This paper aims to look into the determiners of corporate debt adulthood construction utilizing a panel of Tunisian and French publickly traded houses. Consistent with the market clocking theory, we find that French houses tend to publish long-run debt when the term spread is low. This consequence indicates that French houses publish short-run debt when they are waiting for a lessening of involvement rate. Our grounds is consistent with old findings that houses use market conditions to detrmine the adulthood that minimise the brorrowing cost. However, directors fail to cut down the overall cost of capital. In Tunisia, our debt market clocking placeholder has no important impact on the debt adulthood pick. We document besides that debt adulthood is positvely related to plus adulthood, and purchase. Long-run debt decreases with size and statistically unrelated to growing chances and profitableness.
JEL categorization: G32, G21, C33
Keywords: debt adulthood, debt market timing, term spread, panel informations
The pick of the debt adulthood may hold the same importance of the pick of capital construction. However, it ‘s surprising to observe the scarceness of empirical surveies related to this research field. J.R. Morris ( 1976 ) can be considered as the earlier probe of the determiners of the debt adulthood construction. Subsequent empirical surveies are chiefly reserved to the U.S houses. In this paper we attempt to make full this spread by look intoing the determiners of the debt adulthood construction of Tunisian and Gallic houses. This survey makes two chief parts to the literature. Our first part is to widen the probe of the determiners of the debt adulthood pick to two bank-based systems. Previous surveies are about reserved to U.S houses and other market-based systems. Our 2nd part is to research the debt market clocking deductions on the pick between short- and long-run debts.
To the best of our cognition, this survey is the first which connect the pick of corporate debt adulthood construction to firm-specific features and debt market conditions utilizing a panel of Tunisian and Gallic houses. Our consequences are as follows: I ) Consistent with the fiting rule, we find that Tunisian and Gallic houses tend to fund durable assets by long-run debt. two ) Contrary to the bureau theory, we find that larger houses are more likely to trust on short-run adoption. three ) A positive impact of purchase on debt adulthood has been documented. High levered houses are more likely to lengthen their debt adulthoods to differ hazard defaults. four ) The impact of growing options and profitableness has been found out as insignificant. V ) Consistent with the market clocking attack, we find that Gallic directors tend to take short-run debt when the term spread is high and lengthen their debt adulthoods otherwise. In Tunisia, the impact of the term spread on debt adulthood is irrelevant.
The balance of the paper is organized as follows. Section 1 reviews the literature on the determiners of corporate debt adulthood construction every bit good as the hypothesis development. Section 2 provides a description of the informations used in the empirical analysis and nowadayss appraisal consequences. Section 3 investigates whether debt market clocking behavior addition house value.
1. Background literature
When houses are seeking external funding, they have to take between publishing equity and adoption from loaners. If they choose to publish debt, they must do determination on the debt adulthood. In the F. Modigliani and M.H. Miller ‘s ( 1958 ) model, there is no advantage to be taken from opportunistically exchanging between short- and long-run debts. However in being of market imperfectnesss such as bureau costs, fiscal hurt, and information dissymmetry, houses are suggested to hold a mark optimum debt adulthood construction. Previous theories predict that this optimum debt adulthood susceptible to minimise the overall cost of capital is determined by firm-specific features. Recently, the market clocking theory has challenged old anticipations by proposing that corporate debt adulthood construction depends on recognition market conditions. This theory emphasizes the troughs ‘ ability to clip the market in order to borrow cheaply. A. Antoniou, Y. Guney, and K. Paudyal ( 2006 ) look into the determiners of the pick of debt adulthood of French, German, and UK houses. They find that debt adulthood construction is determined by firm-specific and factors state ‘s conditions. Similarly, R. Deesomak, K. Paudyal, and G. Pescetto ( 2009 ) examine the determiners of the debt adulthood within a panel of non-financial houses belonging to four Asiatic states ( Thailand, Malaysia, Singapore, and Australia ) over the period 1993-2001. A¶They find that these companies have an optimum debt adulthood construction mark determined by firm-specific factors and macroeconomic variables. A¶They show that market conditions have a important impact on the pick of debt adulthood. A¶
1.1 Maturity fiting rule
Maturity fiting rule says that liabilities employed to finance assets should be repayable at the clip those points can bring forth sufficient hard currency flows to pay off the debt service. S.C. Myers ( 1977 ) suggests that the correspondence between debt and plus adulthoods serves to decide the job of underinvestment. A¶He shows that the debt adulthood positively depends on the plus life rhythm. The durable assets must be financed by long-run debt whereas the short-run debt should be devoted to the funding of ephemeral assets.
A¶ J.R. Graham and C.R. Harvey ( 2001 ) documented that adulthood matching is the most of import factor impacting the pick between short- and long-run debts. They explain that this correspondence can be justified by risk-management patterns. Firms want to aline plus and liability continuance to rarefy the impact of involvement rate fluctuations on the sum of financess available for investing and daily operations. A¶A¶Mturity
P. A¶Korner ( 2007 ) finds that Czech houses tend to carry on the adulthood matching of their balance sheet by funding fixed assets by long-run debt. K. Cai, R. Fairchild, and Y. Guney ( 2008 ) find that plus adulthood has important impact on widening the adulthood of debt employed by Chinese houses. Using a sample of 146 non-financial UK-based houses over the period 1986-1999, M.R. Correia ( 2008 ) finds grounds that directors follow a adulthood matching regulation.
A¶The hypothesis of correspondence between debt and plus adulthood was confirmed by the bulk of empirical surveies. A¶Therefore, we expect a positive relation between long-run debts and durable assets. A¶The first hypothesis to be tested is as follows ; A¶
Hypothesis 1: A¶The debt adulthood is an increasing map of the plus life rhythm. A¶
1.2 Debt adulthood and bureau theory
S.C. Myers ( 1977 ) differentiates between assets in topographic point and growing chances. He shows that worthwhile bureau costs can coerce houses to go through up positive net nowadays value investing undertakings if the payments to creditors exceed the profitableness of those growing options. To get the better of this obstruction houses should renegociate the debt contract with loaners or shorten debt adulthood. “ Debt that matures before an investing option is to be exercised does non bring on suboptimal investing determination. ” ( S.C. Myers 1977, p.159 ) The anticipation that houses with higher growing options tend to shorten their debt in order to cut down the costs of shareholder-bondholder struggles has been confirmed by empirical surveies. M.J. Barclay and C. Smith ( 1995 ) papers that houses with few growing options have more long-run debt in their capital construction.
In this survey we attempt to prove the undermentioned hypothesis:
Hypothesis 2: Growth chances copiousness shortens debt adulthood.
1.3 Debt adulthood and signal theory
a ) Profitableness
M.J. Flannery ( 1986 ) argues that short-run debt issue is perceived by the market as good intelligence that can non be imitated with houses of bad quality. Investors believe that shortening debt adulthood means that the house has valuable investing. D.W. Diamond ( 1991 ) develops a theoretical account based on dissymmetry information between insiders and foreigners about the house ‘s default hazard. Firms with low hazard and expected unnatural returns should shorten their debt. When the private information about future chances reveals to the market, the house will be able to take advantage of the betterment of its grasp and borrow cheapest. Merely higher profitable houses could take short-run loans because they believe in their ability to refinance in opportune clip. F.C. Scherr and H.M. Hulburt ( 2001 ) documented a positive relation between debt adulthood and profitableness.
In this paper the undermentioned hypothesis will be tested:
Hypothesis 3: The debt adulthood is a diminishing map of house ‘s public presentation.
B ) Size
Bigger houses present a low grade of dissymmetry information and for that ground they are by and large low-risk. Diamond ( 1991 ) proposes that both really low-risk and really bad borrowers prefer short-run debt. F.C. Scherr and H.M Hulburt ( 2001 ) find that debt adulthood is negatively related to the house ‘s size. By contrast, J.R. Morris ( 1976 ) finds that larger houses use comparatively more long-run debt since they have a superior entree to the capital markets. A. Singh ( 2009 ) finds that little unrated houses are more likely to publish short-run debt.
Hypothesis 4: size plays a negative function on debt adulthood.
1.4 Debt adulthood and purchase
J.R. Morris ( 1992 ) argues that high-levered houses tend to lengthen their debt adulthoods in order to prorogue their exposure to bankruptcy hazard. J.R. Morris ( 1976 ) finds that houses with high purchase ratios attempt to lengthen their debt adulthood. H.E. Leland and K.B. Toft ( 1996 ) developed a theoretical theoretical account that predicts a positive relationship between debt adulthood and purchase degree. P. Korner ( 2007 ) find that purchase has a statistically important positive impact on debt adulthood constructions of Czech houses. By contrast, the bureau theory stipulates that debt adulthood is a diminishing map of purchase. High-levered houses are more likely to use short-run debt to extenuate stockholder-bondholder struggles even though borrowing short additions costs of turn overing over short adulthood debt claims. Therefore, optimum debt adulthood construction can germinate as a consequence of the tradeoff between benefits and costs of shortening.
The function played by purchase on the pick of corporate debt adulthood construction is non obvious. In the present paper we assume that houses are more concerned by detaining default hazard than to cut downing costs of equity holder-debt holder struggles. Hence, the undermentioned hypothesis can be formulated:
Hypothesis 5: purchase contributes in widening debt adulthood.
1.5 Debt adulthood and market timing theory
Empirical literature suggests that directors clip their debt issues in order to cut down their adoption costs. They believe in their ability to calculate future fluctuations of involvement rates. In the study conducted by J.R. Graham and C.R. Harvey ( 2001 ) , market timing reveals to be the 3rd most of import determiners of the pick between short-and long-run debt. “ We besides find that houses publish short-run debt in an attempt to clip market involvement rates. CFOs borrow short-run when they feel that short-rates are low comparative to long rates or when they expect long-run rates to worsen ” . ( J.R. Graham and C.R. Harvey 2001, p. 223 ) Similarly, M. Baker, R. Greenwood, and J. Wurgler ( 2003 ) argue that directors clip debt markets by increasing the portion of long-run issues when they expect high extra bond returns. They conclude that debt market timing schemes are successful. However, they did non demonstrated if directors win in cut downing the overall cost of capital. J. Guedes and T. Opler ( 1996 ) found that debt adulthood is negatively related to the term spread ( difference between long-run authorities bond output and Treasury measure returns ) . A. Antoniou, H. Zhao, and B. Zhou ( 2009 ) find that market timing is the primary motive behind corporate debt issues.
Hypothesis 6: debt adulthood is a diminishing map of term spread.
2. Empirical analysis
In the old subdivision we have provided a literature overview of the determiners of the debt adulthood construction every bit good as discoursing our research hypothesis. In this subdivision, foremost we define the dependant and explanatory variables, and so we specify the theoretical account to be estimated, present our sample, sum up descriptive statistics, study arrested development consequences, and eventually construe our findings.
2.1 The dependant variable
In our theoretical account the dependent variable is debt adulthood DEBTMAT. Maturity is the clip in old ages until refund of the principal ( and all staying involvement ) is scheduled. In this paper we use the ratio of long-run debt divided by entire debt. Our motive behind this pick is the troubles to obtain the effectual debt adulthood. Fiscal statements provided by either Tunisian or Gallic houses do non incorporate this information.
Where is long-run debt and is entire debt.
2.2 Explanatory variables
a ) Asset adulthood
Several placeholders can be employed to mensurate the plus adulthood. In this paper we use the undermentioned step to calculate the impact of plus adulthood on the pick of debt adulthood construction.
Where are fixed assets including intangible plus, works, properness, and equipment ( PPE ) , i.e. , assets that can non be easy converted into hard currency. Our motive of this pick is that this step takes history of adulthood of durable assets as a whole.
B ) Growth chances
The market-to-book ratio is normally employed as a placeholder of growing options. The market-to-book ratio is defined as the market value of assets divided by entire balance-sheet. Market value peers entire assets minus book equity value plus market capitalization.
Where represents the market value and the book value of the house.
High values of market-to-book ratios can be interpreted as good grasps of house ‘s growing options by the market.
degree Celsius ) Size
The house ‘s size is measured by the natural logarithm of net gross revenues
vitamin D ) Profitableness
Profitableness is measured by net incomes before involvements and revenue enhancements scaled by entire assets:
vitamin E ) Leverage
To look into the relevancy of the effects of purchase on the pick of the debt adulthood construction, we have tested two steps. The book step is defined as entire debt scaled by entire assets.
The market step is defined as entire debt reported to the market value of the house.[ 1 ]
degree Fahrenheit ) Term spread
The term spread is defined as the difference between 10-year authorities bond outputs and a three month Treasury measure returns.
2.3 Regression equation
We investigate the determiners of the pick of corporate debt adulthood construction within Tunisia and France. Specifically, we run arrested developments utilizing many techniques of panel informations analysis for each state. In this arrested development, debt adulthood is regressed on five variables which reflect firm-specific features and a 6th variable related to market conditions. The arrested development equation is formulated as follows:
This theoretical account is estimated utilizing many panel informations techniques. Using panel informations can heighten the quality and measure of informations. It allows us to place some effects that can non be detected utilizing time-series analysis. Panel
informations arrested development provides three calculators. A pooled calculator which takes as the same across all cross-section units. The fixed effects theoretical accounts approach takes to be a group specific term. The random effects approach that takes as a group specific perturbation. To take between these three attacks we compute foremost a trial of homogeneousness and if the consequence is assumed to be single we use the Hausman specification trial to make up one’s mind whether the fixed or the random effects theoretical account should be used.
2.4 Sample choice
To organize our chief Tunisian sample, we start with all houses listed in Tunis Stock Exchange looking at any point between 2000 and 2007. We restrict this sample to houses which can be observed on a regular basis since 2000. We farther curtail the sample to except fiscal houses. The concluding sample covers 19 publically traded Tunisian houses. The Gallic sample consists in 31 non-financial Gallic houses of the Paris stock market index CAC40 for which information is available during the period 2000-2007. The information set employed for the empirical grounds included balanced panel informations of 19 Tunisian houses and 31 Gallic houses. Each house was observed during 8 old ages ( 2000-2007 ) doing 152 observations for the Tunisian sample and 248 for the Gallic sample.
2.5 Appraisal consequences
Table 1 studies arrested development consequences for the theoretical account linking the pick of corporate debt adulthood construction to five firm-specific factors and a last variable which reflects debt market conditions. Panel information analysis provides three calculators ; Pooled, fixed effects, and random effects. The Hausman ‘s specification trial indicates that single effects are assumed fixed. So, the fixed effects attack is the most proper one.
The empirical consequences provide a strong support to the duplicate rule. A¶Indeed, the coefficient of the variable is positive and important in the two states and for the three methods of estimation. A¶This consequence suggests the being of a correspondence between the debt adulthood and the plus life rhythm. A¶This grounds indicates that Tunisian and Gallic companies fund the acquisition of durable assets by long-run debts in order to vouch some happenstance between debt services and hard currency flows generated by the implicit in plus. A¶This association between the debt adulthood and the plus life rhythm can besides take to decide the job of underinvestment ( S.C. Myers 1977 ) . A¶A¶The impact of the growing chances is non important although it presents the expected mark for Gallic houses. This grounds indicates that A¶French houses tend to shorten their debt while waiting for the exercising of growing options. A¶ A¶In Tunisia, the market-to-book ratio has a positive but non important influence on debt adulthood. This grounds indicates that A¶tyyTunisian houses do non hold great assurance in the profitableness of their future growing chances and prefer to lengthen their debt adulthood. A¶This consequence contradicts the bureau theory which predicts the being of an opposite relationship between growing chances and the debt adulthood. A¶A¶The variable size measured by the natural logarithm of net gross revenues has an impact significantly negative on the debt adulthood. A¶A¶A¶A¶The variable which measures profitableness is negatively related to the debt adulthood. A¶This grounds is consistent with the theory of signal. A¶Tunisian and Gallic houses shorten their debts while waiting for the release of the new public presentations carried out. A¶A¶In the Tunisian context, purchase has a positive impact on the debt adulthood if we choose the Pooled theoretical account. A¶Nevertheless, it changes mark when the fixed consequence theoretical account is chosen. A¶A¶In France, The debt adulthood depends positively on the degree of liability. A¶Thus indicates that Gallic houses lengthen adulthoods of their debts to differ the fiscal hurt. A¶The term spread hasA¶he ter no important impact in the Tunisian context. A¶In France, this variable is negatively and significantly related to the pick of the debt adulthood. A¶This grounds is a strong support to the market clocking theory. A¶French houses are more likely to take short-run debt when the term spread is comparatively high. A¶A¶
Table 1: Determinants of debt adulthood
Tunisia ( 19 houses )
France ( 31 houses )
( 8.37 ) ***
( 2.32 ) **
( 2.9 ) ***
( 8.2 ) ***
( 3.33 ) ***
( 1.52 )
( 0.66 )
( 0.84 )
( -1.48 )
( -0.56 )
( -1.42 )
( -2.24 ) **
( -1.34 )
( -12.9 ) ***
( -4.9 ) ***
( 0.92 )
( -0.96 )
( -0.55 )
( -1.86 ) *
( -1.57 )
( 4.91 ) ***
( -0.33 )
( 1.18 )
( -1.85 ) *
( 5.83 ) ***
( -0.48 )
( 1.35 )
( 0.49 )
( -2.31 ) **
( -4.9 ) ***
***significant at 1 % degree, **significant at 5 % degree, *significant at 10 % degree, t-statistics in parenthesis
T statistics are in parenthesis.
3. Impact of debt market clocking on house ‘s valuing
In an efficient, integrated and perfect capital market, F. Modigliani and M.H. Miller ( 1958 ) argue that there is no advantage to be taken from exchanging between current liabilities and long-run liabilities. There is merely possibility to cut down the mean cost of liability it is to increase the hazard for the stockholders and accordingly to increase the cost of equity. However, in a metameric capital market, houses can cut down their debt costs without altering the cost of equity by following a market timing scheme. M. Baker, R. Greenwood, and J. Wurgler ( 2003 ) argue that houses tend to utilize market conditions to find the lowest-cost adulthood. However, they have non demonstrated if directors win in cut downing the overall cost of capital. S. Titman ( 2002 ) shows that proving the success grade of market timing schemes consists in proving debt market efficiency and intuitively explicate why the market inefficiency can be merely exploited by directors. Titman explains that directors can entirely take advantage from this inefficiency if they are more informed than investors about future fluctuations of involvement rate. However, He recognizes that it is hard to prove the directors ‘ ability cut down the overall cost of capital by choosing for a market timing scheme. K. Song ( 2009 ) paperss no important differences in value across timers and non-timers. He concludes that timers fail to cut down the overall cost of capital. Indeed if timing schemes are successful and if the market can spot between timers and non-timers, timers should hold higher market values than non-timers even before timing schemes are implemented. C.B. Barry, S.C. Mann, V. Mihov, and M. Rodriguez ( 2009 ) find no grounds of clocking ability for fixed-rate or floating-rate debt issues.
To look into the market clocking impact on the house valuing, we connect stock monetary values to a variable which reflects the happenstance between long-run debt issue and favourable market conditions. This variable is computed likewise to the variable invented by M. Baker and J. Wurgler ( 2002 ) to unwrap equity market clocking efforts. Our variable employed to observe debt market clocking behaviours is computed as follows:
Where is the amount of long-run debt issues, is the amount of short-run debt issues, and is the long-run debt issues portion. Besides this variable, stock monetary values are connected to a step of profitableness and the one-year fluctuation of the index CAC40 in order to research the impact of stock market conditions. The arrested development equation used to look into the impact of debt market clocking on the house ‘s value can be written in the undermentioned signifier:
Table 2: impact of debt market clocking on house valuing
France ( 31 houses )
( -0.48 )
( -1.12 )
( -2.71 ) **
( -1.24 )
( 2.48 ) **
( 2.39 ) **
( 18.48 ) ***
( 13.92 ) ***
The statistics of Chi-square and Hausman confirm the significance of the single effects and that these effects are supposed to be random. Our debt market clocking placeholder has a negative impact on stock monetary values. This consequence is consistent with the theorem of irrelevancy of capital construction on the house ‘s value defended by F. Modigliani and M.H. Miller ( 1958 ) . In an efficient, perfect and incorporate market, a addition carried out on the equity cost is offset by a loss on the debt cost and frailty versa. Our consequence suggests that even though Gallic directors try to put up a debt market clocking scheme, they fail to cut down the overall cost of capital. This grounds indicates that Gallic capital market is integrated.
This paper has examined the determiners of the pick of debt adulthood construction in a little sample of Tunisian and Gallic houses. Our findings suggest that debt adulthood seems have the similar determiners in developed and developing markets. Our most interesting consequence is that Gallic houses tend to take long-run debt when the term spread is low. This grounds suggests that Gallic directors try to clip the market in order to take the debt adulthood which reduces the adoption cost. However, we find no grounds for the success of this debt market clocking scheme.