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Modeling Elements for Correlation the Enterprise’s Capital Cost and Its Financial Structure

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Author Info

  • Dorin COSMA

    (Faculty of Economics and Business Administration, West University of Timisoara, Romania)

  • Anca-Ramona BOTEZAT

    (S.D.N. Arad, Romania)

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    Abstract

    In this research paper, our attention turns to the correlation between the enterprise’s cost of capital and its financial structure, the subject having both a theoretical and a practical approach. In our opinion, the decision referring to the financial structure is based on the effect of economic arbitrage between the tax economy as a result of indebtedness and the consequence of a major debt for the solvency and the ability of the enterprise to continue its work. In analyzing the financial structure of the enterprise an important element is the financial leverage, in the same time there must be mentioned the existence of the relationship between the cost of financial debt of the enterprise and the effect of financial leverage. The last section of the research paper presents an econometric study conducted using the EViews program and the respective method Pooled IV / Two-stages EGLS, and subsequent to the regression analysis results that there is a statistically significant correlation between the considered variables, which implies that there is a correlation between the enterprises’s cost of capital and its financial structure.

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    Bibliographic Info

    Article provided by West University of Timisoara, Romania, Faculty of Economics and Business Administration in its journal Timisoara Journal of Economics.

    Volume (Year): 5 (2012)
    Issue (Month): 17 ()
    Pages: 79–95

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    Handle: RePEc:wun:journl:tje:v05:y2012:i17:a06

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    Related research

    Keywords: enterprise; cost of capital; financial structure; correlation;

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    References

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    1. Stephen A. Ross, 1977. "The Determination of Financial Structure: The Incentive-Signalling Approach," Bell Journal of Economics, The RAND Corporation, vol. 8(1), pages 23-40, Spring.
    2. Noe, Thomas H & Rebello, Michael J, 1996. " Asymmetric Information, Managerial Opportunism, Financing, and Payout Policies," Journal of Finance, American Finance Association, vol. 51(2), pages 637-60, June.
    3. Darrough, Masako N & Stoughton, Neal M, 1986. " Moral Hazard and Adverse Selection: The Question of Financial Structure," Journal of Finance, American Finance Association, vol. 41(2), pages 501-13, June.
    4. Jensen, Michael C. & Meckling, William H., 1976. "Theory of the firm: Managerial behavior, agency costs and ownership structure," Journal of Financial Economics, Elsevier, vol. 3(4), pages 305-360, October.
    5. Laurence Booth, 2001. "Capital Structures in Developing Countries," Journal of Finance, American Finance Association, vol. 56(1), pages 87-130, 02.
    6. Stewart C. Myers, 1984. "Capital Structure Puzzle," NBER Working Papers 1393, National Bureau of Economic Research, Inc.
    7. Marsh, Paul, 1982. " The Choice between Equity and Debt: An Empirical Study," Journal of Finance, American Finance Association, vol. 37(1), pages 121-44, March.
    8. Zwiebel, Jeffrey, 1996. "Dynamic Capital Structure under Managerial Entrenchment," American Economic Review, American Economic Association, vol. 86(5), pages 1197-1215, December.
    9. Myers, Stewart C., 1984. "Capital structure puzzle," Working papers 1548-84., Massachusetts Institute of Technology (MIT), Sloan School of Management.
    10. Bradley, Michael & Jarrell, Gregg A & Kim, E Han, 1984. " On the Existence of an Optimal Capital Structure: Theory and Evidence," Journal of Finance, American Finance Association, vol. 39(3), pages 857-78, July.
    11. Myers, Stewart C, 1984. " The Capital Structure Puzzle," Journal of Finance, American Finance Association, vol. 39(3), pages 575-92, July.
    12. Maria Psillaki & Nikolaos Daskalakis, 2009. "Are the determinants of capital structure country or firm specific?," Small Business Economics, Springer, vol. 33(3), pages 319-333, October.
    13. DeAngelo, Harry & Masulis, Ronald W., 1980. "Optimal capital structure under corporate and personal taxation," Journal of Financial Economics, Elsevier, vol. 8(1), pages 3-29, March.
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