Viet Anh Dang

TESTING CAPITAL STRUCTURE THEORIES USING ERROR CORRECTION MODELS: EVIDENCE FROM THE UK, FRANCE AND GERMANY

We employ an error correction model of leverage to test the trade-off and pecking order theories of capital structure for firms in the UK, France and Germany. The error correction framework extends the partial adjustment model by explicitly modelling changes in target leverage and past deviations from such target as determinants of firms’ dynamic leverage adjustment process. We also augment our empirical models to test the pecking order theory. Using appropriate and advanced dynamic panel data methods, we find that UK, French and German firms adjust towards target leverage quickly in both the partial adjustment and error correction models, which is consistent with the trade-off theory. We further show that the trade-off theory explains these firms’ capital structure decisions better than the pecking order theory in the models nesting the two theories.

Leverage, Debt Maturity and Firm Investment: An Empirical Analysis

In this paper, we examine the potential interactions of corporate financing and investment decisions in the presence of incentive problems. We develop a system-based approach to investigate the effects of growth opportunities on leverage and debt maturity as well as the effects of these financing decisions on firm investment. Using a panel of UK firms between 1996 and 2003, we find that high-growth firms control underinvestment incentives by reducing leverage but not by shortening debt maturity. There is a positive relation between leverage and debt maturity as predicted by the liquidity risk hypothesis. Leverage has a negative effect on firm investment levels, which is consistent with the overinvestment hypothesis regarding the disciplining role of leverage for firms with limited growth opportunities.

Cash holdings and employee welfare

This paper examines the relation between employee welfare practices and corporate cash holdings. We find firms that are strongly committed to employee well-being, measured by ratings on employee relations, to hold more cash. The effect of employee welfare standards on cash holdings is stronger for firms in human-capital-intensive, competitive, and high-labor-mobility industries in which employees are more important to their businesses. These results are consistent with the predictions of the stakeholder theory. Overall, our paper provides novel evidence on the role human capital and employee relations play in a firms cash management policy.

Institutional Investment Horizons and Labor Investment Efficiency

Monitoring by long-term investors should reduce agency conflicts in firms’ labor investment choices. Consistent with this argument, we find that abnormal net hiring, measured as the absolute deviation from optimal net hiring predicted by economic fundamentals, decreases in the presence of institutional investors with longer investment horizons. Firms dominated by long-term shareholders reduce both over-investment (over-hiring and under-firing) and under-investment (under-hiring) in labor. The monitoring role of long-term investors is more pronounced for firms facing higher labor adjustment costs. We address endogeneity concerns by exploiting exogenous changes to long-term institutional ownership resulting from the annual reconstitution of the Russell indexes.We investigate how the investment horizon of a firm’s institutional shareholders affects the efficiency of its labor investments. We argue that long-term investors have greater incentives to engage in effective monitoring, which reduces agency conflicts in labor investment choices. Consistent with this argument, we find that abnormal net hiring, measured as the absolute deviation from net hiring predicted by economic fundamentals, decreases in the presence of institutional investors with longer investment horizons. Firms dominated by long-term shareholders reduce both over-investment (over-hiring and under-firing) and under-investment in labor (under-hiring). The monitoring role of long-term investors is more pronounced for firms facing higher labor adjustment costs. These results are robust to alternative model specifications and variable definitions, as well as to tests controlling for the endogeneity in the institutional shareholders’ investment decisions. Overall, our findings suggest that institutional investors play an important role in firm-level employment decisions. JEL Classifications: G23, G32, G34, M51.

Debt Maturity and Initial Public Offerings (IPOs)

We investigate the effect of initial public offerings (IPOs) on the evolution of debt maturity by tracking a sample of US firms that went public over the period 1998-2011. Our findings reveal a significant and permanent increase in debt maturity post-IPO. The short-term debt ratio drops by nearly a fifth in the first two years after the IPO. These findings are economically significant and robust to controlling for the endogeneity in the listing decision. However, the lengthening of the post-IPO debt maturity is only evident in small, high-growth, and highly levered firms. This finding lends greater support to asymmetric information models than theories based on the agency costs of debt. There is some support for the argument based on the agency costs of equity as the IPO effect on debt maturity is only significant for firms with a high dilution ratio. Finally, the IPO effect varies with macroeconomic conditions as the increase in debt maturity post-IPO was most pronounced during the recent financial crisis of 2007-08.

The Use of Trade Credit by Public and Private Firms: An Empirical Investigation

This paper examines differences in the use of trade credit by publicly listed firms and their privately held counterparts. We show that public firms maintain a significantly lower level of trade credit than private firms. This finding is consistent with the argument that public firms rely less on supplier financing because of their greater access to cheaper and less risky sources of external capital. We further find that while public and private firms actively seek to adjust toward their optimal trade credit levels, the former firms experience faster adjustment. The recent financial crisis had differential effects on the trade credit ratios of public and private firms.