seminar code
09-08-2014, 11:28 AM
Key factors influencing capital structure decision and its speed of adjustment of Thai listed real estate companies
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Abstract
This paper investigates the significant factors influencing capital structure decision of the listed real estate
companies and the speed of adjustment towards their target level. The study used homogeneous panel of 39 Thai
companies in real estate industry listed in the Stock Exchange of Thailand (SET) during the period 2002 to 2009.
The analysis employs multiple linear panel regression models in examining factors influencing capital structure
decision, as well as, dynamic panel regression model using one-step and two-step Arellano and Bond GMM
estimation methods in determining the speed of adjustment towards target capital structure. The findings indicate
that firm leverage is positively related to median industry leverage. Furthermore, firm size and growth
opportunities have positive relationship with firm leverage, whereas profitability and leverage are negatively
associated. Our results support pecking order theory as higher profitability firms tend to have less debt and firms
with higher growth opportunities tend to have greater leverage. Additionally, the study also discovers that real
estate companies partially adjust their capital structure towards the target level capital structure only at the rate of
63 percent.
Introduction
For any business organization, capital structure decision is one of the most important topics in
corporate finance. Appropriate capital structure decisions would increase firms’ value. According to
numerous researches, capital structure decisions are determined by a complex set of factors (Chen,
2004; Mazur, 2007; Bhabra, Liu & Tirtiroglu, 2008; Frank & Goyal, 2009; Getzmann, Lang &
Spremann, 2010). Bhabra, Lui and Tirtiroglu (2008) indicated that significant factors influencing
capital structure decision are proportion of tangible assets, size, profitability, and growth opportunities.
Furthermore, Frank and Goyal (2009) suggested that the reliable factors for explaining market leverage
are median industry leverage, market-to-book assets ratio, tangibility of assets, profits, log of assets and
expected inflation. The significant determinants of optimal capital structure have been disagreed over
decades of empirical studies. Specifically, what are the influential factors in determining how firms
Literature Review
Capital structure theories
To formulate a theoretical perspective for examining the keys factors influencing capital structures
decisions, the trade-off theory, the pecking order theory and the market timing theory contribute a
useful model [8]. Firstly, the trade-off theory was employed to clarify the fact that firms are regularly
financed partially with debt and partly with owner equity. This theory indicates that keeping the firm’s
investment plans and assets constant, a firm’s optimal leverage ratio is resolved by trading off between
the tax benefit and the disadvantages of debt. Using debt as a means of financing is attractive since the
benefits of tax saving from debt payments shields a number of costs debt financing. More profitable
firms could have higher benefits from debt financing and have lower level of financial distress costs.
Therefore, soaring profit firms should have higher level of leverage. Secondly, the pecking order theory
that was used to describe the sequence of firms’ financing decisions, where retained earnings have a
preference over debt and debt is favored over equity. Moreover, the firms prefer internal financing
over external finance. If the firms issue securities, the firms favor debt over equity. The interpretation
of this theory implies that profitability would be expected to explain the firm’s leverage level and more
profitable firms will have less leverage. Recently, the idea of market timing has become more popular
due to the fact that firms financial situation changes through time. This theory explains how firms
decide whether to finance their investment with debt or equity instruments. This theory indicates that
security issuance decisions are affected by managers’ ability to time the equity market. Firms prefer
equity when the relative cost of equity is low, and prefer debt otherwise. Therefore, stock markets
conditions would be expected to explain the
Research Methodology
This study uses data from separate financial statements including income statements and balance
sheets of 39 Thai listed real estate companies for the period 2002 – 2009, SET index and stocks market
value from the Stock Exchange of Thailand as well as inflation rate from the Bank of Thailand.
Result and Discussion
The empirical evidence as reported in table 3 indicates that significant factors influencing capital
structure decision include median industry leverage, profitability, firm size, and growth opportunity.
Specifically, firm leverage is positively related to industry leverage, firm size, and growth opportunity,
whereas profitability and leverage are negatively associated. Furthermore, the study also realizes that
real estate companies partially adjust their capital structure towards the target level capital structure
only at the rate of 63 percent.
The findings are considered to support pecking order theory as higher profitability firms tend to
have less debt and firms with higher growth opportunities tend to have greater leverage. Moreover, the
relationship of firm size to firm leverage is positive that is corresponding to the predicted sign by both
trade-off and pecking order theories
Conclusion
This paper analyzes, based on trade-off, pecking order, and market timing theories, factors
influencing capital structure decision and the speed of adjustment for the 39 listed real estate
companies in the Stock Exchange of Thailand. The findings contribute a piece to the capital structure
puzzle by supporting previous results of pecking order behavior in Asia.
The empirical analysis indicates that industry leverage and firm-specific factors are significant
factors influencing capital structure decision of Thai listed real estate companies, while macroeconomic
conditions and stock market condition are insignificantly associated to firm leverage. Additionally, they
partially adjust their capital structure towards the target leverage level.
[attachment=66788]
Abstract
This paper investigates the significant factors influencing capital structure decision of the listed real estate
companies and the speed of adjustment towards their target level. The study used homogeneous panel of 39 Thai
companies in real estate industry listed in the Stock Exchange of Thailand (SET) during the period 2002 to 2009.
The analysis employs multiple linear panel regression models in examining factors influencing capital structure
decision, as well as, dynamic panel regression model using one-step and two-step Arellano and Bond GMM
estimation methods in determining the speed of adjustment towards target capital structure. The findings indicate
that firm leverage is positively related to median industry leverage. Furthermore, firm size and growth
opportunities have positive relationship with firm leverage, whereas profitability and leverage are negatively
associated. Our results support pecking order theory as higher profitability firms tend to have less debt and firms
with higher growth opportunities tend to have greater leverage. Additionally, the study also discovers that real
estate companies partially adjust their capital structure towards the target level capital structure only at the rate of
63 percent.
Introduction
For any business organization, capital structure decision is one of the most important topics in
corporate finance. Appropriate capital structure decisions would increase firms’ value. According to
numerous researches, capital structure decisions are determined by a complex set of factors (Chen,
2004; Mazur, 2007; Bhabra, Liu & Tirtiroglu, 2008; Frank & Goyal, 2009; Getzmann, Lang &
Spremann, 2010). Bhabra, Lui and Tirtiroglu (2008) indicated that significant factors influencing
capital structure decision are proportion of tangible assets, size, profitability, and growth opportunities.
Furthermore, Frank and Goyal (2009) suggested that the reliable factors for explaining market leverage
are median industry leverage, market-to-book assets ratio, tangibility of assets, profits, log of assets and
expected inflation. The significant determinants of optimal capital structure have been disagreed over
decades of empirical studies. Specifically, what are the influential factors in determining how firms
Literature Review
Capital structure theories
To formulate a theoretical perspective for examining the keys factors influencing capital structures
decisions, the trade-off theory, the pecking order theory and the market timing theory contribute a
useful model [8]. Firstly, the trade-off theory was employed to clarify the fact that firms are regularly
financed partially with debt and partly with owner equity. This theory indicates that keeping the firm’s
investment plans and assets constant, a firm’s optimal leverage ratio is resolved by trading off between
the tax benefit and the disadvantages of debt. Using debt as a means of financing is attractive since the
benefits of tax saving from debt payments shields a number of costs debt financing. More profitable
firms could have higher benefits from debt financing and have lower level of financial distress costs.
Therefore, soaring profit firms should have higher level of leverage. Secondly, the pecking order theory
that was used to describe the sequence of firms’ financing decisions, where retained earnings have a
preference over debt and debt is favored over equity. Moreover, the firms prefer internal financing
over external finance. If the firms issue securities, the firms favor debt over equity. The interpretation
of this theory implies that profitability would be expected to explain the firm’s leverage level and more
profitable firms will have less leverage. Recently, the idea of market timing has become more popular
due to the fact that firms financial situation changes through time. This theory explains how firms
decide whether to finance their investment with debt or equity instruments. This theory indicates that
security issuance decisions are affected by managers’ ability to time the equity market. Firms prefer
equity when the relative cost of equity is low, and prefer debt otherwise. Therefore, stock markets
conditions would be expected to explain the
Research Methodology
This study uses data from separate financial statements including income statements and balance
sheets of 39 Thai listed real estate companies for the period 2002 – 2009, SET index and stocks market
value from the Stock Exchange of Thailand as well as inflation rate from the Bank of Thailand.
Result and Discussion
The empirical evidence as reported in table 3 indicates that significant factors influencing capital
structure decision include median industry leverage, profitability, firm size, and growth opportunity.
Specifically, firm leverage is positively related to industry leverage, firm size, and growth opportunity,
whereas profitability and leverage are negatively associated. Furthermore, the study also realizes that
real estate companies partially adjust their capital structure towards the target level capital structure
only at the rate of 63 percent.
The findings are considered to support pecking order theory as higher profitability firms tend to
have less debt and firms with higher growth opportunities tend to have greater leverage. Moreover, the
relationship of firm size to firm leverage is positive that is corresponding to the predicted sign by both
trade-off and pecking order theories
Conclusion
This paper analyzes, based on trade-off, pecking order, and market timing theories, factors
influencing capital structure decision and the speed of adjustment for the 39 listed real estate
companies in the Stock Exchange of Thailand. The findings contribute a piece to the capital structure
puzzle by supporting previous results of pecking order behavior in Asia.
The empirical analysis indicates that industry leverage and firm-specific factors are significant
factors influencing capital structure decision of Thai listed real estate companies, while macroeconomic
conditions and stock market condition are insignificantly associated to firm leverage. Additionally, they
partially adjust their capital structure towards the target leverage level.