Academic journal article Journal of Business Economics and Management

Drivers of Firms' Debt Ratios: Evidence from Taiwanese and Turkish Firms/ Imoniu Skolos Santykio Nustatymas: Taivano Ir Turkijos Imoniu Pavyzdziu

Academic journal article Journal of Business Economics and Management

Drivers of Firms' Debt Ratios: Evidence from Taiwanese and Turkish Firms/ Imoniu Skolos Santykio Nustatymas: Taivano Ir Turkijos Imoniu Pavyzdziu

Article excerpt

1. Introduction

Firms frequently use external monetary sources to meet their fund needs. They need funds sometimes because of their limited amount of cash for daily operations and sometimes because of their investments for fixed assets. Especially long term debts contribute to the equity and earnings of the firms. As Dalmazzo and Marini (2000) mention, increase in the usage of external monetary sources can increase earnings of the investors. The critical point here is the necessity for the earnings to be greater than the costs of the external funds. Thus, because of leverage effect, the firm's earnings go up as the debts increase. However, as Mckenzie (2002) warns the decision makers of the firms listed on stock markets, that investors may refrain from buying the stocks of those firms whose debt / equity ratios are very high because of the over usage of this leverage effect. Moreover, the collapses are much more rapid and harsher than the recoveries in the stock exchange markets (Choudhry 2001; Alexander, Dimitriu 2005).

The literature on corporate financial management of the firms listed on the stock markets begin to give special importance to the management of debt ratios which is a very critical issue for the owners, top managers and investors. In this concern, Singh and Nejadmalayeri (2004) have already developed a comprehensive indebtedness model consisting of the factors that possibly affect the variance in the debt ratios of the firms and tested it in the context of already developed countries' firms.

The main motivation in this study is to develop and test an extended model to explain the factors affecting the capital structure of the firms. Inspired by the Singh and Nejadmalayeri's (2004) study, we use in our research a revised and extended version of this indebtedness model by including some additional drivers namely ROE, total assets, and the depreciation / total assets ratio. Therefore, in this study, we try to test an original indebtedness model consisting of the following independent variables: EBIT, ROE, sales, total assets, fixed assets-total assets ratio, depreciation- total assets ratio.

In addition to the extension of the model, another originality of this study is to test the indebtedness model on two different country settings at the same time to produce comparative implications for the firms operating in a developing (Turkey) and a newly developed (Taiwan) country. Briefly, we desire to test the effects of the indebtedness drivers on the debt ratios in the context of a developing country and a newly developed country, and to make a comparison between them concerning not only these drivers but also the general capital structures of their firms.

The paper proceeds in the following manner. In the second section next to the introduction, the indebtedness literature is reviewed. In the third section, the financial differences between the firms in Turkish and Taiwanese firms and the relations among the model's variables as the drivers of indebtedness are tested via ANOVA and regression analyses; and the final section is devoted to the discussion of the results.

2. Theoretical framework and hypotheses development

2.1. Literature review

Modigliani and Miller (M & M) are highly referred researchers in the literature for their studies on the firms' capital structures, i.e. the combination of the long term debts and equity of the firms (Yukcu et al. 1999). M & M (1958) indicate that managers of those firms where internal monetary funds are not adequate may easily apply for external funds especially when we assume that markets function perfectly and taxes do not exist (Firatoglu 2005). Tough in the real markets, various types of tax exist. Therefore, M&M emphasize that firms can increase their earnings per share by emitting new bonds and accordingly paying less taxes (Yukcu et al. 1999). After M & M's remarks on the impact of tax concerns on the capital structure and debt ratios, the trend in the literature has turned towards determining the optimum combination or balance between the sizes of external and internal monetary funds. …

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