Emeni, francis kehinde aca faculty of management sciences university of benin. Capital structure theory asks what is the optimal composition between debt and equity. This paper develops a theory of capital structure in an international setting with corporate and personal taxes. The textile industry starting from yarn manufacturing industry spinning, cloth. The effect of capital structure on profitability of energy. International listing of assets in otherwise segmented markets directly integrates international capital markets by making these assets tradable. Capital structure that maximizes the value of company or stock prices is the best capital structure husnan and pudjiastuti, 1994. To explain why there are differences in the costs of capital across countries. International financial management eun resnick second edition chapter sixteen 16 international capital structure and the cost of capital chapter objective. The nedc risk has an inverse relationship with the ratio of debt in its total capital. The method of capital budgeting is quite similar for both a domestic company and an international company.
Financial theory would suggest that in an efficient global market the capital structure of identical firms in different nations would be the same. Taxes and capital structure journal of financial and. This chapter discusses the cost of capital for the multinational firm. Debt comes in the form of bond issues or longterm notes. The term capital structure refers to the percentage of capital money at work in a business by type. The capital structure is how a firm finances its overall operations and growth by using different sources of funds. The patterns of corporate capital structures around the world are also discussed. Cultural influences on international capital structure. Capital structure and international debt shifting european. International capital structure equilibrium hodder.
Capital structure is the mix of ownersupplied capital equity, reserves, surplus and borrowed capital bonds, loans that a firm uses to finance business operations. Capital structure formation in multinational and local companies in. A multinational perspective on capital structure choice and internal. The focus and considered from modigliani and miller. From a tactical perspective however, it influences everything from the firms risk profile, how easy. Bahadur institute of management sciences, university of mysore, india available online at. An international comparison of capital structure and debt. Each type of capital has its benefits and drawbacks, and a substantial part of wise corporate stewardship and management is attempting to find the perfect capital structure regarding riskreward payoff for. Capital structure of non public listed firms in the last financial crisis. What are variables that determine capital structure of pakistani firms. Capital structure and mncs capital structure refers to the amount of debt vs.
International capital structure differences among the g7 nations. Capital structure list of high impact articles ppts. Many studies have been conducted on the impact of various factors on international capital structure. Determinants of capital structure university of twente student theses. Capital structure choice is an important decision for a firm. Adapted from jeff madu ra, international financial management slides by yeetien ted fu17. Capital structure describes the mix of a firms longterm capital, which consists of a combination of debt and equity. We generalize the miller analysis to an international equilibrium characterized by differential international taxation and inflation in otherwise perfect international capital markets. The evaluation of the long term investment project is known as capital budgeting. Chapter 17 the cost of capital in an international context. Capital structure, leverage, panel data, static tradeoff theory, pecking order theory, firmspecific characteristics, industry effects and international. Aswath damodaran 3 the objective in decision making n in traditional corporate finance, the objective in decision making is to maximize the value of the firm. Chapter 17 the cost of capital in an international context the cost of capital is the cost of a mncs funds for a projectinvestment. Corporate finance this study examines the influence of institutional environment on capital structure and debt maturity choices by examining a crosssection of firms in 39 developed and developing countries.
International journal of business and management invention. Capital structure is a part of the financial structure and refers to the proportion of the various longterm sources of financing. It is very commonly known that the value of a firm can be maximized by minimizing its capital cost. The literature still reveals disagreement on the significance of the industry and country effects in determining capital structure, and the basis of country differences. International journal of business and social science vol. In integrated capital markets, on the other hand, the cost of capital will be determined by the securities world systematic risk, regardless of nationality.
Chapter iii concepts and theories of capital structure and profitability. The debt capital in a companys capital structure refers to borrowed money that is at work in the business. Capital structure describes the amount of debt a company uses as opposed to equity, and it is often measured with the ratio of debt to equity. From a technical perspective, the capital structure is defined as the careful balance between equity and debt that a business uses to finance its assets, daytoday operations, and future growth. Capital structure is still a puzzle among finance scholars. Suppose that your firm is operating in a segmented capital market. The capital structure is defined as the combine of debt and equity that the firm utilizes in its operation. This paper presents the results of a study of the debt structure of 677 firms in 9 industries headquartered in 23 countries. If a firm does not use debt in its capital structure, it has to face the risk arising out of nonemployment of debt capital. Thus, this study is expected to address this issue. International capital structure international 16 and the.
Generally, the tax advantages of debt finance lead the. A companys capital structure is arguably one of its most important choices. A17 2 chapter objectives to explain how corporate and country characteristics influence an mncs cost of capital. Capital structure is the important part of the business performance. The capital structure puzzle is unravelled and a clear picture is presented in terms of why capital structure matters. We find both corporate and personal income taxes to be significant determinants of capital structure. An international comparison of capital structure and debt maturity choices joseph p. Researchers have argued that if organizational theory is to be relevant to practitioners, emphasis should be placed on organizational effectiveness and its influencing factors 3640. Based on ex post observed summary statistics, across organisation for economic cooperation and development oecd countries, taxes appear to be as important as other traditional variables in explaining capital structure choices.
In 1958 they would have been shocked by the millermodigliani 1958 article, which informed the finance community that the value of a firm was invariant to capital structure. In segmented capital markets, the cost of capital will be determined essentially by the securities domestic systematic risks. Firms with nontradable assets essentially get a free ride from firms with tradable assets in the sense that the former indirectly benefit from international integration in terms of a lower cost of capital. Ii, issue 2,april 2011 171 capital structure and financial performance. Analyzing a companys capital structure investopedia. Once a company has reached a decision to invest abroad the next thing to do is to evaluate various projectsproposals. Empirical evidence from nigeria ogbulu, onyemachi maxwell. Higher risk tends to lower a stock price, but a higher expected return raises it. When the stock is traded and markets are viewed to be efficient, the objective is. What actions would you recommend to mitigate the negative effects. The more debt a company has, the more it has to pay creditors for the use of those funds. Capital structure denotes means a firm funds its operations using some blend of equity plus debt.
D dept of banking and finance abia state university uturu, nigeria. The cost depends on the health of the companys balance sheeta triple aaa rated firm can borrow at extremely low rates vs. In equilibrium, it also represents the required return on a projectinvestment. Pdf capital structure and firm financial performance.
Meaning of capital structure capital structure refer to the proportion between the various long term source of finance in the total capital of firm a financial manager choose that source of finance which include minimum risk as well as minimum cost of capital. Pdf the effects of capital structure on profitability. Prior to 1958, a cfo would have begun by concluding that there was an optimum capital structure the socalled classical position. Capital structure policy involves a tradeoff between risk and return. Trade off theory assumes that firms have one optimal debt ratio and firm trade off the. Empir ical work has unearthed some stylized facts on capital structure choice, but this evidence is largely based on firms in the united states, and it is not at all. Describe goals for international financial management.
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