Capital structure management differences in Latin American and US firms after 2008 crisis.
| Autor | Rodrigues, Santiago Valcacer |
| Cargo | Capital structure management |
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Introduction
From the studies by Durand (1952), Hirshleifer (1958), Lintner (1956), Markowitz (1952) and Modigliani and Miller (1958, 1963), several empirical studies have been performed in an attempt to understand the influence of capital structure on firm value since the 1950s (Ardalan, 2017; Milanesi, 2014; DeAngelo and Roll, 2015; Chakraborty, 2010). Choosing a capital structure is one of the most relevant topics in corporate finance (Drobetz et al., 2015; Chung et al., 2013; Barros et al., 2013; McMillan and Camara, 2012; Noulas and Genimakis, 2011). A trend-setting study developed by Modigliani and Miller (1958) (MM) is the cornerstone of the theoretical framework on capital structure and concluded that financial leverage has no effect on the company's market value.
One of the study branches that arouses most interest in academia is studying factors that determine corporate indebtedness (Graham et al., 2015). In this line of thought, empirical contributions are controversial, so that the MM's postulates were questioned and extended by a broader perspective on financial strategies, as reported by Ardalan (2017), Bradley et al. (1984), Chen (2004), Fama and French (2002), Frank and Goyal (2003), Hovakimian et al. (2004), Kayo and Kimura (2011), Moosa et al. (2011), Rajan and Zingales (1995), Shah (2012), Shyam-Sunder and Myers (1999), Titman and Wessels (1988) and Vo (2017).
In the past six years, the US subprime crisis triggered intense changes in various economies around the world (Dang et al., 2014). The financial crisis of 2008 led global economy into recession in 2009, the worst since the 1929 crisis (Carvalhal and Leal, 2013; Vidal et al., 2011). The crisis effects were transmitted from developed economies to emerging economies (Carvalhal and Leal, 2013; Singer, 2009). In Latin America, the crisis brought changes in external economic conditions, such as reducing foreign borrowing, significant capital flights as well as strong reduction in foreign direct investments and decline in commodities prices (Caprio et al., 2014; Dang et al., 2014). According to Singer (2009), medium and large size countries under a certain industrialization level, such as Argentina, Brazil, Chile, Colombia, Mexico and Peru, were affected by the crisis in a similar way with capital flight, foreign credit reduction and decrease in exports.
In this way, companies have their credit capacity impaired during a crisis period, when their financial statements and conditions may be deteriorated, besides credit availability restrictions, higher costs of outside financing and difficulty in granting or renewal of credit lines towards financial bodies (Vidal et al., 2011; Dang et al., 2014; Drobetz et al., 2015). Similarly, the US financial system contracted with the collapse and bankruptcy of several financial institutions in the country, which directly affected the credit for companies (Campello et al., 2010; Caprio et al., 2014; Graham et al., 2015).
It is here that researches on the connection between Latin American countries and the USA as well as their financial system composition, which directly influences the way companies raise funds to finance their operations, are particularly relevant to analyse capital structure in both markets (Bekiros, 2014; Tseng, 2010; Balli et al., 2015).
Some studies suggest that corporations tend to follow the capital-structure patterns their peers in other countries. Due to the dependence of the financial markets, it is possible for Latin American companies to follow North American standards (Francis et al., 2016).However, analysing the differences between the determinants of the capital structures between countries with different social structures is one of the conditions for the paradigm shift in this field proposed, which was proposed by Ardalan (2017). Given the above, this study aims at assessing the capital structure determining factors of corporations in Latin American and in the USA.
The knowledge on capital structure of developing markets is limited (Belkhir et al., 2016; Cespedes et al., 2010; Vo, 2017). For Al-Najjar (2011) and Chauhan (2016), theoretical explanations and empirical evidences on the issue are still inadequate for emerging markets. Decisions on such structure become even more complex when examined in an international context, particularly in developing economies, which are characterized by controls and institutional constraints (Belkhir et al., 2016; Francis et al., 2016; Haron, 2014).
Empirical studies have directed efforts towards an economic context of emerging Latin American countries in aggregated manner (Sobrinho et al., 2012; Cespedes et al., 2010) or through specific studies for each country (Vidal et al., 2011; Gomez et al., 2014).
Moreover, the period of analysis of this research contributes to the understanding of questions related to capital structure decisions in high volatility periods for both realities, in developed and developing markets (Dang et al., 2014; Duchin et al., 2010; Ivashina and Scharfstein, 2010).
Therefore, it is noteworthy to mention that there is a gap to understand empirically the factors that set corporate debt at this same time of crisis and economic recession. Therefore, the aim of this study is to analyse the difference in the management of the capital structure of the Latin American and US firms, after the post-crisis 2008. Furthermore, there is a need for literature foundation on capital structure of emerging markets with various credit lines from developed countries (Awartani et al., 2015).
This way, the economic background in which the companies are established and on which they have influence must be considered (Chauhan, 2016; Joeveer, 2013; Jong et al., 2008). To reach the proposed goal, this article is organized in four sections after this introduction. The next section discusses the fundamentals of theoretical perspectives on capital structure that guide the analysis of the results. The methodology section presents the material which supported the research, as well as the empirical model used. The fourth section analyses the results of research from the theoretical and compares the results with other empirical evidence. Finally, the section with the conclusions indicates the implications of this study as well as the limitations and future research opportunities.
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Theoretical foundation
The capital structure choice is one of the most relevant topics in corporate finance, despite the lack of consensus on what is the best or the most appropriate combination of debt for companies (Bradley et al., 1984; Myers, 1984; Myers and Majluf, 1984; Titman and Wessels, 1988; Rajan and Zingales, 1995; Shyam-Sunder and Myers, 1999; Moosa et al., 2011; Dang, 2013; Ebrahim et al., 2014; Graham et al., 2015; Ardalan, 2017).
A substantial number of empiric researches emerged from MM's postulates to test claims of authors (Drobetz et al., 2015; Ebrahim et al., 2014). Consequently, new theoretical approaches were revealed to elucidate questions on capital structure determinants, the most familiar are the static trade-off (Myers, 1984), the asymmetry information and the pecking order theory (Brealey et al., 1977; Myers, 1984; Myers and Majluf, 1984; Ross, 1977). It must be highlighted that despite the large number of empirical studies, available currently, the issue is far from being solved (Chauhan, 2016; Kayo and Kimura, 2011; Tucker and Stoja, 2011; Milanesi, 2014; DeAngelo and Roll, 2015; Vo, 2017).
According to the trade-off theory, companies pursue an optimal point of indebtedness considering both the fiscal benefit and the costs of financial difficulties (Graham et al., 2015). Thus, by introducing financial difficulty and agency costs, companies seek a great point of indebtedness, based on a trade-off between tax benefit and cost of debt (Myers, 1984). This theory states that the value of the company consists of the value of the firm without leverage (financed completely by own capital), plus the present value of the tax savings from debt (interest of the debt that affords income tax deduction), minus the present value of financial distress costs (direct and indirect costs of bankruptcy and agency costs) (Myers, 1984).
When analysing the information asymmetry between management and shareholders, over the role of dividends, Ross (1977) noted that changes in capital structure and dividend distribution alter the market perception regarding future prospects, once debt increases indicate an optimistic future in relation to investment projects.
The pecking order background is the asymmetric information between managers and potential new shareholders. Such asymmetry induces the company to value destruction for current owners, in case they decide to issue new shares, as the implementation of new projects could not be evaluated properly by the market. Such fact would cause an underestimation of the new shares and consequently transferring wealth from current owners to new ones (Fama and French, 2002; Voutsinas and Werner, 2011). According to the theory, financing decisions mitigate issues associated with information asymmetry (Amess et al., 2015). Therefore, firms should prefer funds from internal to external sources, and, if funding with external resources were needed, companies should prefer to go into debt instead of issuing new shares; therefore, less vulnerable bonds are preferred rather than asymmetric information (Belkhir et al., 2016; Cespedes et al., 2010; Myers, 1984; Myers and Majluf, 1984). Table I outlines the empirical evidences on capital structure determinants for Latin American companies.
The studies highlight the importance of specific capital structure determinants for each company. The business profitability, earnings before interest and taxes (EBIT) margin, current liquidity, size, tangibility, and risk are considered company specific factors. As Bastos and Nakamura (2009) and Moosa et al. (2011), these factors have...
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