Factor‐product markets and firm's capital structure: A literature review

Istaitieh, Abdulaziz; Rodríguez-Fernández, José Miguel

doi:10.1016/j.rfe.2005.02.001

Cited by 32 publications

(12 citation statements)

References 68 publications

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“…According to Istaitieh and Rodríguez-Fernández (2006), the capital structure literature can be classified according to the following typology: the stakeholder theory of capital structure, the theory of market structure and the competitive strategy theory. The first theory relies on the idea that debt affects non-financial agents such as collaborators and suppliers, as well as shareholders and creditors.…”

Section: Capital Structure: Literature Reviewmentioning

confidence: 99%

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Determinants of the capital structure of Portuguese firms with investments in Angola

Mota

Moreira

2017

SAJEMS

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Background: This article seeks to complement the previous literature and clarify the particularities of the capital structure policy of firms with foreign direct investment in Angola.Aim: This article seeks to identify the determinants of the capital structure of Portuguese firms with direct investment in Angola and to understand whether the determinants normally considered by standard finance theory are in line with those used by firms when structuring their capital structure policy to participate in the specific market of Angola.Setting: This article examines 26 large Portuguese firms with investments in Angola using econometric panel data for the period 2006–2010.Methods: The study applied fixed and random effects methods and panel-corrected standard errors that maintain efficiency and unbiased behaviour even in the presence of panel-level heteroscedasticity and contemporaneous correlation of observations among panels.Results: The results provide evidence that the determinants normally considered by standard finance theory are in fact – in terms of sign and coefficient dimension – those used by firms for structuring their capital structure policy when involved in the internationalisation process of entering Angola. Specifically, age, asset structure, return on assets and tangibility have a positive influence on the capital structure of Portuguese firms that have invested in Angola, while non-debt tax shields and liquidity have a negative influence on these companies’ leverage ratios. When comparing our results with studies that have analysed the capital structure determinants of listed Portuguese firms – firms belonging to the PSI 20 Index and large firms in the Portuguese corporate sector – we found similarities in the sign and coefficient dimension of the determinants of capital structure. However, the profitability coefficient sign is in line with the trade-off framework (i.e. profitability is positively related to debt) but not with pecking order theory (i.e. profitability is negatively related to debt).Conclusion: Our results suggest that the high-growth Angolan market is seen by larger Portuguese firms as a low-risk diversification process because of the economic hardship Portugal has gone through, as well as cultural and linguistic similarities to Portugal. As such, the Angolan market is seen as an extension of the Portuguese domestic market that has increased potential. This scenario potentially reduces the firm default probability and the cost of debt. Maintaining the tax shield benefits of debt and decreasing the cost of debt – through a reduction in the default probability – have induced profitable firms to use more debt.

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Section: Capital Structure: Literature Reviewmentioning

confidence: 99%

“…Ultimately, the last theory -competitive strategy theory -states that the capital structure of firms is related to their competitive strategy, as both aspects strive to leverage the firms (Istaitieh & Rodríguez-Fernández 2006;Oinoa & Ukaegbu 2015).…”

Section: Capital Structure: Literature Reviewmentioning

confidence: 99%

Determinants of the capital structure of Portuguese firms with investments in Angola

Mota

Moreira

2017

SAJEMS

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“…Some studies argue that larger firms tend to be more diversified and hence are less likely to go bankrupt so that they would like the higher leverage (see Istaitieh & Rodriguez, 2006). However, Total assets-intangible assets / total assets Growth rate GR_TA Total assets t − total assets t − 1 / total assets t − 1 GR_OI Total operating income t − total operating income t − 1 / total operating income t − 1 Non-debt tax shield NDTS Depreciation / total assets Uniqueness of assets UNIQ Operating expense / sales Capability of generating internal resources CGIR Net cash flow of operations / total assets Current ratio CR Current assets / current liabilities Rajan and Zingales (1995) argue that size may be inversely related to the debt ratio because large firms tend to release more information to public than smaller ones which will make larger firms favor equity financing.…”

Section: Sizementioning

confidence: 99%

“…In addition, using fixed effects method would potentially control for the unobservable firm-specific factors (λ i ) but it would not alleviate the endogeneity problem that could arise because of the correlation between the contemporaneous error term and past values of the lagged dependent variable. What is more, the review article by Istaitieh and Rodriguez (2006) implies the relevance of endogeneity, simultaneity and causality issues for studies that examine capital structure and factor-product markets. Therefore, we introduce the use of system-GMM estimation technique that can mitigate the distortions caused by fixed effects, simultaneity and the endogeneity problems.…”

Section: Short-runmentioning

confidence: 99%

The relationship between product market competition and capital structure in Chinese listed firms

Gűney

Fairchild

2011

International Review of Financial Analysis

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“…Secondly, financial capability of the firm is the main force that determines its activities on research and development. Istaitieh and Fernandez (2006) survey the literature for the interaction between the financial structure and firm's strategic management. They also emphasize that, this interaction is not in one direction but it is actually in two directions.…”

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confidence: 99%

A Brief Theoretical Analysis of Firms’ Capital

Karakaş

2015

International Review of Economics and Management

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Production process has utmost importance on a firm's survival in a competitive market. For this purpose, firms from developed countries choose to produce in different parts of the world to benefit from cheap labor supply. On the contrary, firms in developing countries prefer to import capital goods from developed countries to increase their chance to survive in a harsh competitive environment. But these capital goods are designed and optimized specially for the firms in developed countries. Thus, it is unclear whether the strategy of firms in developing countries is beneficial or not. In this paper, we clarify the results of firms' strategies from both developed and developing countries. Theoretically, the strategy of firms that originated from developed countries is profitable. On the other hand, the strategy of firms in developing countries harms their profit levels.

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Factor‐product markets and firm's capital structure: A literature review

Cited by 32 publications

References 68 publications

Determinants of the capital structure of Portuguese firms with investments in Angola

Determinants of the capital structure of Portuguese firms with investments in Angola

The relationship between product market competition and capital structure in Chinese listed firms

A Brief Theoretical Analysis of Firms’ Capital

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