MM theories can help firms understand that it is not only the capital structure and dividend policy that matter in firms strengths but other variables should be taken into consideration. MM later by study of corporate taxes suggested that firms should use as much debt capital as possible in order to use the full their value by increasing that interest tax shield. Further in the Altman’s Z score card measure of financial distress, capital structure alone cannot determine the optimal firm performance but combination of both Assets and
Lafontaine (1992) described that franchising includes risk, moral hazard on the side of the agent, moral hazard on the side of the principal, the capital requirements of the franchisor and the information asymmetry between both sides. Lafontaine (1992) performed an empirical research regarding this subject which resulted in incentive issues on both sides of the franchising contract. This result aligns with the empirical research by Norton (1988), who found that franchising is more often used when there is an incentive or monitor problem downstream. Lafontaine (1992) argues that franchisees are more motivated than hired managers and that this is one of the biggest advantages of
As this model was developed throughout the years by Friend, Westerfield and Dittmar they aimed to prove that skewness and kurtosis were significant in explaining the variable asset returns. They proceeded to examine that the systematic skewness (co-skewness) is capable of explaining the behaviour of asset returns which was before not fully explained by the traditional CAPM. The higher moment models therefore continues to suggest that many investors prefer ‘odd’ moments and are willing to pay a substantially higher price for them and that investors dislike even or safe moments and usually expect to be compensated for them. (O’Brien 2016) This higher moment model demonstrates to us that investors are usually of a more risk-taking nature compared to the traditional CAPM model. Studies have shown their results suggest that the input variables, such as market return, book-to-market ratio, co-skewness, and co-kurtosis have had a significant influence on share returns.
These are reasons, among the other, why earning—by theory and facts—tend to be “managed.” 1. Meeting internal earning demand – Big corporations demand managers to achieve certain earning level before providing bonuses and benefits. There is nothing wrong with demanding earning target nor the incentive, though, but as with any performance review system, it is inevitable that managers being evaluated will have a tendency to forget the economic factors underlying the measurement and instead focus on the measured number
That study reasoned that, because capital structure represents the major part of a firm’s financial risk, top management's risk appetite affects the capital structure and the conditions and amount debt lenders are willing to lend. Furthermore, Barton & Gordon (1988) argued that the strategic decisions should ‘fit’ with the goals that top management has set for the firm. Hence, management’s goals for the firm affect capital structure. Lastly, they combined the idea that management strives for maximum control, with the restrictions that are associated with debt financing. This led to the proposition that management prefers internally generated funds over external
A carefully build capital structure will contributes to a good market value. If a firm carries too much debt which increases the leverage will influence investors to retract their money. This will make the market value of a firm to decrease. Each of the funds in capital structure has its own cost to the firm. It is because debt and equity are provided by investors or also known as owners and creditors thus, the fund provider has their expectation and demands on the firm’s profitability and growth for long term.
According to Myers, (1984) firms prefer to finance new investments, first internally with retained earnings, then debt, and finally with the issue of new equity. Myers (1984) argues that an optimum capital structure is difficult to define as equity appears at the top and bottom of the “pecking order”. According to Myers (1984) internal funds incur no floatation costs thus firms will prefer to use them to finance their investments since they have no conditions attached to it unlike debt. The pecking order theory is about what the firm‟s management will prefer in terms of the sources of finance to use. Firstly firms will chose internal finance that is using profits from previous years.
Issuing additional shares (equity) will result in a dilution of control among the existing shareholders/owners. Shareholders who do not want to lose control of their business, preferring to keep major decision-making in their own hands and will only consider equity financing up to a certain level. Borrowing: When sourcing finance, we also need to consider whether we should obtain long-term or short-term funding. In many cases, it may be appropriate to match the type of funding to the nature of the asset. While the long-term finance is repaid over a course of the period which includes bank loans, debentures and retained profits, the short-term finance appeals more as it comes with no additional penalty charge for early payment, unlike the long-term finance.
However, in this study can conclude that cash conversion cycle is essential as a measure of liquidity than current ratio that affects profitability. At the industry level, it is found that the size variable also have impact on profitability. (Eljelly,
Since a company that is constantly having trouble its short term debt is at a higher risk. Liquidity ratios are the perfect tool to measure whether a company will be able to fill the gap that will effect in paying of the debt and comfort a continuing of the business. Any type of ratio analysis should be looked at within the correct context. For instance, investor's should look forward at a company's ratios against those of its competitors(which will give a clear picture of the business), its sector and its industry and over the previous and other backward years. Liquidity ratios using time-series analysis, competitive analysis which helps in knowing the company’s