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6 th class of Seminar In Finance Management Capital Structure Theory

By: Caroline Eva Mursito 16943. 6 th class of Seminar In Finance Management Capital Structure Theory. Article from The CRP. Title: An Empirical Study on the Determinants of the Capital Structure of Listed Indian Firms Theory used: Agency theory Trade off theory of capital structure

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6 th class of Seminar In Finance Management Capital Structure Theory

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  1. By: Caroline Eva Mursito 16943 6th class of Seminar In Finance ManagementCapital Structure Theory

  2. Article from The CRP • Title: • An Empirical Study on the Determinants of the Capital Structure of Listed Indian Firms • Theory used: • Agency theory • Trade off theory of capital structure • The signaling theory • Pecking order theory

  3. Hypothesis: • There are more and more firms accessed equity funds during post-liberalization period due to friendly regulatory framework for equity issues. • The traditional factors affect financing decisions, namely profitability, tangibility, taxes, and growth. • Method of analysis: • Regression model

  4. Variables used in research: • Measures of Leverage • Book leverage • Market leverage • Explanatory Variables • Non-debt tax shields (NDTS) • Tangibility • Profitability • Business risk • Growth opportunities • Growth • Size • Agency variables • Big business group firms • Foreign private firms • Other firms : other business groups and private firms (Indian)

  5. Result of the analysis: • All of the explanatory variables (except growth rate and size) have significant correlation with leverage during pre-liberalization period whereas all the explanatory variables are significantly correlated with leverage during post-liberalization period. • Firms with growth opportunities tend hold larger debt capacities to finance future investment. Larger firms face lower direct costs of bankruptcy and more diversity. • Adjusted R2 show that industry classifications have no impact on the determinants of debt-equity choices. Leverage measured in terms of market value (LMV) reveal higher goodness of fit, both during pre-and- post liberalization period.

  6. Conclusions: • There is decrease in mean debt-equity ratio across the groups and industries. • The traditional factors affect financing decisions, like profitability, tangibility, taxes, and growth. • Comparative analysis of pre and post liberalization period reveals that size and risk measures are additional factors which influence capital structure decisions during post liberalization period.

  7. Article from The Student • Title: • Determinants of Capital Structure: Evidence from Libya • Theory used: • Trade off theory • Pecking order theory (asymmetric information theory) • Agency cost theory

  8. Hypothesis: • There is a positive relationship between leverage ratios and profitability. • There is a positive relationship between leverage ratios and tangibility. • There is a positive relationship between leverage ratios and size. • There is a negative relationship between leverage ratios and profitability. • There is a positive relationship between leverage ratios and growth. • There is a negative relationship between leverage ratios and growth. • There is a negative relationship between leverage ratios and tangibility.

  9. Method of analysis: • Ordinary Least Square (OLS) regression • Cross-sectional regression • Heteroscedasticity-consistent standard errors and covariance • Variables used in research: • Balance sheet • Income statement information • Averaged over five years to smooth the leverage and explanatory variables

  10. Result of analysis: • Larger companies with higher profits will have a higher debt capacity and will, therefore, be able to borrow more, and take advantage of any tax deductibility. • The high proportion of short term to long term debt used by Libyan companies also gives support for the agency cost theory as the conflict between shareholders and debt holders is less of a problem when short term debt is used. • The negative signs for the growth variables in both the public and the private companies indicate that growing companies do not rely on debt to finance their new investment opportunities.

  11. Conclusions: • Hypothesis 1 significant • Hypothesis 2, 6, and 8b stronger for private companies although the relationship is still not significantly different from zero. • Hypothesis 3 and 9 less positive for private companies whereas the relationship between long-term debt and leverage is more positive. • Hypothesis 4 not significant in public and private companies. • Hypothesis 5 slightly less negative for private companies where short-term debt is the dependent variable. • Hypothesis 7 significant for total and short term debt. • Hypothesis 8a significant for private companies.

  12. Thank You for Your Attentiona

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