Capital structure of Finnish firms – Estimating the effects of firm characteristics on capital structure

One of the most disputable matters in the theory of finance has been the theory of capital structure. The seminal contributions of Modigliani and Miller (1958, 1963) gave rise to a multitude of studies and debates. Since the initial spark, the financial literature has offered two competing theories of financing decision: the trade-off theory and the pecking order theory. The trade-off theory suggests that firms have an optimal capital structure balancing the benefits and costs of debt. The pecking order theory approaches the firm capital structure from information asymmetry perspective and assumes a hierarchy of financing, with firms using first internal funds, followed by debt and as a last resort equity. This thesis analyses the trade-off and pecking order theories and their predictions on a panel data consisting 78 Finnish firms listed on the OMX Helsinki stock exchange. Estimations are performed for the period 2003–2012. The data is collected from Datastream system and consists of financial statement data. A number of capital structure characteristics are identified: firm size, profitability, firm growth opportunities, risk, asset tangibility and taxes, speed of adjustment and financial deficit. A regression analysis is used to examine the effects of the firm characteristics on capitals structure. The regression models were formed based on the relevant theories. The general capital structure model is estimated with fixed effects estimator. Additionally, dynamic models play an important role in several areas of corporate finance, but with the combination of fixed effects and lagged dependent variables the model estimation is more complicated. A dynamic partial adjustment model is estimated using Arellano and Bond (1991) first-differencing generalized method of moments, the ordinary least squares and fixed effects estimators. The results for Finnish listed firms show support for the predictions of profitability, firm size and non-debt tax shields. However, no conclusive support for the pecking-order theory is found. However, the effect of pecking order cannot be fully ignored and it is concluded that instead of being substitutes the trade-off and pecking order theory appear to complement each other. For the partial adjustment model the results show that Finnish listed firms adjust towards their target capital structure with a speed of 29% a year using book debt ratio.

FIRM, flood insurance rate map and street index, borough of Carteret, New Jersey, Middlesex County /

Relief shown by spot heights.

The moderating role of firm age in the relationship between R&D expenditure and financial performance: evidence from Chinese and US mining firms

We examine the impact of Research and Development (R&D) on the profitability and sales of mining firms in China and the United States (US) and the moderating effect of firm age using Coarsened Exact Matching (CEM). For the combined panel of 168 major US and Chinese mining firms, we find that, on average, a firm engaging in R&D activities earns 4% to 11% higher sales and generates 4% to 13% more profits than firms that do not engage in R&D activities. We also show that, in the mining industry, firm age moderates the relationship between R&D activities and financial performance. A comparatively mature R&D active firm earns 4.4% more profit and generates 7.2% more sales than a younger non-innovative firm. The turning point at which R&D activities switch from making a negative, to positive, contribution to profit and sales is 37 years and 22 years, respectively. Our results are consistentwith the liability of newness, meaning that firm investment in R&D takes time to have a real impact on bottom line measures of financial performance. We conclude with a discussion of the practical implications of our results for Chinese and US mining firms.

Determinants of Terminal Value in the Evaluation of Companies: A Panel Data Approach to the Context of European Companies.

The uncertainty of the future of a firm has to be modelled and incorporated into the evaluation of companies outside their explicit period of analysis, i.e., in the continuing or terminal value considered within valuation models. However, there is a multiplicity of factors that influence the continuing value of businesses which are not currently being considered within valuation models. In fact, ignoring these factors may cause significant errors of judgment, which can lead models to values of goodwill or badwill, far from the substantial value of the inherent assets. Consequently, these results provided will be markedly different from market values. So, why not consider alternative models incorporating life expectancy of companies, as well as the influence of other attributes of the company in order to get a smoother adjustment between market price and valuation methods? This study aims to provide a contribution towards this area, having as its main objective the analysis of potential determinants of firm value in the long term. Using a sample of 714 listed companies, belonging to 15 European countries, and a panel data for the period between 1992 and 2011, our results show that continuing value cannot be regarded as the current value of a constant or growth perpetuity of a particular attribute of the company, but instead be according to a set of attributes such as free cash flow, net income, the average life expectancy of the company, investment in R&D, capabilities and quality of management, liquidity and financing structure.

What firm characteristics determine women's employment in manufacturing? evidence from Bangladesh

The purpose of this paper is to investigate the principal determinants of women's employment in the manufacturing sector of Bangladesh using a firm-level panel data from the World Bank's "Enterprise Survey" for the years 2007, 2011 and 2013. The paper sheds light on the demandside factors, mainly firm-level characteristics, which also influence this decision. Design/methodology/approach - The authors estimate a fractional logit model to model a dependent variable that is limited by zero from below and one from above. Findings - The results indicate that firm size, whether medium or large, and firms' export-oriented activities, have an important impact on women's employment in the manufacturing sector in Bangladesh. Moreover, the authors find that women are significantly more likely to work in unskilledlabour- intensive industries within the manufacturing sector. Research limitations/implications - The research is limited to Bangladesh; however, much of the evidence presented here has implications that are relevant to policymakers in other developing countries. Practical implications - The study identifies factors that affect female employment, that is, where the main constraints to increase female labour force participation. The study focuses on the demand-side factors, which has been somewhat neglected in recent years. As such, it has practical policy implications. Social implications - Focusing on female employment in Bangladesh also sheds light on the nexus between labour market opportunities and social change within a country that is characterised by extreme patriarchy, which has wide-reaching implications. Originality/value - This is an original and comprehensive paper by the authors.

Essays on firm behaviour in the euro area

This thesis examines firms' real decisions using a large panel of unquoted euro area firms over the period 2003-2011. To this end, this thesis is composed of five chapters in which three are the main empirical chapters. They assess the dimensions of firm behaviour across different specifications. Each of these chapters provide a detailed discussion on the contribution, theoretical and empirical background as well as the panel data techniques which are implemented. Chapter 1 describes the introduction and outline of the thesis. Chapter 2 presents an empirical analysis on the link between financial pressure and firms' employment level. In this set-up, it is explored the strength of financial pressure during the financial crisis. It is also tested whether this effect has a different impact for financially constrained and unconstrained firms in the periphery and non-periphery regions. The results of this chapter denote that financial pressure exerts a negative impact on firms' employment decisions and that this effect is stronger during the crisis for financially constrained firms in the periphery. Chapter 3 analyses the cash policies of private and public firms. Controlling for firm size and other standard variables in the literature of cash holdings, empirical findings suggest that private firms hold higher cash reserves than their public counterparts indicating a greater precautionary demand for cash by the former. The relative difference between these two type of firms decreases (increases) the higher (lower) is the the level of financial pressure. The findings are robust to various model specifications and over different sub-samples. Overall, this chapter shows the relevance of firms' size. Taken together, the findings of Chapter 3 are in line with the early literature on cash holdings and contradict the recent studies, which find that the precautionary motive to hold cash is less pronounced for private firms than for public ones. Chapter 4 undertakes an investigation on the relation between firms' stocks of inventories and trade credit (i.e. extended and taken) whilst controlling for the firms' size, the characteristics of the goods transacted, the recent financial crisis and the development of the banking system. The main findings provide evidence of a trade-off between trade credit extended and firms' stock of inventories. In other words, firms' prefer to extend credit in the form of stocks to their financially constrained customers to avoid holdings costly inventories and to increase their sales levels. The provision of trade credit by the firms also depends on the characteristics of the goods transacted. This impact is stronger during the crisis. Larger and liquid banking systems reduce the trade-off between the volume of stocks of inventories and the amount sold on credit. Trade credit taken is not affected by firms' stock of inventories. Chapter 5 presents the conclusions of the thesis. It provides the main contributions, implications and future research of each empirical chapter.

The importance of gestation process dynamics

Principal Topic In this paper we seek to highlight the important intermediate role that the gestation process plays in entrepreneurship by examining its key antecedents and its consequences for new venture emergence. In doing so we take a behavioural perspective and argue that it is not only what a nascent venture is, but what it does (Katz & Gartner, 1988; Shane & Delmar, 2004; Reynolds, 2007) and when it does it during start-up (Reynolds & Miller, 1992; Lichtenstein, Carter, Dooley & Gartner, 2007) that is important. To extend an analogy from biological development, what we suggest is that the way a new venture is nurtured is just as fundamental as its nature. Much prior research has focused on the nature of new ventures and attempted to attribute variations in outcomes directly to the impact resource endowments and investments have. While there is little doubt that venture resource attributes such as human capital, and specifically prior entrepreneurial experience (Alsos & Kolvereid, 1998), access to social (Davidsson & Honig, 2003) and financial capital have an influence. Resource attributes themselves are distal from successful start-up endeavours and remain inanimate if not for the actions of the nascent venture. The key contribution we make is to shift focus from whether or not actions are taken, but when these actions happen and how that is situated in the overall gestation process. Thus, we suggest that it is gestation process dynamics, or when gestation actions occur, that is more proximal to venture outcomes and we focus on this. Recently scholars have highlighted the complexity that exists in the start-up or gestation process, be it temporal or contextual (Liao, Welsch & Tan, 2005; Lichtenstein et al. 2007). There is great variation in how long a start-up process might take (Reynolds & Miller, 1992), some processes require less action than others (Carter, Gartner & Reynolds, 1996), and the overall intensity of the start-up effort is also deemed important (Reynolds, 2007). And, despite some evidence that particular activities are more influential than others (Delmar & Shane, 2003), the order in which events may happen is, until now, largely indeterminate as regard its influence on success (Liao & Welsch, 2008). We suggest that it is this complexity of the intervening gestation process that attenuates the effect of resource endowment and has resulted in mixed findings in previous research. Thus, in order to reduce complexity we shall take a holistic view of the gestation process and argue that it is its’ dynamic properties that determine nascent venture attempt outcomes. Importantly, we acknowledge that particular gestation processes of themselves would not guarantee successful start-up, but it is more correctly the fit between the process dynamics and the ventures attributes (Davidsson, 2005) that is influential. So we aim to examine process dynamics by comparing sub-groups of venture types by resource attributes. Thus, as an initial step toward unpacking the complexity of the gestation process, this paper aims to establish the importance of its role as an intermediary between attributes of the nascent venture and the emergence of that venture. Here, we make a contribution by empirically examining gestation process dynamics and their fit with venture attributes. We do this by firstly, examining that nature of the influence that venture attributes such as human and social capital have on the dynamics of the gestation process, and secondly by investigating the effect that gestation process dynamics have on venture creation outcomes. Methodology and Propositions In order to explore the importance that gestation processes dynamics have in nascent entrepreneurship we conduct an empirical study of ventures start-ups. Data is drawn from a screened random sample of 625 Australian nascent business ventures prior to them achieving consistent outcomes in the market. This data was collected during 2007/8 and 2008/9 as part of the Comprehensive Australian Study of Entrepreneurial Emergence (CAUSEE) project (Davidsson et al., 2008). CAUSEE is a longitudinal panel study conducted over four years, sourcing information from annually administered telephone surveys. Importantly for our study, this methodology allows for the capture and tracking of active nascent venture creation as it happens, thus reducing hindsight and selection biases. In addition, improved tests of causality may be made given that outcome measures are temporally removed from preceding events. The data analysed in this paper represents the first two of these four years, and for the first time has access to follow-up outcome measures for these venture attempts: where 260 were successful, 126 were abandoned, and 191 are still in progress. With regards to venture attributes as gestation process antecedents, we examine specific human capital measured as successful prior experience in entrepreneurship, and direct social capital of the venture as ‘team start-ups’. In assessing gestation process dynamics we follow Lichtenstein et al. (2007) to suggest that the rate, concentration and timing of gestation activities may be used to summarise the complexity dynamics of that process. In addition, we extend this set of measures to include the interaction of discovery and exploitation by way of changes made to the venture idea. Those ventures with successful prior experience or those who conduct symbiotic parallel start-up attempts may be able to, or be forced to, leave their gestation action until later and still derive a successful outcome. In addition access to direct social capital may provide the support upon which the venture may draw in order to persevere in the face of adversity, turning a seemingly futile start-up attempt into a success. On the other hand prior experience may engender the foresight to terminate a venture attempt early should it be seen to be going nowhere. The temporal nature of these conjectures highlight the importance that process dynamics play and will be examined in this research Statistical models are developed to examine gestation process dynamics. We use multivariate general linear modelling to analyse how human and social capital factors influence gestation process dynamics. In turn, we use event history models and stratified Cox regression to assess the influence that gestation process dynamics have on venture outcomes. Results and Implications What entrepreneurs do is of interest to both scholars and practitioners’ alike. Thus the results of this research are important since they focus on nascent behaviour and its outcomes. While venture attributes themselves may be influential this is of little actionable assistance to practitioners. For example it is unhelpful to say to the prospective first time entrepreneur “you’ll be more successful if you have lots of prior experience in firm start-ups”. This research attempts to close this relevance gap by addressing what gestation behaviours might be appropriate, when actions best be focused, and most importantly in what circumstances. Further, we make a contribution to the entrepreneurship literature, examining the role that gestation process dynamics play in outcomes, by specifically attributing these to the nature of the venture itself. This extension is to the best of our knowledge new to the research field.

Venture idea newness, relatedness and performance in nascent ventures

Principal Topic The study of the origin and characteristics of venture ideas - or ''opportunities'' as they are often called - and their contextual fit are key research goals in entrepreneurship (Davidsson, 2004). We define venture idea as ''the core ideas of an entrepreneur about what to sell, how to sell, whom to sell and how an entrepreneur acquire or produce the product or service which he/she sells'' for the purpose of this study. When realized the venture idea becomes a ''business model''. Even though venture ideas are central to entrepreneurship yet its characteristics and their effect to the entrepreneurial process is mysterious. According to Schumpeter (1934) entrepreneurs could creatively destruct the existing market condition by introducing new product/service, new production methods, new markets, and new sources of supply and reorganization of industries. The introduction, development and use of new ideas are generally called as ''innovation'' (Damanpour & Wischnevsky, 2006) and ''newness'' is a property of innovation and is a relative term which means that the degree of unfamiliarity of venture idea either to a firm or to a market. However Schumpeter's (1934) discusses five different types of newness, indicating that type of newness is an important issue. More recently, Shane and Venkataraman (2000) called for research taking into consideration not only the variation of characteristics of individuals but also heterogeneity of venture ideas, Empirically, Samuelson (2001, 2004) investigated process differences between innovative venture ideas and imitative venture ideas. However, he used only a crude dichotomy regarding the venture idea newness. According to Davidsson, (2004) as entrepreneurs could introduce new economic activities ranging from pure imitation to being new to the entire world market, highlighting that newness is a matter of degree. Dahlqvist (2007) examined the venture idea newness and made and attempt at more refined assessment of the degree and type of newness of venture idea. Building on these predecessors our study refines the assessment of venture idea newness by measuring the degree of venture idea newness (new to the world, new to the market, substantially improved while not entirely new, and imitation) for four different types of newness (product/service, method of production, method of promotion, and customer/target market). We then related type and degree of newness to the pace of progress in nascent venturing process. We hypothesize that newness will slow down the business creation process. Shane & Venkataraman (2000) introduced entrepreneurship as the nexus of opportunities and individuals. In line with this some scholars has investigated the relationship between individuals and opportunities. For example Shane (2000) investigates the relatedness between individuals' prior knowledge and identification of opportunities. Shepherd & DeTinne (2005) identified that there is a positive relationship between potential financial reward and the identification of innovative venture ideas. Sarasvathy's 'Effectuation Theory'' assumes high degree of relatedness with founders' skills, knowledge and resources in the selection of venture ideas. However entrepreneurship literature is scant with analyses of how this relatedness affects to the progress of venturing process. Therefore, we assess the venture ideas' degree of relatedness to prior knowledge and resources, and relate these, too, to the pace of progress in nascent venturing process. We hypothesize that relatedness will increase the speed of business creation. Methodology For this study we will compare early findings from data collected through the Comprehensive Australian Study of Entrepreneurial Emergence (CAUSEE). CAUSEE is a longitudinal study whose primary objective is to uncover the factors that initiate, hinder and facilitate the process of emergence and development of new firms. Data were collected from a representative sample of some 30,000 households in Australia using random digit dialing (RDD) telephone survey interviews. Through the first round of data collection identified 600 entrepreneurs who are currently involved in the business start-up process. The unit of the analysis is the emerging venture, with the respondent acting as its spokesperson. The study methodology allows researchers to identify ventures in early stages of creation and to longitudinally follow their progression through data collection periods over time. Our measures of newness build on previous work by Dahlqvist (2007). Our adapted version was developed over two pre-tests with about 80 participants in each. The measures of relatedness were developed through the two rounds of pre-testing. The pace of progress in the venture creation process is assessed with the help of time-stamped gestation activities; a technique developed in the Panel Study of Entrepreneurial Dynamics (PSED). Results and Implications We hypothesized that venture idea newness slows down the venturing process whereas relatedness facilitates the venturing process. Results of 600 nascent entrepreneurs in Australia indicated that there is marginal support for the hypothesis that relatedness assists the gestation progress. Newness is significant but is the opposite sign to the hypothesized. The results give number of implications for researchers, business founders, consultants and policy makers in terms of better knowledge of the venture creation process.