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.

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.