Capital Structure and Firm Performance
1. Introduction
赣州开店Agency costs reprent important problems in corporate governance in both financial and nonfinancialindustries. The paration of ownership and control in a professionally managed firm may result in managerxerting insufficient work effort, indulging in perquisites, choosing inputs or outputs that suit their ownpreferences, or otherwi failing to maximize firm value. In effect, the agency costs of outside ownership equalthe lost value from professional managers maximizing their own utility, rather than the value of the firm. Theory suggests that the choice of capital structure may help mitigate the agency costs. Under theagency costs hypothesis, high leverage or a low equity/ast ratio reduces the agency costs of outside equity andincreas firm value by constraining or encouraging managers to act more in the interests of shareholders. Sincethe minal paper by Jenn and Meckling (1976), a vast literature on such agency-theoretic explanations ofcapital structure has developed (e Harris and Raviv 1991 and Myers 2001 for reviews). Greater financialleverage may affect managers and reduce agency costs through the threat of liquidation, which caus personalloss to managers of salaries, reputation, perquisites, etc. (e.g., Grossman and Hart 1982, Williams 1987), andthrough pressure to generate cash flow to pay interest expens (e.g., Jenn 1986). Higher leverage canmitigate conflicts
between shareholders and managers concerning the choice of investment (e.g., Myers 1977), the amount of risk to undertake (e.g., Jenn and Meckling 1976, Williams 1987), the conditions under which thefirm is liquidated (e.g., Harris and Raviv 1990), and dividend policy (e.g., Stulz 1990).
A testable prediction of this class of models is that increasing the leverage ratio should result in loweragency costs of outside equity and improved firm performance, all el held equal. However, when leveragebecomes relatively high, further increas generate significant agency costs of outside debt –including higherexpected costs of bankruptcy or financial distress –arising from conflicts between bondholders andshareholders.1 Becau it is difficult to distinguish empirically between the two sources of agency costs, wefollow the literature and allow the relationship between total agency costs and leverage to be nonmonotonic.
Despite the importance of this theory, there is at best mixed empirical evidence in the extant literature(e Harris and Raviv 1991, Titman 2000, and Myers 2001 for reviews). Tests of the agency costs hypothesistypically regress measures of firm performance on the equity capital ratio or other indicator of leverage plussome control variables. At least three problems appear in the prior studies that we address in our application.In the ca of the banking industry studied here, there are also regulatory
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costs associated with very high leverage.
寒冷的一天First, the measures of firm performance are usually ratios fashioned from financial statements or stockmarket prices, such as industry-adjusted operating margins or stock market returns. The measures do not netout the effects of differences in exogenous market factors that affect firm value, but are beyon d management’scontrol and therefore cannot reflect agency costs. Thus, the tests may be confounded by factors that areunrelated to agency costs. As well, the studies generally do not t a parate benchmark for each firm’sperformance that would be reali zed if agency costs were minimized.清除手机内存垃圾
We address the measurement problem by using profit efficiency as our indicator of firm performance.The link between productive efficiency and agency costs was first suggested by Stigler (1976), and profitefficiency reprents a refinement of the efficiency concept developed since that time.2 Profit efficiencyevaluates how clo a firm is to earning the profit that a best-practice firm would earn facing the sameexogenous conditions. This has the benefit of controlling for factors outside the control of management that arenot part of agency costs. In contrast, comparisons of standard financial ratios, stock market returns, and similarmeasures typically do not control for the exogenous factors. Even when the measures ud in the literature areindustry adjusted, they may n
ot account for important differences across firms within an industry – such as localmarket conditions – as we are able to do with profit efficiency. In addition, the performance of a best-practicefirm under the same exogenous conditions is a reasonable benchmark for how the firm would be expected toperform if agency costs were minimized.
Second, the prior rearch generally does not take into account the possibility of rever causation fromperformance to capital structure. If firm performance affects the choice of capital structure, then failure to takethis rever causality into account may result in simultaneous-equations bias. That is, regressions of firmperformance on a measure of leverage may confound the effects of capital structure on performance with theeffects of performance on capital structure.
We address this problem by allowing for rever causality from performance to capital structure. Wediscuss below two hypothes for why firm performance may affect the choice of capital structure, theefficiency-risk hypothesis and the franchi-value hypothesis. We construct a two-equation structural model andestimate it using two-stage least squares (2SLS). An equation specifying profit efficiency as a functi on of the2 Stigler’s argument was part of a broader exchange over whether productive efficiency (or X-efficiency) primarily reflectsdifficulties in reconciling the preferences of multiple optimizing agents –what is today called agency costs –versus “true” inefficien
cy, or failure to optimize (e.g., Stigler 1976, Leibenstein 1978). firm’s equity capital ratio and other variables is ud to test the agency costs hypothesis, and an equationspecifying the equity capital ratio as a function of the firm’s profi t
工作总结范文efficiency and other variables is ud to testthe net effects of the efficiency-risk and franchi-value hypothes. Both equations are econometricallyidentified through exclusion restrictions that are consistent with the theories.
Third, some, but not all of the prior studies did not take ownership structure into account. Undervirtually any theory of agency costs, ownership structure is important, since it is the paration of ownership andcontrol that creates agency costs (e.g., Barnea, Haugen, and Senbet 1985). Greater insider shares may reduceagency costs, although the effect may be reverd at very high levels of insider holdings (e.g., Morck, Shleifer, and Vishny 1988). As well, outside block ownership or institutional holdings tend to mitigate agency costs bycreating a relatively efficient monitor of the managers (e.g., Shleifer and Vishny 1986). Exclusion of theownership variables may bias the test results becau the ownership variables may be correlated with thedependent variable in the agency cost equation (performance) and with the key exogenous variable (leverage)through the rever causality hypothes noted above
To address this third problem, we include ownership structure variables in the agency cost equationexplaining profit efficiency. We include insider ownership, outside block holdings, and institutional holdings.
Our application to data from the banking industry is advantageous becau of the abundance of qualitydata available on firms in this industry. In particular, we have detailed financial data for a large number of firmsproducing comparable products with similar technologies, and information on market prices and otherexogenous conditions in the local markets in which they operate. In addition, some studies in this literature findevidence of the link between the efficiency of firms and variables that are recognized to affect agency costs,including leverage and ownership structure (e Berger and Mester 1997 for a review).
Although banking is a regulated industry, banks are subject to the same type of agency costs and otherinfluences on behavior as other industries. The banks in the sample are subject to esntially equal regulatoryconstraints, and we focus on differences across banks, not between banks and other firms. Most banks are wellabove the regulatory capital minimums, and our results are bad primarily on differences at the mar
2. Theories of rever causality from performance to capital structure
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As noted, prior rearch on agency costs generally does not take into account the possibility of revercausation from performance to capital structure, which may result in simultaneous-equations bias. We offer twohypothes of rever causation bad on violations of the Modigliani-Miller
设计专业有哪些perfect-markets assumption. It isassumed that various market imperfections (e.g., taxes, bankruptcy costs, asymmetric information) result in abalance between tho favoring more versus less equity capital, and that differences in profit efficiency move theoptimal equity capital ratio marginally up or down.
Under the efficiency-risk hypothesis, more efficient firms choo lower equity ratios than other firms, allel equal, becau higher efficiency reduces the expected costs of bankruptcy and financial distress. Under thishypothesis, higher profit efficiency generates a higher expected return for a given capital structure, and thehigher efficiency substitutes to some degree for equity capital in protecting the firm against future cris. This isa joint hypothesis that i) profit efficiency is strongly positively associated with expected returns, and ii) thehigher expected returns from high efficiency are substituted for equity capital to manage risks.
The evidence is consistent with the first part of the hypothesis, i.e., that profit efficiency is stronglypo
sitively associated with expected returns in banking. Profit efficiency has been found to be significantlypositively correlated with returns on equity and returns on asts (e.g., Berger and Mester 1997) and otherevidence suggests that profit efficiency is relatively stable over time (e.g., DeYoung 1997), so that a finding ofhigh current profit efficiency tends to yield high future expected returns.
The cond part of the hypothesis –that higher expected returns for more efficient banks are substitutedfor equity capital –follows from a standard Altman z-score analysis of firm insolvency (Altman 1968). Highexpected returns and high equity capital ratio can each rve as a buffer against portfolio risks to reduce theprobabilities of incurring the costs of financialdistressbankruptcy, so firms with high expected returns owing tohigh profit efficiency can hold lower equity ratios. The z-score is the number of standard deviations below theexpected return that the actual return can go before equity is depleted and the firm is insolvent, zi = (μi +ECAPi)/σi, where μi and σi are the mean and standard deviation, respectively, of the rate of return on asts, andratios for tho that were fully owned by a single owner-manager. This may be an improvement in the analysis of agencycosts for small firms, but it does not address our main issues of controlling for differences in exogenous conditions and intting up individualized firm benchmarks for performance.
ECAPi is the ratio of equity to asts. Bad on the first part of the efficiency-risk hypothesis, firms with higherefficiency will have higher μi. Bad on the cond part of the hypothesis, a higher μi allows the firm to have alower ECAPi for a ven z-score, so that more efficient firms may choo lower equity capital ratios.
文章出处：Raposo Clara C. Capital Structure and Firm Performance .Journal of
闻寡人之耳者Finance.Blackwell publishing.2005, (6): 2701-2727.
