财务杠杆在企业中的应用研究 外文原文 精品

DETERMINANTS OF FIRM’S FINANCIAL LEVERAGE:
A CRITICAL REVIEW
By
Rahul Kumar
Abstract
The purpose of this review paper is to critically investigate the underlying factors that affect firm’s financial leverage from t he perspective of theoretical underpinnings. We reviewed 107 papers published from 1991 to 2005 in the core, non-core and other academic journals. On the basis of critical review, this research has identified a number of determinants of financial leverage based upon logical argume nts identified in the literatures. Major findings show that various frameworks like leverage irrelevance, static trade off, pecking order, asymmetric information signaling framework have partly helped us in understanding the under lying factors determining the firm’s financial leverage, there is no consensus and there is no universal factor determining financial leverage. The paper sets out two challenges for future research: one, how to integrate different factors determining firm’s financial leverage into a common framework and second, what are the explanatory factors determining firm’s financial leverage in a network phenomena Keywords : Capital structure, financial leverage
1. Introduction
In general, companies may raise money from internal and external sources. They can raise money from internal sources by plowing back part of their profits, which would otherwise have been distributed as dividend to shareholders. Or, they can raise money from external sources by an issue of debt or equity. When a company issues shares, shareholders hope to receive dividend on their investment. However, the company is not obliged to pay any dividend. Because dividend is discretionary, it is not considered to be a business expense. When a company borrows money by way of debt, it promises to make regular interest payment and to repay the principal (i.e. the original amount borrowed). If profits rise, the debt holders continue to receive a fixed interest payment, so that all the gains go to the shareholders. On the contrary, when the reverse happens and profits fall, shareholders bear all the pain. If times are sufficiently hard, a company that has borrowed heavily may not be able to repay its debt. The company is then become bankrupt and shareholders loose their entire investment. Because debt increases returns to shareholders in good times and reduces them in bad times, it creates “financial leverage”(leverage). An “unlevered firm2” uses only equity capital whereas a “levered firm” uses a mix of equity and various forms of debt. Common ratios such as debt-to-total capital or debt-to-equity quantify this relationship. The importance of leverage in the capital structure3 of the company is that its efficient use reduces the weighted average cost of capital (WACC) of the company. Lowering the cost of capital increases the net economic returns which, ultimately increases firm value. In sum, the guiding principle of leverage is to choose the course of action that maximizes the firm value and the value of the firm is maximized when the WACC is minimized.
The firm’s leverage decision centers on the allocation between debt and equity in financing the company. However, how the leverage of a firm is determined in a world in which cash flows are uncertain and in which capital can be obtained by many different media ranging from pure debt instruments to pure equity instruments is an unsettled issue.
A number of researchers have attempted to understand financing choices of the firm and to identify the effect of changes in financial structure on the WACC of the firm and its value. A survey on capital structure theories by Harris and Raviv (1991) provide a summary of determinant of financial leverage of the firm, as identified and discovered by the researchers up to the time. However, in the absence of any review of published papers
in the area since then, a need was felt to do this type of review and objective was decided. The literature review is done to understand the progress of research on the subject and to identify the future direction of research. The present study reviews the literatures from January, 1991 to December, 2005, and summarizes various hypotheses determining the leverage of firm as discovered by the researchers. The review work follows from the perspective of theoretical underpinnings developed by the researchers during this time. This paper is organized as follows. In Section 2, we present methodology of review. Section 3 presents classification, discussion, and summary of hypothesis brought forth in the published papers during January, 1991 to December, 2005 from different theoretical underpinnings propounded in the subject area, though the divide line is oblique. Section 4 is the last section devoted to conclusions and future directions of the research.
Section: 2
For the purpose of our study, we systematically exclude certain topics that, while related to the leverage structure of the firm, but do not keep the determinants of the leverage as its central focus. These include literature dealing with call or conversion of securities, dividend, bond covenants and maturity, bankruptcy law, pricing and method of issuance of new securities, common and preferred stock. Second, we briefly discuss the theories on leverage under various subsection of section 3. Though such theories are undoubtedly of great empirical importance, we found that such theories have extensively been surveyed by Harris and Raviv (1991), Bradley et. al. (1984) and for the purpose of convenience we referred the authors for detailed explanation on the theories.
Grouping variables driving leverage allows discussion of the variables in one place and facilitate an examination of the relationship among similar variables. The researchers in the past have looked into the capital structure from various theoretical perspectives and brought forth a number of theories on capital structure. Accordingly, the determination of firm's leverage was postulated to fall under various theoretical model/framework. These are:-
1. Irrelevance theory: Research in this area was initiated by Modigliani and Miller (1958);
2. Static trade-off theory: Research in this area was initiated by Myers and Majluf (1984);
3. Asymmetric information signaling framework : This stream of research began with the work of Ross (1977) and Leland and Pyle (1977);
4. Models based on Agency cost :Research in this area was initiated by Jensen and Meckling (1976) building on earlier work of Fama and Miller (1972);
5. Pecking order Framework: This stream of research began with the work of Myers and Majluf (1984) and Myers (1984);
6. The legal environment Framework of capital structure: Research in this direction was initiated by La Porta et. al.(1997);
7. Target leverage Framework (Mean reversion theory): Research in this direction was initiated by Fischer et al. (1989);
8. Transaction cost Framework: Research from this perspective was initiated by Williamson (1988).
For the purpose of our study, we followed the above distinct categories as have been brought forth by the researchers. Over and above the above theoretical framework we
found that there is some variables not fitting into any of the given categories, which we have put into "others" category. For the purpose of our study, Papers published in the Journals listed in table-1 in the last fifteen years (from 1991 to 2005) are reviewed. Zivney and Reichenstein (1994) categorized academic finance journals as "core" and "noncore." Based on their definition, we categorized the journals into three categories: (i) Core, (ii) Non Core, and (iii) Others. We understand that our sample is the true representative of the population to reflect the state of research in determining the variables affecting the firm’s leverage. We reviewed articles in the journals through the EBSCO research database, Proques t database, Emerald full text database, Elsevie r’s Business management and accounting collection, and JSTOR database.
Section 3
3. Classification, Discussion, and Summary of Hypothesis
The researchers have captured a number of factors determining firm’s leverage. In this section, we report the factors identified in the published literature under different theoretical framework propounded over the period by the researchers.。

分类，讨论和总结的假说
研究人员已经抓获了确定公司的杠杆因素。

在本节中，我们发表的文献报告中确定的根据不同的理论在研究期间所propounded框架的因素。

3.1. The leverage “irrelevance” framework 3.1。

The genesis of research in the area started with the seminal paper of Modigliani and Miller (1958). Modigliani and Miller (1958) in their seminal paper “The cost of capital, corporation finance, and the theory of investment” demonstrated that in the absence of transaction cost, no tax subsidies on the payment of interest, and the same rate of interest of borrowing by individuals and corporations, firm value is independent of its leverage and is given by capitalizing the expected return at the rate appropriate to that asset class.
Modigliani and Miller (1958) concluded that a firm cannot increase its value by using leverage as part of its capital structure. The traditional belief was that the capital structure of the firm is determined by the rate of interest on bonds, so the firm will push the investment to the point where the marginal rate of yield on physical assets equals the market rate of interest. Hence a firm can increase its market value by generating yield on assets that exceeds the market rate of interest. Modigliani and Miller (1958) challenged the traditional notion that a firm can increase its value by using debt4 as part of its capital structure. Ghosh et. al. (1996) investigated the valuation effects of exchangeable debt calls and indicated that the shareholders of firms calling exchangeable debt do not experience any significant changes in wealth. They found that the negative effect of a decrease in leverage due to the call is offset by the calling firm's change in asset composition. Current empirical researches documented significant decline in equity prices both around the announcement of a new equity issue and for the immediately subsequent years and validated Modigliani and Miller argument.
3.2. Static trade -off framework: tax benefit and bankruptcy costs
As we have discussed above, payment of interest on debt is a mandatory charge on the business of the firm, which is allowed as expenses for tax purpose. As a result, the
presence of bankruptcy cost5 and favorable tax treatment of interest payment led to the development of static trade off framework. The framework was first propounded in 1984 (Myers and Majluf, 1984). The proponents of static trade-off model argues that firms balance debt and equity positions by making trade-offs between the value of tax shields on interest, and the cost of bankruptcy or financial distress. In other words, keeping other things constant, higher the cost of bankruptcy, lower the debt and vice versa. Secondly, keeping other things constant, higher the maximum marginal rate of tax, higher the debt and vice versa. on financing, is greater than zero.
Consequently, they proposed that firms in goods producing industries will have a higher debt to equity mix than will firms in service industries. Rajan and Zingales (1995) proposed that one cannot easily dismiss the possibility that taxes influence aggregate corporate leverage. Other results that support the static trade off model include Farrino & Weisbach (1999), Cassar & Holmes (2003), Morellec & Smith (2003). Morellec (2004), and Parrino & Weisbach (2005). The researchers have also observed result inconsistent with the prediction of static trade off theory. Fama and French (1998), despite an extensive statistical research, could find no indication that debt has net tax benefit. Bagley et. al. (1998) critiqued the static tradeoff theory for it does not explicitly treat the impact of transaction costs; does not explain the policy of asymmetry between frequent small debt transactions and infrequent large equity transactions; does not explain why the debt ratio is allowed to wander a considerable distance from its alleged static optimum, or how much of a distance should be tolerated.
In short, static trade off theory offers a partial explanation of the factors determining firm's choice of leverage.
3.3. Asymmetric Information Signaling Framework
The proponents of Information signaling model argue that the existence of information asymmetry between the firm and the likely finance providers causes the relative cost of finance to vary between the different sources of finance. For instance, an internal source of finance, where the funds provider is the firm, will have more information about the firm than new equity holders; thus new equity holders will expect a higher rate of return on their investments meaning that it will cost the firm more to issue fresh equity shares than using internal funds. The conclusion drawn from the asymmetric information theories is that there is a hierarchy of firm preference with respect to the financing of their investments (Myers and Majluf, 1984). Ooi (1999) investigated the corporate debt maturity structure of property companies quoted in the UK over the period 1989-95 and showed that, in order to distinguish themselves from firms in other risk classes and to mitigate the information asymmetry effects, property companies with potential good news employ more debt in their capital structure, which is consis tent with the signaling hypothesis. Bayless and Chaplinsky (1996) found that when there are low levels of information asymmetry (i.e., in hot markets) the announcement-period returns are significantly higher than in cold markets. They concluded that firms try to take advantage of these "windows of opportunity7" as they decide when to schedule a new equity or debt issue. Frank and Goyal (2003) argued that large firms are usually more diversified, have better reputations in debt markets, and face lower information costs when borrowing, therefore, large firms are predicted to have more debt in their capital structures. Hall et. al. (2004) argued that because much of the data which small firms will supply to banks, in their applications for loans, will not be readily verifiable, hence, the problem of
information asymmetry that they face will be particularly acute, so debt would be positively related to firm size. Bhaduri (2002) proposed that young firms are more vulnerable to the problem of asymmetric informatio n, and hence they are likely to use debt and avoid the equity market. Further, the author argued that a firm with a reputation of dividend payment faces less asymmetric information in accessing the equity market, therefore, an inverse relationship is predicted to exist between leverage and dividend payment. Bancel and Mittoo (2004) found in their sample survey of managers from 16 European countries that over 40% of the managers issue debt when interest rates are low or when the firm’s equity is undervalued by the market. These findings suggest the managers use windows of opportunity to raise capital. The authors further reasoned that managers issue convertible debt because it is less expensive than straight debt, or to attract investors who are unsure about the riskiness of the firm. Habib and Johnsen (2000) showed that debt and outside equity can be used to elicit accurate information about the value of an enterprise in alternative uses. They argued that the firm issue securities to reveal outside investors knowledge of the expected return through the size of the stake they acquire and the price they pay for it assuming that the outside investors observe a signal and communicate it to the firm. Devis (1996) explained that preference financing is chosen when significant information asymmetries exist between management and outside investors. Mark Garmaise (2001) showed that firms attempt to maximize diversity of opinion by issuing risky securities such as equity. The author suggested that the researching the state of investor beliefs and choosing an optimal design in the light of these beliefs can create substantial value for the firm's original owners. McLaughlin et. al. (1998) examined the information content of offerings of debt and equity by public corporations by analyzing the relationship between information asymmetry and long run changes in firm operating performance around the offerings. Their results were consistent with the information model of decision to issue securities. Dittmar (2000) examined and found that the firms repurchase stock to take advant age of potential undervaluation. Michaelas et al. (1999) empirically examined the implication of theory of capital structure in the U.K. small business sector and suggested that the asymmetric information costs have an effect on the level of debt in small firms.
The researchers have also observed inadequacy in asymmetric information signaling model to explain the capital structure decisions. Byrd et. al. (1996) examined stock price reactions to conversion forcing calls of convertible bonds and preferred stocks and found that analysts earning forecast, both short term and long term, were revised upward following the call announcement of convertible bonds and preferred stocks. Their findings cast doubt on the established belief that such capital structure decisions signal negative information about firm value. Bhabra et. al. (1996) examined whether all firms that issue convertible bonds truthfully reveal firm quality at the offer announcement and found that some low-quality firms issue convertible bonds with contract terms that suggest higher quality, however market reacts more positively to announcements of these low quality firms.
.
Section 4
Gaps Identified and Future Research Direction
In the last five decades, the researchers have attempted to identify - What determines the firm’s financial leverage. Thereby all perspectives like leverage irrelevance, static trade off, pecking order, asymmetric information signaling framework evolved towards answering the question. Though these frameworks have partly helped us in understanding the underlying factors determining the firm’s financial leverage, there is no consensus and there is no universal factor determining financial leverage and this creates a vital gap to understand the phenomena.
A prudent way to address this gap is to integrate different factors determining firm’s financial leverage into a strategic resource framework Furthermore, across these frameworks; we notice one common assumption about the architecture of the firm is that the firm is as an isolated, independent entity. Today, the phenomenon of business network and interdependence of firms has become so common that firm cannot be looked at in isolation to understand the financial structure. Instead, it is the networks of firms, which aims to understand and explain this question.
As a result, the relevance of these frameworks is restricted in their relevance. Though this phenomenon is the focus of the study in strategic management literatures and has been accepted conceptually therein, the academic field of finance is devoid of any study focusing the determinants of financial leverage in the case of business network. Hence, the two challenges for future research in this regard are identified: one, how to integrate different factors determin ing firm’s financial leverage into a common framework and second, what are the explanatory factors determining firm’s financial leverage in a network phenomena.
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