Chapter iii concepts and theories of capital structure and profitability. Present an argument in support of an mncs favoring a debtintensive capital structure. Mergers, capital structure and risk european financial. Pdf how country affects the capital structure choice.
Capital structure is essentially concerned with how the firm decides to divide its cash flows into two broad components, a fixed component that is earmarked to meet the obligations toward debt capital and a residual component that belongs to equity shareholdersp. The international cost of capital and capital structure. This ratio indicates the proportion of longterm debt in a companys capital structure. Generally, the tax advantages of debt finance lead the. The capital structure decision involves the choice of debt versus equity financing, and is influenced. Introduction the capital structure is defined as the combine of debt and equity that the firm utilizes in its operation. Although the literature on mergers and acquisitions that explains why. A merge may expand two companies marketing and distribution, giving them new sales opportunities. International journal of business and social science vol. An international comparison of capital structure and debt maturity choices joseph p. Seller merges into buyer, with buyer as surviving corporation note.
Capital structure before and after merger and acquisition. International journal of management sciences and business research volume 2, issue 1 issn 22268235 capital structure before and after. The firms investment decision and the cost of capital. International capital structure international 16 and the. The effect of capital structure on profitability of energy. Impact of ownership structure and corporate governance on.
Capital structure decision the overall capital structure of an mnc is essentially a combination of the capital structures of the parent body and its subsidiaries. Hence, this paper attempts to examine the impact of merger and acquisition of malaysian bank by. A reporting corporation files this form to report an acquisition of control or a substantial change in the capital structure of a domestic corporation. A shift to more equity would reduce the corporate tax advantage from using debt. Debt comes in the form of bond issues or longterm notes. Eisner the walt disney company 500 south buena vista. International journal of management sciences and business research volume 2, issue 1 issn 22268235 page 1 capital structure before and after merger and acquisition. This paper uses descriptive statistic to compare the capital ratios and profitability ratios of 5 years before and after merger and acquisition to identify the impact. The capital structure of a given firm reflects its financing decisions. Mergers in kenya banking industry have grown dramatically since 1994.
According to modern corporate finance theories, agency cost is one of the determinants of capital structure whereas corporate governance is structured to alleviate agency issues. What happens to the capital structure of a company after. Most of the research on capital structure has focused on the proportions of debt vs. It is the employment of an asset source of finance for which. The patterns of corporate capital structures around the world are also discussed. Myers he study of capital structure attempts to explain the mix of securities and financing sources used by corporations to finance real investment. The objective of a firm should therefore be directed towards the maximization of its value by examining its capital structure or financial leverage decision from the. International journal of management sciences and business research, 2012. Some of the reasons put forward for mergers are to meet the increased levels of share capital, market share, firm size, information asymmetry, tax regimes, and to benefit from best. Pdf capital structure before and after merger and acquisition.
Pdf recent international financial research finds that not only firm and. Several theories have been developed so far to explain how firms decide on their debtequity ratio. Diversification strategy and its influence on the capital. A merger can also improve a companys standing in the investment community. Explain the effect of merger on earnings per share and market price per share. Financial performance, capital structure, leverage, return on equity, return on assets, and profitability. The final sample covers between 30 and 70 percent of the companies listed in every country, and represents more than 50 percent of the market capitalization in each country. They also commented the relation structures between employers and employees. Investment firms, 3g capital and berkshire hathaway, have teamed up to create a new company through the merger of h. Information about form 8806, information return for acquisition of control or substantial change in capital structure, including recent updates, related forms and instructions on how to file.
Bahadur institute of management sciences, university of mysore, india available online at. Capital structure choice is an important decision for a firm. Giddy corporate financial restructuring 15 dear michael, february 11, 2004 mr. Rajan and luigi zingales abstract we investigate the determinants of capital structure choice by analyzing the financ ing decisions of public firms in the major industrialized countries. Potential effect of capital structure of merger and acquisition.
If neither corporation files form 8806, both corporations are jointly and severally liable for any applicable penalties. Corporate financial restructuring new york university. About form 8806, information return for acquisition of. Internationalizing the firms cost of capital is one such policy. It is important not only from a return maximization point of view, but also this decision has a great impact on a firms ability to successfully operate in a competitive environment.
A firms capital consists of equity retained earnings and funds obtained by issuing stock and debt borrowed funds. The theory provides insight into a firms capital structure decision in a capital. Banking industry in malaysia ong tze san and ng phing phing faculty of economics and management, university putra malaysia, malaysia corresponding author. Ong, tze san and phing phing, ng, capital structure before and after merger and acquisition. Even in a merger, one of the firms is almost always the legal acquiror. A practical guide to mergers, acquisitions, and divestitures delta publishing company. Pdf effect of mergers on capital structure of a firm. A firm that can reduce its cost of capital will increase the profitable capital expenditures that the firm can take on and increase the wealth of the shareholders. Capital structure is defined as the mix of debt and equity or any other long term sources of funds used to finance a firms investment and operating activities. Calling it a merger rather than an acquisition is usually an acknowledgement that the resulting company is on a more equal footing. Shareholders expect the value of their investment to increase by an amount greater than the value of the underlying risks of their investments, by taking into consideration the time value of money. Capital structure is the mix of ownersupplied capital equity, reserves, surplus and borrowed capital bonds, loans that a firm uses to finance business operations. Most research on capital structure has focused on public, non. The impact of adjustment in capital structure in mergers.
This paper first presents a model of the optimal overall capital structure of the multinational firm reflecting tax and nontax factors. 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. This paper focuses on seven pairs of anchor banks which merged and acquired other minor banks in malaysia from year 1999 until 2006. The capital structure puzzle is unravelled and a clear picture is presented in terms of why capital structure matters. Despite being the worlds largest integrated energy company, exxon has held a. Consequently, the market value of its shares may be affected by the capital structure decision. Amzn is an ecommerce platform that has grown into one of the worlds largest and most diverse retailers. Abstract this study examines how the institutional environment in. Merger three basic structures, all of which involve statutory mergers in which sellers outstanding stock is converted into the right to receive stock of buyer, cash, or other consideration. Ong tze san department of accounting and finance, faculty of economics and management, upm. International journal of management sciences and business.
An international comparison of capital structure and debt. The capital structure is how a firm finances its overall operations and growth by using different sources of funds. International journal of management sciences and business research. The firms cost of retained earnings reflects an opportunity cost representing what the existing shareholders could have earned if they had received the earnings as dividends and invested the funds themselves. When the target is merged in a subsidiary of the buyer the case is called a. The work of 2 on capital structure irrelevance has generated considerable interest among academic scholars to study the capital structure and its impact on firm value. Additional tests suggest a causal relation between acquirer organization capital and deal performance. An introduction to international capital markets products, strategies, participants second edition andrew m. It is very commonly known that the value of a firm can be maximized by minimizing its capital cost. Financial leverage changes associated with corporate mergers.