Impact of the cost of capital on the financing decisions of Brazilian companies

Abstract

Purpose – The purpose of this paper is to examine the market timing behavior of listed Brazilian companies to verify the effects of the cost of capital on their financing decisions, and hence on their capital structure. Design/methodology/approach – The relation between the cost of capital (debt and equity capital) and the leverage of firms in the period from 2000 to 2011 is analyzed by means of regression models with panel data. For this purpose, different proxies are used for the cost of equity and debt capital. Findings – The results provide strong evidence that Brazilian firms take advantage of windows of opportunity to obtain financing, and that when the cost of equity capital is high, firms appear to follow a pecking order, giving preference to debt financing. However, the decision is based on the cost of alternative sources of funding rather than just on the hierarchy established by the pecking order theory, due to the information asymmetry between market agents. Originality/value – Few studies of the Brazilian capital market have analyzed firms’ capital structure under the market timing approach, and none have addressed the same aspects analyzed here. Therefore, this paper will be useful to different users of accounting information by indicating the factors that influence the capital structure of Brazilian firms, allowing a better analysis of whether these firms act to maximize the generation of shareholder wealth.

Macroeconomic and Institutional Factors, Debt Composition and Capital Structure of Latin American Companies

“…The signs obtained for the variables GDP growth, per capita income and inflation rate are in agreement with the signs found by et al (2009), indicating a positive relation with leverage. Regarding the participation of publicly traded companies in GDP, it is possible to infer that publicly traded companies have greater financing capacity and are seeking to finance via credit market rather than capital markets, which is common in Brazil, because most of the companies that opened capital in recent years did not return to issue primary shares, according to Albanez and Lima (2014). This positive relationship between public companies' participation in GDP and leverage is also found by Santos (2013).…”

“…The evidence found is significant and point out that the market-tobook index has a significant impact on corporate indebtedness and, consequently, in the definition of its capital structure. In Brazil, studies such as Mendes et al (2009), Rossi Jr. and Marotta (2010), Vallandro et al (2010), Albanez and Lima (2014) and Albanez (2015) found evidence in favor of the Market timing theory.…”

Capital Structure Analysis of EBXGroup’s Companies: Combining Theory and Practice

“…Usually, tangible assets serve as collateral for debts (contracts covenants), the more tangible assets, the lower the creditor's risk and the larger the debt tends to be (Rajan & Zingales, 1995;Albanez, 2015). Therefore, a positive relationship between tangibility and indebtedness (leverage) is expected.…”

Evaluation of Capital Cost: Long Run Evidence from Manufacturing Sector

“…Fatica (2018) stated that tax-adjusted user costs significantly influence capital accumulation. Albanez (2015) analysed behavior of listed Brazilian companies and concluded that in periods of more expensive equity capital, companies restructured their capital with larger share of debt. Case study by Britzelmaier et al (2013) indicated that value-based management has become a key management approach for small and medium size companies, where WACC is used to determine cost of invested capital.…”