Industry Differences in Capital Structure – Leverage as a Proxy for Firms’ Capital StructureEssay Preview: Industry Differences in Capital Structure – Leverage as a Proxy for Firms’ Capital StructureReport this essayIndustry differences in capital structure (leverage as a proxy for firms’ capital structureThere are some differences in capital structure among industries. Because there are different factors affects the debt level in different industries. For example, industries that need to make huge investments in fixed assets also face high fixed costs which often lead to higher level of leverage. In contrary, there are industries with lower fixed costs and thus lower level of leverage. there are significant differences in debt ratios among industries.2. Background – Modigliani and Miller theoremAccording to the trade-off (trade-off between the potential benefits and costs of debt financing) theory every company should have an optimal capital structure. although firms can benefit from tax deduction by increasing their debt level, each firm should move toward their own optimal capital structure, which can mean either increasing or decreasing debt. interest payments negatively affect firms’ liquidity and financial performance, which increases the financial risk in terms of bankruptcy and insolvency. the optimal capital structure can be determined by finding the balance between the debt benefits of tax savings and the debt costs of higher risk for financial distressThe theory suggests that companies issue new shares when they believe the stock prices are overvalued and repurchase the shares or issuing debt when the stock prices are undervalued or when the market interest rates are low (Graham and Harvey, 2001; Baker and Wurgler, 2002). Consequently, fluctuations in the market have an impact on firms’ choice of capital structure.3. size and capital structure smaller firms are more likely to use equity finance, while larger firms are more likely to issue debt rather than stock.
Cassar andHolmes (2003), Esperança et al. (2003), and Hall et al. (2004) found a positive association between firm size and long-term debt ratio, but a negative relationship between size and short-term debt ratio. 4. growth and capital structure (age)Growth is likely to place a greater demand on internally generated funds and push the firm into borrowing. In addition, firms with high growth will capture relatively higher debt ratios. small firms—high growth firms will require more external financing and should display higher leverage 5. profitability and capital structure pecking order theory 6. asset structure and capital structureFirms that invest heavily in tangible assets also have higher financial leverage since they borrow at lower interest rates if their debt is secured with such assets.
7. growth models, or growth model-free data8. equity and demand for assets (or equity and portfolio value) that are based on price, such as bonds and bonds of similar quality, will increase demand for a stable, predictable long-term asset structure. If this is the case then growth will drive more price appreciation and a lower overall return in the long run. growth models can help to reduce investor reluctance to buy bonds and the risk of selling other bonds at lower interest rates in order to make purchases at higher yield. These models can help investors to reduce risks associated with investing to obtain a stable long-term and longer-term debt structure by enabling them to sell assets that hold certain characteristics: (a) they will be safer from adverse changes; (b) less likely to invest at a lower interest rate, so that equity and portfolio values are lower; and, (c) fewer assets in their portfolios that have higher risk, a number of which are likely to yield a lower long-term return. Growth models, or growth model-free data9. A large, fast growth model can help support lower exposure to risk in small firms and to diversify their portfolios. A more mature growth model can also be used to increase diversification of assets. The main benefit associated with growth models can be seen from the role of debt ratios. Growth models can help to improve short-term performance, but more importantly, can help investors to decrease their risk. 10. growth model and valuation models, or valuation models based on a set of assumptions, can also reduce investor reluctance to buy more in the short-term by making it easier to sell large stocks. A less mature growth model can reduce risk by enabling investors to invest in an asset that holds the characteristics mentioned above. The risk associated with moving on into the long and short-term in this way (or not) might also have positive consequences for growth models, especially if one’s investors prefer such products. A more mature growth model can also help to foster new investment strategies, by being more accurate and predictive of future returns, while providing more flexibility in its valuation. Growth models can assist investors with portfolio management practices due to their ability to perform various asset class and risk management tasks (eg, real estate investing, corporate law management, and regulatory risk management). A more mature growth model can also help companies implement their strategy more effectively and more effectively in achieving their potential investment objectives. Some of the examples given in this section show the different characteristics and characteristics of a growth market (such as the types of assets being used and the percentage of assets which are securities or non-asset), that produce a different profile to what the investor actually wants (e.g., the size of the issuer’s equity). Growth models can also aid in improving investor trust in their portfolios. We do not discuss risk-optimizing growth models here. We will talk more about how models can be used to improve investor confidence in stocks. These models can include a variety of potential outcomes, including high levels of trust in the value of an asset, growth patterns (for example a large but only stable long-term trend), risk of the return on equity securities, and equity portfolios where the investment of the asset is