Description
The PPT highlights on capital structure study and analysis
DETERMINANTS OF CAPITAL STRUCTURE
Agenda
?
?
? ? ? ? ? ?
Capital Structure – Introduction Theories Factors affecting leverage Theoretical correlation Data & Methodology Analysis Findings Conclusion
Capital Structure
?
?
?
Financing overall operations and growth using different sources of funds “Proportion of debt instruments and preferred and common stock on a company’s balance sheet” Theories
? Trade
off ? Pecking order ? Agency cost
?
Leverage: Ratio of total loans (secured and unsecured) and net total assets
Trade off Theory
?
Proportion of debt and equity finance to balance cost and benefits
? Corporate
and personal taxes ? Bankruptcy cost
?
? ?
debt ? tax liability ? after tax cash flow debt ? Risk of default ? cost of debt Tradeoff - Optimum capital structure
Trade off Theory
Pecking Theory
?
? ?
Inverse relationship between profitability and debt ratios Follows Law of Least Effort Firms prefer internal financing
?
Adopt target dividend payout ratios
?
External Financing
Debt like convertible bonds ? Equity
?
?
Issue costs
Internal funds : Least ? Debt : Low ? Equity: Highest
?
Factors affecting leverage
?
?
? ? ? ? ? ?
Profitability Size of the firm Non debt tax shield Growth Opportunities Tangibility Dividend Risk Intangibility
Profitability
?
Trade off theory
? Positive
correlation ? Increased capacity to bear interest costs ? Bankruptcy cost of large firm is less ? More the profit, greater the need for tax shield
?
Pecking-order theory
? Negative
correlation ? Greater profits ? greater retained earnings ? internal funding ? reduced leverage
Size of the firm
?
Trade off theory
of firm & bankruptcy cost – Inverse relation ? Positive correlation – size and leverage
? Size
?
Pecking order theory
? Less
information asymmetry for large firm ? Negative correlation
Non-debt tax shield
?
If there are other non debt options available for tax shields ? low leverage
?
Negative correlation
?
Ratio of depreciation and net total assets
Growth Opportunities
?
Trade off theory
? Strong
incentive to avoid under investment ? Equity can be issued at higher market price ? Negative correlation
?
Pecking order
? Growing
firm will not have internal reserves in abundance ? Positive correlation
?
Growth in sales
Tangibility
?
Trade off Theory
? Proportion
of debt increases with increased fixed
assets ? Collateralization – Improved guarantee of repayment ? Positive correlation
?
Pecking order
? Firms
with few tangible assets are more sensitive to informational asymmetries ? Negative correlation
?
Tangibility : Ratio of Book value of fixed assets and Total assets of the firm
Risk
?
?
? ? ?
Standard deviation of Returns Increased information asymmetry Shareholders reluctant to invest Resort to debt Positive Correlation
Dividend
?
?
? ? ?
Dividend paid / BV of equity Less internal funds Better potential to repay debt External Funding – Debt Positive correlation
Intangibility
?
?
? ? ?
Ratio: Intangible assets and total assets Increased information asymmetry Shareholders reluctant to invest Resort to debt Positive correlation
Summary
Factor Profitability Size of the firm Trade off theory + + Pecking order theory -
Non debt tax shield Growth Opportunities Tangibility Dividend Risk Intangibility
-
+
+ + + +
+ + +
Data & Methodology
?
?
? ? ?
Nifty 50: for 44 Companies Time: Year 2008-09 Data Source: www.nseindia.com, Prowess Software: SPSS Tool: Multiple Regression Analysis
Multiple Regression Analysis
Forward Multiple Regression
Forward Multiple Regression Contd…
Forward Multiple Regression Contd…
Findings
Variable Profitability Volatility in Return Size of Firm Tangibility Growth Non Debt Tax Shield Intangibility Correlation with Leverage Negative Positive Positive Positive Positive Negative Positive
Dividend
Positive
Conclusion
?
?
?
?
Companies with greater profit use internal reserves or raise equity for funding Investors are less interested for investing in companies with high return volatility Large firms are favored by creditors due to their less bankruptcy cost Firms with huge fixed assets can attract more lending due to collaterals
Conclusion Contd…
?
?
?
?
Companies with high growth perspective find it easy to raise fund through borrowings Companies with other modes of tax exemption/benefit are less interested in tax benefit on interest paid on debt Investors are highly sensitive to information asymmetry High dividend paying firms show more potential to repay debt
References
?
?
?
?
The determinants of capital structure of Large non-financial listed firms in Nigeria, Rafiu Oyesola Salawu and Akinlolu Ayodeji Agboola, Obafemi Awolowo University, The International Journal of Business and Finance Research, Volume 2, Number 2, 2008 The Determinants of Capital Structure: Evidence from Chinese Listed Companies, Jian Chen and Roger Strange, The University of Greenwich, Springer Science & Business Media B.V. Determinants of Capital Structure of Indian Corporate Sector in the Period of Bull Run 2003-2007 – An Econometric Study, Debabrata Datta & Babita Agarwal Drobertz, W and Fix, R. (2003), "What are the Determinants ofthe Capital Structure? Some Evidence for Switzerland", WXYZ / Department of Finance, Working Paper No. 4103, University of Basel
THANK YOU
doc_222283849.pptx
The PPT highlights on capital structure study and analysis
DETERMINANTS OF CAPITAL STRUCTURE
Agenda
?
?
? ? ? ? ? ?
Capital Structure – Introduction Theories Factors affecting leverage Theoretical correlation Data & Methodology Analysis Findings Conclusion
Capital Structure
?
?
?
Financing overall operations and growth using different sources of funds “Proportion of debt instruments and preferred and common stock on a company’s balance sheet” Theories
? Trade
off ? Pecking order ? Agency cost
?
Leverage: Ratio of total loans (secured and unsecured) and net total assets
Trade off Theory
?
Proportion of debt and equity finance to balance cost and benefits
? Corporate
and personal taxes ? Bankruptcy cost
?
? ?
debt ? tax liability ? after tax cash flow debt ? Risk of default ? cost of debt Tradeoff - Optimum capital structure
Trade off Theory
Pecking Theory
?
? ?
Inverse relationship between profitability and debt ratios Follows Law of Least Effort Firms prefer internal financing
?
Adopt target dividend payout ratios
?
External Financing
Debt like convertible bonds ? Equity
?
?
Issue costs
Internal funds : Least ? Debt : Low ? Equity: Highest
?
Factors affecting leverage
?
?
? ? ? ? ? ?
Profitability Size of the firm Non debt tax shield Growth Opportunities Tangibility Dividend Risk Intangibility
Profitability
?
Trade off theory
? Positive
correlation ? Increased capacity to bear interest costs ? Bankruptcy cost of large firm is less ? More the profit, greater the need for tax shield
?
Pecking-order theory
? Negative
correlation ? Greater profits ? greater retained earnings ? internal funding ? reduced leverage
Size of the firm
?
Trade off theory
of firm & bankruptcy cost – Inverse relation ? Positive correlation – size and leverage
? Size
?
Pecking order theory
? Less
information asymmetry for large firm ? Negative correlation
Non-debt tax shield
?
If there are other non debt options available for tax shields ? low leverage
?
Negative correlation
?
Ratio of depreciation and net total assets
Growth Opportunities
?
Trade off theory
? Strong
incentive to avoid under investment ? Equity can be issued at higher market price ? Negative correlation
?
Pecking order
? Growing
firm will not have internal reserves in abundance ? Positive correlation
?
Growth in sales
Tangibility
?
Trade off Theory
? Proportion
of debt increases with increased fixed
assets ? Collateralization – Improved guarantee of repayment ? Positive correlation
?
Pecking order
? Firms
with few tangible assets are more sensitive to informational asymmetries ? Negative correlation
?
Tangibility : Ratio of Book value of fixed assets and Total assets of the firm
Risk
?
?
? ? ?
Standard deviation of Returns Increased information asymmetry Shareholders reluctant to invest Resort to debt Positive Correlation
Dividend
?
?
? ? ?
Dividend paid / BV of equity Less internal funds Better potential to repay debt External Funding – Debt Positive correlation
Intangibility
?
?
? ? ?
Ratio: Intangible assets and total assets Increased information asymmetry Shareholders reluctant to invest Resort to debt Positive correlation
Summary
Factor Profitability Size of the firm Trade off theory + + Pecking order theory -
Non debt tax shield Growth Opportunities Tangibility Dividend Risk Intangibility
-
+
+ + + +
+ + +
Data & Methodology
?
?
? ? ?
Nifty 50: for 44 Companies Time: Year 2008-09 Data Source: www.nseindia.com, Prowess Software: SPSS Tool: Multiple Regression Analysis
Multiple Regression Analysis
Forward Multiple Regression
Forward Multiple Regression Contd…
Forward Multiple Regression Contd…
Findings
Variable Profitability Volatility in Return Size of Firm Tangibility Growth Non Debt Tax Shield Intangibility Correlation with Leverage Negative Positive Positive Positive Positive Negative Positive
Dividend
Positive
Conclusion
?
?
?
?
Companies with greater profit use internal reserves or raise equity for funding Investors are less interested for investing in companies with high return volatility Large firms are favored by creditors due to their less bankruptcy cost Firms with huge fixed assets can attract more lending due to collaterals
Conclusion Contd…
?
?
?
?
Companies with high growth perspective find it easy to raise fund through borrowings Companies with other modes of tax exemption/benefit are less interested in tax benefit on interest paid on debt Investors are highly sensitive to information asymmetry High dividend paying firms show more potential to repay debt
References
?
?
?
?
The determinants of capital structure of Large non-financial listed firms in Nigeria, Rafiu Oyesola Salawu and Akinlolu Ayodeji Agboola, Obafemi Awolowo University, The International Journal of Business and Finance Research, Volume 2, Number 2, 2008 The Determinants of Capital Structure: Evidence from Chinese Listed Companies, Jian Chen and Roger Strange, The University of Greenwich, Springer Science & Business Media B.V. Determinants of Capital Structure of Indian Corporate Sector in the Period of Bull Run 2003-2007 – An Econometric Study, Debabrata Datta & Babita Agarwal Drobertz, W and Fix, R. (2003), "What are the Determinants ofthe Capital Structure? Some Evidence for Switzerland", WXYZ / Department of Finance, Working Paper No. 4103, University of Basel
THANK YOU
doc_222283849.pptx