By Sanjiva Prasad, Christopher J Green, Victor Murinde
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Additional info for Company Financing, Capital Structure, and Ownership: A Survey, and Implications for Developing Economies
Observation 4: Equity and debt are equally important as the major source of firm finance in developing countries, although one is more important in some countries and the other is more important elsewhere. Hamid and Singh (1992) and Singh (1995) find that firms found within developing economies rely more heavily on equity than on debt to finance growth relative to their counterparts in the developed economies. A reverse pecking order is observed. Singh (1995) argues that the dependence of firms in developing economies on capital markets is due to: (i) active government sponsorship, such as privatisation, and specific policies that encourage the demand and supply of funds; (ii) financial liberalisation which has resulted in higher real interest rates and therefore reduced demand for bank finance; and (iii) rising price-earnings ratios that have reduced the cost of equity capital.
Accordingly, the firm’s capital structure should move away from rather than towards the industry’s mean over time. Likewise, for firms that have higher levels of debt, for any given income stream, retained earnings will be lower, resulting in the Multivariate Empirical Research: Main Empirical Findings 57 firm employing more debt, in turn causing their gearing levels to move away from the industry’s norm over time. If on the other hand, there is an optimal capital structure, firms’ capital structures will more nearly tend to converge over time, once allowance is made for time-variations in the optimal capital structure itself.
Therefore, a possible interpretation of these results is that managements are more concerned with the market value of their holdings than with their absolute proportions. The second issue that table 1 highlights is the role of shareholder concentration on the firm’s capital structure. It is argued that external shareholders, who are thought to be well diversified, would prefer the firm to attain its optimal debt level and therefore have a higher level of leverage than that sought by the firm’s management.
Company Financing, Capital Structure, and Ownership: A Survey, and Implications for Developing Economies by Sanjiva Prasad, Christopher J Green, Victor Murinde