3.7.2 Dependent variables (Measuring the leverage) Financial Leverage There are some issues regarding the definition of Leverage of the firms. In other words there is no clear-cut definition of leverage in academic literatures. For the definition of leverage its Depends on the objective of researcher by which is the study is being conducted. Previous studies suggest that the level of leverage depends upon the definitions of the leverage, several research studies have used both market and book value based measured of leverage (Rajan, R. and Zingales, L, 1995). Through capital structure theories consider long term debt as a substitute for financial leverage, we take the total debt to total equity ratio as a proxy for the financial leverage because in Pakistan firms have mostly short-term financing as the average firm size is small, which makes access to the capital market difficult in terms of cost of capital (Shah & Hijazi, 2004). The main sources of debt in Pakistan have been commercial banks, which do not persuade long term loans. 3.7.3 Independent Variables Size Size (SZ) of the firm is measured by the taking natural log of the sales to smoothen the variation over the periods considered. With respect to the pecking order theory, (Rajan, R. and Zingales, L, 1995) argued that this relationship could be negative. For the static order approach, the large firms, the greater the possibility it has of issuing debt, resulting in positive relationship between debt and size. In another research (Shah & Hijazi, 2004) found that there is a positive relationship between and size of the firm. In this study we expect the same relationship between size and leverage. Profitability Given the pecking order theory that the firm... ... middle of paper ... ...cture: the incentive signaling approach". Bell Journal of Economics , p. 23-40. Shah & Hijazi. (2004). The Determinants of capital structure of stock exchange-listed non-financial firms in Pakistan. Pakistan Development Review , vol. 43, p. 605-618. Shah & Khan. (2007). Determinants of Capital Structure: Evidence from Pakistani Panel Data. International Review of Business Research Papers , vol. 03 (no. 04), p. 265-282. Titman & Tsyplakov. (2005). A Dynamic Model Capital Structure. SSRN Working Paper Series. Titman, S. and Wessels, R. (1988). The Determinants of Capital Structure Choices. Journal of Finance , Vol. 43. Welch, I. (2011). Two Common Problems in Capital Structure Research. International Review of Finance , 11 (1), 1-17. Wikipedia. (2010, October 26). Retrieved November 14, 2010, from www.wikipedia.com: http://en.wikipedia.org/wiki/Capital_structure
Balance sheet lists assets, liabilities and owner’s equity. The assets listed on the balance sheet are acquired either by debt (liabilities) or equity. “Companies that use more debt than equity to finance assets have a high leverage ratio and an aggressive capital structure. A company that pays for assets with more equity than debt has a low leverage ratio and a conservative capital structure. That said, a high leverage ratio and/or an aggressive capital structure can also lead
MCI current capital structure is x% debt and y% equity. Their key ratios are a, b, and c. Comparing to other firms in the utilities industry they appear to be underutilizing (debt/equity). (See exhibit D). Referencing the forecast there is expected to b...
Stewart, J. ‘The Effects of BIS Capital Adequacy Ratios on Bank financing, Irish Accounting Review,
The financial cost and cash flows are significantly changing by quarter after quarter. The rise in cash flows, reduce the risk of financial management as the company can easily pay the financial costs. It is observed that on the other side when there is a downfall of cash flows Company have high financial management risks. According to the correlation analysis, the value of the correlation is 0.012 which is highly insignificant as the limit of the correlation value is 0.953. So there is no relation between profit and leverage. It is also found that financial cost has a positive of correlation with profit as this correlation is verified by Pearson correlation value 0.378. By these findings, it is clear that financial risk is not an important
2 (1970): 383–417. i.e. a. Fama, Eugene F. “Efficient Capital Markets II.” Journal of Finance 46, no. 1 (September, 2011). 5 (1991): 1575–1617.
Higher leverage is very likely to create value for a firm considering capital structure change by exerting financial discipline and more efficient corporate strategy changes.
William Sharpe, Gordon J. Alexander, Jeffrey W Bailey. Investments. Prentice Hall; 6 edition, October 20, 1998
...ence of Capital Measurement and Capital Standards’, Basle Committee on Banking Supervision, vol.1, no.1, p1-28.
... It was the conclusion of the author that financial ratios, when combined with statistical analysis, still remain a valuable tool. The theoretical conclusion was that ratios used within a multivariate framework take on a more influential role than when used in isolation. The discrimination model was very accurate in the initial sample of 66 firms, correctly predicting 94 percent of the original bankrupt firms. The potential suggested uses of the model include: business credit evaluation, investment guidelines and internal control procedures.
Brealey, Richard A., Marcus, Alan J., Myers, Stewart C. 1999, Fundamentals of Corporate Finance, 2nd edn, Craig S. Beytien, USA.
The greater part of finance demand from these enterprises is in the form of debt, estimated at about INR 26 trillion. Overall demand for equity in the SME sector is INR 6.5 trillion, which makes up 20 percent of the total demand. The sector has high leverage ratios with average debt-equity ratio of 4:1. But these leverage ratios are not even across the sector and variations exist based on the size of the enterprise. For instance medium-scale enterprises exhibit a more balanced debt-equity ratio of 2:1. The unregistered enterprises, which comprise 94 percent of the SME sector, account for INR 30 trillion of the finance demand. This demand estimate does not take into account the demand for finance by unorganized
A Company’s policy generally is to have different types of investors for their securities. Therefore, a capital structure should give enough choice to all kind of investors to invest. Usually bold and adventurous investors go for equity shares and loans & debentures are often raised keeping into mind conscious
Thus, capital structure would vary from one company to another company depend upon the company’s availability of fund, operational size, from different sources and management efficiency etc.
Operating leverage is concerned with investment activities of the firm whereas financial leverage is concerned with financing activities of the firm. As well as this, operational leverage is determined by the cost structure of the firm but financial leverage is determined by the capital structure of the firm. Furthermore, degree of operating leverage enables us to measure the business risk associated with the firm. On the other hand, degree of financial leverage enables us to measure the degree of financial risk, associated with the
Some determinants can be listed in this paper are: auditor type, industry type, profitability and leverage.