A trade-off theory of ownership and capital structure

Nicodano, Giovanna; Regis, Luca

doi:10.1016/j.jfineco.2018.09.001

Cited by 32 publications

(24 citation statements)

References 56 publications

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“…The departure is critical as the authors discover that, by enabling both coin-surance and deflection of contagion risk, conditional guarantees allow for an asymmetric shift of the leverage profile across BG's affiliates jointly with an overall expanded debt capacity. Close to the network formation spirit of my paper, Nicodano and Regis (2019) expands Luciano and Nicodano (2014) by proposing a general trade-off model in which a controlling entity optimally decides the ownership share of two subsidiaries, thus allowing for truly complex structures. Depending on the tax saving -contagion trade-off, these range from hierarchical (with full or partial subsidiary ownership by parent) to horizontal.…”

Section: Related Literaturementioning

confidence: 99%

“…In terms of the financing advantage, Almeida et al (2011) show that groups use internal revenues to set up or acquire capital-intensive firms, which are more likely to be constrained in financial markets. Parallel to (or on top of) this channel, tax-saving and financial resilience may shape the architecture and the direction of inter-firm capital allocations (see, in particular, Regis, 2019 andLuciano andNicodano, 2014). I postpone the discussion on this literature to Section 1.1.…”

Section: Introductionmentioning

confidence: 99%

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How does bank credit affect the shape of business groups' internal capital markets?

Giovannetti

2021

Quantitative Finance

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In empirical literature, it is hypothesized that the persistence of Business Groups (BGs) is linked to the capability of easing the financing constraints of participating firms through the implementation of an internal capital market (ICM). ICMs enable capital relocation, thus partially offsetting disparities in accessing bank credit. I offer three contributions. First, I formally ground this idea with a dynamic model in which an ICM is endogenously generated as a function of the bank's lending policy and firms' production incentives. A novelty in the literature, the model contains a trickle-down mechanism which allows bank credit to circulate across firms via inter-firm loans. Second, I study the model to understand how the ICM reacts to shocks to the following empirically critical channels: the BG's debt-to-equity ratio, the profitability of production markets and, most importantly, the bank's credit rationing policy. The model disentangles the contribution of each channel on the shape of the ICM, as measured in terms of the intensity of firms' cross-subsidization. In particular, I discover a non-monotonic relationship between the latter dimension and the intensity of cross-subsidization. Third, I match stylized facts of the so called "Korean crisis" and apply the model to discipline some extant results of the empirical literature: I find that a tightening of the financial market, taken in isolation, would contribute to a densification of the ICM structure, reflecting the functioning of the credit-reallocation channel described in the literature. At the same time, the magnitude of such effect is not sufficiently strong to overcome the reduction in density as caused by the two alternative channels.

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Section: Related Literaturementioning

confidence: 99%

Section: Introductionmentioning

confidence: 99%

How does bank credit affect the shape of business groups' internal capital markets?

Giovannetti

2021

Quantitative Finance

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“…This was controlled because previous studies have found firm size to be positively related to leverage (Friend and Lang, 1988;, whereas others have found it to be negatively related . Large firms may use more leverage in their capital structure because of the availability of tangible assets to secure debts (Nicodano & Regis, 2019) The study also controlled for firm performance, because of strong indications of its effect on capital structure (Le and Phan, 2017). For example, pecking order theory postulates that firms generating profits finance their assets from retained profits first before resorting to debts.…”

Section: Measurement Of Variablesmentioning

confidence: 99%

Effect of Chief Executive Officer’s Characteristics on Capital Structure of Publicly Listed Firms in Kenya

Mutai¹,

Tarus²,

Komen³

et al. 2020

RJFA

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Based on a panel of publicly listed firms in Kenya over the period of 2008 to 2014, we examined if Chief Executive Officer's Characteristics affects capital structure. CEO tenure, CEO gender and CEO age and CEO education were used as independent variables while the capital structure was used as the dependent variable of the study. The study used upper echelon theory, trade-off theory and agency theory. Majorly, descriptive statistics, Pearson correlation analysis and panel regressions were performed. Panel regression analysis was used to determine the effect of CEO characteristics on capital structure. CEO tenure had a negative and significant effect on capital structure, CEO age had a positive and significant effect on the capital structure, CEO gender and CEO education indicated a negative and significant effect on capital structure respectively. The study indicates that there is an association between CEO characteristics and capital structure of listed firms in Kenya. It is therefore instrumental for firms to appoint their CEOs based on the duration they have served the company, CEOs to sit in their position for a longer period of time and those who have the requisite knowledge and experience hence they can be tasked with making important decisions pertaining firms' financing.

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“…Recent scholars explore capital structure and monetary policy (Grosse-Rueschkamp et al, 2019), asymmetric information, debt capital, (Lemmon and Jaime, 2019), optimal leverage, profitability (Chen et al, 2019), trade-off theory of ownership (Nicodano and Regis, 2019) and bankruptcy choice (Antill and Grenadier, 2019). Largely, literature seems to converge on the notion that an optimal capital structure is required to minimise cost of capital, thereby maximising shareholder's value.…”

Section: Introductionmentioning

confidence: 99%

Financial leverage and corporate performance: does the duration of the debt ratio matters

Appiah

Gyimah

Razak

2020

IJBEM

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This paper examines the relationship between financial leverage and performance of listed firms in an emerging market, Ghana. Specifically, we examine the link between short-term, long-term and total debts on performance. We use data of 190 firm-year observations from 19 listed firms over a period of ten years (2005-2014). Fixed and random effects regression models are used to examine the financial leverage-corporate performance nexus. The result shows that total debt to total assets is negatively related to accounting and market performance. Short-term debt to total assets is also negatively related to return on assets and Tobin's Q but not return on equity. The long-term debt to total assets is negative and insignificantly related to corporate performance. Our contribution is that; short-term debt diminishes shareholder value in the developing economy context.

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A trade-off theory of ownership and capital structure

Cited by 32 publications

References 56 publications

How does bank credit affect the shape of business groups' internal capital markets?

How does bank credit affect the shape of business groups' internal capital markets?

Effect of Chief Executive Officer’s Characteristics on Capital Structure of Publicly Listed Firms in Kenya

Financial leverage and corporate performance: does the duration of the debt ratio matters

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