The cost of capital is the minimum rate of return an investment project must generate in order to pay its financing costs. Determinants of capital structure university of twente student theses. Whether or not, a capital structure suitable for a particular business depends upon the circumstances and nature of business. Understand the impact of taxes and bankruptcy on capital structure choice understand the basic components of the bankruptcy process definition of capital structure a firms capital structure is the relative proportions of debt, equity, and other securities that a. Electronic file organization tips nist weights and measures page 3 of 4 march 2016 when an electronic folder hierarchy is shared between multiple personnel, things can get messy quickly because everyone thinks about organizing and finding files in different ways. Structural reforms and experience with the oecd code of liberalisation of capital movements the dramatic increase in international capital flows, despite a temporary contraction during the global crisis, has motivated policy discussions on the associated benefits and costs of. This research provides international evidence on capital structure.
A17 27 the mncs capital structure decision the overall capital structure of an mnc is essentially a combination of the capital structures of the parent body and its subsidiaries. Capital structure describes the amount of debt a company uses as opposed to equity, and it is often measured with the ratio of debt to equity. This paper first presents a model of the optimal overall capital structure of the multinational firm reflecting tax and nontax factors. Control motivations and capital structure decisions eief. When the stock is traded and markets are viewed to be efficient, the objective is. International listing of assets in otherwise segmented markets directly integrates international capital markets by making these assets tradable. Capital structure is the interdependence of the companys longterm and shortterm debts or the mix of the companys equity and debt capital and the capability of the company to cope with them evidently, every company can not develop without investments and credits, so businessmen borrow money in banks or use obligations and bonds and the debt of the. An international comparison of capital structure and debt maturity choices abstract this study examines the influence of institutional environment on capital structure and debt maturity choices by examining a crosssection of firms in 39 developed and developing countries.
Clemens and michael kremer michael clemens is a senior fellow, center for global development, washington, dc. Using a sample of reits from twelve countries around the world, we examine the determinants of reit capital structure. Corporate finance this study examines the influence of institutional environment on capital structure and debt maturity choices by examining a crosssection of firms in 39 developed and developing countries. The more debt a company has, the more it has to pay creditors for the use of those funds. The capital structure should frame in such a way that it maximise returns to its owners. The theory and practice of corporate capital structure january 2006 2 liability strategies group executive summary this paper discusses the theory and practice of corporate capital structure, drawing on results from a recent survey. Higher government debt is associated with lower corporate leverage. Following modigliani and miller 1958, most theories such as the pecking order theory, agency theory and trade off theory have sought to explain capital structure by introducing frictions omitted in the original. International investors demanding rights and returns. International capital structure international 16 and the. This paper analyzes determinants of the capital structures of foreign affiliates of u. In section ii, we provide some stlized facts on the patterns of international capital flows to motivate our analysis. What are variables that determine capital structure of pakistani firms.
Meaning of capital structure capital structure refer to the proportion between the various long term source of finance in the total capital of firm a financial manager choose that source of finance which include minimum risk as well as minimum cost of capital. However, as we argue below, this conclusion may be unwarranted if personal taxes are also considered in addition to corporate taxes. International journal of economics and financial issues. The capital structure of a company is made up of debt and equity securities that comprise a firms financing of its assets. The capital structure puzzle is unravelled and a clear. The exchange rate passthrough erpt is a measure of how responsive international prices are to changes in exchange rates. International journal of economics and finance issn. So it relates to the arrangement of capital and excludes shortterm borrowings. Department of health and human services, provided capacity building grants to expand and strengthen the role of nonprofit organizations in their ability to provide social services to lowincome individuals.
Ncb capital is a saudi joint stock company with a paid up capital of sr1,000 million and is authorized by the capital market authority of the kingdom of saudi arabia with a license number 3706046 granted by capital market authority to carry out dealing, as principal and agent, and underwriting, managing, arranging, advising and custody, with respect to securities. A companys capital structure is arguably one of its most important choices. The choice of capital structure to maximize the value of a rm is sometimes formulated more narrowly as a choice of optimal leverage. Canada liquidation proceedings firms can file for firm is in control in stay on all. Ppt international capital structure and the cost of. January 2016 of health care systems 2015 international. In section iii, we examine the correlation between foreign capital inflows and growth.
Trend toward international standards of governance. Trade off theory assumes that firms have one optimal debt ratio and firm trade off the. Ludwig lachmann 19061990 was a germanborn member of the austrian school of economics. Introduction eariier literature on the development process stressed the importance of capital accumulation, and the role of financial institutions in that process. Structural reforms and experience with the oecd code of. Pdf the financing decision is one of the most important imperative in corporate finance. The goal of this chapter is to discuss the various theories that help to explain the determination of capital structure. From a technical perspective, the capital structure is defined as the careful balance between equity and debt that a business uses to finance its assets, daytoday operations, and future growth. He studied at the london school of economics in the 1930s, taught at the university of wiwatersrand in south africa, and wrote seminal material on austrian capital theory. Erpt is estimated using the following dynamic lags regression.
Corporate finance, international finance and macroeconomics, monetary economics when a nation can finance its investments via foreigncurrency denominated debt or domesticcurrency claims, what is the optimal capital structure of the nation. Researchers have argued that if organizational theory is to be relevant to practitioners, emphasis should be placed on organizational effectiveness and its influencing factors 3640. Vivek chibber, postcolonial theory and the specter of capital, new york, verso, 20, isbn 9781844679775 hbk, isbn 9781844679768 pbk, 320 pp penny for the old guy. Michael kremer is the gates professor of developing societies, harvard university, and research. This paper stresses the importance of the processes and institutions by which capital is allocated, and the. The major contending theories of capital structure as well as their predictions are considered. Hierarchical determinants of capital structure fgv eaesp pesquisa. Pdf capital structure choice is an important decision for a firm. Theoretical considerations a firm could use three methods to determine its capital structure. Generally, the tax advantages of debt finance lead the. The paper contributes to the capital structure literature by investigating the determinants of capital structure of firms operating in the asia pacific region, in four countries with different legal, financial and institutional environments, namely thailand, malaysia, singapore and australia. Ams chose a competencybased strategy for human capital performance improvement. The firms cost of retained earnings reflects an opportunity cost representing what the existing shareholders could have earned if they had received the earnings as dividends and invested the funds themselves.
We investigate firmspecific and countryspecific factors, and account for the unique legal requirements that reits face in each country. The cost depends on the health of the companys balance sheeta triple aaa rated firm can borrow at extremely low rates vs. Chapter iii concepts and theories of capital structure and profitability. For a leveraged firm, the financing costs can be represented by the weighted. It is the employment of an asset source of finance for which. From a tactical perspective however, it influences everything from the firms risk profile, how easy. Capital structure denotes means a firm funds its operations using some blend of equity plus debt. Firms with nontradable assets essentially get a free ride from firms with tradable assets in the sense that the former indirectly benefit from international integration in terms of a lower cost of. Hostile market for corporate control activist investors, hedge funds, private equity. Capital structure is simply a measure of how much equity andor debt a company utilizes to finance its operations. The debt capital in a companys capital structure refers to borrowed money that is at work in the business. Aswath damodaran 3 the objective in decision making n in traditional corporate finance, the objective in decision making is to maximize the value of the firm.
Our results suggest that legal requirements are significant determinants of the capital structure of reits. Pdf this study seeks to extend abors 2005, and gill, et al. A multinational perspective on capital structure choice and internal. International capital structure and the cost of capital 1 international capital structure and the cost of capital 2 cost of capital. Key concepts and skills definition of capital structure. Compustat annual files including the research file. An international comparison of capital structure and debt maturity. An international comparison of capital structure and debt. We find that a countrys legal and tax system, the level of. Financial constraints and firm capital structure in kenya econstor. The capital structure of nations patrick bolton, haizhou huang. He is also a research fellow of the institute for the study of labor iza in bonn, germany. It is the permanent financing of a firm represented by longterm debt, preferred stock and net worth.
Unlikely that a standard system will work well in all countries. Previous studies that attempt to compare capital structures in different coun. The compassion capital fund ccf, administered by the u. The international cost of capital and capital structure. Health care system financing and coverage in 18 countries. Competencybased organizational development strategy. Pdf the relationship between capital structure and profitability. The topic of this paper is to explore such an analogy, and thereby to address the general question of the optimal capital structure of nations. The capital structure decision involves the choice of debt versus equity financing, and is influenced by both corporate and country characteristics. An international comparison of capital structure and debt maturity choices joseph p. A firms capital consists of equity retained earnings and funds obtained by issuing stock and debt borrowed funds.
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