This paper offers an empirical look at the corporate performance and capital structure of SMEs from UK. The paper combines two strands of business research: one from the international business field on corporate performance and country of origin; and the other from corporate finance research on capital structure. We study corporations from UK and find that both financial performance and capital structure are influenced by the country of origin. Specifically, we find that corporations have significantly higher returns on equity and invested capital than corporations from the other countries, possibly reflecting the concentrated conglomerate business structure typical of UK. The performance differences among firms from other countries are not statistically significant. Firms have significantly higher leverage than firms from the other countries. Leverage itself does not seem to affect corporate performance.
Table of Contents
Chapter 1: Introduction5
Aims and Objective6
Significance7
Shortcomings9
Capital Structure Theory10
What is capital structure?11
Chapter plans11
Chapter 2: Review of Related Literature13
Measures of Capital Structure15
Theories On Capital Structure17
Shortcomings Of The Modigliani & Miller Theorem21
The Static Trade-Off Theory25
Empirical Evidence26
The Free Cash Flow Theory27
Informal Asymmetry Hypothesis28
The Signaling Theory28
The Pecking Order Theory30
The pecking order theory vs. The trade-off theory32
Reported practice33
Financial intermediaries (size_fin.intermed)34
The efficiency of the legal system (legal_efficiency)35
Commercial law: creditor and shareholder rights (creditor_rgt, shareholder_rgt)36
Firm-specific Capital Structure Determinants37
Chapter 3: Methodology40
Sample Selection40
The Econometric Model44
Chapter 4: Results and Discussion47
Data Analysis47
Descriptive Statistics of Country-Specific Variable49
Determinants of Debt Levels Across Countries52
Means of OLS Regression55
Presenting Data about Capital Structure Adjustments Across Countires58
Effects of Institution- and Market-specific Characteristics on Debt Adjustments60
Capital Structure Adjustments62
Robustness Tests63
The Pecking Order Or Static Trade-Off Theory64
The Capital Structure Decision : International Evidence65
Bankruptcy law66
Chapter 5: Conclusion69
Reference73
Chapter 1: Introduction
Many international business researchers have argued that increased globalization of markets and increasing international competition imply that firms in all nations will face similar, if not identical, competitive environments. If companies respond in similar ways to the global marketplace and the pressures of competition, profitability performance would not be a consistent function of the country of origin. Several studies have compared the performance of corporations across countries and tested for differences in performance that can be traced to the country of origin. The evidence presented by these studies has been mixed. While most of the earlier studies found some significant differences in performance linked to the home country, Blaine (1994) found that during the latter half of the eighties, large German, Japanese and American corporations earned roughly equivalent rates of return. Nearly all of the previous studies on corporate performance across countries use data from the industrialized countries of Europe, US, and Japan. Further, most of these studies use only accounting performance measures and do not attempt cross-sectional analysis to link corporate financial policies to performance.
There is a large body of theoretical and empirical research on the determinants of capital structure. Most of the empirical research has focused on US corporate data. The few studies that analyze the capital structure of corporations from other countries tend to look at companies in the major industrialized ...