The articles:
1. An Empirical Study on the Determinants of the Capital Structure of Listed Indian Firms
2. How do we explain the capitalstructure of SMEs in sub Saharan Africa? Evidence from Ghana
The reason select this article:
To know about the capital structure of Ghanaian SMEs because they are mostly capable of accessing short-term credit in financing their operations.
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Components of Comparison
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Article from CRP |
Article from Student |
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Title |
An Empirical Study on the Determinants of the Capital Structure of Listed Indian Firms | How do we explain the capital
structure of SMEs in sub Saharan Africa? Evidence from Ghana |
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Topic |
Capital Structure | Capital Structure |
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Theory used by article |
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Pecking Order Theory(POT) suggests that firms will initially rely on internally generated funds, i.e. undistributed earnings, where there is no existence of information asymmetry, then they will turn to debt if additional funds are needed and finally they will issue equity to cover any remaining capital requirements.
Petersen and Rajan (1994) The older firms have higher debt ratios since they should be higher quality firms. Hall et al. (2004) who found age to be positively related to long term-debt but negatively related to short-term debt. Cassar and Holmes (2003), Esperanc¸a et al. (2003) and Hall et al.(2004) in terms of the relationship between size and long-term debt ratio, but they had contrasting finding with respect to the short-term debt model. Chittenden et al., (1996); Jordan et al., (1998); Michaelas et al., (1999); Cassar and Holmes,2003; Hall et al., (2004); Sogorb-Mira, (2005) Many countries try to finance their fixed assets with long-term debt, and their current assets with short-term debt. Cassar and Holmes, (2003); Esperanc¸a et al.,(2003); Hall et al., (2004) The more profitable the firm, the less need it has to borrow either long-term or short-term |
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Hypothesis of research
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Variables used in research |
Explanatory variables:
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Dependent Variable:
Independent Variable:
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Method of analysis |
Regression Model |
Regression Model |
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Result of the analysis |
Descriptive Statistics The book value based leverage (LBV) has decrease during post liberalization period whereas, market value based leverage (LMV) shows increase during the same period. Non-debt tax shield (NDTS) has decreased during post liberalization period due to declined tax rates. Profitability has also decreased due to increased competition due to liberalization and general recession in some major sectors. Ownership group-wise and industry-wise aggregate changes in corporate leverage in term of book value (LBV) There has been significant decrease in mean debt equity ratio across the groups and industries. More and more firms accessed equity funds during post liberalization period due to friendly regulatory framework for equity issues. Paired Changes in Corporate Leverage (LBV) There has been significant decrease in mean debt equity ratio in post liberalization period across the groups and industries. The Leverage as Total Debt to Total Assets Ratio The only significant difference is in case of foreign firms whose leverage ratio has increase during post liberalization period. Correlation Matrix Except growth rate and size all other explanatory variables have significant correlation with leverage (both book value and market value based) during liberalization period whereas all the explanatory variables are significantly correlated with leverage during post liberalization period. Regression Analysis for the Pre-liberalization period and for Post-liberalization period The traditionally estimated covariance matrix is inappropriate for cross sectional data showing heteroscedasticity. The interpretation of these result is presented below: 1. Tax and signaling effects on financing decisions: The overall results are consistent with the prediction of the tax based model and signaling model. The estimated coefficients of Non-debt tax shield, Cash operating profit, Market to book value ratio are consistently significant and have predicted signs across the equations. 2. Agency effects on financing decisions: The estimated coefficients of ownership patterns are negative and significant for all regressions only for foreign firms. It implies that foreign investors are not adopting high leverage to discipline management. For big group firms these coefficients are negative and significant when leverage is measured in terms of market value. Conclusion: Traditional factors that are affecting financing decisions are profitability, tangibility, taxes, and growth are all significant. Comparative analysis of pre and post liberalization period reveals that size and risk measures are additional factors which influence capital structure decisions during post liberalization period. Ownership patterns is significant when leverage is measured in terms market value. |
Correlation Analysis
Significantly positive correlation between size and age. Asset structure is also significant and negatively correlated with age. Profitability is significantly and negatively correlated with age and asset structure. Growth shows a significantly negative correlation with profitability. Firm risk and profitability are significantly and positively correlated. Regression Result
The effects of some of the parameters were marginal (that is age, size, and growth in the case of the long-term debt ratio and age, and size in the case of the short-term debt ratio). Conclusion: First, the short-term debt constitutes a relatively high proportion of total debt of Ghanaian SMEs. Second, the positive relationships between the debt ratios and both age, and size suggest that age and size of the firms are very important in influencing SMEs’ access to debt finance. Third, the significantly positive relationship between asset structure and long-term debt ratio denotes the fact that asset tangibility or collateral plays an important role in SMEs’ access to long-term debt finance. Fourth, the results clearly support the pecking order theory that more profitable SMEs demand less debt. |
