The financing decision during economic crisis
A research on the impact of the financial crisis on thedeterminants of the financing decision
University of Groningen & Uppsala University International Financial Management
Abstract
Table of contents
1. INTRODUCTION ... 4
2. LITERATURE REVIEW... 7
2.1 THE MODIGLIANI AND MILLER THEOREM... 8
2.2 TRADE-OFF THEORY... 9
2.3 PECKING ORDER THEORY... 10
2.4 MARKET TIMING THEORY... 11
2.5 DETERMINANTS OF THE FINANCING DECISION... 13
2.5.1 Profitability ... 13 2.5.2 Growth opportunities ... 13 2.5.3 Size... 14 2.5.4 Financial flexibility ... 14 2.5.5 Tangibility ... 15 2.5.6 Macro-economic determinants ... 15
2.6 IMPACT OF THE FINANCIAL CRISIS... 16
3. METHODOLOGY & DATA... 19
3.1 METHODOLOGY... 19
3.2 DATA... 21
3.3 DESCRIPTIVE STATISTICS... 22
4. EMPIRICAL RESULTS ... 27
4.1 OLS REGRESSION ANALYSIS... 27
4.2 LOGIT REGRESSION ANALYSIS... 30
5. CONCLUSIONS... 34
5.1 LIMITATIONS... 35
6. REFERENCES ... 37
1. Introduction
The financial crisis in which the world is currently immersed has been described by analysts as the worst crisis since the Great Depression1. Throughout the world it led to unemployment, decreased investor confidence, corporate collapses and plummeting stock and bond prices (Gorton, 2010, Reinhart & Rogoff, 2009). Large financial institutions such as Lehman Brothers and Bear Stearns declared bankruptcy while other institutions were bailed out by governments. This economic downturn was initiated when mortgages in the U.S. were sold to third parties through securitization in the period before the crisis. Such mortgage-backed securities derive their value from housing prices and mortgage payments and provide an opportunity for investors to invest in the U.S. housing market. The values of these securities plummeted in 2006 as mortgage holders were unable to repay their debt and the housing bubble collapsed. This resulted in severe damage for banks and other financial institutions. Ultimately, unsure of the total damage, banks stopped lending out money which led to restricted credit availability. Combined with damaged investor confidence this crisis eventually developed into a global economic crisis that started in 2007 and still lasts.
Because of the limited lending capacity of banks and low security prices, firms have found themselves restricted in using external financing during the credit crisis (Campello et al., 2009). Eventually, the refusal of banks to lend freely seems to have caused firms to find alternative ways to finance their investments (Hughes and Bullock, 2009). For example, an article in the Financial Times (Lex, 2009) showed that corporate lending in 2008 and 2009 is still one-third less than the highs of 2006. On the other hand, corporate bonds issues have increased and provide more than a fair competition for conventional lending (Bullock, 2009). Hughes and Bullock (2009) confirm that firms issue large amounts of corporate bonds and argue that this may be caused by the lower than expected risk premiums. Another explanation for this effect could be that the costs of issuing equity are relatively high because of low stock prices. When investigating the Asian crisis of 1997, Lim (2003) also found that firms are migrating away from bank financing and turning to the capital markets for their financing.
So it appears that the financing policy is affected by a period of economic crisis. Therefore, one of the objectives of this research is to find out if corporate financing is indeed affected by the financial crisis. This matter is addressed by analyzing the loan, debt and equity issues of
1
1036 firms in the period 2002-2008. The results show no distinct change in the use of debt during the crisis period. On the other hand, firms do issue smaller amounts of equity and larger amounts of loan during the crisis period. Therefore, it can be concluded that the financing decision is indeed affected by the financial crisis.
In this context it is also interesting to explore which factors actually determine this financing decision. Over the years there has been an extensive theoretical discussion on this subject. However, while these theories were tested numerous times, the way in which firms determine their financing decision is still contended (Bancel & Mittoo, 2004; Elsas & Florysiak, 2008). Still, these theories can be used to define the determinants that influence the financing decision. These determinants may be significantly influenced by changes in the economic environment as discussed by Deesomsak et al. (1997). Therefore, it will be interesting to explore how the determinants of the financing decision are affected by the financial crisis. The above leads to the following main question that will be answered in my thesis:
Which factors influence the financing decision of a firm and how are they affected by the current economic crisis?
To answer this question regression analysis will be performed on 2357 loan, debt and equity issues using the following determinants: profitability, growth, size, tangibility, financial flexibility and GDP growth. The results show a significant effect of these determinants on the financing decision and on occasion a different influence during the crisis period. For instance, the profitability and growth opportunities of a firm have a positive effect on the use of external financing during the crisis period. Furthermore, when needing external financing profitable firms prefer equity over debt. The influence of growth opportunities does not change over the crisis period nor seems to influence a firm’s preference for loan, debt or equity. Tangible firms will also use more external financing and have an increased preference for loan and debt during the crisis period. This is consistent with theory which predicts that tangible assets can be used as collateral and thereby reduces the costs of debt.
financing decision during the crisis period. Large firms prefer issuing equity during the crisis while this effect did not occur before the crisis period. The financially flexible firms that do use external financing during the crisis prefer issuing loan and debt over equity. The opposite effect was found before the crisis where firms preferred using equity. Finally, GDP growth does not have a clear impact on the amounts of external financing or the preference for loan, debt or equity.
2. Literature review
While the financial crisis is far from over its impact on economies all over the world is already evident. Decreasing investor confidence led to stock and bond prices plummeting in financial markets all over the world (Gorton, 2010). There has been a dramatic drop in international trade and a predicted decrease in housing prices of on average 35% (Reinhart & Rogoff, 2009). Furthermore, most countries, including the countries analyzed in this research, have experienced vast growth in unemployment and government spending during the crisis period2. But as explained above the financial policy within a firm is also affected by this crisis.
Financial managers within a firm have to face two basic decisions. First, what specific assets should the firm invest in? This is the firm’s investment or capital budgeting decision. Second, how should the cash required for investment be raised. Should the firm issue equity, go to the capital markets for long-term debt or should it borrow from a bank? This is the financing decision (Brealy et al., 2004). However, during a crisis the cost of external financing increases. Furthermore, during the current crisis banks have suffered from restricted lending capacity. This has proved to be a financial constraint for companies that have investment opportunities and need external sources to finance them.
Surveying CFOs in the U.S., Europe and Asia, Campello et al. (2009) established that 86% of these CFOs found themselves restricted during the credit crisis. They further state that the problems of borrowing externally have caused many firms to bypass attractive investment opportunities. Hughes and Bullock (2009) explain that the limited capacity of banks caused firms to find alternative ways of financing. The alternative source of financing became corporate bonds. They explain that as the markets have been virtually shut for months investors have turned to debt when sentiments about the economy improved. The lower than expected risk premiums has led to firms issuing large amounts of corporate bonds used for financing investments (Hughes & Bullock, 2009). A similar result was found by Lim (2003) when investigating the economic crisis in Korea in 1997. He argued that firms were leaving banks and going to the capital markets for their financing.
2
From the above can be concluded that an economic crisis is indeed affecting the financing decision of a firm. To provide a better understanding of the financing decision the following sections will cover the prevailing literature. First, the leading theories will be discussed and used to derive several determinants of the financing decision. Subsequently, the possible influence of the financial crisis on these determinants will be reviewed.
2.1 The Modigliani and Miller theorem
The article of Modigliani and Miller (1958) is the starting point for discussing the theory on this topic. According to the Modigliani-Miller theorem the market value of the company does not depend on its capital structure (Brealy et al., 2004). The market value of a company is derived from the cash flows that a firm can distribute to its debt and equity holders. Because the capital structure decision has no effect on the total cash flows that a firm can distribute, the total value of a firm’s debt and equity will not be affected (Grinblatt & Titman, 2002). Under their assumptions of a perfect market, no-tax world the means by which investments are financed are irrelevant for the total value of the firm (Amihud et al., 1990). Financial managers contemplating about issuing equity or debt should stop worrying; neither financing decision is superior to the other.
However, when the assumptions of perfect markets, no transaction costs and especially no taxes are relaxed, the premise of the Modigliani-Miller theorem does not hold in the real world. Because the interest on debt is tax deductible, after-tax cash flows to bond- and equity holders will increase when they include more debt in their capital structure. This leads to firms favouring debt over equity (Grinblatt & Titman, 2002). Modigliani and Miller (1963) recognized this aspect and incorporated tax advantages of debt in their follow-up model. In literature and research over the years more assumptions were to be relaxed while still building on the original theoretical aspects of Modigliani and Miller (Amihud et al., 1990; Meyers, 1984; Shyam-Sunder & Meyers, 1999; Fisher et al., 1989).
2.2 Trade-off theory
Borrowing provides the firm with interest payments that are tax deductible. Therefore the optimal capital structure for a firm would consist entirely of debt. In this way after-tax cash flows are maximized and so is firm value. Furthermore, this policy would minimize the weighted-average cost of capital. In addition, using debt also decreases agency costs that can arise between managers and stockholders. When issuing debt, the firm is obliged to pay interest. This reduces the free cash flows of the firm to spend by managers. In this way managers are less likely to invest cash in projects that offer returns below the cost of capital or spend it on organization inefficiencies (Jensen, 1986).
However there are also disadvantages to borrowing. An example is that bondholders have to pay taxes on the interest they receive. This must be weighed against the taxation on the proceeds to equity holders. Taxes for equity holders are often less as they are taxed at the time capital gains are actually realized and are taxed at a lower rate (Brealy et al., 2004). Even more important are the potential costs of financial distress. These costs arise when a firm uses excessive debt and is prone to default on the payments to debt holders. The threat of bankruptcy and its impending costs are relevant even if the firm never defaults on its obligations (Grinblatt & Titman, 2002). Such bankruptcy costs can be divided into direct and indirect costs. Direct costs consist of the legal and administrative costs of bankruptcy. Indirect costs reflect the difficulties of running a company while it is going through bankruptcy, e.g. image problems, worried suppliers and diminished operating efficiency (Brealy et al., 2004). The probability for distress increases with leverage as the probability of defaulting is higher with large fixed payments obliged to debt holders. Investors factor the potential for future distress into their assessment of current value (Brealy et al., 2004).
or equity) against each other is an essential economic principle. In this way the trade-off theory can be interpreted in a broader way (Elsas & Florysiak, 2008).
Dynamic trade-off theories explain that this optimal debt ratio varies over time (in response to fluctuations in asset values). An optimal dynamic capital structure policy also depends on asset variability; the riskless interest rate and the size of the costs of recapitalizing (Fisher et al., 1989). Titman et al. (2001) argue that firms tend to make financing choices that move them toward target debt ratios that are consistent with trade-off models. Therefore trading off costs and benefits will determine the choice between issuing debt or equity. In the context of the dynamic trade-off theory this implies that financing decisions may vary over time and are affected by external shocks.
2.3 Pecking order theory
Another theory that explains a capital structure is what Donaldson (1961) called the pecking order of financing choices. According to the pecking order, the firm has no well-defined target debt-to-value ratio (Meyers, 1984). However, the firm does have specific preferences when financing investments. In summary (Brealy et al., 2004; Grinblatt & Titman, 2002; Frank & Goval, 2003):
1. Firms prefer to finance investments with retained earnings rather than external sources of funds
2. Because of their preference of internal finance, firms adapt their dividends policies to match their anticipated investment needs
3. If external finance is required firms issue straight debt first, next issue convertible bonds and issue equity only as a last resort.
The basic idea of this information asymmetry is that managers have more information about the firm than outside investors. Managers use private information to issue risky securities (debt and equity) when they believe they are over-priced (Meyers & Majluf, 1984). In the other way around, managers will be reluctant to issue stock when they believe their shares are undervalued (Grinblatt & Titman, 2002). Outside investors are aware of this asymmetric information problem and therefore discount new issues of risky securities. Because management will anticipate these discounts they are reluctant to finance investments with debt or equity. They will favour retained earnings, because no asymmetric information problem arises, or with low risk debt, for which the problem is negligible (Fama & French, 2002).
Alternative explanations can be found in managers and employees personally benefiting from having their firms unlevered (Grinblatt & Titman, 2002). Managers of low leveraged firms can more easily raise new capital and employees may have more job security. Therefore employees within the firm may prefer internal financing. During bad financial tides internal financing might even become more important. When investigating the financial crisis in the Asia Pacific region of 1997 Deesomsak et al. (2004) found that raising external capital became more costly because of higher risk premiums. Therefore during economic recession firms must rely more on internal financing and will worry more about retaining earnings and dividend policy.
Both the trade-off theory and the pecking order theory are tested numerous times. Because both theories do no not seem mutually exclusive (Beattie et al., 2006) the results are somewhat contradicting. Some authors argue that the pecking order theory best explains capital structure and financing decisions of firms (Meyers, 1984; Shyam-Sunder, 1999), others argue against it (Frank & Goval, 2003; Fama & French, 2005) and others find some support for both the trade-off theory and the pecking order of financing choices (Graham & Harvey, 2001; Beattie et al., 2006). A final theory that provides an explanation for the way in which firms finance their investments is called the market timing theory.
2.4 Market timing theory
firms will increase leverage after share price increases. Furthermore, it is contradictory to the pecking order which predicts that firms do not issue equity when they have excess debt capacity. Given the shortcomings of both theories the concept of market timing has become more important (DeAngelo et al, 2009). Market timing refers to firms issuing equity, when market prices are overpriced (Elsas & Florysiak, 2008). It proposes that managers can identify opportunities when issuing equity is less costly compared to other external financing such as straight debt or bonds. In practice, managers will issue shares at high prices and repurchase shares at low prices thereby exploiting fluctuations in the cost of equity (Baker & Wurgler, 2002). This of course benefits the current shareholders at the cost of the new shareholders.
Baker and Wurgler (2002) argue that in practice, market timing appears to be an important aspect of corporate financial policy. They provide evidence of different studies to support this conclusion. For instance, analysis of financial decisions show that firms tend to issue equity instead of debt when market values are high compared to book values and past market values. Besides this, analysis of long-run stock returns following financial decision actually show that market timing is successful on average. Their results show that market timing indeed has large persistent effects on financing decisions.
In a survey of 392 CFO’s conducted by Graham and Harvey (2001) managers actually admitted to conduct market timing practices. They found that earnings per share dilution and recent stock price appreciation are the most important factors influencing equity issuance. In essence, firms will be reluctant to issue common stock when they perceive that it is undervalued. However, as Gatchev et al. (2008) explain, market timing cannot completely explain equity issuance. DeAngelo et al. (2009) state that although market timing is statistically and economically significant it does not provide a stand-alone theory for stock issuance. In essence, they prove that while stock issuing firms often have market-timer characteristics (high market/book ratio, positive pre-offer abnormal returns) there also many firms within the same industry that have such characteristics but do not issue stock. DeAngelo et al. (2009) explain that the primary motive to issue stock is the short-term need for cash.
They conclude that when issuing debt managers are most concerned with financial flexibility and credit ratings. There is ample evidence that firms see financial flexibility as an important determinant in the financing decision (e.g. Gamba & Triantis, 2008; Graham & Harvey, 2001; Bancel & Mittoo, 2004). This is consistent with the theories explained earlier because financial flexibility diminishes the probability of financial distress and creates financial slack that helps to avoid the need for external financing.
2.5 Determinants of the financing decision
Using the literature and previous research explored above this section will define several variables that influence the financing decision of the firm. In addition, their influence on loan, debt and equity will be assessed. The micro-economic determinants used are: profitability, growth, size, tangibility and financial flexibility. Finally, to control for macro-economic effects the GDP growth for each country is included as well.
2.5.1 Profitability
According to trade-off theories highly profitable firms are more likely to issue debt. Profitable firms can carry larger amounts of debt without having to worry about financial distress costs. But profitable firms will also achieve high levels of retained earnings. Therefore internally generated funds are more likely to be sufficient to finance investments, which is consistent with the pecking-order theory of Meyers (1984). In general, past empirical research often supports the pecking-order theory (Fama & French, 2002; Elsas & Florysiak, 2008). Rajan and Zingales (1995) confirm that firms prefer to finance investments with internally generated funds. Their results further show that profitability is negatively correlated with leverage. Titman and Wessels (1988) also found that there is a negative relationship between profitability and debt levels. In my research, the firms investigated all need external financing and have a choice between issuing loan, debt or equity. Based on the past empirical research I will stick with the hypothesis that profitability is negatively related with issuing debt or loan. The proxy used for profitability is the ratio of net income to total assets.
2.5.2 Growth opportunities
growth opportunities stimulate issuing equity. An explanation can be found in that firms have a tendency to invest suboptimal in order to expropriate wealth from the firm's bondholders (Titman & Wessels, 1988). Informational asymmetries and debt agency costs are likely to increase with growth opportunities (Gatchev, 2008). With the trade-off theory in mind, firms that grow relatively fast will have higher costs of financial distress and should therefore use a greater amount of equity financing. Past empirical research often favours the explanation given by the static trade-off theory (Fama & French, 2005; Shyam-Sunder, 1999; Gatchev, 2008). As an indicator for growth opportunities we use the market to book value as suggested by Meyers (1984) and Rajan and Zingales (1995). As explained earlier the market timing theory also predicts that firms tend to issue equity instead of debt when market values are high compared to book values. Therefore, a positive relationship between growth opportunities and equity is expected.
2.5.3 Size
The size of a firm can also be related to the financing decision. For a start, larger firms are likely to issue larger amounts of external financing. Furthermore, Gatchev (2008) found that small firms, relative to large firms, issue more equity and less debt. This can be explained by larger firms being less prone to default or bankruptcy. New and smaller firms have a large probability of failure and have often less assets to pay out in case of failure. In contrast, large firms are more diversified, more transparent and receive more attention from analysts and rating agencies which reduces information asymmetry (Elsas & Florysiak, 2008; Titman & Wessels, 1988). Therefore costs of financial distress are lower, which reduces the costs of issuing debt. Overall, larger firms are able to carry more debt which is consistent with financing theory. Following Gatchev (2008) a logarithm of total assets will be used as a proxy for size.
2.5.4 Financial flexibility
theory in mind I therefore assume that financial flexibility is positively correlated with issuing debt or loan. In my thesis, financial flexibility is determined by dividing free cash flow by the total assets of each company.
2.5.5 Tangibility
One way to classify the assets of a firm is by tangible and intangible assets. The tangible assets of a company have a physical form, such as buildings, machineries and inventory. Examples of intangible assets are patents, trademarks and goodwill (Brealy et al., 2004). The asset structure of a firm influences its financing decision because tangible assets can be used to provide security to outside investors. This can be related to the problem of information asymmetry where managers have superior information about the financial state of the firm (Meyers & Majluf, 1984). The associated risk for external investors can be mitigated if tangible assets serve as collateral. As the costs of issuing debt will be reduced, debt financing becomes more interesting for a firm. Firms with large intangible assets will prefer equity, as intangible assets are difficult to use as collateral (Elsas & Florysiak, 2008). Previous research suggests that there indeed exists a positive relationship between tangibility and leverage (Rajan & Zingales, 1995; Elsas & Florysiak, 2008). Therefore, a positive relationship between tangibility and debt or loan issues can be expected. Tangibility will be measured as the ratio of net tangible assets to total assets.
2.5.6 Macro-economic determinants
In addition to the control variables defined above some macro-economic determinants can be added. Previous research showed that the industry and country in which a firm operates is related to its capital structure. Evidence exists that firms operating in the same industry have similar leverages (Elsas & Florysiak, 2008). An explanation for this phenomenon is that competition and product market environment varies across industries in a way that affects the optimal capital structure (Graham & Harvey, 2001). Besides this, Graham and Harvey (2001) explain that industry debt ratios are important for bond ratings. As explained earlier, these bond ratings are important for debt decisions. Therefore the industry in which a company operates might influence its financing decision.
such as most continental Europe, companies can more easily turn to banks for external capital and banks have a controlling role in overseeing the decisions of corporate managers. This can result in corporations being able to carry more debt. In a market-based system, such as Great Britain, companies must rely on the financial markets to provide capital. However, Thomsen (2003) argues that these corporate governance systems are increasingly converging. A more important aspect could be the association between the financing decision and the economic growth of a country. Dittmar and Dittmar (2008) have linked economic development to the financing decision. Their main statement is that financing decisions result from responses to economic stimulus, namely the growth in GDP. Dittmar and Dittmar (2008) explain that economic expansion reduces the cost of equity relative to the cost of debt. This induces firms to issue equity in times of economic growth. The growth in GDP is included as an indicator for economic development and a positive relationship with equity issuance is expected.
2.6 Impact of the financial crisis
My interest in this research lies not in empirically testing one of these theories once again. The intention is to achieve a better understanding of which factors affect a firm’s financing decision and how economic tiding influences corporate financing. As explained above, Dittmar and Dittmar (2008) have linked the economic situation to the financing decision. The variable GDP growth should provide some indication of the influence of economic conditions as economic growth is logically affected by the crisis. This section will explore the influence of the crisis on corporate financing in more detail.
Market timing theory predicts similar effects. In times of economic crisis firms will issue less equity as the stock markets will be suffering from a downturn (Reinhart & Rogoff, 2009). This also consistent with research conducted by Fama and French (2005) who found that firms under duress will not typically issue equity. This could be a reason for financial managers to prefer debt over equity during the financial crisis. Deesomsak et al. (1997) showed that as the costs for external financing increase during a crisis period firms will rely more on internal financing. Furthermore, Ellingsen and Vlachos (2009) explain that during the crisis the problems of asymmetric information in the credit market are probably magnified. According to the pecking order theory this also will increase a firm’s preference for internally generated funds.
In theory, firms can adapt their dividend policies to match their future investment needs (Grinblatt & Titman, 2002). But some comments must be made in this aspect. For a start, changing the dividend pay-out ratio may not be possible on short-term. In addition, dividend cuts send a negative signal about future cash flows and earnings to the firm’s investors (Brealy et al., 2004). Finally, decreasing dividends for a few years during recession may not be sufficient to generate enough earnings to finance future investments. Matching dividend pay-out ratios with anticipated investment needs is something that has to be considered over the long term. Therefore, during bad economic tides, firms may not generate enough internal funds to finance their investments or profit shortfalls. Forgoing profitable investments is obviously not a desired strategy and therefore financial slack is valuable for an organisation. Having enough cash, marketable securities and saleable assets readily available ensures that financing is accessible for good investments (Brealy, 2004). In addition, financial flexible firms are better able to avoid financial distress costs and have easier access to external financial markets. Therefore, it is expected that financial flexibility becomes more important during a crisis period.
while corporate bonds issuance is increasing (Hughes & Bullock, 2009). Lim (2003) also showed that large firms decrease the share of loans and turn to the bond markets to compensate this decrease in times of economic crisis. In this context, a shift in preference is expected as well. The hypothesis is that large firms will prefer debt over bank loans during a crisis period. On the contrary, firms that have high growth prospects are less constrained during the financial crisis (Campello et al., 2009). Therefore, it is expected that firms with growth opportunities will use more external financing during a crisis period. However, growth opportunities are measured by market-to-book value which is positively related with issuing equity. As the market value has decreased during the crisis period equity might be less preferred during the crisis period (Reinhart & Rogoff, 2009).
3. Methodology & data
Based on literature and previous research the previous chapter has identified several factors that may influence the financing decision. In addition, the possible impact of the financial crisis on the financing policy of a firm has been discussed. This chapter will present the methodology and data used to study these issues. The methods used will be set out in the following section. After this, the second part of this chapter contains a description and discussion of the data used in this research.
3.1 Methodology
This section sets out the methodology applied in my study. First, summary statistics on the loan, debt and equity issues will be developed in the data section. Differences and developments in firm issues will be presented, interpreted and statistically analyzed using independent t-tests and non-parametric tests. Subsequent, a regression analysis will be performed to analyze whether the chosen firm-specific and macro-economic factors have a significant influence on a particular issue. Regression methods are commonly used in previous research (Titman & Wessels, 1988). They have the advantage that the results can be easily interpreted and given the large data set it should provide reliable results. The method used in my thesis is the ordinary least squares regression (OLS). This method can be used to provide an estimated model of a linear relationship between an independent variable and a dependent variable (Newbold, 2003). The regression analysis will be executed with the statistical software SPSS and thereby using the following equations:
Model 1:
Loani,t = αi + β1 Profitabilityi,t + β2 Growthi,t + β3 Sizei,t + β4 Financial flexibilityi,t (4.1) + β5 Tangibilityi,t + β6 GDPi,t + β7 Crisis + β8 Industryi,t + β9 Yeari,t + εi,t
Debti,t = αi + β1 Profitabilityi,t + β2 Growthi,t + β3 Sizei,t + β4 Financial flexibilityi,t (4.2) + β5 Tangibilityi,t + β6 GDPi,t + β7 Crisis + β8 Industryi,t + β9 Yeari,t + εi,t
Where:
Loan/debt/equity issue = issue of firm i at time t
Profitability (e.g.) = the corresponding firm specific variable at time t GDP = GDP growth at time t for the country in which firm i is operating Crisis = dummy variable for an issue before or during the crisis
Industry = dummy variable for the industry in which a company is operating Year = dummy variable for the year in which an issue is placed.
α = the intercepts
β = the coefficients that are estimated for each variable ε = the random error term
The least squares procedure obtains estimates of the equation coefficients (β) which are calculated in such a way that the sum of the squared residuals is minimized (Newbold, 2003). These coefficients indicate the relationship between the dependent variable (the loan, debt, or equity issue) and the determinants (profitability, size, growth etc.). If an estimated coefficient deviates significantly from zero the null hypotheses can be rejected which beholds that the corresponding variable influences the issue. The main disadvantages of this method are that linear models are sensitive to outliers in the dataset and are limited in its shapes over long ranges (Newbold, 2003). The presence of outliers affects the accuracy of the estimates for the coefficients. This problem concerning outliers will be addressed in section 3.3.
In addition to the model presented above a second model will be constructed. This model will include several interaction variables to assess if certain firm-specific variables have a different influence on an issue before and during the crisis period. Therefore, binary variables are included for profitability, growth and financial flexibility that indicate whether an issue takes place before or during the crisis period. This results in the following regression analysis:
Model 2:
Loani,t = αi + β1 Profitabilityi,t + β2 Growthi,t + β3 Sizei,t + β4 Financial flexibilityi,t (4.4) + β5 Tangibilityi,t + β6 GDPi,t + β7 Industryi,t + β8 Yeari,t + β9 Profitability*Crisisi,t
Debti,t = αi + β1 Profitabilityi,t + β2 Growthi,t + β3 Sizei,t + β4 Financial flexibilityi,t (4.5) + β5 Tangibilityi,t + β6 GDPi,t + β7 Industryi,t + β8 Yeari,t + β9 Profitability*Crisisi,t
+ β10 Growth*Crisisi,t + β11 Financial flexibility*Crisis i,t + εi,t
Equityi,t = αi + β1 Profitabilityi,t + β2 Growthi,t + β3 Sizei,t + β4 Financial flexibilityi,t (4.6) + β5 Tangibilityi,t + β6 GDPi,t + β7 Industryi,t + β8 Yeari,t + β9 Profitability*Crisisi,t
+ β10 Growth*Crisisi,t + β11 Financial flexibility*Crisis i,t + εi,t
To analyze which determinants affect an issue during a financial crisis in more detail the dataset will be divided into three types of firms:
Firms that have issued debt, loan or equity before the crisis period (before crisis) Firms that have issued during the crisis period (crisis period)
Firms that have issued in both periods (both periods)
Using these samples separate regressions will be executed to assess whether the determinants have a different influence on the financing decision during the crisis period. Finally, logit regressions will be executed to determine which factors are important for a firm that wants to issue loan, debt or equity during the crisis period. These regressions include a binary variable for he firms that either issue before (0) or during the crisis period (1). These regressions will be executed using equations 4.1-4.3 (excluding the crisis dummy).
3.2 Data
not all company specific data could be extracted from Datastream, the observations with missing values were excluded from the sample. In total 245 observations were excluded which results in a final sample of 2357 issues conducted by 1036 different firms.
3.3 Descriptive statistics
The descriptive statistics of the data used are presented and interpreted in the following paragraphs. Table 3.1 and 3.2 will present summary statistics on the loan, debt and equity issues for the whole period as well as for several sub-periods. As the crisis started in 2007, the period 2007-2008 will be marked as the crisis period.
Table 3.1 Summary statistics in million $, sub-periods
Mean Median No. issues
Loan issues Before crisis (2002-2006): 2690,609 700,000 626 Crisis period (2007-2008): 4902,636 920,000 269 Whole sample (2002-2008): 3355,453 750,000 895 Debt issues Before crisis (2002-2006): 1057,256 425,207 363 Crisis period (2007-2008): 1048,943 637,647 120 Whole sample (2002-2008): 1055,190 473,985 483 Equity issues Before crisis (2002-2006): 383,319 93,920 636 Crisis period (2007-2008): 293,945 57,290 343 Whole sample (2002-2008): 352,006 77,820 979
Mean difference T-value Mann-Whitney U
Loan issues
Crisis period - Before crisis 2212,027 2,144** 70800,000***
Debt issues
Crisis period - Before crisis -8,313 -0,586 19264,000*
Equity issues
Crisis period - Before crisis -89,374 -4,198*** 85225,000***
Note: This table presents the summary statistics and the results of independent t-tests and non-parametric tests executed to statistically compare means and medians. The dependent variable is the
total value of an issue scaled by total assets. This value is winsorized at the 1st and 99th percentile. The
From table 3.1 we can conclude that loan issues are the largest with an average of 3,355 billion dollars. Further analysis shows that while equity is most issued, about 50% more than debt, the average equity issue has the lowest value. Some developments become obvious when comparing these sub-periods with each other. Loan and equity issues show large differences in average value before and during the crisis period. For instance, the average equity issue decreases more than 30% in value over the crisis period. On the contrary, the average loan issue is almost twice the size during the crisis period. The value of the average debt issue remains more or less the same over these two periods.
Statistical analysis confirms these observations. The average loan and equity issue before the crisis period differs significantly from the average issue during the crisis period. It can be concluded that average loan issue increases during the crisis period. On the contrary, the average equity issue decreases during the crisis period. The amounts of debt issued do not change significantly between these periods. This is contradicting with the contents of the articles published in the Financial Times which described a large increase in the use of debt and a decrease in the use of bank loans. However, these articles have focused on the year 2009 which is not included in this research. Still, the impact of the financial crisis on external financing used by firms is made evident in this analysis.
Table 3.2 Summary statistics in million $, sub-samples
Mean Median No. issues
Loan issues
Before crisis 2765,648 523,000 370 During crisis 2866,418 630,000 116 Both periods (before crisis) 2591,732 1000,000 256 Both periods (during crisis) 6446,434 1100,000 152
Debt issues
Before crisis 857,334 319,410 233 During crisis 610,134 425,954 48 Both periods (before crisis) 1415,576 841,385 131 Both periods (during crisis) 1341,482 678,254 71
Equity issues
Before crisis 332,773 85,079 514 During crisis 221,870 45,174 247 Both periods (before crisis) 596,274 109,910 122 Both periods (during crisis) 479,388 141,749 96
Mean difference T-value Mann-Whitney U
Loan issues
During crisis-before crisis 100,770 2,388** 14640,000*** Both periods (before crisis) - Before crisis -173,916 -0,244 36321,500*** Both periods (during crisis) - During crisis 3680,787 2,866** 6887,500*** Both periods (during crisis - before crisis) 3854,703 2,289** 18463,000
Debt issues
During crisis-before crisis -247,2 -0,951 5255,000 Both periods (before crisis) - Before crisis 558,242 3,357*** 10810,000*** Both periods (during crisis) - During crisis 731,348 3,256*** 1208,500*** Both periods (during crisis - before crisis) -74,094 -0,352 4665,000
Equity issues
During crisis-before crisis -110,903 -5,849*** 41565,000*** Both periods (before crisis) - Before crisis 263,501 1,653* 29162,000 Both periods (during crisis) - During crisis 257,518 3,476*** 7823,000*** Both periods (during crisis - before crisis) -116,886 -0,110 5567,500
Note: This table presents the summary statistics and the results of independent t-tests and non-parametric tests executed to statistically compare means and medians. The dependent variable is the
total value of an issue scaled by total assets. This value is winsorized at the 1st and 99th percentile. The
From table 3.2 it becomes clear that the firms that issue in both periods also issue the largest average amounts of debt and equity. This indicates that firm characteristics may differ between the subsamples and that these differences affect the use of external financing. This is confirmed by the statistical analysis which shows that that the average amount of debt and equity issued differs significantly between the samples. Furthermore, the statistics show that on average smaller amounts of debt and equity are used during the crisis period. On the contrary, the average loan issue increases during the crisis which is confirmed by statistical analysis. In addition, the average amount of equity decreases over the crisis period for the firms that issue only before or during the crisis.
Interpretation of the means and medians again show again that most firms issue small amounts and some firms issue large amounts thereby exerting a large influence on the average issue. The Mann-Whitney U test is used for assessing whether two samples of observations come from the same population (i.e. have the same median). The null hypothesis is that the central locations (median) of the two samples are identical (Newbold, 2003). The values presented in table 3.1 and 3.2 show that the various samples used in my thesis statistically differ from each other. Only the comparison between firms that issue equity before the crisis period shows no significant difference in median. Again these results points towards a significant influence of the economic tiding on loan, debt and equity issues.
Table 3.3 Descriptive statistics of control variables
Mean Median Micro-economic determinants: Profitability 0.008 0.033 Growth 2.936 1.860 Size 6.219 6.220 Financial flexibility 0.064 0.078 Tangibility 0.462 0.368 Macro-economic determinants: GDP growth 2.36 2.05
(with a maximum of 7.7% and a minimum of -1%) this data showed no particular outliers. To reduce the impact of outliers the data concerning the firm-specific variables will also be Winsorized at the 1st and 99th percentile.
Table 3.4 Correlation matrix
Profitability Growth Size Financial flexibility Tangibility GDP growth Profitability 1 Growth 0.001 1 Size 0.034 0.016 1 Financial flexibility 0.426** 0.019 0.033 1 Tangibility -0.099** -0.129** 0.049 -0.218** 1 GDP growth 0.044 -0.010 0.025 -0.022 0.155 1
4. Empirical results
In the following sections the results will be presented and interpreted. The first section covers the OLS regressions set out in the methodology section. In the second section the results of the logit regressions are exhibited and used to explore which factors influence the financing decision of a firm during a crisis period.
4.1 OLS regression analysis
This section will cover the outcome of the OLS regressions. These results are used to assess whether the determinants investigated have a significant influence the amount of loan, debt or equity issued. Furthermore, the influence of the crisis on these determinants will be reviewed.
Table 4.1 Results regression analysis
Note: This table presents the results of OLS regression. The total value of an issue is scaled by total assets. All regressions include year and industry effects. The value of an issue and the firm-specific variables are winsorized at the 1st and 99th percentile. The signals *, ** and *** denote statistical significance at the 1%, 5% and 10% level.
Model 1 Model 2
Loan Debt Equity Loan Debt Equity
The results of the OLS regressions will be discussed for each determinant and are presented in table 4.1 and 4.2. Regression analysis was also executed for firms that issue in both periods. However, these results show effects quite similar to the results for firms that issue in either period and are therefore exhibited in the appendix. In general, it can be concluded that most determinants show no opposite coefficients between debt and equity which is contradicting to previous research and theory. Furthermore, the crisis dummy shows a significant negative effect on an equity issue. This denotes that the financial crisis has affected the amount of equity issued negatively. In addition, there seems to be a small positive relationship between the crisis and the amount of loan and debt issued but this effect is not significant.
The results further show that the profitability of a firm has a significant negative effect on a debt issue. This beholds that as the profitability of a firm increases the amount of debt issued will decrease. The estimated coefficients are negative for loan and equity issues as well although not significant. In model 2, this negative relationship between profitability and equity becomes significant as well. This result is in line with the pecking order theory which predicts that profitable firms need less external financing. Furthermore, the negative effect found is larger for debt issues than for equity issues. This indicates that when profitable firms need external financing they will favour equity over debt. Profitability has a positive effect on the amount of equity issued by firms during the crisis period (model 2). Thus, profitable firms that want to use external financing during the crisis period have a preference for equity. Another viable explanation can be that outside investors that want to buy stock prefer to invest in profitable firms, especially during a period of economic crisis. From table 4.2 can further be concluded that profitability has a strong negative relationship with the amount of loan issued during the crisis period.
firms that have growth options before the economic crisis. The expectation discussed in section 2.6 was indeed that equity will be less used during a period of economic crisis. However, comparing the results of firms that issue either before or during the crisis does not confirm this observation. Table 4.2 also shows that the growth opportunities of a firm have a positive effect on the amount of external financing used and that this effect remains the same during the crisis period.
The results for firm size show a significant negative impact on the amount of external financing issued by a firm. This effect is out of the ordinary as one would expect larger firms to issue larger amounts of loan, debt and equity. Furthermore, this negative relationship is specifically large for loans which contradicts the prevailing hypothesis that larger firms should be able to carry larger amounts of loans and debt. It is expected that large firms use less external financing (and more internally generated funds) during the crisis period. While the results in table 4.2 confirm this idea there is no distinct difference between the two periods.
The theory predicts that financial flexibility should affect debt and loan issues positively and equity issues negatively. However, the estimated coefficient in model 2 merely shows that firms that are more financially flexible tend to issue larger amounts of equity. Conversely, there is a significant change of effect during the crisis period. During the crisis period financial flexibility has a positive relation with issuing loan and debt while the relationship with issuing equity becomes negative. These results are exactly in line with the expectations. Table 4.2 shows similar results. Financial flexible firms will therefore issue larger amounts of loans and debt during a crisis period than firms that are not financially flexible. Furthermore, the size of the effects is much larger during the crisis period. Thus, firms that issue loan and debt seem more concerned with their financial flexibility during a crisis period.
during the crisis period. Finally, the results in table 4.1 show that GDP growth does not have a significant impact on the financing decisions of the firms in the sample. From this last observation can be concluded that the economic situation and development of the country in which a firm is operating has no clear relationship with the amount of external financing needed. Furthermore, it does not impact the preferences for loan, debt or equity.
Table 4.2 Results regression analysis for firms that issue in either period
Before crisis During crisis
Loan Debt Equity Loan Debt Equity
Constant 7,151*** (1,432) 1,626*** (0,296) 0,886*** (0,174) 3,581 (3,192) 1,508** (0,721) 2,129*** (0,352) Profitability 1,650 (2,697) -1,517*** (0,569) -0,162 (0,177) -15,565** (7,277) 0,616 (1,664) 0,038 (0,314) Growth 0,144** (0,070) 0,036*** (0,011) 0,029*** (0,006) 0,331** (0,138) 0,018 (0,006) 0,030*** (0,010) Size -1,068*** (0,196) -0,253*** (0,039) -0,184*** (0,026) -0,786 (0,466) -0,329*** (0,094) -0,340*** (0,059) Financial flexibility -0,190 (2,021) -0,389 (0,522) 0,006 (0,204) 10,925*** (4,271) 0,668 (1,866) -0,516 (0,357) Tangibility 0,979 (0,887) 0,565*** (0,154) 0,673*** (0,048) 5,047*** (1,690) 1,075*** (0,312) 0,814*** (0,073) GDP growth -0,035 (0,095) -0,061*** (0,020) 0,008 (0,016) -0,085 (0,317) 0,001 (0,021) 0,059 (0,038) R2 0,152 0,371 0,538 0,251 0,423 0,621 Observations 370 233 514 116 48 247
Note: This table presents the results of OLS regression using a subsample of firms that issue either before or during the crisis period. The total value of an issue is scaled by total assets. All regressions include year and industry effects. The value of an issue and the firm-specific variables are winsorized
at the 1st and 99th percentile. The signals *, ** and *** denote statistical significance at the 1%, 5%
and 10% level.
4.2 Logit regression analysis
The results presented in table 4.3 show a significant positive relationship between the profitability of a firm and a loan, debt or equity issue during the crisis period. This denotes that as the profitability of a firm in the sample increases the odds of a loan, debt or equity issue during the crisis period increases as well. Therefore, these results indicate that profitable firms use more external financing during a crisis period than less profitable firms which is in line with the expectations discussed in section 2.6. The OLS regressions showed that profitable firms issue larger amounts of equity and smaller amounts of loan during the crisis period. Thus, it can be concluded that firms that do issue during a crisis period are likely to be profitable firms and that they prefer equity over loans and debt. The effect remains the same when the firms that issue in both periods are included in the analysis (table 4.4).
Table 4.3 Results logit regression for firms that issue in either period
Loan Debt Equity
Intercept 1,027 (1,271) -3,357 (2,196) 4,597*** (0,000) Profitability 13,851*** (3,086) 30,007*** (5,797) 3,074*** (0,000) Growth 0,247*** (0,058) 0,117 (0,077) 0,039* (0,096) Size -0,486*** (0,189) 0,186 (0,307) -0,900*** (0,000) Financial flexibility -4,145** (1,878) -12,052*** (4,874) -3,207*** (0,000) Tangibility 0,446 (0,759) 0,054 (0,002) 0,016 (0,926) GDP growth -0,119 (0,078) 0,386*** (0,118) -0,127** (0,036) R2 0.257 0.426 0.212 Observations 486 281 761
Note: This table presents the results of logit regressions using a subsample of firms that issue either before or during the crisis period. The dependent variable is a binary variable that takes the value of one when an issue takes place during the crisis period and zero otherwise. All regressions include
industry effects and firm-specific variables are winsorized at the 1st and 99th percentile. The signals *,
** and *** denote statistical significance at the 1%, 5% and 10% level.
showed that growth opportunities have a positive effect on the amount of external financing used during the crisis period. Overall, these results are consistent with the proposition that firms with growth prospects are less constrained during a financial crisis and will therefore use more external financing.
On the contrary, the size of a firm has a negative relationship with a loan or equity issue during the crisis period. As firm size increases the odds of a loan or equity issue during the crisis period therefore decreases. A possible explanation could be that larger firms want to avoid using external sources of financing during the crisis period. This would be in line with the results of the OLS regressions and the theory which explained that internal financing becomes more important during bad financial tides. We can speculate that larger firms may therefore have less need for loan and equity during the crisis period or that they are more constrained in the use of external financing. The alternative explanation is that large firms prefer to use debt in period of economic crisis. This idea is confirmed by the results presented in table 4.4 which show a positive relationship between size and a debt issue in the crisis period. The observation that large firms prefer debt over loans during a crisis period is consistent with the expectations discussed in section 2.6.
Based on previous literature I explained that financial flexibility creates financial slack that helps a firm to avoid using external sources of financing. In addition, a firm that is financially flexible can carry more debt and loan because the costs of financial distress are reduced. The OLS regressions proved that if financial flexible firms issue during a crisis period they will prefer loans and debt over equity. The results presented in table 4.3, however, show a significant negative effect on any issue during the crisis period. This effect remains the same when comparing it with the results in table 4.4. If financial flexibility increases the odds of an issue during the crisis period decreases. This denotes that financial flexible firms can avoid or have no need for external financing during bad economic tides. The financial flexible firms that do issue during the crisis period will issue larger amounts of loan and debt.
and reduces the cost of debt this observation is in line with theory. The firms operating in countries with GDP growth during the crisis period will use debt to finance their investments. The opposite is true for loan and equity issues. However, these results are difficult to interpret as GDP growth is contradicting to a country that is suffering from an economic crisis.
Table 4.4 Results logit regression for firms that issue in both periods
Loan Debt Equity
Intercept -1,260 (0,824) -7,500*** (1,568) 2,873*** (0,619) Profitability 13,226*** (2,148) 23,735*** (3,857) 3,098*** (0,700) Growth 0,164*** (0,041) 0,117*** (0,058) 0,058*** (0,021) Size 0,026 (0,114) 0,811*** (0,212) -0,567*** (0,098) Financial flexibility -5,253*** (1,428) -11,630*** (3,412) -3,369*** (0,772) Tangibility 0,093 (0,510) 1,385* (0,798) -0,024 (0,148) GDP growth -0,088* (0,053) 0,205** (0,087) -0,133*** (0,051) R2 0,152 0,286 0,142 Observations 895 483 806
Note: This table presents the results of logit regressions using a simple of firms that issue in both periods. The dependent variable is a binary variable that takes the value of one when an issue takes place during the crisis period and zero otherwise. All regressions include industry effects and firm-specific variables are winsorized at the 1st and 99th percentile. The signals *, ** and *** denote statistical significance at the 1%, 5% and 10% level.
5. Conclusions
Recent articles in the Financial Times indicated that the financing decision might by affected by the current economic crisis. The objective of this research was to analyze which factors influence the financing decision and to assess the influence of the global financial crisis. Based on financing theory and previous research the following six factors have been identified: profitability, growth, size, financial flexibility, tangibility and GDP growth. This chapter will sum up the most important findings of this research and will discuss some limitations.
From studying a sample of 1036 European firms that have issued loan, debt or equity can be concluded that the average amount of loan and equity issued during the crisis period differs significantly from the amounts issued before the crisis period. Firms use larger amounts of loans during the crisis period while at the same time equity is less used. The amount of debt issued remains the same over the two periods which is contradicting with previous research that found firms issuing more debt during the financial crisis. However, there seems to be a shift in preferences where firms prefer to use less equity during the crisis period. This decrease in the amounts of equity issued is predicted by market timing theory as stock prices are declining during the crisis which makes issuing debt less interesting for firms.
Further analysis indicates that differences between firms affect the amounts of external financing used. The use of external financing by firms that issue in both periods differs significantly from that of firms that issue only before or during the crisis. For instance, firms that issue in both periods issue by far the largest amounts of debt and equity. Analysis of the different subsamples again points towards a significant influence of the economic tiding on loan, debt and equity issues. On the other hand, GDP growth, which should provide an indication of the influence of economic conditions, did not impact the amounts of external financing used by firms nor their preference for loan, debt or equity. However, further analysis did show some effects of the economic crisis on the determinants of the financing decision.
financing during a crisis period. The results show that profitable firms use more external financing and have a distinct preference for equity during the crisis period. This is consistent with the proposition that profitable firms are in general more attractive to outside investors and have easier access to external financing. The growth opportunities of a firm influence the financing decision as well. Firms that have more growth opportunities will use larger amounts of loan, debt or equity. Furthermore, these firms are more likely to use external financing during the crisis period. The influence of this determinant on the amounts issued did not change over the crisis period. Furthermore, growth opportunities do not seem to influence a firm’s preference for loan, debt or equity.
The results concerning firm size indicate that large firms use less external financing. This effect is unexpected as it would be more logical that larger firms also issue larger amounts of loan, debt or equity. Furthermore, firm size is negatively correlated with a loan or equity issue during the crisis period. Theory predicted that this effect is caused by large firms avoiding external sources or being more constrained during the crisis period (see section 2.6). However, the results also show that larger firms prefer to use debt during the crisis period. In addition, financially flexible firms also avoid the use of external financing during bad economic tides. Financial flexible firms that do issue during the crisis period will prefer loan and debt which is in line with previous research. This influence is significantly different from before the crisis period as financially flexible firms will then prefer equity over loan and debt. In general, it can be concluded that firms that issue loan or debt are more concerned with financial flexibility when the issue takes place during the crisis period.
Finally, firms that have more tangible assets use larger amounts of external financing. Tangible firms further seem to have a preference for loans and debt during the crisis period. This indicates that tangible assets, which can serve as collateral and reduce the cost of external financing, are more important during the crisis period. Overall, from the above can be concluded that the financial crisis has had a distinct impact on the financing decision. In addition to the changes in the amounts of loan and equity issued its influence on several firm-specific factors became clear in this analysis.
5.1 Limitations
in this research. For instance, when earnings of a company are highly volatile and unstable over the time, it affects the ability to meet their obligations to debt holders. The probability to default on its payments, at a future point in time, increases and the cost of debt will also increase (Timan & Wessels, 1988). However, as I constructed my sample to only include the characteristics of a firm at the time of issuing volatility in earnings could not be calculated. Taking firm characteristics into account when firms are not issuing would have provided a better opportunity to compare which specific factors are important in an economic crisis. In this way I could have compared the preferences between loan, debt and equity before and during the crisis in a better way. In addition, some firms that issued only during the crisis period may not have existed during the period before the crisis. This may have influenced the differences between the two periods.
6. References
Amihud, Y., B. Lev & N.G. Travlos, 1990, Corporate control and the choice of investment financing: the case of corporate acquisitions, The Journal of Finance, Vol. 45 , No. 2, 603-616
Arslan, O., C. Florackis & A. Ozkan, 2008, How and why do firms establish financial flexibility?, SSRN working paper
Baker, M. & J. Wurgler, 2002, Market timing and capital structures, Journal of Finance, Vol. 57, No. 1, 1-32
Bancel, F. & U.R. Mittoo, 2004, Cross-country determinants of capital structure choice: A survey of European firms, Financial Management, Vol. 33, No. 4, 103-132
Beattie, V., A. Goodacre, S.J. Thomson, 2006, Corporate financing decisions: U.K. survey evidence, Journal of Business Finance & Accounting, Vol. 33, No. 9-10, 1402-1434
Brealey, R.A., S.C. Meyers & A.J. Marcus, 2004, Fundamentals of corporate finance, international edition, McGraw-Hill
Bullock, N., 2009, Corporate bonds at record levels, Financial Times, October 20
Campello, M., J. Graham & C. Harvey, 2009, The real effects of financial constraints: evidence from a financial crisis, NBER working paper 15552
DeAngelo, H., L. DeAngelo & R.M. Stulz, 2009, Seasoned Equity Offerings, market timing, and the corporate life cycle, Journal of Financial Economics
Deesomsak, R., K. Pauyal & G. Pescetto, 2004, The determinants of capital structure: evidence from the Asia Pacific region ,Journal of Multinational Financial Management, Vol.14, No. 4-5, 387-405
Dittmar, A.K & R.F. Dittmar, 2008, The timing of financing decisions: an examination of the correlation in financing waves, Journal of Financial Economics, Vol. 90, No. 1, 59-83
Donaldson, G., 1961, Corporate Debt Capacity: A Study of Corporate Debt Policy and the Determination of Corporate Debt Capacity, Boston, Division of Research, Harvard Graduate School of Business Administration
Ellingsen, T & J. Vlachos, 2009, Trade finance in a liquidity crisis, Policy research working parper 5136
Elsas, R. & D. Florysiak, 2008, Empirical Capital Structure Research: New Ideas, Recent Evidence, and Methodological Issues, Discussion Papers in Business Administration, Munich School of Management
Fama, E.F. & K.R. French, 2005, Financing decisions: who issues stock?, Journal of Financial Economics, Vol. 76, No. 3, 549-582
Frank, M.Z. & V.K. Goyal, 2003, Testing the pecking order theory of capital structure, Journal of Financial Economics, Vol. 67, 217-248
Fisher, E.O, R. Heinkel & R.Zechner, 1989, Dynamic capital structure choice: theory and tests, Journal of Finance, Vol. 44, No. 1, 19-40
Gamba, A. & A. Triantis, 2008, The value of Financial Flexibility, Journal of Finance, Vol. 63, No. 5, 2263-2296
Gatchev V.A., P.A. Spindt & V. Tarhan, 2009, How do firms finance their investments? The relative importance of equity issuance and debt contracting costs, Journal of Corporate
Finance, Vol. 15, No. 2, 179-195
Gorton, G.B., 2010, Questions and answers about the financial crisis, NBER working paper 15787
Graham, J.R. & C.R. Harvey, 2001, The theory and practice of corporate finance: Evidence from the field, Journal of Financial Economics, Vol. 60, 187–243
Grinblatt, M. & S. Titman, 2002, Financial markets and corporate strategy, second edition, McGraw-Hill
Hughes, J. & N. Bullock, 2009, Appetite for bonds surprises bankers, Financial Times, June 26
Jensen, M.C., 1986, Agency costs of free cash flow, corporate finance and takeovers, The American Economic Review, Vol. 76, No. 2, 323-329
Lex column, 2009, Bonding experience, Financial Times, October 14
Lim, Y., 2003, Sources of corporate financing and economic crisis in Korea: a micro-evidence, NBER working paper 9575
Modigliani, F., & M. Miller, 1958, The Cost of Capital, Corporation Finance and the Theory of Investment, American Economic Review, Vol. 48, No. 3, 261-297.
Modigliani, F., & M. Miller, 1963, Corporate Income Taxes and the Cost of Capital: A Correction, American Economic Review, Vol. 53, No. 3, 433-443.
Myers, S., 1984, The capital structure Puzzle, Journal of Finance, Vol. 39, No. 3, 575-592 Myers, S.C., & N. Majluf, 1984, Corporate financing and investment decisions when firms have information that investors do not have, Journal of Financial Economics, Vol. 13, No. 3, 187-221
