Crisis Effects on the Capital Structure Determinants for Manufacturing Companies

Crisis Effects on the Capital Structure Determinants for Manufacturing Companies

Osman Sahin (Turgut Ozal University, Turkey)
Copyright: © 2013 |Pages: 16
DOI: 10.4018/978-1-4666-3006-2.ch019

Abstract

The purpose of the study is to investigate crisis effects on the capital structure determinants for manufacturing companies listed on the Istanbul Stock Exchange Market (ISE) in Turkey for the period 2005-2010. This period is divided into two parts: The period of 2005-2007 is used as pre-crisis period, and the period of 2008-2010 is used as a crisis period. The periods are compared to understand crisis effect on the capital structure determinants. The panel data analysis is used for this study. Short term, long term, and total debt ratios are used as a proxy for the analysis. The sample consists of 138 manufacturing companies in Turkey over the period of 2005-2010. As a result, manufacturing companies’ capital structure is usually determined in accordance with the financial hierarchy theory. During financial crisis, the effects of capital structure determinants deviate from expectations.
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Literature

According to the income tax theory, firms prefer to use debt due to interest tax deductibility (Modigliani and Müller, 1963). On the other hand, Miller (1977) proposed that the advantage of borrowing is offset by the disadvantage of higher income tax at the investor level. The bankruptcy costs’ theory that is caused because of high risk of borrowing was put forward by Stiglitz (1972) and Titman (1984). The asymmetric information concept due to the fact that managers have more information than investors was developed by Myers and Majluf (1984). Jensen and Meckling (1976) and Myers (1977) examined that the effects of conflicts relationships on the capital structures that is named agency costs problem between managers, shareholders and lenders. The theory of signs that use high debts as indication of a healthy expression of company was added into literature by Ross (1977).

According to financial hierarchy theory (POT), Companies primarily use their retained earnings as internal resources when they are faced with profitable investment opportunities. Then, they will respectively use the less risky bonds, stocks that can be converted to shares and lastly to issue shares to meet their financing needs. In this approach, the existence of negative relationship is accepted between the value of the company, profitability and borrowing (Rajan and Zingales, 1995; Frank and Goyal, 2003).

On the contrary, according to tradeoff theory (TOT), there is a positive relation between profitability and the optimal debt ratio. High profit companies have lower bankruptcy costs and higher tax benefits in this theory. In order to increase their firm value, they can benefit from this positive relationship (Jensen, 1986).

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