Is Managerial Ability Associated with Capital Structure Adjustment Speed?*

Cho, Hyung-Jin; Choi, Ga-Young; Choi, Sera

doi:10.1111/ajfs.12329

Cited by 3 publications

(2 citation statements)

References 64 publications

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“…The target leverage is obtained from a regression model of observed leverage, which is a function of firm-level characteristics (Fama and French, 2002; Flannery and Rangan, 2006). The standard determinants of firm-level variables used in this study are similar to those used in advanced countries (Baker and Wurgler, 2002; Rajan and Zingales, 1995; Titman and Wessels, 1988), and in the ASIAN contexts (Cho et al , 2021; Chua et al , 2022; Haron et al , 2013). The observed regression model is given as follows: Leverage is used to measure the capital structure.…”

Section: Data and Research Methodologymentioning

confidence: 99%

Capital structure and speed of adjustment: the impact of environmental, social and governance (ESG) performance

Adeneye

Kammoun²,

Wahab³

2022

SAMPJ

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Purpose This study aims to examine the impact of sustainable practices as proxied by the environmental, social and governance (ESG) score on capital structure. It also investigates whether ESG performance influences the speed of adjustment (SOA) to target leverage in firms. Design/methodology/approach The sample covers 116 non-financial firms listed on the main stock exchanges from five Southeast ASEAN countries (Bursa Malaysia, Indonesia Stock Exchange, Philippines Stock Exchange, Singapore Stock Exchange and Stock Exchange of Thailand) over the period 2012–2019. The study adopts the OLS regression and system-GMM estimators to perform the data analysis. Findings The authors show that the ESG score is positively associated with book leverage, suggesting that firms increase their debt capital through sustainable practices. However, they find that the ESG score is negatively associated with market leverage across our model estimations. The authors also reveal that environmental, social and governance pillar scores produce about 7.82%, 2.88% and 0.47% SOAs, respectively, higher than the SOA of the traditional SOA without the ESG factor. The aggregate ESG score has about 3.41% SOA higher than the baseline SOA without the ESG factor. Practical implications This study is of interest to investors, corporate firms and policymakers. The study demonstrates that the ESG score increases the firm’s SOA to target leverage. By disaggregating the ESG score, the authors establish that ESG pillar scores produce higher SOAs than the traditional SOA (without ESG), with the environmental score inducing the fastest SOA. Practically, the study implies that environmentally sustainable activities reduce environmental transaction costs, benefit firms through better information transparency and enhance a trustful climate between the firm and suppliers of capital. Therefore, this study demonstrates that firms do not only incur the cost of disseminating ESG information but also benefit from lower information asymmetry and a higher SOA with better tax-deductible advantages. Social implications The findings have combined advantages for both stakeholders and directors who monitor and manage the firms’ resources to improve the quality of ESG practices and initiatives. Originality/value To the best of the authors’ knowledge, this study is among the first to establish that sustainable practices induce higher debt capital. Secondly, unlike prior research focusing on the cost of capital, the authors examine whether ESG performance affects capital structure patterns. Thirdly, it documents the extent to which sustainable practices influence the SOA towards target leverage in firms. The authors contribute to corporate finance literature that firms reach faster to their target leverage in the presence of ESG performance. Theoretically, through the notion of the stakeholder proposition, the study establishes that the firms’ pursuance of stakeholder goals further enhances the prediction of the trade-off theory.

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Section: Data and Research Methodologymentioning

confidence: 99%

Capital structure and speed of adjustment: the impact of environmental, social and governance (ESG) performance

Adeneye

Kammoun²,

Wahab³

2022

SAMPJ

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“…Moreover, managers with high ability may excel in engaging with diverse stakeholders (Veltri et al, 2016). Effective communication and understanding of stakeholder expectations can foster a positive relationship, leading to improved CSR outcomes (Cho et al, 2021).…”

Section: Literature Review and Hypotheses Developmentmentioning

confidence: 99%

Does managerial ability matter in corporate sustainability-related dynamics? An empirical investigation

Pasko,

Zhang,

Markwei Martey

et al. 2024

Problems and Perspectives in Management

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This study aims to assess the intricate interplays between managerial ability, corporate social responsibility (CSR), and firm value, focusing on 3,498 company-year observations sourced from the RANKINS CSR RATINGS and China Stock Market &amp; Accounting Research (CSMAR) databases representing China’s Shanghai and Shenzhen A-share listed companies from 2009 to 2018. Employing a rigorous sample selection process and utilizing data from reliable databases, the research employs a comprehensive methodology to explore the intricate corporate sustainability-related dynamics influencing organizational success and societal impact.The findings reveal a compelling negative correlation between managerial ability and CSR performance, corroborating previous research and suggesting potential challenges in reconciling managerial competence with social responsibility priorities. Furthermore, this paper establishes a negative correlation between CSR and firm value, with managerial ability influencing the magnitude of this impact, underscoring the significance of managerial skills in moderating the relationship between CSR initiatives and overall corporate performance. Moreover, the study uncovers a robust positive correlation between managerial ability and firm value, emphasizing the pivotal role of adept leadership in achieving higher corporate valuation. It provides valuable insights for practitioners, policymakers, and scholars, creating a conducive environment for well-informed decision-making. In the ever-changing corporate landscape, a deep understanding of these interconnections is essential to nurture business practices that are both sustainable and value-oriented. AcknowledgmentThis paper is co-funded by the European Union through the European Education and Culture Executive Agency (EACEA) within the project “Embracing EU corporate social responsibility: challenges and opportunities of business-society bonds transformation in Ukraine” – 101094100 — EECORE – ERASMUS-JMO-2022-HEI-TCH-RSCH-UA-IBA/ERASMUS-JMO-2022-HEI-TCHRSCH https://eecore.snau.edu.ua/Oleh PASKO expresses sincere gratitude for the support from the Kirkland Research Program, generously provided by the Leaders of Change Foundation established by the Polish-American Freedom Foundation.

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Managerial ability and tax avoidance adjustment toward the optimal level

Lee,

Jung,

Cho

2024

Spanish Journal of Finance and Accounting / Revista Española de

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The tax literature shows that income shifting within multinational companies collides with optimal incentivization of managers in subsidiaries. The different modes of income shifting have received different attention, however, and the incentive implications of internal debt shifting have not yet been investigated. We analyze the different impacts of tax-efficiently setting intercompany prices for the use of intangibles (royalties) and debt shifting on incentivization of affiliate managers. Different from most other studies, we focus on endogenous, unobservable managerial effort and the firm's optimal design of the (linear) compensation contract. For EBIT(DA) as performance measure, we find that internal debt shifting does not have a direct effect on management incentives, but has an ambiguous indirect impact via increased investment. In contrast, tax-motivated royalty payments have a clearly negative incentive effect that is fully offset, however, by an higher compensation rate. Hence, the adjustment of the compensation payment reveals the firm's aggressiveness in income shifting via intangibles. There is no confounding indirect effect from tax-motivated royalty payments because these payments do not affect investment.

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Is Managerial Ability Associated with Capital Structure Adjustment Speed?*

Cited by 3 publications

References 64 publications

Capital structure and speed of adjustment: the impact of environmental, social and governance (ESG) performance

Capital structure and speed of adjustment: the impact of environmental, social and governance (ESG) performance

Does managerial ability matter in corporate sustainability-related dynamics? An empirical investigation

Managerial ability and tax avoidance adjustment toward the optimal level

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