How Do Firms Finance Their Investments? the Relative Importance of Equity Issuance and Debt Contracting Costs

Gatchev, Vladimir A.; Spindt, Paul A.; Tarhan, Vefa

doi:10.2139/ssrn.971301

Cited by 48 publications

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“…Carpentier and Suret (1999) also bring results showing a negative effect of size on indebtedness. Gatchev et al (2009) also confirm these results because size, estimated by the natural logarithm of total assets, would reduce short and medium term debt issuance. Arguments explaining this relation can be found in the information theory which considers size as an inverse indicator of the information level revealed to external investors.…”

Section: Financial Policy: the Effects Of Size Family Characteristicsupporting

confidence: 66%

“…Amongst others, size (Rajan & Zingales, 1995;Gaud & Elion, 2002;Gatchev, Spindt & Tarhan, 2009;Leary & Roberts, 2010) and organizational components (Gallo, 1995;Gallo & Vilaseca, 1996;DeAngelo & DeAngelo, 2000;Colot & Croquet, 2007;Lopez-Gracia & Sanchez-Andujar, 2007) have an influence on the financial mechanisms adopted by the firm. In this section, an approach in two phases will be implemented, allowing us to analyse clearly the effects of size and family characteristics on the firm's financial policy.…”

Section: Financial Policy: the Effects Of Size Family Characteristicmentioning

confidence: 99%

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Pecking-Order or Static Trade-off Theory in Family Firms? Evidence from Belgium

Bauweraerts¹,

Colot²

2012

IBR

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The purpose of this paper is to investigate whether a difference can be stated in the family firms' financial choices. Using the Shyam-Sunder and Myers model, our research focus on the financial behaviour of family and non-family privately held firms in Belgium. Out of a sample of 210 privately held firms for the period 2002-2010, panel data methodology is employed to estimate Pecking-Order and Static Trade-off models. Our results show that although neither Pecking Order nor Static Trade-off Theory seems to apply to non-family firms, family firms are more likely to adopt an indebtedness target ratio. Moreover, the introduction of an allowance for corporate equity on the Belgian market is also taken into account. Our results indicate that such a mechanism seems to have an influence on the family firms funding choices.Keywords: family firm, debt, financial structure, capital structure, financial behavior, allowance for corporate equity IntroductionIn the literature relative to the financial structure of the firm, two theories are regularly confronted. The theory of Modigliani and Miller (1958) revealed the neutrality of the financial structure under the hypothesis of a perfect market. By introducing corporate income tax, Modigliani and Miller (1963) demonstrated the superiority of firms using debts, since the take advantage of the deductibility of interest expenses. Nevertheless, this model was criticized because it did not take into account the costs of distress within the firm. In order to fill this gap, Static Trade-off Theory was built to develop a model based on a costs-profits analysis resulting from the issuance of debt (Krauss & Litzenberger, 1973). This theory assumes the existence of a target indebtedness ratio equalling the profits of the deductibility of interest expenses and the costs of distress of the firm. Besides, an alternative theory was proposed by Myers and Majluf (1984): the Pecking-Order Theory. Under this theory, due to information asymmetry between managers and external investors, self-financing would be preferred to debts and stocks issuance by the managers.

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Section: Financial Policy: the Effects Of Size Family Characteristicsupporting

confidence: 66%

Section: Financial Policy: the Effects Of Size Family Characteristicmentioning

confidence: 99%

Pecking-Order or Static Trade-off Theory in Family Firms? Evidence from Belgium

Bauweraerts¹,

Colot²

2012

IBR

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“…Our results are consistent with the findings of Gatchev et al (2009) for listed companies in the US. The authors investigate, among else, which financing sources companies use for different types of investments.…”

Section: Financing MIX For Actual Investmentsupporting

confidence: 92%

“…We find that for investment projects of German SMEs bank loans are a more important form of external funding than new equity. This is in contrast to the result by Gatchev et al (2009) for listed companies, which shows that additional fixed assets are financed to equal parts by new debt and new equity. The higher reliance on bank loans by SMEs can be explained by the lack of access to public equity markets.…”

Section: Financing MIX For Actual Investmentcontrasting

confidence: 86%

Loan availability and investment: can innovative companies better cope with loan denials?

Mueller¹,

Reize²

2013

Applied Economics

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Die Dis cus si on Pape rs die nen einer mög lichst schnel len Ver brei tung von neue ren For schungs arbei ten des ZEW. Die Bei trä ge lie gen in allei ni ger Ver ant wor tung der Auto ren und stel len nicht not wen di ger wei se die Mei nung des ZEW dar.Dis cus si on Papers are inten ded to make results of ZEW research prompt ly avai la ble to other eco no mists in order to encou ra ge dis cus si on and sug gesti ons for revi si ons. The aut hors are sole ly respon si ble for the con tents which do not neces sa ri ly repre sent the opi ni on of the ZEW.Download this ZEW Discussion Paper from our ftp server:ftp://ftp.zew.de/pub/zew-docs/dp/dp10025.pdf Non-technical SummaryAccess to external financing is of high importance to companies for the financing of fixed investments. Investment in fixed assets occurs in irregular intervals and requires relatively large amounts of financing, whereas internal financing from cash flow accrues more continuously. For large investment projects internal financing is therefore unlikely to be sufficient. Bank financing is especially important for small and medium-sized enterprises (SMEs), because they have no access to either the public equity market or to the corporate bond market. When companies apply for loans they are not sure whether they will actually receive financing. So far, little is known about how companies adjust their investment volume in case desired loans turn out to be unavailable. It is also not known which financing mix companies choose for the investment they are able to realize.Our main focus is on differences between innovative and non-innovative companies. Whereas debt financing is less well suited for innovative companies due to the higher uncertainty regarding their returns, equity financing has the advantage of the financier participating in the upside potential of the company. Innovative companies may be better able to cope with loan denials if they are able to substitute external equity for unavailable bank loans.The analysis is based on an annual company survey conducted by KfW Bankengruppe that is representative of German SMEs. We build on more than 4,500 observations relating to the years 2005 to 2007. The survey is unique in that it provides detailed information on planned investment, actual investment, experience with loan applications and innovative activities.Econometrically we control for the non-randomness of loan denials by estimating a selection equation for loan denials. We use the intensity of banking competition at the district level as an exclusion restriction to ensure identification is not only based on functional form assumptions.We find that innovative companies can better cope with loan denials. Compared with noninnovators, innovators can realize additional 10.0 percentage points of the share of actual to planned investment when facing a loan denial. By investigating the mix of financing sources that companies ultimately use to finance their actual investment, we provide an explanation for the better performance. Innovative companies...

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“…Researchers have modified their notion that the savings rates may be constant (see, for example, Gatchev et al, 2009) by noting that firms' investment behavior and financing patterns are different between a profit shortfall and a profit gain.…”

Section: Introductionmentioning

confidence: 99%

Cash Savings from Net Equity Issues, Net Debt Issues, and Cash Flows: International Evidence

Seifert

Gönenç

2013

SSRN Journal

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Our study examines cash savings from net equity issues, net debt issues and internally generated cash flows. Previous research has tended to focus on only one savings channel at a time and then report only an aggregate savings rate. We note first that savings rates depend on the level of cash flows. For negative cash flows, savings rates are very low from cash flows and higher from net equity and net debt issues. For higher levels of cash flows, savings rates from cash flows increase substantially while savings rates from net debt issues and net equity issues fall.Using a sample of firms worldwide, we find that constrained firms have higher total savings rates than unconstrained companies which suggest that constrained firms which face costly external finance save more now in order to minimize the chance of not being able to fund valuable investment projects in the future. We also find that savings rates are positively related to investment opportunities, R&D intensity, multinational status, and whether firms are located in countries with a bank-oriented system and negatively related to whether firms pay dividends and whether companies reside in common law countries. The relationships we observe are significant for the subset of firms that are constrained but are usually insignificant for unconstrained firms. Finally, our results suggest that when firms increase their savings, they usually use multiple channels as opposed to relying only on one channel.Overall, our findings support the idea that firms save when they have important investments or activities (for example R&D) in the future that need to be undertaken and save less when they appear to have sufficient resources to cover future contingencies. These results are consistent with a broad precautionary motive for saving. Codes: 240, 230 EFM Classification

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How Do Firms Finance Their Investments? the Relative Importance of Equity Issuance and Debt Contracting Costs

Cited by 48 publications

References 0 publications

Pecking-Order or Static Trade-off Theory in Family Firms? Evidence from Belgium

Pecking-Order or Static Trade-off Theory in Family Firms? Evidence from Belgium

Loan availability and investment: can innovative companies better cope with loan denials?

Cash Savings from Net Equity Issues, Net Debt Issues, and Cash Flows: International Evidence

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