However, obrien 2003 argued that the effect of financial leverage on performance may be contingent upon competitive intensity and the strategy pursued by the firm and researchers noted the need. However, virtually all crosssectional empirical studies of the leveragecash flow relationship find a negative contemporaneous association. A read is counted each time someone views a publication summary such as the title, abstract, and list of authors, clicks on a figure, or views or downloads the fulltext. Raviv, 1991, the theory of capital structure, journal of finance 46, 297355. This theoretical literature has proven that the assumptions underlying the modigliani and miller theory are, in general, not ful. Pdf in this paper the authors survey capital structure theories, from the startup. Grossman and hart take the perspective of the securities holders and restrict themselves to the implications for the public value of the firm. It is not clear ex ante whether and, if so, what effect the ruling would have had on the innovation activities of delaware firms further away from insolvency i. Other studies suggest that one specific way to tie pay to performance is by making a greater percentage of a managers compensation equitybased, such as through incentive stock options e. Taken together, the results suggest a rethinking of the. Peterson distinguished professor of finance, kellogg graduate school of management, northwestern university. The incumbent management team receives the benefits of control. Deviations from contractual priority in the sale of vc. This table describes deviations from contractual priority in a sample of 42 vcbacked firms sold in 2003 or 2004.
The pecking order theory of financing demonstrates that capital structure is driven by firms desire to finance new investments, first internally, then with lowrisk debt, and finally with equity myers, 1984. Comparing the sum of these standalone values to the firms actual value implies a % to 15% average value loss from diversification during 1986 1991. Harris and raviv 1991 survey the theoretical literature that explains differences in observed capital structures in developed economies. Capital structure decisions in multibusiness firms. The study examined the relationship between capital structure and profitability of nbfcs listed in nse in india. Although the two groups were not explicitly matched on the pclr, the average score in each was 19. Journal of empirical finance the firms leveragecash flow.
Myers, 1991 principles of corporate finance, c haps. Pdf finance scholars approach to capitalstructure issues reflects a. Harris is chicago board of trade professor of finance and business economics, graduate school of business, university of chicago. We estimate diversifications effect on firm value by imputing standalone values for individual business segments. While there have certainly been important contributions afterwards, they have been mostly empirical, and they have not undermined the conceptual framework underlying harris and raviv s analyses. Evidence from jordanian industrial companies 177 of these studies, some broad categories of capital structure determinants have emerged.
This paper surveys capital structure theories based on agency costs, asymmetric. Harris would also like to thank dimensional fund advisors. Harris and raviv 1991, bolton and scharfstein 1996, and hart and moore 1998. The survey by harris and raviv 1991 and the empirical study by titman and wessels 1988 are commonly cited as sources for basic empirical facts about capital structure decisions. Grossman and hart 1988 and harris and raviv 1988 analyze the effects that deviations from the one shareone vote principle and the simple majority rule have on the value of the firm. Nbfcs have emerged as financial intermediaries and growth engines in the indian financial system. We gratefully acknowledge the financial support of the bradley foundation. In harris and raviv 1990a and stulz 1990, managers and investors disagree over an operating decision. Benefits of control, managerial ownership, and the stock. Since 1984, periodic october supplements to the current population survey cps have asked individuals if they use computers at work. A theory of board control and size by milton harris, artur.
The impact of the ownership structure and the quality of financial information on the cost of debt of tunisian firms. Thus, we compliment zhangs 2008 work by investigating. Often reference is made to the survey by harris and raviv 1991 or to the. The theories of capital structure were first propounded in the 1950s durand, 1952. The ohio state university fisher college of business. The timing model addresses the three questions, but it relies on the assumption that the market fails to incorporate all the information communicated by a security issue. Capital structure and the informational role of debt. Smith and watts, 1992 than as a model of security issue choice. Harris, milton and raviv, artur, a theory of board control and size. The latter two papers also have insightful things to say about the financial contracting literature. Similar to our model, harris and raviv 1990 study the.
Relationship between capital structure and profitability. Durand 1952 put forward his relevance theory stating that capital structure affects the value of firms and companies because of the impact of relative different costs of debt. Evidence from mergers and acquisitions 89 common in continental europe faccio and lang, 2002. Pdf capital structure decisions in multibusiness firms. Harris and raviv 1991 survey the theoretical liter ature that explains differences in observed capital structures in developed economies. Capital structure decisions munich personal repec archive. Harris, raviv 1991, the theory of capital structure, journal of finance, 46, 297 355. The last two rows provide this data limited to companies where a deviation from contractual priority occurred.
Because the pclr was scored using file information only, the cutoff score for classifying offenders as psychopaths was set at 25 rather than the customary 30. At the macrolevel, several authors have maintained that corporate debt increases the vulnera. However, the core question of what the determinants of companies capital structure are has not reached a consensus amongst theorists myers, 2001. Capital structure and speed of adjustment in nonfinancial. See harris and raviv, 1991, for an excellent description of these conflicts. Capital structure and ownership distribution of tender offer. Parsons and titman 2009 because they can more easily be redeployed at relatively low transaction costs when the borrower defaults or becomes distressed. Harris and raviv 1988 argue that the market value of the firm reflects only the firms cash flows, as competition among passive investors will drive the market price to the present value of the cash flows net of the benefits of control p. Debt financing, survival, and growth of startup firms. By contrast, banking firms are typically subject to government supervision and regulation, including onsite examinations and offsite monitoring. March 1991 the theory of capital structure milton harris and artur raviv abstract this paper surveys capital structure theories based on agency costs, asymmetric information, productinput market interactions, and corporate control considera tions but excluding taxbased theories. Harris and raviv 1991 categorize the determinants of capital structure as agency factors, asymmetric information, markets and competition, and corporate control.
Titman and wessels 1988, and harris and raviv 1991, however, point out that the choice of suitable explanatory variables is potentially continues. Tangible assets also tend to be less risky and easier to value than intangible assets. Small businesses and computers federal reserve bank of. The center for research in security prices working paper. Information aggregation through stock prices and the cost. The theory of capital structure wiley online library. The optimal capital structure in harris and raviv trades off improved. It is especially noteworthy that, ten years later, the survey by harris and raviv 1991 would not necessitate any dramatic rewriting. Several studies shed light on the specific characteristics of firms and industries that determine leverage ratios. However, harris and raviv 1991 reported that nondebt tax shield is positively correlated with debt.
In particular, in harris and raviv managers are assumed to want always to continue the firms current operations even if liquidation of the firm is preferred by investors. A tension exists between debt holders and stockholders, because risky ventures. Journal of financial and strategic decisions volume 7. American journal of business education january 2011. Harris and raviv 1991 have summarized see table iii, p. These two classic papers illustrate the problem of disagreements over basic facts. An incomplete list of important recent work includes hovakimian, opler, and titman 2001, baker and wurgler 2002, fama and french 2002, korajczyk and levy 2003, flannery.
Firm performance firm performance in the literature is based on the value of the firm. Based on theoretical analysis, numerous scholars have carried out empirical research from diverse perspectives national, industry. Determinants of capital structure univerzita karlova. Security prices crsp 1991 daily returns files, 1991. Market evidence on the opaqueness of banking firms assets. The harris and raviv model predicts that firms with higher liquidation value, e. We are grateful to the national science foundation and the bradley foundation for financial support. Executive compensation structure, ownership, and firm.
Options, equity risks, and the value of capital structure. Our objective in doing so is to explicitly study whether non. Lisa received september 1991, final version received march 1992 this paper argues that corporations may use convertible bonds as an indirect way to get equity into. In the presence of frictions, panacea university document d14 pdf firms adjust their capital structure infrequently.
The only exception is the relationship between capital structure and roa which is negative. Raviv 1991 provided a survey of the development of this theory as of 1991. Cg affects value as a result of reduced expropriation by insiders and improvement in the expected cash flow that can be distributed to investors. Brien 2003 argued that the effect of financial leverage on performance may be contingent upon competitive intensity and the strategy pursued by the firm and researchers noted the need for studies that examine the influence of these variables. Harris and artur raviv 1991, andrei shleifer and robert vishny 1997, and luigi zingales 2000 that the reader can consult to supplement what i have to say. Peterson professor of finance, kellogg graduate school of management, northwestern university, and professor, faculty of management, tel aviv university. Dalam rangkuman harris dan raviv 1991 dapat diidentifikasi beberapa variabel yang secara teori dan empiris berlaku untuk perusahaan di amerika serikat. The theory of capital structure milton harris ecsocman. In unregulated industries, these agency problems are resolved via marketbased mechanisms.