The Effect Of Geography On Firm 's Characteristics And Financial Decisions

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.

Empirical evidence indicates that capital rationing is prevalent amongst firms. It was concluded that between 50 and 75% of firms operate under the capital constraint as found by Fremgen (1975) and Petty, Scott & Bird (1975). Further support for this notion was found

The firm also has several branches across different states. This offers a deliberate effort regarding location since the strategy behind this is placing and concentrating the outlets in populations where middle-income households reside. This concept helps to cut implicit transaction price regarding distance and time.

As a supply-side strategy for influencing the location choices of firms, tax policy is used to address what kind of costs? Do taxes influence location decisions?

The Case Study is provided by the Harvard Business School and is considered necessary reading prior to the understanding the responses contained herein. This paper is

Hi, Mallory, good observation regarding small businesses thriving in the 21st century. One of the questions I had in answering the question was does geography have an impact on the sustainability and longevity of small businesses. One country I was curious about was Canada because in healthcare the United States is often compared to this country. Surprisingly, although Canada is vastly different in their healthcare system, they offer universal healthcare. Universal Healthcare offers the same healthcare plan for everyone. The United States remains a democracy offering a healthcare market. In a healthcare market, health insurance is offered like any other product or service. Consumers can shop around for the best healthcare care option based upon cost,

Baker, M. & Wurgler, J. 2002, ‘Market Timing and Capital Structure,’ Journal of Finance, vol. 57, pp 1-32

Generally, firms can choose among various capital structures in order to maximize overall market value of the company. It is proposed however, that

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

As much as market cap measures to what’s related to the company’s equity value, a firm’s decision based on its capital structure estimates more significantly to how the value of that company is allocated not only for the return on equity but accounting for debt as well. Most economists would refer to capital structure as the mix of a company’s long-term debt, the current portion of it, and of common and preferred stock. Furthermore, large tech-companies today have been taking advantage of capital structure optimizations as it is placed shoulder to shoulder to increasing return on equity thus lowering weighted average costs of capital for long-term investment. In other words, it is how a corporate manager should base his/her decisions on financing the company’s assets and operations through various growth prospects and forecast estimates. We will begin to further evaluate the composition of Google’s capital structure by focusing on the company’s key statistics and research data from the selected top online providers of financial statements, including Google!

The analysis shown by Kaplan and Zingales indicate an opposite results with the other research papers. This may be due to the classification of the firms status they used is based on direct observation, and the test that they used to assess their financing constraint indicators is unclear.

Already in 1958, Modigliani and Miller have pointed the discussion of capital structure towards the cost of debt and equity. According to their first proposition, in a world of no corporate taxes and with perfect markets, financial leverage has no effect on a firm’s value. In their second proposition, they state that the cost of equity equals a linear function defined by the required return on assets and the cost of debt (Modigliani and Miller, 1958).

Geographic distance between lender and borrower is another possible explanation for the effect of the banking network on small business lending. Distance acts as an obstacle for banks in assessing loan applications, and raises the opportunity cost for borrowers to negotiate for the best offers (Sussman \& Zeira, 1995, Sussman \& Zeira, 1995). Mortgage lending, although less dependent on ``soft information", benefits from banking networks as well. Ergungor (2010) finds access to physical branches promotes mortgage originations and lowers the mortgage spreads in low-to-moderate income (LMI) neighborhoods.

This section starts with the theory of irrelevancy of capital structure. Following subsections give the overview of theories that suggest that the capital

There are numerous benefits for financial institutions that seek geographic diversification, domestically or internationally. For one, geographic expansions provide the opportunity for efficiently-operated organizations to extend the efficiencies across additional locations and more resources (Berger & DeYoung, 2001). The increases in efficiency can result in decreased costs for products offered, greater revenues due to broader product offerings, or both (Berger & DeYoung, 2001). For example, improving network production through the joining of