporate Finance Center • Established in 2006 (http://en.cfcenter.ru/) • One of the first academic research centers in Corporate Finance in Russia (part of Center for Fundamental Research) • Professors, Lecturers and Master Students of HSE (24 members) • Research projects in the Areas: • Corporate Financial Decisions • Corporate Financial Architecture • Corporate Governance and Performance • Intellectual Capital: Valuation, Performance • “Empirical Corporate Finance in emerging markets” in progress • Network of Excellence “Corporate Financial Architecture and Role of Boards” • Corporate Finance E-Journal (www.cfjournal.ru)

  3. DETERMINANTS: • COUNTRY LEVEL: • Hungary, India, The Czech Republic, Turkey, Taiwan, Thailand,Slovenia, China, Argentina,Brazil, Chile, Colombia, Hong Kong, Israel, South Africa, South Korea, Sri Lanka, Malaysia, Mexico, Pakistan, Peru, Philippines, Poland, Russia, Singapore, Turkey, and Venezuela • MULTICOUNTRY LEVEL: • Booth et al., 2001 (10 countries); Delcoure (2007);Seifert, Gonenc (2008, 23 countries, including Russia); Ivashkovskaya, Solntseva (Kokoreva) (2009, BRIC) • BASIC TEORIES TESTING: • Delcoure N. 2007 (Central and Eastern Europe), Zou, H., Xiao, J.Z., 2006 (China) , Berk A., 2007 (Slovenia), Chakraborty, I., 2010 (India) • DYNAMIC CAPITAL STRUCTURE: • Nivorozhkin E., 2005 (Central and Eastern Europe, former Soviet Union), Karadeniz, E. et. al, 2009 (Turkey), Bhaduri, S.N., 2002 (India) Capital Structure Research on Emerging Markets

  4. WHY BRIC? • BRIC term (Brazil, Russia, India, China) appeared in 2001 (Goldman Sachs) for fast developing economies • Economic reasoning (since 2006 – politics also) • Cheap resources countries (agriculture, minerals, intellectual, labour) • June, 16 2009 – First BRIC summit in Russia • Current Goldman Sachs forecasts (taking crisis into account): • Average annual growth: • BRIC (2009) 4,8% World (2009) -1,1% • BRIC (2010) 8% World (2010) 3,3% • Appear within 8 largest economies in 2027 • Appear within 5 largest economies in 2050

  5. WHY BRIC?

  6. Pecking Order Theory Testing: Results 2009 • RUSSIAN SAMPLE: DO NOT REJECT • Internal financing deficit explains up to 41% of the new debt • Higher significance for capital structure variables based on market value of equity • SUB SAMPLES: PO motives are more important for companies with foreign shareholders • BRAZILIAN SAMPLE: REJECT • The majority of the companies do not have internal deficit for the period of study, the coefficients are not significant • Not significant for all sub samples • CHINESE SAMPLE:REJECT • Explanatory power of regressions is too low (R-squared is from 0,003 to 0,04) • Not significant for all sub samples

  7. Trade-off Theory Testing: Results 2009 • RUSSIAN SAMPLE: DO NOT REJECT • Deviation from the target level is responsible for a significant part of new debt, but never achieve the unit level (less than 63%) • The DL has higher coefficients than the DEF for Pecking Order tests almost in all specifications • SUB SAMPLES: for HIGH debt level firms and firms NOT controlled by the government • BRAZILIAN SAMPLE: DO NOT REJECT • Low significance in all specifications (R-squared from 0,02 to 0,06) • Could not be rejected for sub samples analysis but preference for a specific sub sample can not be revealed CHINESE SAMPLE : DO NOT REJECT • Chinese large-scale companies most likely follow trade-off logic of financing (DL stands for 16-69% of new debt) • Could not be rejected for sub samples analysis but preference for a specific sub sample can not be revealed

  8. Dynamic Trade-Off OPTIMAL CAPITAL STRUCTURE: ■Modeling from determinants (fitted values for target capital structure) ■ Historical average leverage (Shyam-Sunder, Myers, 1999),(Fama, French, 2002) • ADJUSTMENT COSTS: • ■ Optimal and observed capital structures do not coinside (Heshmati, 2001) • ■ Determinants of adjustment costs : • standard determinants plus the distance from the optimal (Bangeree et al, 2004); • Institutional factors: market and institution specific (Wanzenried) • Macroeconomic (CookandTang, 2008) MODELLING: Interaction of financing, investing, dividend decisions

  9. Methodology of the Research • DATA : • 2004-2008 panel data • 54 Russian large companies • 139 Brazilian large companies • 143 Indian large companies • 110 Chinese large companies • RESEARCH METHODOLOGY: • Target ratio modeling • Adjustment model • Final model • Checking for individual effects • RESULTS, INTERPRETATION, APPLICATIONS

  10. Leverage Variables and Capital Structure Determinants • Leverage ratios: • Based on Book value and Market value of equity • Based on interest bearing debt and liabilities • Capital structure determinants: • Profitability • Asset structure • Size • Growth • Tax shields • 2008 Dummy • National Dummy • Industry Dummy • MTB

  11. Results for 2004-2007 FY TDR - Total debt ratio – Total interest bearing debt/(total debt +book value of equity) TDRA – Book value total debt ratio - Total liabilities/total assets MTDR – Total market debt ratio - Total interest bearing debt/(total debt +market value of equity)

  12. Results for 2008 FY TDR - Total debt ratio – Total interest bearing debt/(total debt +book value of equity) TDRA – Book value total debt ratio - Total liabilities/total assets MTDR – Total market debt ratio - Total interest bearing debt/(total debt +market value of equity)

  13. Results • Large BRIC companies follow similar dynamic strategy in capital structure choice • Large BRIC companies move to their target capital structure ratio but face recapitalization costs • The speed of adjustment is high (due to companies size mostly) – 41-51% • Target level of capital structure depends on: • Profitability (negative relationship) • Size calculated as ln(Total Assets) (positive relationship) • Size calculated as ln(Sales) (negative relationship) • Tangibility (positive relationship) • Non debt tax shield (positive relationship) • Model is not applicable for 2008 (external factors matter)

  14. Thank you for your attention!

  15. Descriptive statistics

  16. Descriptive statistics

  17. Dynamic statistics

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