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

Abstract

We investigate firm‐level determinants of capital structure using a large sample of 4,284 Japanese firms over a 19‐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.

Sermaye Yapısının Belirleyicileri: BIST’de İşlem Gören İmalat Sektörü Firmaları Üzerine Ampirik Bir Araştırma

“…This result, which supports the POT, demonstrates that firms with more liquid assets tend to employ these assets rather than use debt in financing their investments. This finding is also supported by other studies (Hossain et al, 2015;Mirza et al, 2017;Bilgin, 2019;Danso et al, 2020, Khoa et al 2021). However, the positive relation between LIQ and LTL in model 10 supports the TOT and might indicate that high-levered firms having more liquid assets borrow more in the long term.…”

“…Therefore, this variable can be expected to exhibit negative association with leverage based on the POT (Delcoure, 2007;Dakua, 2019). Despite theoretical expectations regarding the association between these two variables, some researchers have estimated a negative association (Marsh, 1982;Titman et al, 1988;Burucu et al, 2016;Sikveland et al, 2020), while others (Danso et al, 2020;Krishnan et al, 1996;Deesomsak et al, 2004;Noulas et al, 2011;D'Amato, 2020) have reported a positive association.…”

“…So, high liquidity increases the use of debt. Conversely, based on the POT, firms with more liquid assets can, however, use their internal resources to fund profitable investment opportunities, which leads to a decrease in their leverage (Danso et al, 2020;Dakua, 2019;De Jong et al, 2008). There are, however, conflicting conclusions regarding the influence of this variable.…”

“…However, given that investors of firms with higher earnings volatility are more likely to request a higher rate of return, risky firms may prefer to use high levels of debt rather than issue equity. Hence, within the logic of the POT, a positive linkage between risk and level of debt is expected (Deesomsak et al, 2004;Delcoure, 2007;Khémiri et al, 2018;Danso et al, 2020). Empirical research on the link between firms' earnings volatility and their leverage also offers conflicting results.…”

“…The empirical validity of these theories has been tested in many studies. The firm-level factors such as firm size, profitability, liquidity, non-debt tax shields, asset tangibility, growth opportunities, and earnings volatility are often regarded as important determinants of capital structure and their influence on capital structure still endures a matter of debate (Danso et al, 2020).…”