Firm Financing in the Euro Area: How asset risk affects capital structure decisions within the monetary union
(Sprache: Englisch)
Using a sample of non-financial listed firms located in the Euro area, the determinants of capital structure decisions in the years 2000-2003 are investigated in this study. In line with the traditional theoretical approach and in contrast with traditional...
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Using a sample of non-financial listed firms located in the Euro area, the determinants of capital structure decisions in the years 2000-2003 are investigated in this study. In line with the traditional theoretical approach and in contrast with traditional empirical literature, the study is based on a market-value measure of leverage, estimated with the Merton model. In a cross-section regressions some variables have similar effects on financing decisions across countries, while others may play a different role; risk, measured as the volatility of the market value of assets, is the best predictor of observed leverage ratios.
The integration of Euro-area financial markets varies significantly in different market segments: money and inter-bank markets are highly integrated, corporate bond and equity markets show a clear path of increasing integration, while retail banking markets are much less integrated. Tax and bankruptcy rules differ across the twelve countries, as well as the economic background. As a consequence, nationality is still an important determinant of observed debt ratios, despite the monetary union.
Klappentext zu „Firm Financing in the Euro Area: How asset risk affects capital structure decisions within the monetary union “
Using a sample of non-financial listed firms located in the Euro area, the determinants of capital structure decisions in the years 2000-2003 are investigated in this study. In line with the traditional theoretical approach and in contrast with traditional empirical literature, the study is based on a market-value measure of leverage, estimated with the Merton model. In a cross-section regressions some variables have similar effects on financing decisions across countries, while others may play a different role; risk, measured as the volatility of the market value of assets, is the best predictor of observed leverage ratios.The integration of Euro-area financial markets varies significantly in different market segments: money and inter-bank markets are highly integrated, corporate bond and equity markets show a clear path of increasing integration, while retail banking markets are much less integrated. Tax and bankruptcy rules differ across the twelve countries, as well as the economic background. As a consequence, nationality is still an important determinant of observed debt ratios, despite the monetary union.
Lese-Probe zu „Firm Financing in the Euro Area: How asset risk affects capital structure decisions within the monetary union “
Textprobe:Chapter 2.4, Relationships with the existing literature and conclusions:
The first thing to highlight, when comparing these results with the ones obtained in previous studies, is the much higher R2 obtained, mainly due to the inclusion of the volatility of market value of assets as additional explanatory variable. This variable, obtained via application of the Black-Scholes-Merton model, affects signicantly the fitting of the regressions, both when using market values of both debt and equity, and when using market values of equity and book values of debt as generally done in other studies. Volatility appears to be the main predictor of firms' behaviour when making financing choices; the inclusion of the variable sometimes affects also the importance of other variables, like implicit (expected) bankruptcy costs and firm size.
Another interesting result is the ambiguous role played by profitability of firms: sometimes this variable results to be positively related with the debt ratio, sometimes the relation is negative. The influence of firm size (here measured in terms of market enterprise value, rather than in terms of sales as in previous research) is marginal: it plays a role in some countries, but not in others, and its effect in some cases becomes insignificant once volatility is included in the regression.
Taxes affect capital structure decisions for most countries; not surprisingly, they are less relevant for firms situated in those countries with the lowest statutory tax rates. The main issue with respect to the role played by taxes lies in the difficulties found in estimating a proper measure of the tax advantage of debt. Given the international dimension that most firms nowadays have, an exact measure of the effective marginal tax rate for a firm would require to decompose geographically the earnings and determine the tax burden for each country in which the firm operates. Unfortunately, available data do not allow to do so. This might
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explain why the tax rate is significant only for firms located in the biggest countries in the sample.
In contrast with the results reported in previous studies, I often find the level of intangible assets to be positively, rather than negatively, correlated with debt. This finding can be explained in at least two ways. First of all, if firms have completed many acquisitions, they are likely to have an high value for goodwill included among intangibles: as long as the assets of the acquired firm are valuable and distinguishable from the assets of the purchasing firm, it can be later sold and the goodwill recovered. Secondly, markets nowadays more frequently trade (or use as collateral) intangible assets like licences, patents, concessions or trade marks. As long as an active market exists, these assets can be used to recover the value of debt in the event of default; this would in turn imply that firms with this type of assets can lower the cost of debt and increase their access to credit markets, just like it has been usually assumed for tangible assets.
The use of market, rather than book, values of debt does not produce big differences in the significance of the variables, but some changes are found. In addition, by using market values of debt it is possible to determine more precisely the market value of total assets, in order to build a better proxy for the Tobin's q. More importantly, once the market enterprise value is known it is possible to calculate its volatility which, as it has been shown, is the main predictor of financing choices.
The central result that I obtain is that, although various firm characteristics may play a role in determining capital structure strategies, the main predictor of leverage ratios is the volatility of market enterprise value, a proxy for the risk of firms' assets.
If asset risk is the main predictor, then the sector of activity may play an important role in determining financing choices; I find that, once firms are grouped base
In contrast with the results reported in previous studies, I often find the level of intangible assets to be positively, rather than negatively, correlated with debt. This finding can be explained in at least two ways. First of all, if firms have completed many acquisitions, they are likely to have an high value for goodwill included among intangibles: as long as the assets of the acquired firm are valuable and distinguishable from the assets of the purchasing firm, it can be later sold and the goodwill recovered. Secondly, markets nowadays more frequently trade (or use as collateral) intangible assets like licences, patents, concessions or trade marks. As long as an active market exists, these assets can be used to recover the value of debt in the event of default; this would in turn imply that firms with this type of assets can lower the cost of debt and increase their access to credit markets, just like it has been usually assumed for tangible assets.
The use of market, rather than book, values of debt does not produce big differences in the significance of the variables, but some changes are found. In addition, by using market values of debt it is possible to determine more precisely the market value of total assets, in order to build a better proxy for the Tobin's q. More importantly, once the market enterprise value is known it is possible to calculate its volatility which, as it has been shown, is the main predictor of financing choices.
The central result that I obtain is that, although various firm characteristics may play a role in determining capital structure strategies, the main predictor of leverage ratios is the volatility of market enterprise value, a proxy for the risk of firms' assets.
If asset risk is the main predictor, then the sector of activity may play an important role in determining financing choices; I find that, once firms are grouped base
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Autoren-Porträt von Marco Botta
Born in Como (Italy) in 1979, Marco Botta holds a BSc cum laude in financial economics from the Università Cattolica del Sacro Cuore, an MSc in Economics and Finance, awarded with distinction, from the Warwick Business School at the University of Warwick and a PhD in Economics from the Università Cattolica del Sacro Cuore.He now works as a business consultant at his firm Studio Botta Consulenza Aziendale, based in Como, and teaches Corporate Finance to graduate students of the MSc in Banking and Finance at the Università Cattolica del Sacro Cuore.
His research interests are in corporate finance, performance measurement and applied econometrics.
He also holds the position of adjunct professor at the Università degli Studi dell Insubria, where he teaches Principles of Economics to undergraduate students of the BSc in Industrial Chemistry.
A former fencer, he currently holds the position of delegate of the Italian Olympic Committee for the province of Como.
Bibliographische Angaben
- Autor: Marco Botta
- 2014, Erstauflage, 168 Seiten, 35 Abbildungen, Maße: 15,5 x 22 cm, Kartoniert (TB), Englisch
- Verlag: Anchor Academic Publishing
- ISBN-10: 3954893142
- ISBN-13: 9783954893140
- Erscheinungsdatum: 08.10.2014
Sprache:
Englisch
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