Corporate Debt Issuance and the Historical Level of Interest Rates

Barry, Christopher B.; Mann, Steven C.; Mihov, Vassil T.; Rodríguez, Mauricio

doi:10.1111/j.1755-053x.2008.00019.x

Cited by 85 publications

(63 citation statements)

References 22 publications

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“…Our results also find, according to the pecking order theory, an inverse relationship between leverage with debt cost (Cuñat 1999;Barry et al 2008) and firm age (Michaelas et al 1999;Hall and Graham 2000;López and Sogorb 2008). As reported in many previous studies (Giannetti 2003;Chen 2004;Huang and Song 2006;Frank and Goyal 2009;Céspedes et al 2010;Chakraborty 2010;Kayo and Kimura 2010), our results revealed an inverse relationship between cash flow and indebtedness, thus supporting the theoretical framework proposed in the pecking order theory.…”

Section: Empirical Evidence and Discussionsupporting

confidence: 76%

“…Then, an inverse relationship it is expected between debt cost and leverage. This kind of relationship is found in different papers (Cuñat 1999;Barry et al 2008). The proposed hypothesis is:…”

Section: Debt Costmentioning

confidence: 72%

“…However, according to the pecking order theory, managers have a preference for issuing debt when interest rates are low or when interest rates are expected to increase (Van Horne 1977;Graham and Harvey 2001). When interest rates are low, firms take advantage in order to increase their leverage (Cuñat 1999;Barry et al 2008). Then, an inverse relationship it is expected between debt cost and leverage.…”

Section: Debt Costmentioning

confidence: 99%

“…Debt cost (IN) is measured by the ratio of financial expenses between the total debts (Cuñat 1999;Barry et al 2008).…”

Section: Database Description and Variable Definitionmentioning

confidence: 99%

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Capital structure of small companies in the Spanish footwear sector: relevant factors

Acedo-Ramírez¹,

Calvo²,

Rodríguez-Osés³

2012

SERIEs

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This study suggests the preponderance of the pecking order theory over the trade-off theory when there are greater problems of information asymmetry, which is more usual in small-sized firms. The results show that debt level has an inverse relationship with non-debt tax shield and direct relationship with investment in fixed assets, supporting the trade-off theory. However, the positive coefficient of growth opportunities and negative coefficient of debt cost, age and cash flows is consistent with the prediction of the pecking order theory. Results taken from a sample of small Spanish companies in the footwear sector during the period 1998-2006, revealed that in absence of asymmetric information, firms with positive cash flows will prefer debt because (a) they want to maintain their optimal capital structure; (b) they have greater needs to shield this cash flow from corporate tax and (c) they are concerned about the problem of over-investments, which means that they issue debt in order to discipline the firm's managers. The relationship between growth opportunities and debt level was positive. This is not surprising due to the need to finance these investment opportunities with debt, because rapidly growing firms are likely to have insufficient earnings to finance internally all of their growth. Furthermore, the low debt level of companies in the Spanish footwear sector also helps to explain this relationship due to the importance of R&D investments for this industry, which lenders value as strategic investments. Finally, small businesses face high transaction costs derived from typical agency problems and financial restriction on capital markets. Such high transaction costs justify the gap between the target and the current debt level and are responsible for the slow approach of their debt level to the target ratio.

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Section: Empirical Evidence and Discussionsupporting

confidence: 76%

Section: Debt Costmentioning

confidence: 72%

Section: Debt Costmentioning

confidence: 99%

“…Debt cost (IN) is measured by the ratio of financial expenses between the total debts (Cuñat 1999;Barry et al 2008).…”

Section: Database Description and Variable Definitionmentioning

confidence: 99%

See 2 more Smart Citations

Capital structure of small companies in the Spanish footwear sector: relevant factors

Acedo-Ramírez¹,

Calvo²,

Rodríguez-Osés³

2012

SERIEs

View full text Add to dashboard Cite

show abstract

“…Two types of proxies are used to represent this variable: dummies for credit ratings, and dummy for rated and non-rated firms. Barry et al (2008) argued that firms use more debt when present interest rate is lower than the historical interest rate. Higher inflation means paying lower to the lender at the time of inflation and real value of tax advantage which is higher at the time of inflation (Taggart, 1985) may result positive relationship between inflation and leverage under the prediction of Trade-off theory.…”

Section: Supply-side Factorsmentioning

confidence: 99%

Determinants of Corporate Capital Structure: A Theoretical Integration and Some Empirical Evidences

Uddin¹

2015

IJEF

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This research reviews all of the relevant important theories and concepts developed in corporate capital structure until till date in an aggregate manner. The empirical part of the study reveals that the leverage ratios defined in short-term debts, long-term debts, total debts and book value of assets are correlated. Similarly, the leverage ratios defined in short-term debts, long-term debts, total debts and market value of assets are correlated. However, book value based and market value based leverage ratios are not correlated. The leverage ratios defined in earnings before interest and taxes over interest and earnings before interest, taxes and depreciation over interest are positively perfectly correlated. Besides, short-term loans are three times more compare to long term debts, firms are reluctant in paying tax and allotment in research and development expenses are insufficient. In addition, industry median average, non-debts tax shield, uniqueness (R&D) positively significantly affects financial leverage and, and size, tangibility, tax rate, dividend pay-out, agency cost, business risk, GDP growth, and money growth negatively significantly affects financial leverage. The selling, general and administrative expenses positively affects short-term debts, negatively affects long-term debts and have no significant effects on total debts. Last but not least, human capital cost do not have affect on any kind of leverage.

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