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Capital Structure - Science topic

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How do you measure the capital structure for an insurance company when it is by nature leveraged?
My argument is that the debt/equity ratio is problematic for financial firms.
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I think the following paper will help you out in this regard:
Effects of Financial Performance, Capital Structure and Firm Size on Firms' Value of Insurance Companies in Nigeria.
H Ayuba, AJ Bambale, MA Ibrahim… - Journal of Finance …, 2019 - search.ebscohost.com
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I intend to use the QCA (qualitative Comparative Analysis) to compare the impact of banking regulation on Islamic and conventional banks, I would like to have your opinion and is what I can combine it with the DEA and regression
The theories mobilized :
*The theory of capital structure
*The theory of financial intermediation
The methods used:
Z-score for stability
DEA to measure efficiency
l'AQC
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Yes, you can do.
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Maybe "impact of gender on capital structure"? Should it be relevant topic?
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The COVID-19 Impact on Corporate Leverage and Financial Fragility
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Capital Structure is the particular mix of debt and equity used by a company to finance its overall operations and growth. There is an optimal capital structure for a given firm, that is the mix of debt and equity financing matters. The optimal capital structure is the optimal mix of debt and equity financing that lowers the firm's overall weighted average cost of capital and maximizes its value. Corporate Strategy is a portfolio approach to srategic decision making. It takes a look across all the firm's businesses to assess how to create the most value. To develop a corporate strategy, a firm must investigate how the various pieces of the business fit together, how they impact each other, and how the parent company is structured, in order to optimize human capital, processes, and governance. Corporate strategy builds on top of business strategy which is concerned with the strategic decision making for an individual business.
Is there a connection between Corporate Strategy and Capital Structure?
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The optimal capital structure for a given firm exists only in theory. It is an illusion in modern finance theory. The debt to equity ratio is without any logic in practice, because the most important is the differentiation between short and long-term debt. Therefore, long term engaged assets (inventories and short-term receivables) should be long term financed. To achieve this principle, the difference between actual net working capital and net working capital that is needed, is crucial. This is called “capital adequacy” of the company. This difference means a surplus or a deficit of net working capital. Its movement shows the movement of the solvency risk of a company. Maintaining liquidity and solvency of the company is a prerequisite for a sound based corporate strategy. More about capital adequacy, you can find on:
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How can I coin a topic that will include a moderating/mediating variable with capital structure and financial sustainability as the independent and dependent variables respectively?
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Capital Structure and Sustainability: An Empirical Study of Microfinance Institutions
Capital Structure, Financial Performance, and Sustainability of Micro-Finance Institutions (MFIs) in .................
Effect of Capital Structure on Financial Sustainability of Deposit-Taking Microfinance Institutions in ...................
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From the beginning of the industrial revolution and the description of the functioning of enterprises in the conditions of market structures, in the trend of classical economics, three types of production factors dominated in the production processes defined by three slogans: land, labor, capital.
However, successively with the development of industry and technological progress in the 20th century, other categories of production factors, typical for economies largely based on information, are added to these classic factors of production.
These factors of production, whose role in many industries has been growing since the 1960s include: knowledge, information, technology and innovation.
In view of the above, the current question is: In what branches of industry such production factors as knowledge, information, technology and innovation are currently or become the most important?
Please, answer, comments. I invite you to the discussion.
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Dear Alhaji Ahmadu Ibrahim,
Yes, intellectual capital is one of the most important success factors for many business entities and projects implemented in various spheres of human activity.
Thank you very much,
Best wishes,
Dariusz Prokopowicz
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Hello, I'm trying to run an OLS regression to test whether firms’ capital structure changes more during the 2007-2008 financial crisis according to their pre-crisis liquidity.
My quarterly data runs from 2000 - 2020. I create a dummy variable CRISIS_DUM for the crisis period 2007Q3 - 2008Q2. I also create a dummy variable PRECRISIS_DUM for the pre-crisis quarter 2007Q2. My baseline model is something like this:
LEVERAGE = LIQUIDITY + PRECRISIS_DUM + CRISIS_DUM + LIQUIDITY x PRECRISIS_DUM + CONTROLS (PROFITABILITY, ASSET TANGIBILITY, SIZE, MARKET-TO-BOOK)
My variable of interest is LIQUIDITY x PRECRISIS_DUM but the OLS estimator results insignificance.
I have a few concerns regarding the model:
- Is this model adequate in testing the relationship between pre-crisis liquidity and leverage during the financial crisis?
- Should I include Firm Fixed Effects, given the controls included in the model?
- Should I reduce the time period?
Any advice and comment is greatly appreciated. Thank you!
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It depends on the estimated findings of your final model design. You have to check whether the interaction term LIQUIDITY x PRECRISIS_DUM could capture the potential effect or not.
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We have solid alternative competitive theories in capital structure field but none has been a general theory in all cases.
Are we asking the right question? Is there a generalization?
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In my opinion, Market Timing Theory (Baker & Wugler, 2002) is a capital structure theory that is closer to the real conditions of companies in general.
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My topic is Financial performance of SMEs using Islamic versus Conventional Financing.
I have two financial performance variables of ROA and ROE, and Three predictors, Debt to Equity, Short-term Debt and Long-term Debt with two control variables of Tangibility and Growth. I want to add Liquidity in my model. Shall I add it as predictors or control variables?
Looking for your suggestions. Thank You
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It depends on a number of issues, the most important of which is the Objectives of your study and the Question(s) you want to answer by your study. You may add Liquidity to the other predictors if you deem necessary to fulfil your study purposes. You may also want to add Tobin's Q as a financial performance variable.
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What kind of scientific research dominate in the field of Analysis of the effectiveness of stock exchange markets?
Please, provide your suggestions for a question, problem or research thesis in the issues: Analysis of the effectiveness of stock exchange markets.
Please reply.
I invite you to the discussion
Thank you very much
Best wishes
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Dear Chia-Lin Chang,
Yes of course. The currently used automated trading systems used by institutional investors are based on analytical models that use the latest achievements in the implementation of statistics and econometrics in the field of finance.
Thank you, Best wishes,
Dariusz Prokopowicz
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1. Variables of Capital Structure are Total Debt, Short-term debt & Long-term debt Whereas,
2. Financial Performance measured by ROA & ROE
3. Firm Characteristics i.e. Age, Size, Location, Sector & Ownership structure.
4. Owner-manager Characteristics like, Age, Gender, Education, Experience & Ethical background
Your suggestions that how the Firm Characteristics and Owner-manager Characteristics are measured? and which estimation techniques uses for this type of data?
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It could be interesting to include the exchange rate with respect to the currency, for an international projection.
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Capital Structure Theories like MM Theorem, Trade-off, POT and so on fall under what categories.
i.e. Net Income Approach, Net Operating Approach, Traditional Approach etc.
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You are welcome, Jan Jansen . You may want to give the link to your SCF paper.
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In Graham and Harvey (2001) paper, CEOs consider equity dillusion to be the most concerning factor when considering an equity offering, and therefore I am wondering is there a proxy for this controlling variable.
Thanks.
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Hi, I have recently conducting a research on the determinant of securities offering. And I have about 1500 companies at different announcement dates (From 2000- 2018). However, I need to collect financial information for compaines prior to their annoucement.
For example, if a firm annouced to issue convertible bond at June 1st 2012, it does not make sense to use financial information after that. I have seen little references to deal with this issue in the literatures.
My question is, how to I solve this issue without manually going through all 1500 companies.
Thanks for your help !
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I have a number of published research papers dealing with similar issue. You may want to check them out.
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Does deepening the liberalization of the rules of conducting transactions in financial markets, banking lobbying in rating agencies, moral hazard in investment banking, failure to observe prudential procedures, neglecting the methodology of creditworthiness analysis in the process of verification of potential borrowers and violation of ethics in business can be the main factor in the next global financial crisis?
And these types of factors at the transactional and procedural level were, in addition to the mild monetary policy of central banking, indicated by economists as the key determinants of generating the global financial crisis in 2008.
Please, answer, comments.
I invite you to the discussion.
Dear Friends and Colleagues of RG,
The issues of risk management in the context of determinants of the global financial crisis, globalization processes, technological progress and other factors I described in the publications:
I invite you to discussion and cooperation.
Best wishes
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Yes, I agree, the factor of moral hazard, breaking the rules of business ethics, moral hazard, etc., played a significant role in generating the 2008 global financial crisis, but these were not the only major determinants that caused this crisis. Other significant factors include mistakes made as part of state intervention, creating financial innovations that precede the development of control systems of financial systems supervision institutions, imperfections in the procedures and systems of credit risk management, the generation of a speculative bubble on credit derivatives created specifically to maintain the economic situation in the housing sector, real estate e.t.c. In the context of the effective functioning of banking, a particularly key issue is to maintain high standards of financial risk management, including primarily credit risk, debt, financial liquidity, etc., and to apply high standards of business ethics and corporate social responsibility to avoid financial and economic crises, i.e. it appears from time to time in Western financial systems. The issue of unethical business practices of investment banking, which became one of the key factors in generating the global financial crisis of 2008, is described in my publications available on the Research Gate portal. Such practices that do not comply with the principles of business ethics and corporate social responsibility should not be used in finance and banking, including in the field of granting loans, selling securities, including subprime bonds, and other forms of external financing, as it largely leads it is the execution of financial transactions with too high credit risk etc. and, consequently, also to financial and economic crises. In banking, these standards should be high because banks are institutions of public trust. The only issue that remains is the effective use of modern information technology, ICT, Internet and Industry 4.0 in finance, including the improvement of risk management processes. Therefore, it is also necessary to improve operational and technological risk management processes as well as IT systems, with particular emphasis on the risk of loss of data transferred via the Internet as part of the development of online electronic banking, including mobile banking. I am conducting research in this field. I have published my conclusions from the research in scientific publications that are available on the Research Gate portal. I invite you to research cooperation on this interesting and still topical issue.
Best wishes,
Dariusz Prokopowicz
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I'm interested in estimating the impact of business risk on capital structure (CS) and dividend policy (DP). My study focused on three hypotheses. The first and second hypotheses focused on estimating panel regression to examine impact of business risk on CS, and impact of business risk on DP. Now in the third hypothesis, i want to estimate impact of business risk on CS and DP in one analysis using eviews. Is there a way to do that?
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@Eulogio thank you so much sir
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Are the supra-national investment investments in investment banking an important factor in the ongoing process of economic globalization?
If the increase in the scale of transnational investment investments in investment banking is faster than the rate of economic growth of the countries expressed, for example, in the Gross Domestic Product, is this the way in which economic globalization can generate additional systemic credit risks?
If in the context of these processes the diversification in profitability and income between investment banking and other types of financial institutions and non-financial business entities increases, can this situation be one of the symptoms of increasing systemic risk and the probability of the next global financial crisis appearing in the next several years?
Please reply
Best wishes
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اعتقد ذلك... ولهذا أهمية وأثر كبير في هذا الخصوص
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After more Theory , Theorem and Evidence . Do you think Its still for now as Non-solve Matter ?
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Yes. It is a continuing debate.
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(effect of corporate governance on the adjustment speed towards target capital structure)
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LITERATURE REVIEW. If you have a topic, conduct literature review of you research issue of that topic. The literature will tell you what factors or variables had been used in prior research. see which factors or variables are available in your target territory of study, what could be substituted if not available? what new variables could be added and tested if the current condition in your country of study differs from the literature.
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How the bank credit influence the corporate working capital management policies of commercial and industrial sector of Pakistan?
What kind of different proxies (Operational Variable) would be considered, when I shall make hypothesis, sample design, collection of data and analysis the data?
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Hi Ali,
for my articles and PhD thesis in Credit Banks in Indonesia. Thanks.
Kind regards,
Yafet
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No benefit of financial leverage, but still a great peace of mind due to low proportion of debt component in the capital structure of a company.
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It depends on who your respondents are; their risk appetite, composition of their portfolios, investment strategy, and whether they equate "Low Debt" with "Peace of Mind" or "Low EPS" with "Peace of Mind" and/or "Peace of Mind" with "Low EPS." Context is also critical, sector (GICS), stock (defensive or growth) and business cycle (expansionary vs recessionary).
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Dear all,
I am running panel data analysis and facing some difficulties. My goal is to find out drivers of firms' decision on leverage. I am using Eviews software for my analysis.
My data has 9 years timespan with yearly frequency and consists of 75 companies, represented by 23 industries.
My dependent variables are: long-term debt, short-term debt .
Independent variables: profitability(x1), size(x2), tangibility(x3), liquidity(x4), non-debt tax shield(x5) median industry leverage(x6). All my variables are appropriately transformed.
I estimated Y C X1 X2 X3 X4 X5 X6 random effect equation (as suggested by Hausman test) and got satisfying result. Next, I decided to include dummy variables (k-1) for each industry to control individual intercept and find out effect of each industry.
The problem is that I can no more
estimate an equation as Eviews gives me 'Near singular matrix'. I dropped variable X6 and managed to estimate pooled regression. However, random effect regression can no longer be estimated as 'there are not enough cross-sections'. From now on Eviews allows just for fixed effect regression.
After introduction of dummy variables, Eviews does not let me to conduct Heteroscedasticity and Hausman tests.
Thank you for dedicating your time to read this question. Any help is appreciated.
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You cannot include fixed effects and industry level variables; use random effects and drop the fixed effects; see these three papers
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Dear all, I want to conduct a research on the determinants of capital structure of commercial Banks. Their capital structure is regulated by national Banks. So, is it recommended to conduct a study on this topic?
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This topic is extensively researched and hence it would be difficult to find question(s) that is/are not answered.
So try first to write your research question(s) and go through the literature to see if any of your research question(s) is/are not answered or addressed adequately.
For a master degree you may consider this topic but for a PhD you should be very careful before you go further.
Further, banks are totally different than other sectors as they operate at a very high level of leverage and you need to bear this in mind.
You can find a very good summary of research conducted in this area in a paper written by Frank and Goyal (2009).
"Frank, M. Z., & Goyal, V. K. (2009). Capital Structure Decisions: Which Factors are Reliably Important?. Financial Management • Spring 2009 • pages 1 - 37"
If you can't locate this paper, please contact me via email ismailfcca@gmail.com and I will send it to you.
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BASF as compared to ppg industries.
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DEBT RATIO = Total debts / Total Assets
DEBT RATIO = Total liabilities / Total Assets
LARGE ASSETS tbat has better return of asset, i.e. effective use of assets to produce higher income. With better ROA or high income from assets tbere is no need to borrow money. This is called self sufficient, no need for borrowing to sustain operations. When there is no need to borrow, there is no or little liabilities or debts, thus, debt ratio is low.
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In an Indian perspective
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I Second Mr Sheikh
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Almost all the Micro Finance Literature on Capital structure, governance and Performance shows that data is collected from Mix Market. Is this Data available on DATA STREAM ??
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Yes, you can find it in datastream.
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Hi. I am writing my master thesis about the influense of market timing on capital structure. In doing this, I am using the paper by Baker and Wurgler (2002) as inspiration. They have panel data of many US firms and multiple years.
To test the effect of market timing, they construct a variable EFWAMB which is the "weighted average market-to-book ratio" weighted by the sum of external finance in any given year divided by the total of external finance issued up untill that point from year 0 in the sample.
Then they run a pooled OLS with White SE:
Book leverage = EFWAMB (t-1) + MB(t-1) + Tangibility(t-1) + Profitability(t-1) + size(t-1)
However, they do not give any reasoning for pooling the data and breaking the panel structure. Why are they not concerned with serial correlation in the residuals?
In all fairness, I am worried about unobservable fixed factors such as managerial ability or attitudes towards risk. At the same time, I am worried about time-specific effects such as the interest rates and demand.
Could anyone please give me some advise on which model to pick? Can I use fixed effect regressions in this circumstance? Because, using fixed effects, I get an insignificant EFWAMB. Using pooled OLS, I get a significant EFWAMB, similar to Baker and Wurgler (2002).
Any advice would be very much appreciated.
Best regards,
Morten
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I think you need to conduct some pre-estimation tests to determine any possible heteroskedasticity or cross sectional dependence in the dataset. You may also read Tsalavoutas et al. 2012, Moundigbaye, William S. Rea, and W. Robert Reed 2018.
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For research in the above area, one have to access to number of proxies used for the measure of relationship mentioned above. For the proxies DATA is needed which must be a reliable data. One information is Mix-Market, Can someone guide for any other source? Would it be paid source or free available?
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Hello, it is do difficult to find out globa data for capital structure.
I believe it is a better way, that you might find them in IMF(Asian) resources.
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Dear Research Gate community,
I am looking for capital structure data of listed firms in Bloomberg dataset. I could find data on SBF120 index but cannot get access to all firms’ information, probably because of my awkward use of Bloomberg. Any help/advice could be valuable.
Best regards
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We did not try Fitch connect. Institutional ownership is provided by Bloomberg.
Best .
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What can be possible GAPs for a PhD Study in the above Topic
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@Adnan read and review some articles from the Gurus in the area. You may search these articles from reputable research platforms like Research Gate, SSRN google scholar etc. Another simple way to get a possible research gap is to create a meaningful interaction among the predictors ( Mediation or moderation)
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To estimate the relationship between capital structure and performance variables I have selected three profitability ratios i.e. net profit margin, return on assets and return on capital employed, whereas for capital structure I am working on DE ratio.
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Can you share about model or idea need to be worked.
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I m working to fine the effects of capital structure on dividend policy but I have a question in my mind that what is the main relationship between capital structure and dividend policy? Give reasons.
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Hi Muhammad,
In addition to the earlier suggestion, you might want to consider this publication by Aggarwal & Kyaw (2010) which examines capital structure and dividend policy both from empirical and theoretical points of view:
Best wishes..
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Hi Everyone,
I wanted to know how Governance risk originate.
I am recently confused as to what or where to classify Governance Risk.
As it does not deals with either the Capital structure (Financial risks) or operating structure (Business risk) of banks.
I need some argument and clarifications please.
Thanks.
Regards,
Oluwaseyi
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You may read literature on Agency Theory, Agency Costs and Corporate Governance. Many scholars argue that Financial Performance and Shares Valuation has an association with quality of governance. Moreover, the Corporate Governance rules under Listing Agreement Clause 49 requires corporate to form various committees including audit committee to look into financial affairs of organization.
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I m using Pooled OLS type of Panel data. Panel data facilitates of cross sectional and time series data. I will collected five year data of Cement industry from Pakistan Stock Exchange to find the effectiveness of Capital Structure and Corporate Governance on Dividend Policy. I will use Debt Ratio and Debt to Equity Ratio indicators for CS. And Managerial Ownership and Institutional Ownership indicator for CG. but my question is that before using Pooled OLS type of Panel data analysis, is it necessary to check the Fixed or random effect test???
Please answer me in a simple words.
Thanks in advance.
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Test the following;
i. Normality,
ii. Collinearity,
iii. Homoscedasticity,
iv. Linearity
*
However, you can read the file i have attached here on panel data for proper guidance and steps. And i am very sure that you will get your problem(s) resolved.
*
*
Goodluck
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How can we measure corporate governance/ capital structure variables using Primary data ? Most of the available measures are based on the secondary data. Any suggestion or sending good papers in this regard will be highly appreciated. Thanks
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Dear Ikram
Please read my paper on capital structure
Available on:
All the best
Oscar
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EBITDA has been widely in finance as metric for both valuation and securities pricing analysis. Pundits for EBITDA argue that it is a sound measure of valuation as it clearly delineates profitability (devoid of impact of accounting policies, capital structure, and taxation regimes) and pure operating performance of a going concern. However some financial analyst loudly think that that EBITDA exaggerate cash flow because it does not take into consideration all the non-cash gains and expenses in addition to changes in working capital. As a result, using EBITDA as a metric for valuation is therefore "highly questionable". Thus, the question is: Is EBITDA an incredulous (dubious) valuation metric?
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EBITDA (EBIT + Depreciation and Amortization, EBITDA) is a proxy, it is an incomplete version of FCF or any other CFs (you can arrive to FCF, to CFE and to CCF starting from EBITDA). What is of interest for valuation is the Free Cash Flow, FCF or the Capital Cash Flow CCF or the Cash Flow to Equity CFE or the FCF + Tax Savings (when using the APV approach for valuation).
In summary, if you need to value a firm, don't use EBITDA, use the proper cashflow (ALL methods, if properly done, will yield the same and identical result: the firm value (in the case of CFE you need to add the value of debt).
In addition, multiples are not a "method" for valuation. Use multiples AFTER you have done a proper and detailed valuation. Having value, you can COMPARE with multiples for the industry. Say, you divide your calculated Value through EBITDA, EBIT, Net Income, Sales, whatever..., and compare that with the average for the industry or with a recently transaction for a firm belonging to the same industry.
Best regards
Ignacio
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I am working on impact of Capital structure on the profitability of quoted firms. I am using 100 quoted firms and a duration of 10 years. i want to run the analysis using the Eviews software. Can someone show me how to run this analysis?
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Dear Riman
I hope you would have gotten good answers. Nevertheless, I apply some test such as cross-sectional dependency test using stata. if you looking any help regarding stata, most welcome!
For ykur convenience, I am sharing link of my thesis. Have a look on it. Good luck!
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The first var affecting the second var and the total variances explained by the second var affecting the third var.
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Multi-level(2 or 3) SEM would be a solution
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Please Suggest me the Solution......
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Hi,
You can perhaps try to use an "instrumental variable" . Anyway I advise you to read this paper:
"Endogeneity in empirical corporate finance" Michael R Roberts and Toni Whited, 2012
Best regards.
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Hi all,
I am doing a research in which i have to separate our sample to financially constrained and non financially constrained firms. I plan to use "distance to default" as an indicator for measuring financial constraint. I highly appreciate if any one of you could help guide me how to estimate that indicator. Thank you so much.
Kim Thoa
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I think the following paper could help you do the needed estimation:
Forecasting default with the Merton distance to default model
ST Bharath, T Shumway - Review of financial studies, 2008 - Soc Financial Studies
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I have got panel data of 200 companies for 10 years, i.e. 2000 observations. For example, if I collect macro-economic data of GDP (per year data) for 10 years it will be 10 observations . How do I regress my panel data over macro-economic data? Which econometric/statistical model will be used and how?
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The actual placing of the GDP observations in the spreadsheet of your Panel depends on how it is arranged.
Where we have added Macro-economic avariables to a panel analysis we have just added them as another column in the panel.
If the Panel is by company and several vaiables just add it as the last variable for the correct year; this involves 10 entries for 1 company.  Repeat this for each company.  It is a bit repititous but won't take to long for 200 companies.  If you can write a little visual basic it is even quicker.
As final comment you might want to use some other measures like inflation, unemployment rate, exchange rate.  Best to collect them all and do it at once.
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Board Independence. How can we measure the independence of a board. what variables should be considered and how can each be measured?
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HI,
This recent paper may be of interest for you:
H chou, P Hamill, Y Yeh, "Are regulatory compliant independent director appointements the same? An analysis of Taiwanese board appointments", Journal of Corporate Finance, 2016, forthcoming.
Best regards
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Is there any relationship between the business cycle and capital structure? I will really appreciate comments directly focusing on the effect of business cycle effect on firm equity, debt, tangible assets and working capital. 
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We have been working on this subject and used the Dickinson (2011) model to distinguish the life cycle stages in which firms can be classified. It has advantages and drawbacks. If you are interested, you can consult the following references available through Researchgate and/or directly in the web page of the Juornal:
- CASTRO, P., TASCÓN, M.T., AMOR, B. and DE MIGUEL, A. (2016). Target leverage and speed of adjustment along the life cycle of European listed firms, Business Research Quarterly, 19(3), July-September, 188-205.
- CASTRO, P., TASCÓN, M.T., and AMOR-TAPIA, B. (2015). Dynamic analysis of capital structure in technological firms based on their life cycle stages. Spanish Journal of Finance and Accounting, Vol. 44, nº 4, 458-486
- CASTRO, P., TASCÓN, M.T. y AMOR-TAPIA, B. (2014). The role of life cycle on the firm’s capital structure. Pecvnia. Revista de la Facultad de Ciencias Económicas y Empresariales de León, nº 19, julio-diciembre, 131-155.
I hope you find them useful.
Maria T. Tascon
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The impact of change in capital structure on stock prices.
I'm currently doing a study on the impact of capital change on stock price for South African companies listed on Johannesburg Stock Exchange. I would really appreciate if I can be advise about useful sources that will enable me to retrieve data.
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why not trying thomson reuters Data stream
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What are the theories which explain the relationship between acquisition and capital structure ?
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I am currently finishing up my dissertation on external costs generated by leveraged transactions involving corporations.
During the research I have developed a sound theory of capital structure vs. transactions involving the capital structure. Basically in order to link the two, you need to construct the current capital structure of the company (using the basic MM and accounting proposition of Enterprise Value = Debt + Equity, or Assets = Liabilities + Equity) and then construct the new capital structure which will be determined by the amount of debt and equity assumed by the post-transaction entity.
I know this all may sound somewhat incomprehensible, but in order to reach these conclusions you need not only good theory, but also a very good understanding of the financial modelling procedures used by investment bankers involved in such transactions.
If anyone is interested in developing this further, please let me know.
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We cannot use weighted average of financing cost of the two systems since capital structure can change any time in the future for on-going operating projects.
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What if for the risk free rate you determine a base index for islamic securities (which should be provided by several IFIs) with the least volatility that still generates positive returns as cost of equity and then you proceed with the assumption of 100% Equ Capital Structure? You might need to adjust for general market movements to lower the risk of a negative net present values. 
If the expectations hold true, the higher yield of equities could compensate for the lack of debt financing. 
However, if you calculate historical discount rates that have been realized, I would expect that you would find, that companies that only use financing methods that are conform with Islamic norms, would have already paid a higher risk premium.
Otherwise you would need to find comparable industry benchmarks for the respective company.
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I am working on a research on above topic
Need suggestions
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Dear Ali Hussain,
I suggest to read some articles:
de Jong, A., Kabir, R., and Nguyen. T.T. (2008), “Capital structure around the world: The roles of firm- and country-specific determinants”, Journal of banking and Finance, Vol. 32, No. 9, pp. 1954-1969.
Harris, M., and Raviv, A. (1991), “The Theory of Capital Structure”, The Journal of Finance, Vol. 46, No. 1, pp. 297-355.    
Masulis, R. (1988), “The Debt/Equity Choice”, Ballinger Publishing, Co.
Modigliani, F., and Miller, M.H. (1958), “The cost of capital, corporation finance, and the theory of investment, The American Economic Review, Vol. 48, No. 3, pp. 261-267.
Myers, S.C. (1977), “Determinants of corporate borrowing”, Journal of Financial Economics, Vol. 5, No. 2, pp. 147–175.
Myers, S.C. (1984), “The Capital Structure Puzzle”, The Journal of Finance, Vol. 39, No. 3, pp. 574-592.
Myers, S.C., and Majluf, N.S. (1984), “Corporate financing and investment decisions when firms have information that investors do not have”, Journal of Financial Economics, Vol. 13, No. 2, pp. 187-221.
Rajan, R.G., and Zingales, L. (1995), “What Do We Know about Capital Structure? Some Evidence from International Data”, The Journal of Finance, Vol. 50, No. 5, pp. 1421-1460.
Ross, S.A. (1977) “The Determination of Financial Structure: The Incentive-Signalling Approach”, The Bell Journal of Economics, Vol. 8, No. 1, pp. 23-40.  
Strebulaev, I.A., and Yang, B. (2013), “The mistery of zero-leverage firms”, Journal of Financial Economics, Vol. 109, No. 1, pp. 1-23.
Greetings,
Fabrizio
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instead of dominant shareholder if there exists some other major shareholder in the same firm, can they effect the capital structure decision of the firm?
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HI,
I agree with Shabana Kashif Talpur. I just want to add that multiple block-holders may collude towards a same goal, or disagree and fight against the others. Suppose some blockholder wants to get a short term risky debt , and that the others prefer. long term debt,, a conflict of interest may happen. The CEO position and traits deserve perhaps also to be taken into account.
Best regards
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I want to examine the modern capital structure and the possible of reversal from performance to capital structure thereby test the efficiency-risk and franchise value hypotheses. Most of the techniques I have come across like the two stage least squares can not account for the dynamic heterogenous non stationary panel data.The same problem is applicable to GMM.These common estimators do not account for cross sectional dependence and the heterogenous nature of the cross sectional element. They assumed they are homogeneous although they account for endogeneity and simultaneity bias. But the nature of my samples are cross sections of firms that have different characteristics and they are of different age and size and they belong to different industry. The kind of series of the parameter is not likely to be stationary. I was thinking there could be causal panel method that can be use to estimate the causal relationship between capital structure and firm performance.
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Hi,
Perhaps you may benefit from reading this paper:
J L Coles, M Lemmon, JF Meschke, "Structural models and endogeneity in corporate finance: The link between managerial ownership and corporate performance", Journal of Financial Economics, 2012, 103, p 149 -168.
Best regards.
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In “pecking order hypothesis”, the notion that firms has a preferred order of raising capital which starts from preferring internal financing and then debt financing and then equity as a last resort,  is somehow weak.
In real life mostly firms will shop around for than one or two companion at the same time.
What do you think?
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Based on selected empirical evidence across countries, the pecking order theory seems applicable to listed firms in some countries.                                                                  
Ni and Yu (2008) use the entire cross-section sample of China's listed firms. The authors find no evidence that listed firms in China follow a pecking order when they need funds to finance investment projects. Further subgroup analyses indicate that big firms follow a pecking order and small and medium firms do not. Likewise, Aggarwal and Zong (2006) use comparable data of corporations in the US, the UK, Japan, and Germany, they find that in all four countries, investment levels are significantly positively influenced by levels of internal cash flows, indicating that corporations may follow the pecking order theory.                                                
Conversely, Delcoure (2007) findings reveal that neither the pecking order, tradeoff, nor agency costs theories explain the capital structure policies in Central and Eastern European (CEE) countries. They conclude that the differences of banking systems, disparity in legal systems governing corporate operations, shareholders’ and bondholders’ rights protections, sophistication of stock and bond markets, and corporate governance, are the factors that influence corporate leverage decisions for CEE countries.
It appears that the pecking order theory explains capital structure decisions of some listed firms, but the validity of pecking order theory is country specific.
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Greetings,
Could you please explain me shortly that can i take capital structure an independent variable?.if yes then how it effect the financial performance of a bank (Return on Assets,Return on Equity  and Dividend payout?
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It is interactive. Structure determines governance and id is determined by it, especially as between majority and minority shareholders and especially in Asia. Performance in conventional even studies terms is dealt with in agency theory modified by positive accounting theory with an underlying thread that the more power majority shareholders have over the Board and the debt holders, the higher earnings will be for them. However, nothing in governance overrides the eternal business verities of what drives a profitable business to succeed, increase earnings quality and maintain solvency. Governance is icing on the cake, not the cake itself.
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Looking for evidence for the alignment between corporate strategy and capital structure?
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Hello Victor, This seems like a good question and my initial reaction is to agree with you prior that there are links.  In my research on companies and small businesses in several countries the finding indicate statistical significant relationships between financial structure and performance.  This is of course consistent with the financial leverage impacting beta.  The method used in these articles is regression models with Tobin's Q, ROA, ROE etc used as dependent variable.  The properties of the data influence the particular regression used OLS, GLS and GMM, etc. and while most have used panel data when poolability test indicated inadequate changes over time cross-sectional regression is used.
Strategy as a series of independent variables is an interesting idea.  As strategy will be reflected in operating leverage you would expect it to be important.  As strategy will also be impacted in financial leverage there is a jointness in the testing which may mean to equations with a high degree of commonality. 
If you can make financial structure eg D/A the dependent variable, and Strategy a continuous variable between very conservative to very aggressive, and use performance metrics as the independent variables then you might have two nice equations.  As Strategy and financial structured are likely to be correlated could then use "multivariable" to analyse which could be fun.  Enjoy! (you can find my papers on research gate or Google if you want to check any of them out)
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Any literature for support will be appreciated.
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All of the above are rational answers to your question but will not really address the underlying issue I see which is your question itself.
The issues are 1/ "wealth", 2/ whether you can continually maximise it, 3/ what is rational and 4/ "optimal capital structure".
1/ There are good books on wealth by Beinhocker, Santa Fe etc but what is wealth? It also demands a time consideration so therefore are you discussing price/value over rational financial decisions compared to eventual outcomes?
2/ Is it wise to always maximise or should the strategy be to target an optimal outcome and achieve it? Maximisation involves increased risk that outcomes do not materialise.
3/ In today's multi-investor world the size of investments need must necessarily involve investors with competing objectives so what would be rational for one may not be for another, besides reflect on what you mean by rational, is it "logical process" or a reference to accepted frameworks?
4/ This infers you are looking at regulated industries which opens a completely different problem that is well articulated in the financial press. If you infer gambling via non-regulated instruments with all its risks then that is equally available from the G-20 and FT etc, otherwise you are always putting your capital at risk with equity/debt it's just the price at the time that needs to be assessed.
Remember price and value are not the same and governance, variety and time are variables that need attention.
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Despite the tax-shield benefits of debt, some firms use zero level of debt in their capital structure. It appears that existing capital structure theories are unable to explain this zero debt puzzle, well. What theory explains why some firms use zero debt in their capital structure? Your contributions are welcome.
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I suggest this article:
Strebulaev, I.A., and Yang, B. (2013), “The mistery of zero-leverage firms”, Journal of Financial Economics, Vol. 109, No. 1, pp. 1-23.
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in pharmaceutical companies 
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It really depends on the group of firms you are analyzing. However, what is really important it to watch for the causality issue in your econometric analysis. In other words, does capital structure affect profitability or profitability affects capital structure???
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Dear Colleagues,
in my research, I am attempting to analyze the financial decision behavior of Shari’ah compliant companies compared to their non-compliant peers on selected countries, i.e. US, UK, Canada, Japan, Taiwan, S.Korea and India. I have chosen Dow Jones Islamic Market World Index as a source for the Shari’ah compliant companies, as it covers starting from 1996.
For me to conduct such a research it is utmost important to have the historical information of DJIM index with its constituent companies. In specific, this research requires the information about those companies which were included/excluded (joiners/leavers) into DJIM index between the years 1996-2014 (on annual basis).
Any suggestions from where to collect the data? I would appreciate it very much if anyone could share these data.
Note: within 'Thomson Datastream' any DJIMxx-Serie, e.g. DJIMUS$ provides the constituent list as of today ONLY. 
Hope I could express well enough my request and hope for support.
Best regards and thank you in advance.
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Thank you so much dear. I am screening the whole universe (S&P) for Shariah compliance. my screening is based on 30 years data... Once I am done I can share it with you... All the calculations are based on my analysis so may be you will observe lot of differences with the list of S&P Shariah indices
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Researcher from Commerce and Management discipline
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You may want to consider capital structure based on ownership. Intuitively ownership capital structure for Asian countries. 
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Some researchers suggest that it is necessary to conduct a panel unit root tests on a firm-level studies (e.g. capital structure study) that uses 9 years observation. For more than 10 years observation, it appears necessary to conduct panel unit root tests. However, the reasons for conducting panel unit root tests with 9 years or lesser observation are not very clear. Panel unit root tests are usually conducted on macro-level studies that use panel data method with longer time periods. Is it necessary to conduct a panel unit root tests on a firm-level study with 9 years or lesser observation? Your contribution are welcome.
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PURPOSE O UNIT ROOT TEST: The purpose of unit root test is to verify whether the data series (time series) is non-stationary when running autoregressive modeling. The rationale for testing data for non-stationarity is to be sure that there is no effect from shock that would throw the series out of its long-term equilibrium, i.e. integrated data. Is 9 years considered long-term for purposes of verifying mean reverting characteristic of autoregressive model? To answer this question, you need to revisit your research objective: what does the research want to achieve?
Assume that the 9 years period in the study includes a period of economic crisis. Assume further that the effect of the crisis exert significant effect upon the series equilibrium. Is the unit root est necessary? Here, you need to plot the data and see how the data are distributed.
FIRM CAPITAL STRUCTURE STUDY: Capital structure of a firm is not a univariate array. Firms raise their capital from (i) debt, (equity), or (iii) hybrid. It is not enough by just using ratio analysis and use the ratio from each year to construct a model through autoregressive model. Consider fixed effect and random effect on (i) - (iii) and then test for changes, i.e. first 3 years, second test 4 years, ..., nth test 9 years. (a) are their change in the intercept? (b) are there changes in the slope? and (c) are there changes in the error term? See atatched article.
REFERENCES:
[1] Dickey, D. A.; Fuller, W. A. (1979). "Distribution of the Estimators for Autoregressive Time Series with a Unit Root". Journal of the American Statistical Association 74 (366a): 427–431. doi:10.1080/01621459.1979.10482531
[2] Sargan, J. D.; Bhargava, Alok (1983). "Testing Residuals from Least Squares Regression for Being Generated by the Gaussian Random Walk". Econometrica 51 (1): 153–174.JSTOR 1912252
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We are doing research on capital structure. To the best of my knowledge, researchers usually applied panel with fixed of random effect. Few studies use SUR when they focused on macro variables. When should we use SUR in stead of panel with fixed or random effect? As the results I got quite different when running SUR. Many thanks 
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A panel of data consists of a group of cross-sectional units that are observed over time. The number of cross-sectional units may be denoted by N and the number of time periods by T. The SUR technique is one of panel data estimation metdods. The acronym SUR stands for seemingly unrelated regression equations which was described by Zellner (1962). SUR is a way of estimating panel data models that are long (large T) but not wide (small N). When estimating an SUR model, the data need to be arranged as a time series (not a panel) with different variables listed separately. In the basic SUR model, the errors are assumed to be homoscedastic and linearly independent within each equation. The error of each equation may have its own variance. Each equation is correlated with the others in the same time period. The latter assumption is called contemporaneous correlation, and it is this property that sets SUR apart from other models. If contemporaneous correlation does not exist, the LSR method applied separately to each equation (fund’s portfolio) is quite efficient.
Best regards,
Joanna
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If yes, How? If no, Why?
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One of my paper published in International Journal of Commerce and Management entitled "Impact of capital structure on performance" indicate that capital structure have material effects on firm value in Pakistan. Pakistan is bank-based economy. Firms prefer to borrow when internal funds are insufficient to meet their needs. However banks prefer to extend short-term loans on favorable terms than long-term risky loans. Moreover interest payments are tax-deductible. These factors encourage the managers to use more debt in their capital structure which in turn generate the agency problems between shareholders and debt holders and thereby creates a negative impact on firm performance.
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Unlike previous years, risks managers now are taking their position among the top management teams contributing to strategic planning relating to risk. The markets are now interconnected suggesting that risk can crop up suddenly from anywhere around the world and increase the pressure on risk managers. There is need to consider a variety of issues such as systematic risk, operating risk, financial risk, governance, and risk modeling techniques in particular, among others. How does ‘risk management issues’ change the way risk managers and researchers model risk today?
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I am afraid that little if anything has changed in risk modeling and the understanding of risk. One should first identify the nature of the system involved. There is no consesus on it, so naturally different approaches are proposed in which some proposals are evident flaws. I can supply loads of examples, how risk was understimated or completely ignored whereas the system revealed symptoms
of collosal changes ex ante, before the events took place. My contribution to this issue is based on the studies of chaotic systems. A lot of discourse takes place on the rigors fulfilled to declare a system is chaotic. Those familiar with the subject know that those rigors are not easily met or computed. Traditional approach through the Lyapunof exponent is not entirely wrong but inappropriate for large perturbations and there is a simpler and shorter way for declaring that the system is chaotic (and deterministic). This directly leads to a revision of the theory of catastrophy. It is a giant step forward from SOC (Self-Organized Criticalities) and the theory of fragility and infragility (Taleb), both based on some degree of randomness in the system. Now we can say that we cannot attribute all cause-and-effect to randomness alone. I can make an even stronger statement, that very little, if not none, of large perturbations is the work of unknowledgable random causes. The discovery of  intrinsic order hidden in the system raises some fundamental questions about the extent of the free market confronted with the work of the so called fat fingers and big hands and also about the borders of social acceptance of control and manipulation. One of the gravest examples is of course the recent devaluation of the euro against the swiss franc (EURCHF). Nothing was random there. It was a well prepared action supported by finely tuned chaotic parameters and a very clever scientific setup. 
Ian Dalling proposed a programme. You select, you click and press OK? I think that we misunderstand the issue of the question.
The problem is that most risk management sucks and creates fragilities while clearly there are antifragile entities who benefit from ill-conceived risks by others. How they do it, is a story for a good thriller book.  That they do it, there is no doubt.         
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Finance and Economics research are mostly driven by advancement in econometrics. Some econometrics issues such as reverse causality between variables or endogenous variables (especially among finance and economics variables) make traditional Ordinary Least Squares (OLS) Method appears irrelevant or obsolete. But OLS seems applicable to investigate issues that are cross-sectional in nature. If research should be mainly driven by real issues, then OLS may still be relevant. Specifically, I have come across interesting research applying Ordinary Least Squares (OLS) method to investigate relationship between cultures and corporate decisions such as dividend policy and capital structure etc. What is the relevance of Ordinary Least Squares Method in Economics and Finance research today? Your contributions are welcome
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As I read the answers above, I tended to agree with parts of J. Shi, B.T Matemilola, R. Sharma, and A. Andriansyah. We all recognize the limitations of OLS; however, I doubt any of us would be comfortable ruling it out before seeing the model and the data available, especially in the vast and diverse area of economics and finance research. In addition, I am not sure where I would start in teaching econometrics this semester if OLS was stripped from the course.
I think B.T Matemilola's question begs us to think deeper in a different way. Consider the rate of change in refining theory, technique, and data. It seems to me refinement in the data (i.e., both what we collect and how we collect it), may be the slowest to change in economics. Although I am certain we could improve if we could go back and start over, part of our challenge (especially with time series data) is that we often cannot retroactively refine the data. I suspect few of us would care to sacrifice consistency and/or continuity if we could start over now. We are fortunate that what we research is relatively more easy to quantify than other disciplines and those who preceded us devised more or less effective ways to measure variables. I have been fascinated with the ability to adapt in economics, and especially econometrics, and without consciously doing it, it seems like we have followed the least-costly path of improvement in expanding the frontiers of knowledge.
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The coefficient of lagged debt ratio has economic meaning in capital structure research that makes use of dynamic model specification. From the coefficient of the lagged debt variable, researchers usually calculate the speed of adjustment to the target debt (capital structure) level. But the coefficient of this lagged debt ratio is usually constrained between positive one and zero. Can the coefficient of lagged debt variable be negative in capital structure model? if yes, does it indicates negative adjustment to target debt (capital structure) level.
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Prof. Stuart Locke, thank you for your answer. I have come across a study that report negative coefficient on the lagged debt ratios but the authors are silent on the interpretation. I suspect that they find it hard to interpret but it is possible for the coefficient to be negative as you also noted.  Although, such results are uncommon in the literature.
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We find that many SMEs struggle to keep their cash flow smooth. They keep taking working capital loans but use it for long term investment. They find it difficult to promptly collect dues from debtors but are not able to purchase at long credit term.
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Many SMEs are first time entrepreneurs, and do not have sufficient bandwidth in all the functional areas. They are not able to estimate their own short term and long term financial needs accurately given all the uncertainties they face. Financial agencies and banks however require clarity in financial projections, documentation, current and fixed assets to be able to decide quantum of working capital requirements vis-a-vis long term loan requirements of the SME.
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What are the Methodology can be used?
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This is such a difficult topic and there is unfortunately not one answer. Like Susanne mentioned, it is time related. However, there is definitely a limit to the extend of debt that should be used as an investor. You might want to read "Leverage, please use responsibly" for some ideas on optimal level of debt. Good luck.
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I am currently working with an unbalanced panel data set in order to analyse capital structure decisions and determinants. I am using STATA to conduct the analysis. So far I have done the following steps:
1. Fixed-Effect Regression (xtreg)
Nevertheless, the results were mostly insignificant despite tons of empirical evidence in literature and a large data set under analysis.
2. Testing for Heterosced. (xttest3) and Serial Correlation (within the panels) (xtserial)
Result: Heterosced. And Serial Correl.
3. Winsorization oft he data set
4. Fixed-Effect Regression (xtreg) with Clustered Std. Errors.
Improved results, more significant coefficients.
5. GLS-Panel Regression (xtgls) with Hetero and AR(1)
Improved results.
Now, I am not sure which of the models, 4 or 5 I should use.
How can one choose between these two models?
Further, according to Petersen (2009) one should include a Time-Dummy to account for cross-sectional (between panel, over time) correlations. However, this destroys the results. In addition, I am not sure if cross-sect. Correlation exists as I was not able to test for it due to a highly unbalanced sample.
Do I have to include the Time-Dummies? Is there another way to test for cross sect correl instead of XTTEST2 or XTCSD, Pesaran?
Input would be highly appreciated!
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Have you considered the Blundell and Bond method for a dynamic panel. There is a stata ado file that does this.
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.
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Yes, sure. Weak corporate governance would allow managers to do what they prefer to, which could be at the expense of equity holders, eg: excessive debts, etc.
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Do you think that if a firm increases debt in its capital structure by issuing Islamic bond, it is going to affect the agency environment differently (compared to conventional bonds)?
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This is a topic on which credible research is not available as most of them are hypothetical due to non availability of data.
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I'm planning to conduct a comparative analysis about capital structure and employee productivity between China and Malaysia. Is there anyone who would be interested in working with me?
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Dear Ms. Norrima, thank you very much for your attention. I have conducted a simple testing already for China and wanna to develop a more complex model. Do you familiar to some econometric model? thanks.