Narrow Results

This study describes the impact of leverage on earnings management and determines varying relationships with the moderating effect of firm size in linear and nonlinear setting. Results from selected firms of members’ countries of Asia Pacific Trade Agreement (APTA) unequivocally revealed that in all countries the relationship between the leverage and earnings management is sigmoid in nature. Firms can limit the managers reporting of income-increasing accruals through debt creation up to a certain threshold after which further debt creation challenges the debt covenants. The firm size substantially moderates the relationship of leverage and earnings management and systematically converses the relationship through moderation. The relationship between accruals and firm size is also sigmoid in nature. The specific behavior is seen in Indian firms in which relationship between leverage and accruals is like Richard’s curve in nature due to higher agency cost issue. In Pakistan, firm size has been found as a major factor that guides the accrual due to higher political cost. Additionally, in the setting of comparative static analysis, at the first place, we examine cash flows-risk determining liquidity-risk position of the firms in Pakistan and Bangladesh. At the second place, in the case of China, India and Pakistan, this study reveals an increasing relationship between the effective tax rate and the probability of reporting negative accruals which may create attitude of tax evasion among the firms in these countries. In the third place, in the case of China, India and Bangladesh, sales growth depicts an increasing relationship with the likelihood of reporting positive accruals. However, decreasing relationship is observed for Pakistan and Sri Lanka between the sales growth and the possibility of positive accruals. This study has major implications for funding institutions, debt manager and regulatory bodies of Asian Economies.

The Paris Agreement signals increased climate awareness and potential changes in the business environment as an economy decarbonizes. Ratification of the Paris Agreement could heighten climate-related transition risks, especially for companies in high-emitting industries. This research analyzes the impact of Paris Agreement ratification on the debt financing decisions of publicly listed companies in Southeast Asian economies. Our empirical evidence shows that, after announcement of Paris Agreement ratification, firms in high-emitting industries have leverage and financial leverage that are an average of 1.8% and 4.2% lower, respectively, than firms in low-emitting industries. Firms in the region also witnessed higher risks 2 years after ratification, and these risks do not differ significantly between high- and low-emitting industries. This finding implies that firms become riskier under heightened transition risks, and this influences their financial decisions. Governments might thus consider introducing policies that facilitate their response to a low-carbon transition.

This paper begins by showing that even after conditioning for factors that might justifiably lead to a country having relatively high leverage, China remains a debt outlier. In this sense, China can be regarded as over-leveraged and its debt levels may present potential risks to growth and financial stability. The corporate sector is central to China’s debt story, accounting for two-thirds of the total. Moreover, the corporate sector has been mostly responsible for China’s leverage cycles, including the leveraging up since 2008 and an earlier deleveraging phase starting in 2003. Two major but under-appreciated drivers of Chinese corporate leverage cycles are then identified. The most important is the share of internally funded corporate capital expenditure, which is a combined consequence of evolving corporate earnings and capital expenditure. The second is the rising importance of real estate and construction firms as holders of corporate debt. China’s corporate leverage landscape is also shown to be more complex than a story of zombie state-owned enterprises in industrial segments with excess capacity being ever-greened with loans from state banks. A balanced mix of policy responses will be needed to manage a warranted and orderly deleveraging cycle in the years ahead.

We examine the determinants of bank capital structure using a large sample of banks in the world. We find that banks determine their capital structure in much the same way as non-financial firms, except for growth opportunities. We also provide evidence that country-level factors, such as the legal system, bank-specific factors and economic conditions influence banks’ capital decisions through their impacts on bankruptcy costs, agency costs, information asymmetry and liquidity creation. The results show that, besides the direct effects, there are indirect impacts of country-level factors on the decision of bank capital. Our results have potential policy implications for the on-going regulatory reform.

A macroeconomic model based on the economic variables (i) assets, (ii) leverage (defined as debt over asset) and (iii) trust (defined as the maximum sustainable leverage) is proposed to investigate the role of credit in the dynamics of economic growth, and how credit may be associated with both economic performance and confidence. Our first notable finding is the mechanism of reward/penalty associated with patience, as quantified by the return on assets. In regular economies where the EBITA/Assets ratio is larger than the cost of debt, starting with a trust higher than leverage results in the highest long-term return on assets (which can be seen as a proxy for economic growth). Therefore, patient economies that first build trust and then increase leverage are positively rewarded. Our second main finding concerns a recommendation for the reaction of a central bank to an external shock that affects negatively the economic growth. We find that late policy intervention in the model economy results in the highest long-term return on assets. However, this comes at the cost of suffering longer from the crisis until the intervention occurs. The phenomenon that late intervention is most effective to attain a high long-term return on assets can be ascribed to the fact that postponing intervention allows trust to increase first, and it is most effective to intervene when trust is high. These results are derived from two fundamental assumptions underlying our model: (a) trust tends to increase when it is above leverage; (b) economic agents learn optimally to adjust debt for a given level of trust and amount of assets. Using a Markov Switching Model for the EBITA/Assets ratio, we have successfully calibrated our model to the empirical data of the return on equity of the EURO STOXX 50 for the time period 2000–2013. We find that dynamics of leverage and trust can be highly nonmonotonous with curved trajectories, as a result of the nonlinear coupling between the variables. This has an important implication for policy makers, suggesting that simple linear forecasting can be deceiving in some regimes and may lead to inappropriate policy decisions.

TELCO is the leading manufacturer of commercial vehicles (trucks) in India. In 1998, TELCO succeeded in manufacturing a small car of international standards without financial or technological collaboration with any leading foreign car manufacturer. This case deals with TELCO's success in its small car project and the challenges that lie ahead. It highlights the role played by creative resource leverage in the success of firms from developing countries in a global environment.

We analyze a stochastic volatility market model in which volatility is correlated with return and is represented by an Ornstein-Uhlenbeck process. In the framework of this model we exactly calculate the leverage effect and other stylized facts, such as mean reversion, leptokurtosis and negative skewness. We also obtain a close analytical expression for the characteristic function and study the heavy tails of the probability distribution.

Purpose: Classify the characteristics of taxpayers in paying tax compliance based on financial performance, leverage, and tax reporting and analyze the relationship between financial performance and leverage on tax reporting and tax compliance companies.

Design/method: This research was conducted at the Office of the Foreign Investment Tax Service in the Six Regional Offices of the DJP Jakarta, especially the Directorate General of Taxes (KPP PMA ENAM). The population in this study were corporate taxpayers registered at KPP PMA ENAM 2015–2018, namely 750 taxpayers. Sampling using the purposive method obtained as many as 660 companies. Cluster analysis and cross-tabulation were used as analysis methods in this study.

Findings: In particular, corporate tax reporting depends on financial performance, but only on high-level corporate clusters that depend on leverage as well. While in the low company cluster (Cluster 1) tax compliance is influenced by these three variables, in the medium cluster (Cluster 2) tax compliance does not depend on these three variables, while in the high cluster (Cluster 3) tax compliance is only influenced by leverage.

Originality: The cluster analysis method and the cross-tabulation method are used to analyze the effect of the financial performance and leverage variables on the tax reporting and tax compliance variables.

This study aims to identify the role of contextual variables, especially the interest rate, in affecting the relationship between a firm’s capital structure and firm value. This study investigates the capital structure of Pakistani-listed firms in light of rising interest rates, declining “Domestic credit to the private sector” and emerging Islamic banking in the country. The study uses GMM (Two-Step) to examine the linear, and dynamic Panel threshold model to examine the quadratic relationship between leverage firm value and how other contextual variables affect this relationship. The study found that there is a negative relationship between leverage and firm value in the presence of the majority of contextual variables. Except for tax, depreciation, and free cash flow, leverage shows a negative relationship with firm value in presence of all other contextual variables. Further results show that there is a quadratic relationship present between leverage and firm value. Also, the interest rate and inflation has a negative effect on firm value in long term, while in short term this relationship is positive. The study supports the pecking order & Trade-off theory but does not support the agency theory. The study is using new methodologies, just as the panel threshold model which is never used before for Pakistani industries. The panel threshold model is using some variables for the first time in research. Previously only size and debt were used in panel threshold models, this time we used debt, firm value, profitability, tax, and tangibility, which will be a significant contribution to the literature.

Firm size has been empirically found to be strongly positively related to capital structure. This paper investigates whether a dynamic capital structure model can explain the cross-sectional size–leverage relationship. The driving force that we consider is the presence of fixed costs of external financing that lead to infrequent restructuring and create a wedge between small and large firms. We find four firm-size effects on leverage. Small firms choose higher leverage at the moment of refinancing to compensate for less frequent rebalancings. Their longer waiting times between refinancings lead to lower levels of leverage at the end of restructuring periods. Within one refinancing cycle, the intertemporal relationship between leverage and firm size is negative. Finally, there is a mass of firms opting for no leverage. The analysis of dynamic economy demonstrates that in cross-section, the relationship between leverage and size is positive and thus fixed costs of financing contribute to the explanation of the stylized size–leverage relationship. However, the relationship changes sign when we control for the presence of unlevered firms.

This paper addresses the following question: Are banks special firms that can achieve their goals only with high leverage, above and beyond what is considered acceptable for industrial corporations?

This question is related to the issue of the cost of capital and how it is affected by leverage. If we accept the Modigliani–Miller (M&M) theorem (1958), then the capital structure is irrelevant for both the cost of capital and the value of the bank. Specifically, the M&M hypothesis argues that higher levels of equity capital reduce bank leverage and risk, leading to an offsetting decline in banks’ cost of equity capital. Hence, we ask the question whether banks are special firms such that M&M theorem does not apply to banks.

We show that M&M propositions cannot be applied for banks primarily because of explicit guarantees and subsidies that provide incentives for increasing leverage. Then, some of the risk faced by the bank is transferred at no cost to the providers of these guarantees and subsidies, giving banks the incentive to increase leverage as much as they can. We show that under perfect market conditions, when risk is fairly priced, this opportunity vanishes.

We study policies that regulate executive compensation in a model that jointly determines executives’ effort, compensation and firm leverage. The market failure that justifies regulation is that executives are optimistic about asset prices in states of distress. We show that shareholders propose compensation packages that lead to socially excessive leverage. Say-on-pay regulation does not reduce the incentives for leverage. Regulating the structure of compensation (but not its level) with a cap on the ratio of variable-to-fixed pay delivers the right leverage. However, it is more efficient to directly regulate leverage because restricting the variable compensation impacts managerial effort more than if shareholders are free to design compensation subject to a leverage constraint.

The integration of two merging firms takes time to complete, and synergy gains from a merger can be captured only after the firms go through a costly and often lengthy post-merger integration period. This paper presents a dynamic model of capital structure for the target firm and the acquirer to examine the effects of the integration period on acquiring firms’ financing behavior around mergers. The model generates predictions that provide rational (non-behavioral) explanations for documented empirical evidence regarding leverage dynamics around mergers. When anticipating a longer and costlier integration period, acquiring firms strategically plan ahead by choosing a lower leverage prior to and at the time of the merger, and gradually lever up as the post-merger integration process nears completion. Deals with longer integration periods are financed with a larger fraction of equity. The model also implies that acquiring firms optimally time takeovers of underleveraged firms that experience negative shocks to their earnings.

Does policy uncertainty affect productivity? Policy uncertainty creates delays on decision-making as firms await new information about prices, costs, and other market conditions before committing resources. Such delays can have real consequences on firms’ productivity and corporate decisions. We find that economic policy uncertainty has a negative impact on firm-level productivity. We further show that the negative impact is alleviated by firms’ high cash holdings or prior committed irreversible investments. These findings are robust to various specifications.

This paper investigates the impact of the recent terrorist attacks on the Turkish banking sector. Specifically, an event study analysis is executed to estimate the abnormal returns of banks’ stocks in Turkey. According to the results, negative and significant abnormal returns were observed on the event dates of terrorist attacks, those of which especially occurred at international points and touristic places. The study continues with a regression analysis that looks into the cross-bank variation of abnormal returns by using important bank characteristics as predictors. The regression analysis exhibits that banks with higher leverage and larger size are prone to getting more negatively affected by the terrorist attack. On the other hand, banks with higher liquidity and higher income level are likely to have less negative abnormal returns.

We examine the stock return implications of corporate-defined benefit pension plans in innovative U.S. firms and in R&D- and patent-sorted portfolio specifications. We find that investors underreact to firms increasing off-balance-sheet liabilities. Pensions represent material off-balance-sheet liabilities: in our extensive and large sample (1985–2017, 2541 firms for 26,522 observations), entities with pension plans are 38% more levered when we integrate pension liabilities and assets into the firms’ capital structure. We find that R&D-intensive firms increasing the size of their pension liability subsequently underperform their benchmark returns. Through six alternative R&D-market capitalization portfolios, we also find that this association is stronger for smaller firms. Finally, the relationship remains persistent over a long horizon. These findings are robust to endogeneity concerns addressed through instrumental variables, propensity score matching, and Heckman correction.

Beijing’s recent peace initiatives in the Middle East have drawn growing scrutiny and generated heated debate over its role in the Global South. Learning from the West’s hitherto mixed record in the regional peace process, China attempts to improve the effectiveness of regional peace diplomacy by focusing on three important ingredients, namely, neutrality, leverage, and timing. While Beijing’s neutrality stems from the long-held principle of inviolability of sovereignty and territorial integrity, its leverage draws from extensive and robust economic ties with regional stakeholders. Moreover, Beijing offers its good offices at a time when both the Iranians and Saudis have become conflict-weary, believing that continued tensions go against their own interests. Recent breakthroughs in peace diplomacy may raise local actors’ expectations to such levels that Beijing may find difficult to meet because China still defines its role as one of a facilitator, not a security guarantor.

Main objective of the study is to analyze firm characteristics which affect stock illiquidity. The paper aims to give suggestions and policy implications to corporates and investors while dealing with investments in illiquid stocks. ANOVA, chi-square tests, correlation analysis, univariate and multiple regression models are employed on Amihud (2002) (Amihud, Y., (2002). Illiquidity and Stock Returns: Cross-Section and Time-Series Effects, Journal of Financial Markets 5, 31–56) illiquidity measure and various firm characteristics. Findings of this paper suggest that firms with illiquid stocks can be characterized with low promoter’s stakes, high leverage, poor financial health, small size and low/negative profitability. The findings of the paper will be of relevance to retail investors who are at the mercy of informed investors. The results portray basic characteristics that an investor should look into before investing in any stock. The study is of value to the investors who are grieved because of the adverse selections and information asymmetry. Moreover, the basic nature of illiquid firms has never been studied.

Fast Moving Consumers Goods (FMCG) sector is the fastest and the fourth largest sector of the Indian economy. This study attempts to identify the critical factors affecting the financing decisions of 15 FMCG companies using panel framework and tries to investigate whether the factors considered provide convincing explanation as per the capital structure models like peking order theory, trade-off theory and Agency theory developed over a period of time. The data are collected from CMIE Prowess database for the period 2008 to 2019. The variables considered are profitability, size, non-debt tax shield, tangibility, uniqueness, liquidity and origin. It is found that Pooled OLS is the appropriate model for explaining the factors influencing the short-term debt, long-term debt and total debt as the dependent variables. It is evident that the short-term debt of the company is influenced by profitability, non-debt tax shield and liquidity of the company; the long-term debt is influenced by profitability, tangibility and origin of the company; and the total debt is affected by profitability, size and liquidity of the company. The factors which are significant confirm to the expected behavior with respect to pecking order theory of capital structure.

This study examines the relations between leverage and investment and the relations between leverage and firm value during the COVID-19 period using data from Chinese listed companies. We find that the COVID-19 pandemic has strengthened the inhibition of leverage on corporate investment and firm value, while alleviated the constraint of leverage on corporate cash holdings. Furthermore, the pandemic-induced negative relationships are stronger for non-SOEs, firms holding less cash, multinational firms and firms in severe epidemic areas. Overall, our results are consistent with the risk-aversion theory. Higher economic uncertainty increases the firms’ risk aversion and eventually strengthens the negative relations between leverage and investment.