Capital structure, stock exchanges in Chile: 2007 to 2016.

AutorHenrique, Marcelo Rabelo
  1. Introduction

    The countless investigations carried out to try to exhaust the question of the capital structure are endless, for example items such as forms of data collection, variables to be chosen for an econometric model, the econometric tools used, the types of companies and the legal characteristics of the accounting-financial area.

    Titman and Wessels (1988) analyzed the explanatory power of some variables on capital structure. Kochhar (1997) believes that companies with strategic assets are able to achieve a sustained competitive advantage.

    Perobelli and Fama (2003) share that "theories suggest that companies select their capital structure according to theoretical attributes that determine the various costs and benefits associated with the issuance of shares or debt," and in an attempt to do work based on Titman and Wessels (1988), using factor analysis, the authors carried out this verification for the Latin American market, in particular for Chilean companies, analyzing which variables help to maintain the indebtedness of companies listed on stock exchanges in the countries that carried out their research.

    The way in which the managers combine the sources of financing is an important decision for the financial and strategic context of the company. The capital structure refers to the way in which companies use sources of origin, whether their ownor those of third parties, toapply in patrimony assets and in activities that demand them.

    Furthermore, inquiries related to the choice of financing--indebtedness versus own capital--have gained importance for the investigation of management strategy. In a short space of time, there was a significant increase in the attention devoted by the management strategy literature to financial aspects (Sandberg et al., 1987; Kochhar, 1997).

    Therefore, the justification for this study is to evaluate the capital structure of the companies listed on the Chilean stock exchange, in the period from 2007 to 2016.

    Contemporary capital structure theory emerged with the work of Modigliani and Miller (1958), in which they refer that, under certain conditions, the form of financing of companies is irrelevant. The determinants of capital structure are not restricted only to company-specific factors.

    As observed in previous studies, it was possible to elaborate the following research problem-question: What is the behavior of the determinants of the capital structure of companies listed on Chilean stock exchanges, under the prism of the financial theories of the pecking order and trade-off, in the period from 2007 to 2016?

    The general objective of this research is to compare the behavior of variables that determine the capital structure of Chilean companies listed on the stock exchange. In this way, institutional aspects (number of employees and open units) and economic aspects (market niche, performance in the internal and external markets) will not be evaluated, being limited only to specific factors of the company.

    To better guide the research, the stepsto be taken to beable to answer the main objective is to select the independent variables, statistically test them in relation to the types of indebtedness and analyze the behavior of these variables as determinants of the capital structure of Argentine and Chilean companies to light from trade-off theory (TOT) and pecking order theory (POT).

    This study is organized as follows: Section 1 describes the context of the studies and the research objectives; Section 2 presents the literature review, as well as the discussions of the proposed hypotheses; Section 3 describes the sample and the methodology used; Section 4 shows the research results; Section 5 presents the research conclusion.

  2. Literature review

    From these studies on capital structure, a long discussion was established, that is, many works were carried out and other theories were elaborated in an attempt to explain what determines the use of own or third-party capital by companies, in addition to ideal mix between funding sources.

    Table 1 presents the evolution of theories on capital structure in recent decades.

    In addition to works that are concerned with discussing differences and testing theories developed byModigliani and Miller (M&M) and traditionalists, there isa class of authors who prioritized the discussion of bankruptcy costs and their influence on the definition of the structure. Capital of companies.

    There is a predominance of two theoretical trends on capital structure: POT and TOT.

    When trying to find a balance between indebtedness and maximizing the value of companies, going through financial difficulties and tax benefits, TOT by Modigliani and Miller (1958, 1963) proposes, in perfect markets, that the capital structure can impact the value of the company, that is, although indebtedness is interesting for the company, managers know that it should not be increased indefinitely (Kraus and Litzenberger, 1973).

    Fama and French (2002) confirm the predictions shared in the POT, that is, they are more profitable and companies with fewer investments have higher dividend payments.

    Research carried out by Bastos et al. (2009), Espinosa et al (2012), Rodrigues et al. (2017), Fiirst et al (2017) and Rodrigues and Santos (2018) analyzed the behavior of the capital structure of companies in Latin American countries (Brazil, Argentina, Chile, Mexico, Colombia and Peru), whose analysis periods for each study were from 1998 to 2013, rescuing the POT and TOT.

    2.1 Optimal capital structure: hypotheses

    Research on the capital structure of companies is considered the most important in the area of finance. Various theoretical approaches have been discussed and tested in the financial literature.

    Perobelli and Fama (2003) found that the optimal capital structure, to be pursued by companies, was never achieved. In this case, new theories emerged that sought to explain the choice of capital structure by companies. Some relevant works in this line were developed by Remmers et al. (1974), Toy e tal (1974), Scott and Martin (1975), Stonehill et al. (1975), Ferri and Jones (1979), DeAngelo and Masulis (1980), Bradley et al. (1984), Myers and Majluf (1984), Myers (1984), Lumby (1991), Thies and Klock (1992), Balakrishnan and Fox (1993), Allen and Gregory (1995) and Rajan and Zingales (1995) (Perobelli and Fama, 2003, p. 12).

    Tapia and Albornoz (2017) present a regulatory model that allows the administration to establish in advance the optimal capital structure and concentrate efforts toward that objective. The effect of personal taxes on shareholders and debt owners, on tax economies and, therefore, on the optimal capital structure was studied.

    Booth et al. (2001) and Bastos et al. (2009) state that it is not a very easy task in determining hypotheses between theoretical currents, as the behavior of a certain variable can be explained by one or another theory.

    When evaluating deals, an important issue to consider is the level of detail. If for analysts to add details is to provide an opportunity for better forecasts for each added item, then, on the other hand, it would be interesting to create more inputs, which in this case could increase the potential for errors to occur in each added input (Damodaran, 2007).

    According to Myers and Majluf (1984), Myers (1984) and Nakamura et al. (2007), the POT indicates the use of sources of resources and acting on new opportunities for the organization's growth, in which the company's administrators are guided by a hierarchy of resources to bet on these growth opportunities. Therefore, it is expected that more profitable companies will have to borrow less. Corroborating this idea, Ross (1977 apud Harris and Raviv, 1991) states that there is a positive relationship between the level of indebtedness and profitability. In contrast, Brito etal. (2007) state that profitability is not a determining factor in a company's capital structure.

    From this scenario, the following hypotheses are proposed:

    H1. There is a significant negative relationship between return to shareholders and debt indicators.

    H2. There is a significant negative relationship between asset returns and debt indicators.

    For Myers and Majluf (1984), companies invest in their assets to guarantee their debts when evaluating opportunities at the time of their business, including in future situations. With this, companies disrupt risk strategies used by shareholders who intend to extract wealth from their creditors. Inverse views are taken by Brito et al. (2007), and there is a negative relationship between a company's assets and its total indebtedness. Therefore, the following hypothesis is proposed:

    H3. There is a significant positive relationship between asset growth and debt indicators.

    It was noticed in previous research that companies that have growth potential have greater flexibility to invest, and they tend to increase their debts, which indicates a negative relationship with the organization's growth (Kayo and Fama, 1997; Gaud et al, 2005). Gomes and Leal (2001), on the other hand, found a positive relationship between the level of growth and the company's indebtedness. Brito et al. (2007) found the same relationship with long-term debt and no relationship with short-term debt. These latest studies found that companies that need more resources to invest in opportunities tend to get more into debt. Therefore, the following hypothesis is proposed:

    H4. There is a significant negative relationship between sales growth and debt indicators.

    For Titman and Wessels (1988), they state that fixed assets help companies to increase their debt because of payment guarantees to obtain and keep these types of investments as their assets. The idea is to mitigate the agency theory between stakeholders and shareholders Myers and Majluf (1984). Therefore, the following hypothesis is proposed:

    H5. There is a significant positive relationship between asset tangibility and debt indicators.

    ...

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