Proceedings of the 26th and the 27th International Academic Conference (Istanbul, Prague)

CORPORATE LEVERAGE, FIRM CHARACTERISTICS AND FINANCIAL CRISIS

JANG-SHEE BARRY LIN

Abstract:

This paper investigates the leverage decision of Japanese firms in their corporate leverage choice by analyzing the multi-directional causal relationship among firm characteristics such as firm size, profitability, tangibility (ratio of fixed to total assets), and growth opportunity (as measured by market-to-book ratio) on firms’ choice of leverage. Using corporate finance data for a large sample of Japanese firms (25,698 firm-years) between 1980 and 2000, this paper finds a highly significant and positive size effect. Tangibility positively affects total debt, but Profitability negatively affects total debt. Market valuation also positively affects total debt. Finally, profitability is positively affected by operating cash flow, growth in sales, and change in earnings. The model is applied to sub-samples before and after the Asian financial crisis and results remain broadly similar before and after the financial crisis. Our findings support the hypothesis that the firm leverage choice is driven by firm characteristics.

Keywords: Leverage, Profitability, Size effect, Market to book

DOI: 10.20472/IAC.2016.027.025

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