CHAPTER 5
CONCLUSION AND POLICY IMPLICATIONS
5.1 Conclusion
According to the conventional corporate finance literature, in a perfect capital market, the financing decisions of firms should be irrelevant. The main implication of such theory is that given that there are no perfect capital markets, the financing decisions of firms do matter and should have significant consequences on the performance of these firms.
There were two major objectives of this study. Firstly, the study attempted to examine the financing pattern of non-financial firms in the small open economy open economy of Jamaica. The second aim was to determine whether, the capital structures derived - which are these consequences of these financing decisions - impact on the performance of these firms.
In terms of the methodology employed, the first approach was to analyze the information gleaned from the financial statements of the firms listed on the Jamaica Stock Exchange. The intention was to determine the types of financing as well as the trends. Having understood how these firms went about making their financing decision, the next step was to use Instrumental Variable (IV) techniques on panel data, to examine the nature of the relationship between the capital structure and the performance of these firms.
The first major finding of this study was is that there is a heavy reliance on the use of internally generated financing by firms in Jamaica. Between 1999 and 2008, the internal finance to net assets ratio was 1.81. Internal finance also proved to be a most popular source of financing across all industries. In particular, it was found to be greatest in the retail industry (2.89) and tourism (2.87) industries and lowest in the category represen...
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...s, Jamaica, 2002) only 38 are listed on the Jamaica Stock Exchange. In spite of some progress, much remains to be done to develop and fully integrate the capital market in the Caribbean.
To increase the demand for finance from the capital markets, the macroeconomic and incentive framework must stimulate entrepreneurship and the growth and restructuring of enterprises. This would require more pro-market activist policies, with the emphasis both on market forces and Government prodding. In addition, micro, small and medium-sized firms must be encouraged and provided with incentives to open up their firms to new investors and ideas that could foster innovation and firm growth and competitiveness. For instance, means for a group of, small and medium-sized firms to access a pool of capital market finance to reduce costs and increase the uptake should be considered.
Jamaica is home of the phrase “be happy, don’t worry,” and is a popular tourist spot that foreigners escape to for a temporary slice of paradise. Given the success of the tourist industry, it is easy to mistake Jamaica as a thriving country with the locals living blissfully in paradise; the clip from “Life and Debt” completely dispels these notions and introduces the negative effects that have developed from free trade policies that were recommended by the International Monetary Fund. International Monetary Fund representatives in the clip present globalization and free trade as a form of economic liberation that would bring Jamaica economic success despite its small size. An IMF representative in the clip states that, “Jamaica is a very small
Finding the perfect capital structure in terms of risk and reward can ensure a company meets shareholder expectations and protects a firm in times of recession. Capital structure refers to how a business puts its money to “work”. The two forms of capital structure are equity capital and debt capital. Both have their benefits and limitations. Striking that perfect balance between the two can mean the difference between thriving versus trying to survive.
Assessing the capital structure of any firm is important for investors attempting to determine if...
The documentary Life and Debt portrays a true example of the impact economic globalization can have on a developing country. When most Americans think about Jamaica, we think about the beautiful beaches, warm weather, and friendly people that make it a fabulous vacation spot. This movie shows the place in a different light, by showing a pressuring problem of debt. The everyday survival of many Jamaicans is based on the economic decisions of the United States and other powerful foreign countries.
Capital structure is the composition of the company 's capital value and the proportion of the relationship which can reflect the company 's structural stratification and core competitiveness of the company 's business performance also has unpredictable impact on market value, shareholder wealth and even sustainable development capacity . Through the analysis of the equity ratio, the debt ratio, the long-term debt ratio, the return on assets and the Modigliani and Miller theory, Sainsbury 's capital structure is stable.
When starting a business an important question arises, how to finance the company. The steady economic growth combined with low interest rates has produced a lot of liquidity in debt and equity markets. For example, in 2005, non-financial corporate business borrowing increased dramatically to $289 billion, compared to the mere $174 billion it was in 2004 and the $85 billion it was in 2003 (Chung). The outcome of using only debt financing or only equity financing is mostly direct. Businesses run ino the issue when a company’s finance requires both debt and equity characteristics, changing the tax effects greatly (Hanke).
There is a range of criteria relevant for a decision of financing a new venture. To construct my list for the evaluation of a new company as an opportunity I have selected to refer to t...
Corporate finance is all about management sources of fund which are separated into two, debt and outside equity. When the firm is solely funded by equity, high cost of capital, or by debt, financial distress or bankruptcy cost, the firm will not reach the optimal capital structure. The combination of debt and equity, trade-off capital structure, should be used and the matter of agency costs must be reduced to maximise value of the firm. The trade-off between tax benefit and bankruptcy cost has already been discussed as if the firm’s debt usage becomes high enough, the marginal increase in the tax shield will be less than the marginal increase in the bankruptcy cost. Agency costs consist of monitoring costs to observe the firm 's executives by shareholders, management 's bonding costs to assure owners that their best interests maximisation value of the firm, and residual losses that result even when sufficient monitoring and bonding exists. Adding additional debt reduces agency costs to equity holders because the manager can buy out outside equity using debt financing as the leverage effectively shifts some agency costs to
The economy of Jamaica has typically been agricultural, but this has begun to change. Manufacturing and services have become a major part of the Jamaican economy. Tourism is the greatest contributor of foreign exchange. Most of their international trade
What is capital structure? Capital structure describes the specific mixture of long-term debt and equity the firm uses to finance its operation and growth. The risk and value of the firm will be affected by this mixture. Hence, it is often a challenging task for the finance managers to determine the optimal capital structure. An error free decision is critical to avoid an incorrect financing decision (Eriotis, Vasilou & Neokosmidi, 2007) and different levels of debt and equity used in capital structure suggest that managers may employ firm-specific strategies for improved performance (Gleason, Mathur, & Mathur, 2000).
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
One of the significant contribution of this study is to help investors and managers to determine the capital structure of REITs by analyzing the relationship between determinants of capital structure and leverage. A study about REITs is rarely performed in Malaysia. In this study, it would contribute to a more comprehensive understanding on capital structure of REITs and their characteristics. It helps to identify the main determinants of capital structure of REITs by examining the determinants and their correlation between leverage.
The financing decisions should be made with a view to achieve that target capital structure set by the management of the company. After existence of a company for few years, the financial manager then has to deal with the existing capital structure. Almost every company needs funds to finance its activities continuously. Each time the funds have to be arranged, the financial manager needs to consider the advantages and disadvantages of various sources of finance and selects the best option keeping in view the target capital structure.
"Overview of Trade." Trade Reference Centre - Jamaica. N.p., n.d. Web. 17 Nov. 2013. .
The capital structure of a firm is the way in which it decides to finance its operations from various funds, comprising debt, such as bonds and outstanding loans, and equity, including stock and retained earnings. In the long term, firms seek to find the optimal debt-equity ratio. This essay will explore the advantages and disadvantages of different capital structure mixes, and consider whether this has any relevance to firm value in theory and in reality.