Determinants of Leverage in Slovenian Blue-Chip Firms and Stock Performance Following Substantial Debt Increases
Hypotheses concerning capital structures are some of the most frequently tested in the financial literature. Authors usually discuss different incentives for the use of leverage. Their views can be broadly classified in two main groups. The proponents of the first argue that leverage increases the cash flow available to investors. With the use of debt a firm gains because it uses a cheaper component of capital and since it pays less tax thanks to advantageous debt tax shields. On the other hand, the proponents of the second group stress the importance of minimising transaction costs, and information asymmetry. They point to a pecking order of finance sources. In this article, I explain the most frequently stated drivers that provide incentives for the more extensive use of debt with a focus on an emerging market environment and test whether they are relevant to Slovenian blue-chip firms that emerged from the transition of the last decade. The second part introduces the owners' point of view. I test whether raised debt levels in fact improve the long-term return to the stockholders of Slovenian firms. This should be expected because of the institution-led capital structure conservatism that firms practised in the past. Three methods are employed to test the relationship between increased levels of debt and long-term stock return. All of them offer a similar conclusion that the expected long-term performance of firms which significantly increased their leverage is no better than the long-term performance of firms that did not. The results are useful for other emerging capital markets in Europe where firms and investors faced similar circumstances tied to their socialist past and transition process.
Volume (Year): 18 (2006)
Issue (Month): 4 ()
|Contact details of provider:|| Web page: http://www.tandfonline.com/CPCE20|
|Order Information:||Web: http://www.tandfonline.com/pricing/journal/CPCE20|
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- La Porta, Rafael & Florencio Lopez-de-Silanes & Andrei Shleifer & Robert W. Vishny, 1997.
" Legal Determinants of External Finance,"
Journal of Finance,
American Finance Association, vol. 52(3), pages 1131-1150, July.
- Rafael LaPorta & Florencio Lopez-de-Silanes & Andrei Shleifer & Robert W. Vishny, "undated". "Legal Determinants of External Finance," Working Paper 19443, Harvard University OpenScholar.
- Rafael LaPorta & Florencio Lopez de-Silanes & Andrei Shleifer & Robert W. Vishny, 1997. "Legal Determinants of External Finance," Harvard Institute of Economic Research Working Papers 1788, Harvard - Institute of Economic Research.
- Rafael La Porta & Florencio Lopez-de-Silane & Andrei Shleifer & Robert W. Vishny, 1997. "Legal Determinants of External Finance," NBER Working Papers 5879, National Bureau of Economic Research, Inc.
- RAFAEL LaPORTA & FLORENCIO LOPEZ-de-SILANES & ANDREI SHLEIFER & ROBERT W. VISHNY, "undated". "Legal Determinants of External Finance,"," CRSP working papers 324, Center for Research in Security Prices, Graduate School of Business, University of Chicago.
- 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.
- Rajan, Raghuram G & Zingales, Luigi, 1995. " What Do We Know about Capital Structure? Some Evidence from International Data," Journal of Finance, American Finance Association, vol. 50(5), pages 1421-1460, December.
- Raghuram G. Rajan & Luigi Zingales, 1994. "What Do We Know About Capital Structure? Some Evidence from International Data," NBER Working Papers 4875, National Bureau of Economic Research, Inc.
- Glen, Jack & Singh, Ajit, 2004. "Comparing capital structures and rates of return in developed and emerging markets," Emerging Markets Review, Elsevier, vol. 5(2), pages 161-192, June.
- Swati Basu, & Saul Estrin & Jan Svejnar, 2004. "Wage Determination Under Communism and In Transition: Evidence from Central Europe," William Davidson Institute Working Papers Series 2004-717, William Davidson Institute at the University of Michigan.
- Basu, Swati & Estrin, Saul & Svejnar, Jan, 2004. "Wage Determination under Communism and in Transition: Evidence from Central Europe," IZA Discussion Papers 1276, Institute for the Study of Labor (IZA).
- Goyal, Vidhan K. & Lehn, Kenneth & Racic, Stanko, 2002. "Growth opportunities and corporate debt policy: the case of the U.S. defense industry," Journal of Financial Economics, Elsevier, vol. 64(1), pages 35-59, April.
- Pandey I M, 2001. "Capital Structure and the Firm Characteristics: Evidence from an Emerging Market," IIMA Working Papers WP2001-10-04, Indian Institute of Management Ahmedabad, Research and Publication Department.
- Malcolm Baker & Jeffrey Wurgler, 2002. "Market Timing and Capital Structure," Journal of Finance, American Finance Association, vol. 57(1), pages 1-32, February.
- Jeffrey A. Wurgler & Malcolm P. Baker, 2001. "Market Timing and Capital Structure," Yale School of Management Working Papers ysm181, Yale School of Management.
- Kjellman, Anders & Hansén, Staffan, 1995. "Determinants of capital structure: Theory vs. practice," Scandinavian Journal of Management, Elsevier, vol. 11(2), pages 91-102, June.
- Miller, Merton H, 1977. "Debt and Taxes," Journal of Finance, American Finance Association, vol. 32(2), pages 261-275, May.
- Dusan Mramor, Aljosa Valentincic, 2001. "When Maximizing Shareholders’ Wealth Is Not the Only Choice," Eastern European Economics, M.E. Sharpe, Inc., vol. 39(6), pages 64-93, November. Full references (including those not matched with items on IDEAS)
When requesting a correction, please mention this item's handle: RePEc:taf:pocoec:v:18:y:2006:i:4:p:479-494. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Chris Longhurst)
If references are entirely missing, you can add them using this form.