Capital Structure Policy and Determinants-Evidence from the Portuguese Banking Industry

1、Capital Structure Policy and Determinants-Evidence from the Portuguese Banking IndustryCapital Structure Policy and Determinants: Evidence from the Portuguese Banking Industry Manuel O. Marques Associate Professor Faculdade de Economia do Porto Rua Roberto Frias 4200 Porto Portugal 8E-mail: momarque

2、sfep.up.pt Mrio C. Santos Visiting Assistant Professor DEGEI - Universidade de Aveiro Campo de Santiago - 4150 Aveiro Portugal E-mail: msantosegi.ua.pt (Preliminary draft this version November 2, 2003) Comments are welcome Please do not quote or cite without permission Capital Structure Policy and D

3、eterminants: Evidence from the Portuguese Banking Industry ABSTRACT The paper examines theoretically and explores empirically the problem of the banking firms capital structure (voluntary) decisions. Data was gathered through a survey conducted to a sample of 879.5 percent of the Chief Executive Off

4、icers (CEOs) of Portuguese banks in office during the 1989-19view, with respect to the contention 3surrounding the corporate capital structure theory, is Myerss argument that it is a puzzle, 4mirrored by Kamath (1997) enigma, Stiglitz dilemma, or, as suggested in The Economist, a 5mystery. It appear

5、s that (1) we are still lacking a comprehensive theory to explain how firms decide about their strategic financing; and (2) yet we can not unambiguously specify the relation between capital structure choice and firm value. Since the foundational work of Modigliani and Miller (1958), a number of auth

6、ors extended their capital structure irrelevancy theory. The literature also thoroughly describes the various attempts to model corporate debt/equity policy. However, what optimal mix of securities should a firm issue still remains undetermined. If extant capital structure theoretical literature has

7、 so far successfully modeled a ?large number of potential determinants of capital structure? choice (Harris and Raviv 1991), empirical literature has as well failed in finding unambiguous and compelling validation of the contextual relevance of such models. Available empirical evidence often appears

8、 to show significant dependence of the observed reality and the research methods applied, leading sometimes to unconvincing and 1 The paper draws partially on the second authors PhD dissertation. We are deeply grateful to Anbal Santos, Pedro Duarte Silva, Ricardo Cruz, and Sam Hayes for valuable sug

9、gestions and comments. The user disclaimer applies concerning errors and omissions. 2 Other important research areas are, for example, security design, and debt maturity structure choice. 3 See Myers (1984). 4 See Stiglitz (1989). - 3 - 6contradictory results. As suggested by Frankfurter and Philipp

10、atos (1992) one of the debilities of 7corporate finance theories ?is their weak correspondence to facts?. Overall we still lack a satisfactory, comprehensive and positive explanation for firms capital structure observed behavior. Theoretically, it is still not well understood why firms financial con

11、tracts recurrently appear in certain patterns (e.g., Harris and Raviv 1989). This suggests that we need to resort to a more robust framework to gather useful insights into the financing behavior of actual real-world firms. 8Capital structure literature recurrently highlights the topic at the non-fin

12、ancial firm level. Further, corporate finance empirical research has, to a certain extent, frequently disregarded financial industry data (e.g., Fama and French 1992). Overall it seems that the investigation of 9capital structure of financial firms such as banks has been largely overlooked. As sugge

13、sted by Chen and Mazumdar (1994) ?the bank capital structure debate remains unresolved.? However, as posited, e.g, by Orgler and Taggart (1983) general capital structure theory could provide ?a useful framework for analyzing bank capital structure.? Merton Millers (1995) question if ?M&M proposi

14、tions apply to banks? is also consistent with the view that banks debt/equity choice still remains an empirical question. On these grounds, the banking firm capital structure problem appears as a promising topic for empirical research to enhance our understanding of the capital structure puzzle, thr

15、ough the investigation of an extreme financial leverage polar-case 10(Masulis 1988). It is a truism that the mainstream of theoretical and empirical research on corporate capital structure springs from the examination of U.S. phenomena. This fact hinders the generalization of these results to other

16、countries or geographical areas with (sometimes) 5th See, The Economist, January 6 1996, p. 61. 6 An interesting illustration is provided by Opler and Titman (1996) who suggest that in Fischer, Heinkel and Zechners (1989) capital structure (dynamic) model, ?a firm issues equity after its share price

17、 declines and repurchases equity after its share prices increase to adjust towards an optimal capital structure.? Extant empirical and anecdotal evidence indicates that firms actually do the opposite. 7 One plausible explanation for this phenomenon may be the misalignment between the behavioral char

18、acteristics of financing choices available to firms and the theoretical microeconomic underpinnings of the standard neoclassical model of the firm, which represents a general theoretical foundation for a number of corporate finance models. 8 As observed by Dowd (1996) ?traditional banking literature

19、 tends to overemphasize the difference between banks and non-financial firms, and therefore overlooks important similarities between them.? 9 To the best of our knowledge Marcus (1983), Sharpe (1995), Osterberg and Thomson (1996), and Hasan (1997) are some of the very few papers on this topic. 10 Ac

20、cording to Masulis (1988) “one means of expanding on the previous evidence on capital structure is to study the determinants of leverage in an industry exhibiting extreme leverage choices. Some of the best examples of this situation are commercial banks which typically have leverage ratios of 95 per

21、cent debt to assets and higher.” - 4 - remarkably dissimilar economic, financial, and institutional conditions what, in these conditions, 11would seem inappropriate or even imprudent. Among these conditions are, as noted by Milgrom and Roberts (1992), ? rights that come with ownership vary among cou

22、ntries and over time.? Allocative functions of financial markets may also vary widely across countries. Thus, informational and operating efficiency, and liquidity, are institutional features of financial markets that may have a role as “determinant(s) of corporate financing choices” (Demirg?-Kunt a

23、nd 12Maksimovic 1996). According to Sa-Requejo (1996), Rajan and Zingales (1995), and Harris and Raviv (1992), among others, further substantiation of capital structure hypotheses is needed to increase the robustness of their predictions. This desideratum may be pursued through their empirical testi

24、ng in different environmental contexts of country, time and industry. Such investigations may be helpful for a better understanding of the implications of environmental and behavioral factors on capital structure decisions, and thus contributing for broadening the explanatory and predictive power of

25、 the theory. Field-based research methods are a long-established practice in corporate finance 13investigation. However it seems to have recently experienced a renewed interest on its use with the argument that bringing together both ;traditional; and field-based types of research for ?studying the

26、activities of a few firms may be one of the only ways to study phenomena which are not easily 1415,quantifiable.? In order to evaluate how standard capital structure theory could handle strategic financing decisions of Portuguese banks we conducted a survey to a sample of CEOs through a person-to-pe

27、rson interview supported by a structured questionnaire. 11 Those conditions include: market structures; regulatory frameworks; governance systems including relations between banks and firms; cultural environment; accounting principles and practices; legal system including tax and bankruptcy laws; fi

28、nancial system design, degree of development, and regulation; national savings levels; and risk preferences of capital market participants. 12 Remarkable disparities among countries relate, among other dimensions, to firms characteristics (e.g., size), market structures, legal and regulatory regimes

29、, prevailing governance systems, cultural environments, accounting principles and practices, which might well be relevant sources of variance across space, time and industry. 13 Lintner (1956), and Donaldson (1961) provide good illustrations. 14 Foddy (1993) suggests that ?asking questions is widely

30、 accepted as a cost-efficient (and sometimes the only) way, of gathering information about past behaviour and experiences, private actions and motives and attitudes (i.e. subjective variables that cannot be measured directly).? See also Jensen et al. (1989). 15 The Board of Governors of the Federal

31、Reserve System has conducted “The National Survey of Small Business Finances” in 1987, 1993 and 1998. Survey data sets have been made available to academia and extensively used, among others, in Ang, Cole and Lin (2000), Berger and Udell (1998) and Petersen and Rajan (1994). - 5 - Our empirical appr

32、oach to the studying of the bank capital structure problem, although having a similar research objective of other recent survey-based studies, e.g., Graham and Harvey (2001), and Bancel and Mittou (2002), distinguishes from this prior research in a number of aspects. First, we conducted the survey i

33、n a face-to-face interview format rather than administered 16by mail, as is the case with the majority of prior studies. Our empirical research methodology minimizes some of the potential problems that the survey method may suffer, namely, non-response and response biases. We also reduced the potent

34、ial for survey participants interpreting survey questions differently, since interviews were personally conducted by one of the authors. Secondly, the study was conducted within a single and relatively homogeneous industry, thus avoiding difficulties in controlling the unsystematic effects, inevitab

35、ly present in cross-sectional samples. Third, we surveyed approximately 90 percent of the population, comparing to an average 17response rate of 20.3 percent in capital structure mail-administered surveys. Fourth, although confidentiality and anonymity were guaranteed to survey participants, we were

36、 able to control across important bank characteristics: ownership, position in the life cycle, listing condition and capitalization. Fifth, the survey was conducted outside the U.S. and consequently offers an opportunity for generalizing empirical results obtained for the propositions submitted to t

37、est. Lastly, in our study we combine qualitative survey data and quantitative data drawn from a database for banks financials developed by the authors. In this investigation we aim at providing evidence to the following generic research questions: (1) Are capital structure theories incorporated in C

38、EOs decisions? (2) Would capital structure managerial decision-making provide empirical support for extant theories? (3) Which are the potential determinants of debt / equity managerial policies? The remaining of the paper is organized as follows: Section two introduces and discusses the theoretical

39、 background of the capital structure problem at the firm level, building the basis for the development of the testable propositions included in the survey instrument. Section three examines methodological issues related to our empirical study, and describes survey design, 16 See Appendix 2.1 to Chap

40、ter 2 and Appendix 5.4 to Chapter 5 for summaries of survey-based research in corporate capital structure. - 6 - sample selection and data. Section four reports survey results. Section five summarizes and concludes the paper. 2. THEORETICAL BACKGROUND The undertaking of risky investment projects inc

41、reasingly requires larger pooling of financing. Such amounts of resources are frequently beyond a firms ability to generate and retain cash. To cope with this potential shortage of financial capital, firms increasingly tend to 18organize as larger and more complex business organizations. A wealth-co

42、nstrained firm owner endowed with a profitable investment opportunity is driven to raise external capital to finance the project by selling securities. These securities vary in terms of claims to issuers future rents and 19in terms of allocation of residual rights of control. The capital structure p

43、roblem emerges from 20the definition of the mix of securities the firm should optimally issue. 21Modigliani and Miller (1958) provided the foundational impulse to the study of the capital structure problem by formally proving that, under conditions of complete, perfect and frictionless markets, a fi

44、rms market value and the welfare of its security holders remain 22unaffected by financing decisions. This theoretical proposition carries the implications that: (1) financing and investment policies are independent; (2) internal and external financing are perfect substitutes; and (3) the specific ty

45、pe of the financing contractual arrangement, either equity or debt, is also irrelevant. M&Ms irrelevance theory was subsequently extended and its results generalized under a less stringent set of assumptions, showing that the theorem still obtains in the presence of risky 17 See Table 5.4 append

46、ed to chapter 5. 18 Since the allocation of funds implied by the increased scale of projects is, typically, out of reach for more primitive forms of business organization, the modern corporation emerges as a much more open vehicle for pooling capital, and with less restricted residual claims. Hansma

47、nn (1996) observes that the ?large-scale enterprise will be organized in the form of investor-owned firms.? This idea is corroborated by Easterbrook and Fischel (1991) who claims that ?publicly held corporations dominate other organizational forms when the technology of production requires firms to

48、combine both the specialized skills of multiple agents and large amounts of capital.? 19 Grossman and Hart (1986) suggest that “contractual rights can be of two types: specific rights and residual rights. When it is costly to list all specific rights over assets in the contract, it may be optimal to

49、 let one party purchase all residual rights. Ownership is the purchase of these residual rights.” According to Jensen and Meckling (1976) “there is another important dimension to this problem capital structure namely the relative amount of ownership claims held by insiders (management) and outsiders

50、 (investors with no direct role in the management of the firm).” 20 Without loss of generality, capital structure theoretical literature emphatically assumes that investors provide external financing under two major types of contracts: debt and equity. Therefore, a number of characteristics often fo

51、und in real world corporate security issuance are not considered in this context. 21 M&M hereafter. - 7 - debt and hybrid securities, and when the risk class assumption is relaxed. Similarly, the irrelevance proposition still holds in both single period and intertemporal modeling settings, 23implying that the market value of the firm is also unrelated to debt maturity structure. Despite its unquestionable analytical el