1.2 Thesis Statement
My Main thesis statement is:
“Firm size has an impact on the access to capital markets”
My main aim is to examine if there is truly a relationship between the amount of debt firms hold and the firms size. Larger firms these days seem to be able to borrow large amounts of money than that of smaller firms. I will approach this statement by focusing on the size of the firm itself by using their Total Assets value and relating this to their long term debt figure. I gathered a sample data of 274 firms within the UK of various sizes and debt levels and I will use the data gained to determine whether a relationship truly exists.
1.3 Main Findings
The amount of debt a company held varied throughout my data gathered from
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Profitability provided a negative relationship with financial leverage while Ratio of Tangibility provided a positive relationship. These both agree with our theory however they were again statistically insignificant and therefore we reject the null hypothesis.
1.4 Layout
The aim of this paper is to identify if certain variables are determinants of financial structure. I have structured the paper in the following way. In section 2 I have carried out a literature review on this topic from historical papers and past researchers. I have also stated the hypothesis’s that I will be testing and why. Section 3 contains the data set I will be using, the variables included and my methodology approach and how I am going to test my hypothesis. In section 4, which is the main part of my paper contains my results in table format along with detailed explanations of these results while also testing if they are statistically significant. The final section, section5 I have commented my outcomes and possible way to enhance these results in the future.
2. Literature Review
The determinants of financial structure have been looked on a consistent basis over many years. Recently it has been looked at in extreme detail due to the Financial Crisis which has had a major impact on firms due to the
Finding the perfect capital structure in terms of risk and reward can ensure a company meets shareholder expectations and protects a firm in times of recession. Capital structure refers to how a business puts its money to “work”. The two forms of capital structure are equity capital and debt capital. Both have their benefits and limitations. Striking that perfect balance between the two can mean the difference between thriving versus trying to survive.
Managers use the degree of operating leverage to gauge the risk associated with their cost function and to explicitly calculate the sensitivity of profits to changes in sales. Managers need to consider the degree of operating leverage when they decide whether to incur additional fixed
However, two known authors in this field of study believe that companies with low business risk obtains factors of production at a lower cost which may also pave to the ability of the firm to operate more efficiently (Amit & Wernerfet, 1990). Therefore, many stockholders faced a high of uncertainty; this is because some companies do not have the financial strengths to cover its debts that even may result to bankruptcy.
For each measure, I attempt to build the best empirical mapping as made available by my data. First, I calculate a firm’s value by adding the book value of debt to the market value of equity. I measure profitability as net income over firm value, financial leverage as book debt over market equity, capitalization as book equity over assets, growth as market equity over book equity, and volatility as the quarterly standard deviation of daily log returns. For ease of replication, I collect these variable definitions into the appendix. Note that although the growth variable appears similar to the usual Tobin’s q measure of non-bank firms, banks by design have a large proportion of their assets held as debt in the form of deposits, so the usual approximation of neglecting liabilities does not apply. For bank-specific variables, I also compute total income as non-interest income plus net interest income. I construct the non-interest income ratio (NIIR) by dividing non-interest income by total income, the non-bank subsidiary ratio (NBSR) by dividing the count of non-bank subsidiaries (NAICS codes not equal to 5221) by total subsidiaries, and normalize loans and debt by dividing by value. All figures use the fullest available information. All tables drop all observations missing any relevant variables. I report all ratios in percentage terms. To control for outliers outside the scope of this paper, all ratios are winsorized at the 1% level, where the sample is across all available bank-quarters in the
Analysis and modification of both LTD and shareholder’s equity is needed for a clear identification of leverage. Exhibit 4 shows the major contributing factors to each company’s shareholder’s equity: common stock, additional paid-in capital, retained earnings, treasury
The company’s debt ratios are 54.5% in 1988, 58.69% in 1989, 62.7% in 1990, and 67.37% in 1991. What this means is that the company is increasing its financial risk by taking on more leverage. The company has been taking an extensive amount of purchasing over the past couple of years, which could be the reason as to why net income has not grown much beyond several thousands of dollars. One could argue that the company is trying to expand its inventory to help accumulate future sales. But another problem is that the company’s
Financial flexibility (Solvency and leverage) is a company’s ability to adapt to unforeseen events and opportunities. Leverage means using debt (or other third party funds) to increase earnings for the owners. Table 3 presents some financial flexibility and leverage ratios of Amazon.com from 2005 to 2009 and for Ebay from 2008 to 2009. Amazon.com is a fast growing company and in the fiscal year ended 2004, they had a negative total equity, which could skew the ratios. Therefore, we did not present the ratios in 2004.
Financial characteristics of companies vary for many reasons. The two most prominent drivers are industry economics and firm strategy. Each industry has a financial norm around which companies within the industry tend to operate. Each company within industries has different financial characteristics and strategies which can produce striking differences in financial results for firms in the same industry.
1. Brigham, Eugene F. and Michael C. Ehrhardt. Financial Management Theory and Practice, 13th Edition, Thompson South-Western, ISBN-13# 978-14390-7809-9, ISBN-10#1-4390-7809-2
A capital structure policy aims to balance the trade-off between the benefits of debt financing (interest tax shield) and the costs of debt financing (financial distress and agency costs). Every firm should set its target capital structure such that its cost and benefits of leverage ultimately maximise the firm’s value. Graham and Harvey asked 392 firms’ chief financial officers whether they use target debt ratios. Results show that the majority of them do, although the level of strictness of the target policy varies across different companies. Only 19% of the firms avoid target ratios, of which most are likely to be the relatively smaller firms. This clearly
If the firms funding requirements are larger than their retained earnings, they must issue debt as this is preferred to issuing equity. Based on this theory, a firm’s financing policies could be viewed as signalling management’s view of the firm’s stock value (Wang & Lin 2010).Myers and Majluf (1984) also add that if firms issued no new securities but only used its retained earning to support the investment opportunities, the information asymmetric could be resolved. This suggests that issuing equity turn out to be more expensive as asymmetric information insiders and outsiders increase. Large firms should then issue debt to avoid selling under priced securities. As the requirement for external financing increases, businesses will work down the pecking order, from safe to riskier debt, perhaps to convertible securities or preferred stock, and finally to equity as a last resort. Each firm's debt ratio therefore reflects its cumulative requirement for external financing (Myers 2001).The pecking order theory clarifies why the bulk of external financing comes from debt. It also describes why organizations that are more profitable borrow less: since their goal debt ratio is, low-in the pecking order they do not have a goal since profitable firms have more internal financing available.
The objective of this study is to check whether the changes in structure of capital has impact on the overall value of the firms, and specifically in leverage ratio of firms listed in Karachi Stock Exchange (KSE).
List of abbreviations List of tables Acknowledgements Abstract 1. 2. 3. 4. 5. 6. 7. 8. Introduction Problem statement Objectives and hypothesis of the study Literature review Structure and performance of the financial sector in
It may have diverse structural features conditional to various national laws and traditions. Thus, a financial conglomerate can be characterized chiefly as a securities, a banking or an insurance structure. The character of that company would be identified by the sector characterized at the holding company level and/or by the type of major business activities carried out by that financial conglomerate. Alternatively, it may consist of of businesses such that not a single sector dominates the character of the entity.
Thus, this paper mainly studies the impact of bank ownership structure on business performance, but from the perspective of the actual operation of the bank, which considering that there is a certain relationship between the bank 's operating performance and the bank 's size and the capital structure, etc.