Factors explaining debt capacity

Woodruff, Gregg S.

doi:10.1108/01409170710736293

Cited by 5 publications

(2 citation statements)

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“…Any industry-based leverage effects could, we argue, potentially be a function of the level of debt capacity. Woodruff (2007), using US data covering 2001-2005, identified debt capacity as being potentially a function of four factors: the proportion of property and plant and equipment in total assets (TA), industry group (because of asset specificity), sales variability and finally the depreciation method used. He found the first two factors to be statistically significant in explaining the debt capacity.…”

Section: Industry Membership and Capital Structure In The Literaturementioning

confidence: 99%

The capital structure of Chinese listed firms: is manufacturing industry special?

Tse

Rodgers

2014

Managerial Finance

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Purpose – The purpose of this paper is to examine whether or not industry membership can explain the leverage of Shanghai listed firms prior to the 2007 financial crisis. In view of the central role that manufacturing industry played in China's rise as a global economic power, the authors are particularly interested in whether or not manufacturing is a special case. Design/methodology/approach – The paper undertakes a comparative study of leverage differences between manufacturing and non-manufacturing industry firms on both a cross-section and time-series basis. This is supplemented by a pooled regression analysis that models the factors determining leverage on an industry-by-industry basis. Findings – The authors find that leverage levels differ across industries because of industry-based differences in financial characteristics. It is also found that, despite playing a leading role in China's economic development, there is no evidence to suggest that manufacturing is a special case. Across all sectors borrowing-power-related variables were identified as being important determinants of leverage and, contrary to the expectations, factors relating to profitability were largely insignificant. Research limitations/implications – The trade off and pecking order capital structure theories found to be commonly applicable to firms in the western business environment do not appear to adequately explain capital structure in China. Originality/value – The paper identify evidence to suggest that China needs to be treated as a “special case” in the context of capital structure theory due to the unique cultural and business environment.

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Section: Industry Membership and Capital Structure In The Literaturementioning

confidence: 99%

The capital structure of Chinese listed firms: is manufacturing industry special?

Tse

Rodgers

2014

Managerial Finance

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“…When the additional debt capacity is worn out, the firm acquires further capital through equity as a source of financing. Woodruff (2007) conclude that debt capacity is valuable for different stakeholders, including investors, creditors and corporate firms. Creditors and investors may be reluctant to lend or invest in firms having low or no spare debt capacity.…”

Section: Financial Flexibility and Firms' Investment Abilitymentioning

confidence: 94%

Do corporate financial flexibility, financial sector development and regulatory environment affect corporate investment decisions?

Mahmood

Rashid

Rizwan

2021

JEAS

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PurposeThis study aims to examine how corporate financial flexibility, financial sector development and the regulatory environment influence corporate investment decisions in an emerging economy after controlling for several macroeconomic factors.Design/methodology/approachThe authors estimated random-effects models to empirically examine the impacts of corporate financial flexibility, banking sector development, equity market development, regulatory quality and corruption on corporate investment decisions. The empirical analysis is based on an unbalanced annual panel data set of a sample of 198 non-financial firms listed on the Pakistan Stock Exchange for the period 1992–2018.FindingsThe results show that financially flexible firms tend to invest more. The increased banking sector development, stock market development and better regulatory quality play a pivotal role for enabling firms to increase their investment ability. However, the results reveal that corruption acts as a barrier and reduces corporate investments during the examined period. The results suggest that unused borrowing capacity is a good source of financial flexibility. These results strongly support the pecking order theory, which explains why firms incline toward internal sources for financing their investments and why they prefer debt to equity when go for external financing.Practical implicationsThe empirical findings of the study enable corporate managers to make better financing and investment decisions by understanding the significance of the attainment and maintenance of the corporate financial flexibility to enhance firm value. Furthermore, the findings enable corporate managers to examine and understand the role of banking sector development (BSD), equity market development (EMD), regulatory quality and the role of corruption in affecting corporate firms' investment ability, allowing them to make appropriate investment decisions, especially from an emerging economy perspective. The findings also help investors in making appropriate investment decisions while they are purchasing financial assets. Finally, the findings of the study have some implications for regulators as well. Specifically, the findings suggest that the authorities should implement economic and financial policies favoring banking sector as well as equity market development to enhance corporate investment.Originality/valueThe study significantly adds to the literature by examining the impact of financial flexibility, financial sector development and regulatory environment on corporate investment decisions. According to the authors' knowledge, the empirical evidence examining the impact of all of these factors on corporate investment is very scarce. Therefore, this study is an effort to fill the gap left in the literature.

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The capital maintenance regime matters for creditors

Dudycz

Mielcarz

2023

Borsa Istanbul Review

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Factors explaining debt capacity

Cited by 5 publications

References 10 publications

The capital structure of Chinese listed firms: is manufacturing industry special?

The capital structure of Chinese listed firms: is manufacturing industry special?

Do corporate financial flexibility, financial sector development and regulatory environment affect corporate investment decisions?

The capital maintenance regime matters for creditors

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