Unobservable effects and firm's capital structure determinants

Abstract

If you would like to write for this, or any other Emerald publication, then please use our Emerald for Authors service information about how to choose which publication to write for and submission guidelines are available for all. Please visit www.emeraldinsight.com/authors for more information. About Emerald www.emeraldinsight.comEmerald is a global publisher linking research and practice to the benefit of society. The company manages a portfolio of more than 290 journals and over 2,350 books and book series volumes, as well as providing an extensive range of online products and additional customer resources and services.Emerald is both COUNTER 4 and TRANSFER compliant. The organization is a partner of the Committee on Publication Ethics (COPE) and also works with Portico and the LOCKSS initiative for digital archive preservation. AbstractPurpose -This paper aims to test the significance of unobservable firm-specific effects on a capital structure model. Design/methodology/approach -The paper employs the restricted least squares method to test the significance of unobservable firm-specific effects in a fixed effects model that includes unobservable effects against a pooled ordinary least squares model that excludes unobservable effects. Findings -The empirical findings indicate that models that include unobservable firm-specific effects are correctly specified.Research limitations/implications -The limitation of this study comes from lack of data to measure unobservable effects such as managerial ability or managerial skills. Future research can develop index measures of managerial ability or managerial skills and borrow from management theory to explain the connection between managerial ability or managerial skills and firms' capital structure. Practical implications -The findings imply that a capital structure model that excludes firm-specific effects could be mis-specified because such a model does not control for unobservable firm-specific factors such as managerial ability or managerial skills which have significant effects on firms' capital structure decisions. Originality/value -The findings are important because the paper applies the restricted least squares method to test the significance of unobservable firm-specific effects. This technique has not been applied previously. The paper contributes to capital structure research in the fast growing South Africa.

Adjustment speed towards target capital structure and its determinants

“…Elsas and Florysiak (2011) estimate the adjustment speed of 26 percent for all Compustat firms. Matemilola et al (2013) also confirm that South African firms have optimal capital structure and they make effort to move towards optimal capital structure at the adjustment speed of 40 percent per year. Recently, Zhang et al (2020), using data from 1054 listed Chinese companies in 2004-2016, stated that Chinese companies have leveraging goals that they adapt to at an average speed of 25.9%.…”

“…Newton (1985) as cited in Abbas and Ahmad (2011), report that one of the main reasons behind varying corporate failure rates in different countries is the difference in the capital structure of the businesses. Bankruptcy due to use of the high debt may be explained in context of trade-off theory of the capital structure (Matemilola et al, 2013). Given these issues in corporate sector of Pakistan, unavailability of studies on dynamism of corporate financing decisions, and inconsistent findings of available capital structure studies; it becomes important to understand the dynamism of corporate financing decisions in Pakistan.…”

Empirical Analysis of Capital Structure Determinants of Russian Oil and Gas Companies

“…Таким образом, был сделан вывод о том, что, поскольку уровень левериджа с течением времени не изменяется, главные определяющие его факторы тоже должны сохраняться, а следовательно, среди объясняющих переменных структуры капитала обязательно должны быть факторы, определяющие специфику конкретных фирм. До этого исследования такие факторы в расчет не принимались, что приводило к погрешностям [Matemilola, 2013]. Тем не менее в некоторых работах авторы приходили к сходным выводам.…”

Banking Sector Development and Corporate Leverage: Empirical Evidence from South African Firms

“…The system GMM uses additional instruments in difference which is presumed to be uncorrelated with the unobservable fixed effects in the level equation. The efficiency of the system GMM rests on the validity of the additional moment's condition which requires that the correlation between unobservable fixed effects in the level equation and difference be equal to zero (Matemilola et al, 2013). In addition, Blundel and Bond (1998) show that the system GMM is a more efficient estimator in situations where the difference GMM's performance is poor such as in short sample periods and persistent data.…”

“…Certain firm level characteristics may also be excluded from the model such as managerial ability, corporate governance, cash flow etc. the absence of which may bias the result of the estimations (Flannery & Hankins, 2013;Matemilola et al, 2013). To fix this problem, Lemmon et al (2008) suggest the use of fixed effect to control for the unobservable time invariant features of the firm.…”