Corporate finance literature suggests that the capital structure decision has played a pivotal role over the years in driving the establishment and growth of firms. There is also a body of evidence that financial markets take a keen interest in firm performance, especially for those listed on the stock exchange. There is no empirical evidence that there is a causal relationship between capital structure and the firm’s performance despite the importance of the two concepts in corporate finance.This study uses the debt/equity ratio as a proxy for capital structure and a selected few financial ratios to represent attributes of firm performance (e.g. profitability and shareholder value) in investigating the relationship between the two in the South African context.The results based on stock exchange data as input are inconclusive but they lay a foundation for potential future research. Interesting insights are drawn from using some limitations identified in the literature to try and explain why the results are the way that they are. / Dissertation (MBA)--University of Pretoria, 2010. / Gordon Institute of Business Science (GIBS) / unrestricted

Rights issues are an area of much interest and research globally. With the last significant local study on the topic conducted in 2005, this paper updates the findings based on more recent data. This is also the first study to explore the impact that the company’s financial position has on the share price reaction to the announcement. The study was conducted by analysing rights issue announcements occurring on the JSE between 1st January 2001 and 31st December 2010. 35 events were used in this study since they met the criteria for clean measurement. A standard event study methodology was used. Abnormal returns were measured through both the market model and control portfolio, with the Altman Z Score utilised as a measure of the issuers’ financial position. Statistical analysis was conducted throughout to confirm significance. Average Abnormal Returns of -2.33% and -3.30% were found on the day of the announcement, depending on the model used, and Cumulative Average Abnormal Returns (CAARs) for five days post the announcement were between -5% and -6%. Of most interest, share price reactions were found to differ, with statistical significance, according to the financial position of the issuer. Companies categorised as healthy recovered from the initial decline to a CAAR of less than -1% twenty days post the announcement. In contrast companies categorised as unhealthy and in the grey zone suffered CAARs after the same period of -9.17% and -8.06% respectively. The conclusion of the study is that the well-researched share price decline on the announcement of a rights issue persists, but that this reaction is significantly worse for companies in a poor financial position, as measured by their Altman Z Score. / Dissertation (MBA)--University of Pretoria, 2012. / Gordon Institute of Business Science (GIBS) / unrestricted

The increasing importance of economic contributions of small and medium-sized sized enterprises (SMEs) around the world, especially in developing countries, motivated a better understanding of financial practices among SMEs. Financial support is among the factors affecting the success of SMEs. However, studies on the financial practices among successful SMEs in Malaysia are still limited. An understanding of the financial practices of this particular group of SMEs is essential in developing a supportive financial framework to achieve national agenda for improving SMEs sustainability and increasing the overall SMEs’ contributions to the Malaysian economy. This research investigates the financial practices among successful SMEs in Malaysia based on the list of Enterprise 50 award winners from 1998 to 2010. This specific database was chosen to serve the objective of this study. Investigations into SME managers’ level of preferences for various sources of financing, and their firms’ capital structure, are the main scope of financial practices under study. Electronic surveys among 444 SMEs were conducted with 120 responses, yielding a response rate of 29.6%. The results of analyses revealed that retained earnings and banking institutions were the most preferred sources of internal and external financing among SMEs managers. Generally, successful SMEs depend more on debt over equity-sources of financing with Debt-to-Equity ratio (DER) of 57 to 43. Furthermore, managers’ ownership status, highest level of education and level of experience are found to have a statistically significant association with their level of financing preferences. On the other hand, non-debt tax shields, tangibility and liquidity were found to have a statistically significant relationship with a firm’s capital structure. Managers’ levels of financing preferences were also found to be significantly associated with the proportion of their firm’s capital structure. Multivariate analyses revealed that managers’ levels of financing preferences were explained by their ownership status, highest level of education and level of experience, while the proportions of a firm’s capital structure are significantly explained by the manager’s levels of financing preferences. Finally, firms’ capital structures were found to be influenced by non-debt tax shields, tangibility and liquidity. This research enhances the existing body of knowledge of the financial practices of successful SME in Malaysia, by providing information on managers’ level of financing preferences and firms’ capital structure. This is the first study to focus on investigating the level of financing preferences among managers of SMEs in Malaysia. In addition, the firm’s capital structure was also investigated. This new knowledge will improve understanding and will enable further enhancement of knowledge in this area of financial practices among successful small businesses, in general, and particularly in the case of Malaysian SMEs.

This dissertation contains two essays on the aggressive behavior of corporations in product market competition. In the first essay, I investigate how market structure can impact a firm's risk of facing predation by rivals, and hence, its financial policy decisions. Using a simple model, I demonstrate that a firm faces a greater predation threat when it meets the same competitor in many markets, as this competitor is able to internalize more of the benefit, degrading the firm's ability to compete in the future through aggressive actions today. I then test the predictions of the model using 2003-2011 panel data on store location across retail store chains in the US. I find that firms tend to expand more aggressively in markets shared with a competitor experiencing a substantial increase in leverage, or a decline in a credit rating, when they face that competitor in more of the other markets. The expansion relationship was found to be stronger in data from the 2008-2009 financial crisis, a period when difficulty in rolling over or obtaining new debt made it especially hard for weak firms to absorb losses. I also show that a firm facing the same competitors in many markets choose lower levels of leverage and that it decreases that leverage when a merger in the industry increases the amount of competitive overlap it has with other firms. These results suggest that firms are aware of the predation risk due to a competitive overlap and select financial policies to minimize this risk. In the second essay, I study the impact of internally generated funds on product market competition. More specifically, I investigate the idea that firms compete aggressively when their competitors face cash flow shortfalls. Testing this idea is challenging because competitor's cash flow changes are potentially endogenous with respect to firm's behavior. I address this problem in three ways. First, I investigate firm's reaction in a given market when its competitors face cash flow shortfalls outside of that market; this analysis is conducted using store location data on retail store chains. Second, I focus on the 2008-2009 financial crisis period in which retail store chains were hit by a negative demand shock which was hardly expected ex ante. Finally, I use a shock to local economic conditions which varies across markets and the different distributions of store locations across firms as instruments for the changes in competitors' cash flows. I find that a firm expands more in a given market in which it competes with rivals which face a more negative cash flow shortfall in the other markets. This relation is stronger when the competitors were highly leveraged before the crisis. Finally, I illustrate evidence that a firm responds more aggressively to competitor's cash flow shortfalls if it competes with that competitor in many of the same markets; this result is consistent with the prediction of the model in Chapter 1. These essays contribute to the literature by adding new evidence on the predatory behavior of corporations in product market competition. / text

In the first chapter of this dissertation, I hypothesize that several non-tax-driven benefits of debt induce REITs managers to issue debt despite no apparent tax-driven benefit. Several methodologies and tests applied in capital structure literature are introduced to the literature of REITs capital structure. First, I investigate how the market prices leverage in absence of tax-deductibility benefit. Then, I diagnose the relative importance of several non-tax-driven benefits of leverage in deriving the capital structure decisions of REITs. Third, I conduct a thought investment experiment with debt-restricted vs. non-restricted REITs portfolios. I find weak evidence that leverage, by itself, creates value. Nevertheless, I find strong evidence that during financial crisis debt-restricted REITs perform better than non-restricted ones. Also I find evidence that lends support to the pecking order story of leverage. I conclude that REITs managers issue debt mainly to avoid issuing equity and to maximize wealth of existing shareholders. The second chapter addresses corporate diversification discount. I present and test a hypothesis that diversifiers exchange immediate diversification discount with future value gain attributed to unanticipated financial and strategic advantages of diversification. Two implications of this hypothesis are tested in this dissertation. First, the initial diversification discount found in static methodologies should be attenuated in a dynamic analysis. Second, diversifier's value evolution patterns are driven by the materialization of certain financial and strategic efficiencies. The overall results indicate that there is value recovery over time. Diversifiers' performance and value evolution is dynamically linked to synchronous improvements in market power, internal capital market activities, and cost efficiencies. Further, consistent with current evidence in diversification literature, related diversifiers outperform unrelated diversifiers. Moreover, related diversifiers witness faster value recovery relative to unrelated diversifiers.

This study examines the influence of working capital management components on the profitability of South African firms listed on the Johannesburg Stock Exchange (“JSE”). In addition, the study investigates how the influence of the selected working capital management components changes as macroeconomic conditions change. The study used accounting based secondary data obtained from I-Net Bridge and BF McGregor for 254 firms from 2004 to 2010. The Pooled Ordinary Least Squares (“OLS”) regression models were used in the analyses. The key findings from the study indicate the following: (1) that there exists a significant negative relationship between the net time interval between actual cash expenditures on a firm‟s purchase of productive resources and the ultimate recovery of cash receipts from product sales (cash conversion cycle) and profitability. This negative relationship suggests that managers can create value for the shareholders of the firm by reducing the cash conversion cycle; (2) that there exists a significant negative relationship between days sales in receivables and profitability. This indicates that slow collection of accounts receivables is associated with low profitability and suggests that corporate managers can improve profitability by reducing credit period granted to their customers; (3) that an increase in the length of a firm‟s cash (operating) cycle tends to increase profitability during an economic recession than during an economic boom. This result indicates that firms adopt a more generous trade credit policy during an economic recession than during a boom in an attempt to boost sales which would ordinarily dwindle during a recession. The implication of this positive relationship in comparison with a negative relationship between the normal cash conversion cycle and profitability is that corporate managers need to streamline their trade credit policy and change it accordingly as the macroeconomic environment changes in ensuring that the company‟s sales are not adversely impacted as economic conditions change. Furthermore, the study finds that there exists a highly significant negative relationship between profitability and the following respective ratios: days payables outstanding, current ratio, and capital structure. The negative relationship found between profitability and debt to equity ratio (used as a proxy for capital structure) indicates that South African firms‟ profitability tends to decrease at excessively high and increasing levels of debt.

Thesis (M.M. (Finance & Investment))--University of the Witwatersrand, Faculty of Commerce, Law and Management, Graduate School of Business Administration, 2012. / This study analyses data for the top ten listed real-estate firms in South Africa to examine the relationships that exist between Internal Liquidity, Capital Structure and Firm Profitability. The ten firms under study represent 79% of the industry by market capitalisation. Other than in six unique cases out of the thirty regressions run, results show that there is little relationship between the variables. These six however, all fall within the test of Internal Liquidity on the firm’s Capital Structure. Results indicate that the level of Internal Liquidity has explanatory power on the level of debt used by the listed real-estate firm. Interestingly, results also show that the market’s perception of a listed real-estate firm is independent of its capital structure and its cash on hand. It is further implied that firms in South Africa with property as the majority asset, are under-geared as a result. This study supports the stakeholder co-investment theory to explain the low average debt levels in South Africa.

Financial and industrial economists are increasingly recognising the interaction between capital structure and firms' strategies in the product market. A debate exists regarding the nature of the relationship between firms' product market power and financial leverage. Particularly, researchers have asked whether the relationship is positive, negative or non-linear. This thesis contributes to this research agenda by developing game-theoretic models, and conducting empirical tests. Specifically, the thesis examines the effects of market power on a firm's use of long-term debt.

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Corporations are subject to agency problems resulting from the separation of ownership and control. When the managers and shareholders¡¦ interests are not consistent, managers will not care whether capital structure is stable, and furthermore will not mind if the project would improve firm value or not. The only thing managers concern about is to maximize their own benefit. Previous work only discusses the relation between firm value and capital structure, or the connection between agency problems and firm value. However, capital structure, agency problems and firm value are multi-connected. When managers adjust firm¡¦s capital structure, firm value changes and agency costs decreases. This research examines the relation among firm value, capital structure, and agency problems of Taiwan listed companies from 1991 to 2003, excluding banks, securities, and insurance company. We address the potentially endogenous relation among these variables by estimating a three-stage least squares regression model. The empirical results show that the higher the debt ratio, the lower the firm value, and the higher the agency costs, the lower the firm value. Nevertheless, raising debt can mitigate the effect of agency problems on firm value. The higher firm value implies the better asset utilization. However, after firms¡¦ gaining profit, managers might abuse discretionary expenses, such as luxurious office, cars, and upper salaries leading to serious agency costs. In the industry aspect, debt ratio of electronic industry hurts firm value. But in the non-electronic industry, debt can mitigate the effect of agency problems, especially for firms with low tangible asset ratio, because many companies in Taiwan are facing underinvestment. Raising debt will force firms to select the best portfolio and then increase the firm value.