Corporate financial decisions : alternative sources and uses

  • Jun Qiu

Student thesis: Doctoral Thesis

Abstract

Corporate financial decision making is primarily a study of alternative financing sources and uses. This thesis investigates three aspects of such decisions. First, we examine the implications of information asymmetry on the choice of security to issue and the effect of issue announcement on share price. We find that the choice between internal funds and external capital is positively related to the level of information asymmetry between managers and investors – firms with higher information asymmetry prefer the use of internal funds. The probability of issuing equity, relative to debt, is dependent on the level of information asymmetry for smaller firms. We find no significant relation between the level of information asymmetry and the choice between equity and debt for larger firms. Our results show that the share price of the firm increases after the announcement of equity issue and drops after a year of the issue of equity. We find such changes in share price are dependent on the stock volatility of the firm. Next, we examine the determinants of debt choice between public debt, syndicated loans, bilateral loans, 144A private debt, and traditional non-bank private debt. Primarily, the variables interests include credit quality, information asymmetry, market conditions, and macroeconomic conditions. We find that market conditions and macroeconomic conditions affect the choice of syndicated loans negatively relative to bilateral loans. The choice of 144A private debt against traditional non-bank private debt is negatively related to credit quality, market conditions and macroeconomic conditions, and is positively related to the level of information asymmetry. We also find that credit quality, information asymmetry, and macroeconomic conditions (market conditions) determine the choice of bank loans over non-bank private debt positively (negatively).The choice of public debt over private debt is positively associated with credit quality and market conditions, and negatively related to information asymmetry and macroeconomic conditions. Finally, we examine whether firms retain external capital to increase their cash holdings for precautionary purposes or to repay the debt. We find that firms hoard more than a quarter of externally raised capital in cash – a source of the observed substantial increase in corporate cash balance in recent years. Precautionary motive is found to drive the increase in cash holdings, that is, finance from external sources. The cost of equity issues has a negative impact on precautionary cash holdings. Moreover, the results suggest that when the equity issue cost is low firms raise large amounts of equity capital and repay their debt. Highly levered firms are more likely to raise equity capital to repay the debt. We also find that firms are less likely to use cash balances to repay the debt. Finally, the evidence suggests that firms have a target level of cash holdings and a target level of debt in their capital structure. Overall, the findings suggest that the financial decisions of a firm are dependent on information asymmetry, credit quality, precautionary motives, market conditions, macroeconomic conditions and that firms have been using a large proportion of externally raised capital to raise their cash holdings.
Date of Award17 Dec 2015
Original languageEnglish
Awarding Institution
  • University Of Strathclyde
SponsorsUniversity of Strathclyde
SupervisorKrishna Paudyal (Supervisor) & Leilei Tang (Supervisor)

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