Elmar Puntaier:
Capital Structure and Profitability: S&P 500 Enterprises in the Light of the 2008 Financial Crisis - neues Buch
2008, ISBN: 9783836643917
Inhaltsangabe:Introduction: General Definition and Justification of Issues and Objectives: The publication of the Modigliani and Miller (MM) capital structure irrelevance theorem in 1958 … Mehr…
Inhaltsangabe:Introduction: General Definition and Justification of Issues and Objectives: The publication of the Modigliani and Miller (MM) capital structure irrelevance theorem in 1958 and the subsequent preference of purely debt financing due to tax advantages in 1963, was in contradiction to traditional approaches which suggested an optimal capital structure. Meanwhile the theories of MM are academically accepted and out of competition with other approaches, since the underlying assumptions, especially the existence of perfect capital markets, is considered as unreal. However, in every economic boom, when access to capital becomes easier, financial markets seem to come close to the conditions of perfect markets, characterised by high competition and prosperity. It is found that the western economic order is marked by asset bubbles that resulted in over one hundred crises over the last three decades and which bring companies back to reality with a hard landing. Access to capital becomes extremely restricted and uncertainty dominates as the collapse of Lehman Brothers in September 2008 showed. Although signs were evident in 2007, the change from prosperity to depression can come overnight, where free market policy shows its true face, with unpredictable damages deeply wounding in the economy, and seeming to paralyse even the most experienced economists. Since liquidity becomes a scarce resource and consumption declines, free cash flows that were previously available to finance an amply corporate structure, dividends and bonuses, are likely to fall. As debt, if any, must still be paid back ¿ often to worse conditions than before ¿ corporations might run out of liquidity, as has happened to major US companies during the last twelve months. Also, investments that ought to ensure future profits are likely to be reduced or to come to a still stand, sending firms and the economy in a downward spiral. However, as experienced and predicted by Copeland and Greenspan, systematic organisations which are considered as ¿too-big-to-fail¿ are offered bail-outs at the cost of society. This work aims to investigate the impact of the capital structure on the profitability of large capitalised US companies. It does not, therefore, aim to test existing theories, nor does it try to find a model to predict one or another capital structure, since numerous attempts have previously been made that have so far struggled to capture the full complexity of the real world. Rather, it focuses on correlations between capital structure and profitability and major profitability-associated measures that can have an impact on a firm¿s survival, i.e. liquidity, dividends, investments and the impact of an industry-related target gearing ratio as a potential systematic risk. Thus, this work is supposed to contribute to the understanding of how resistant companies are to financial distress, and it provides evidence on the extent to which vulnerability can be reduced to prevent major systemic crises by means of their capital structure adjustments through the awareness of shareholders and corporate governors. Research Questions and Methodology: The basis of this research project is a selection of secondary performance data over the period from 2004 to 2008 of firms listed in the Standard & Poor¿s 500 index (S&P 500) in January 2004. The index represents the 500 largest capitalised US companies among ten sectors that reflect the whole US market. The combination of the US market and the S&P 500 companies, who have access to the widest range of financial sources, is expected to give a highly reliable result to find empirical evidence for the following research questions. Question 1. According to the MM theorem and the pecking order theory that relies on information asymmetry between insiders and investors, leverage should not depend on the industry a firm is in. However, evidence suggests that firms in different industries operate with different capital structures. Thus, the first hypothesis (H1) is to verify whether industry-specific leverage exists. Question 2. Since revenues are likely to decrease in an economic downturn, this reduces a firm¿s ability to meet debt payments, which is expected to have a negative impact on profitability. The second and central hypothesis (H2) is, therefore, that a negative correlation between gearing ratio and profitability exists, i.e. higher geared firms are less profitable. As this research question is the centre of attention, it merits a deeper investigation than all other hypotheses, especially for the years 2007 and 2008. Question 3. Most of the companies are affected by financial distress, not because they are not unprofitable, but because they have no liquidity. If cash inflows decline, firms are likely to be unable to finance current expenses, including the interests on debt. Hence, the third hypothesis (H3) is the existence of a correlation between gearing ratio and liquidity. Higher geared firms are supposed to have lower cash positions, especially in 2008. Question 4. Investments in R&D are crucial for survival and competitiveness of firms within some industries. Since higher geared firms must concentrate more to the avoidance of financial distress, they may tend to reduce expenses in long-term R&D projects that have no immediate effects. The aim of the fourth hypothesis (H4) is to prove whether a correlation between gearing ratio and R&D expenditure exists, especially in 2008, that is expected to have a negative influence on future profits. Question 5. Highly geared companies are encouraged to pay out higher dividends by transferring wealth from bondholders to shareholders, although managers should have an incentive to reduce them if liquidity becomes a scarce resource. The fifth hypothesis (H5) is, therefore, to find evidence of the existence of a correlation between gearing ratio and dividend policy, especially in 2008. Overview and Organisation of Chapters: This dissertation is organised into seven sections, each with a brief statement at the beginning and the end of the issues previously and subsequently discussed. Although this might seem repetitious, it enables the reader to go through in multiple sessions. The following few paragraphs give an outline of the next six sections. After the introduction and definition of the above stated research questions, section 2 attempts to review the existing literature on capital structure with a discussion of the main theories, after which a more detailed focus on the fields in respect of the research questions is provided. Section 3 discusses and justifies the methodology used to answer the research questions, which refers to data sampling and data collection, the treatment of missing values, the variables defined and applied hypothesis testing methods. Section 4 outlines the key findings in respect of the hypotheses initially stated, which are then analysed and discussed. Where appropriate, the results found are related to the most relevant findings discussed in the literature review. Section 5 recalls the research objectives and findings previously obtained. After that, it concludes with the underlying assumptions required for the implications drawn from those findings, which are part of the next section. Section 6 attempts to identify management implications and recommendations to solve the issues. Based on the results revealed from the sample, it aims to identify measures in reducing vulnerability and systematic risk in order to achieve sustainable economic growth without adverse effects for society. Section 7 points to the achievement of the objectives of this study, its strengths and weaknesses. Ultimately it gives insights to the personal development drawn from the execution of this research project with reference to difficulties faced.Inhaltsverzeichnis:Table of Contents: Abbreviations4 Acknowledgements5 Abstract6 1.Introduction7 1.1GENERAL DEFINITION AND JUSTIFICATION OF ISSUES AND OBJECTIVES7 1.2RESEARCH QUESTIONS AND METHODOLOGY9 1.3OVERVIEW AND ORGANISATION OF CHAPTERS10 2.Existing Theories and their Predictions12 2.1EXISTING THEORIES12 2.1.1The Trade-Off Theory14 2.1.2The Pecking Order Theory18 2.2PREDICTIONS OF EXISTING THEORIES21 2.2.1Capital Structure and Industry21 2.2.2Capital Structure and Profitability24 2.2.3Capital Structure and Liquidity27 2.2.4Capital Structure, R&D and Tangible Assets28 2.2.5Capital Structure and Dividend Policy30 2.3A FINAL COMMENT32 3.Methodology34 3.1DATA SAMPLING34 3.2DATA COLLECTION35 3.2.1Missing Values and Adjustments36 3.3VARIABLES AND THEIR DEFINITIONS37 3.3.1Leverage and Gearing37 3.3.2Profits and Return39 3.4HYPOTHESES AND HYPOTHESES TESTING39 3.4.1H1: Capital Structure and Industry40 3.4.2H2: Capital Structure and Profitability41 3.4.3H3, H4 and H5: Capital Structure, Liquidity, R&D and Dividend Policy42 4.Findings and Analysis44 4.1H1: THE IMPACT OF INDUSTRY ON CAPITAL STRUCTURE AND ASSOCIATED VARIABLES44 4.2H2: THE EXISTENCE OF A CORRELATION BETWEEN LEVERAGE AND ROCE54 4.3H3: THE EXISTENCE OF A CORRELATION BETWEEN LEVERAGE AND LIQUIDITY59 4.4H4: THE EXISTENCE OF A CORRELATION BETWEEN LEVERAGE AND R&D62 4.5H5: THE EXISTENCE OF A CORRELATION BETWEEN LEVERAGE AND DIVIDENDS66 5.Conclusions71 5.1CAPITAL STRUCTURE71 5.2PROFITABILITY72 5.3LIQUIDITY72 5.4INVESTMENTS73 5.5DIVIDENDS74 6.Recommendations76 7.Reflections80 7.1OBJECTIVES80 7.2STRENGTHS81 7.3WEAKNESSES AND LIMITATIONS81 7.4PERSONAL DEVELOPMENT83 Bibliography84 Appendix AS&P 500 industries, January 2004 and June 200991 Appendix BMissing values of dead firms, based on balance-sheet records92 Appendix CSignificant year-by-year correlations of core factors with Gearing 293 Appendix DIndependent t-test of delisted and non-delisted firms94 Appendix EIndependent t-test of the ten lowest and highest geared firms95 Appendix FIndependent t-test of the ten less and most profitable firms105 Appendix GMann-Whitney test of the ten lowest and highest geared firms115Textprobe:Text Sample: Chapter 2.2.5, Capital Structure and Dividend Policy: Shareholders expect a return on their investments, either in the form of an increase in share prices or through dividends for placing equity at the disposal of a business. Since some organisations, such as pension funds and charities, periodically require revenues, dividends might be preferred that also reduces transaction costs. This reality might be overseen in the simplified MM argument of 1961, according to which, dividend policy does not matter in perfect markets. Dividend announcements, due to information that they contain, influence stock prices and thus the market value of a firm which has an impact on equity issues, according to the pecking order. This concept was approved by Asquith and Mullins on a sample of 168 publicly listed US companies from 1964 to 1980, who began to pay dividends. Also Baskin argues that ¿[d]ividends provide signals both to current and future earnings¿ and found that higher dividend payments in 1965 resulted in considerably higher debt levels in 1972. He (ibid.:31) observed that the level of dividend payouts is rather stable, since ¿[s]erial correlation after twelve years is 0.714 and amounts to about 50% explained variance¿. In contrast, Antoniou et al. find a negative correlation of gearing and dividend payments for US firms only, while Lintner argues that dividends depend on profits and successful investment strategies that allow a stable compensation for shareholders. Also Rozeff argues that more investment opportunities lead to lower dividend payout ratios that, however, do not reduce agency costs, which are offset by higher transaction costs for debt issuance. Thus, according to the pecking order theory, dividends contain information about the future that makes dividend policy a ¿sticky¿ subject, ¿while capital spending varies over the business cycle¿ that increases debt levels. According to Baskin, ¿the need to adhere to stable dividend policy appears to be much stronger than those motivating adherence to some statically defined optimal capital structure.¿ In a severe downturn, however, where profits and financial resources shrink, it is worth questioning whether a firm should stick with dividend policy or would be better selling undervalued assets to generate liquidity. An observation made by Graham is that ¿dividend-paying firms issue debt more conservatively than do non-dividend-paying firms, even though they presumably have less severe informational problems.¿ This implies higher leverage for non-dividend-payers as is confirmed by Frank and Goyal. Thus, firms who pay dividends do not only have less interests to pay, but would also be able to reduce dividend payments in bad times and thus are able to avoid financial distress, while for them it is easier to continue investments. Another explanation is that non-dividend-payers have more growth opportunities, requiring new investments that are leveraged with external debt, while mature firms do not always have the possibility to invest in profitable projects. Baskin states that ¿an increase in equity issues necessarily results in greater dividends, and greater dividends in turn give rise to a larger burden of personal taxation.¿ As a result, investors would prefer lower dividends in favour of faster growing share prices. While young firms with large growth potential do not have these problems with free cash flows, rational investors of mature firms expect dividends to avoid over-investment. Also large firms, who generally pay higher dividends, tend to expand more slowly than small ones, as observed by Baskin, which implies higher dividend payouts. Capital Structure and Profitability: S&P 500 Enterprises in the Light of the 2008 Financial Crisis: Inhaltsangabe:Introduction: General Definition and Justification of Issues and Objectives: The publication of the Modigliani and Miller (MM) capital structure irrelevance theorem in 1958 and the subsequent preference of purely debt financing due to tax advantages in 1963, was in contradiction to traditional approaches which suggested an optimal capital structure. Meanwhile the theories of MM are academically accepted and out of competition with other approaches, since the underlying assumptions, especially the existence of perfect capital markets, is considered as unreal. However, in every economic boom, when access to c, Diplomica Verlag<
