A Report on Comparative Study of Determinants of Capital Structures for Companies in Britain and United States
Assessment area: The Determinants of Capital Structure
Word limit: 2500 (words +/- 10%)
Deadline: 25th April 2016 (4.00 pm)
Assessment tasks:
In this coursework you are asked to critically analyse the factors that influence a company's capital structure decision using international data.
To accomplish this, follow the steps below
1)Select a number of listed, non-financial firms to perform the international analysis. Your sample must contain:
-at least 50 non-financial companies listed on the London Stock Exchange, and,
-at least 50 listed non-financial companies from another country of your choice.
2)Obtain the necessary financial information to calculate the following proxies, i.e.
-Leverage (ratio of total debt to total assets);
-Profitability (ratio of earnings before interest and tax to total assets);
-Market-to-book ratio [(total assets - book value of equity + market value of equity) to total assets];
-Size (logarithm of total sales);
-Tangibility (ratio of property plant and equipment to total assets);
The data should cover five consecutive years, ending in 2015.
3)In order to compare determinants of capital structure across two countries, estimate one regression for each country, and one for the total sample (three regressions in total), using the following OLS regression model
Leveragei,t=α + β1Tangibilityi,t + β2 Market-to-Booki,t+ β3 Sizei,t + β4 Profitabilityi,t + εi,t
4)On the basis of the regression models estimated in step 3, evaluate the importance of each factor in terms of the impact on the capital structure decision. The evaluation should also include discussion on international differences, and/or similarities.
5)Critically discuss your results in terms of their consistency with the relevant literature.
6)Finally, suggest how the model presented in the third step could be modified, in order to explain better the capital structure decision. The recommendations should be based on the contemporary corporate finance theory and practice (not on econometrical methods).
Notes:
1.It is highly recommended to obtain the list of firms and the data outlined in the second step of the requirements from one of the following databases: Datastream, Bloomberg, or Compustat. For more information on the databases please visit http://www2(dot)hull(dot)ac(dot)uk/hubs/about-us.aspx
2.The raw data does not need to be included in the submission, however some basic information on the selected firms must be provided, for example the number of firms used, country selected.
3.The regression models must be estimated in STATA or Excel. Both programmes are available for use at the University owned computers.
4.Before you start planning your essay, please refer to the module website on canvas for further information on:
i.Coursework submission deadline;
ii.Assessment criteria for coursework; and
iii.Coursework submission procedures.
5.You should also refer to the Module Handbook for a list of references and the Journals (Sections 6 and 12) for general essential reading, which may be related to the assignment topic. However, you are strongly advised to also benefit from the range of references and resources available throughout the University Library.
Ps: 1. please read the handbook.
2.And a paper which teacher give us.
3. Must use the data I give you. First is the data of china, second is the data of UK, third is the data of china combine uk.
PLEASE USE THE DATA THAT I PROVIED IN THE ATTACHMENTS
A Report on Comparative Study of Determinants of Capital Structures for Companies in Britain and United States
Introduction
The modern theory of capital structure was developed 37 years ago but has since been able to undergo several modifications that were aimed at ensuring that companies can make more informed decisions. Capital structures are always designed to ensure that the value of a company makes sense to both investors and those involved in the management of the company. Research shows that many companies are not aware of the empirical evidence and the impact that capital structures have on the manner in which business is undertaken (Milani, 2009). Data available also indicates that determinants of capital structures for most companies in the world are based on a number of factors. This report presents findings of a comparative study that looked at determinants of capital structures for companies in China and United Kingdom.
Background Information
According to Rehbein,(2014), there is no universal theory that can easily explain the pattern for capital structure decision making for companies around the world and this is because of different factors. Challenges have continued to emerge with regard to the manner in which managers craft their capital structure plans and the approach they use when it comes ensuring the success of the business as a whole. Different decisions are based on models that have been researched by experts in the field of capital planning.
Financial distress is also another major issue that is considered when making decisions by business and at the same time there are challenges that have to be addressed (Gagnon & Hinterschweiger, 2011). The goal of businesses is to make profit and at the same time ensure that it is able to stay in the industry. International trade is also important and understanding what goes on in different countries is also healthy for businesses that are seeking to go beyond their boarders.
Capital Structure Decision Making
Several factors have been known to directly influence the manner in which capital structure decision making is undertaken and the kind of systems that are adopted along the way. A firm’s characteristics and the industry in which they operate in is also likely to shape the manner in which capital structure decision making is undertaken (Eaton & Turnovsky, 2013). In addition to that, countries have to work around the clock in making sure that everything is done in the right manner and at the same time there is effective realization of goals that they set. Theoretical and empirical research has been very instrumental in the process of ensuring that decisions made are effective and at the same time leads to better results when it comes to capital structures that are adopted along the way.
United Kingdom & China
Managerial decision making in the United Kingdom and China is influenced by a number of key factors within these economies. Scant attention has been directed towards understanding the manner in which financial decisions in the Chinese markets are made and the kind of factors that different industries adopt. This report presents a number of important structures that different industries in Britain and China adopt when it comes to making these critical decisions. Boundary decisions are critical in understanding how firms are likely to be affected if they shift or expand their operations in some of these countries.
Firms compete in different industries and as a result, they have to come up with strategies that can guarantee them success and continuous survival in the industry. A firms focus and core competency is directly affected by the manner in which decisions are made. The success of these strategies also affects the manner in which profit is generated and at the same time how the economy performs in the long run.
Methodology
This research will apply available data that will be used when it comes to decision making and the manner in which capital structures are designed. A total of 100 companies were selected when it came to this analysis. A total of 50 companies that are listed on the London stock exchange were selected in the study. A total of 50 other companies listed on Chinese Stock market were also selected for purposes of informing this study. Information regarding these companies was also gathered as means of understanding the impact that they have on the stock market in general (Eaton & Turnovsky, 2013). To ensure that the research is effective, data that is available was aimed at ensuring that calculations of various financial aspects are made possible through the regression analysis.
Regression Analysis
Regression analysis is a very important statistical tool that is utilized when it comes to estimating the relationship among variables that are under study. The following are determinants of capital structures that were under investigation in the two countries.
* Leverage
* Profitability
* Market to Book Ratio
* Size
* Tangibility
The regression analysis aims at looking at the strength and weaknesses of each of these factors in these two countries. In addition to that, the overall regression analysis was adopted in assessing how these factors affect decision making in these two countries in general.
Data description
Data that was used in this particular analysis was collected from various financial reports and information that is available. Prices of the ordinary share and the its performance on the stock market was also calculated and used in the regression analysis and at the same time the manner in which they were reported by financial statements of different companies. The sample in the study comprised of a total of 100 companies drawn from the United Kingdom and China.
Findings & Discussion
The main focus of this study was on regression analysis and how different factors affect the manner in which capital structure decision making is made in different countries and at the same time how the differences affects the business in general. Based on the data that is available, the following determinants of capital structure were calculated using regression analysis and the manner in which they affect the business decisions were also highlighted (Carriero, 2006). The data that was used is comprised of information from 2010 to 2015 and the kind of results that they have been able to post over the past 5 years. The data set investigation was a clear pointer to the manner in which the business performed along the way and how these two instruments continued to play a critical role.
Companies that had negative book value were included in the study but at the same time the ratio was analyzed based on the asset ratio that the business posted from time to time. The main challenge in data presentation was on the manner in which the business performed along the way and regression analysis values that were obtained along the way. In Britain for example, there was a huge difference in the number of capital structure determinants as compared to those that were reported along the way.
The table below presents a summary of results for regression analysis of factors that were under investigation this particular study. The same is followed by a clear and detailed analysis of each determinant and what the results mean for United Kingdom, China and overall.
Regression Analysis for United Kingdom Companies
Usually the more spread out the data is the larger the SST, so from our table it is clear the data was not spread out .meaning the deviation of the observed determinants from the mean was small. As for the coefficients of the determinants, when the value is near 0 it simply means that the model used has done little to explain the variation, while values near 1 imply the model had explained a large portion of the variation
From the table of regression analysis in the united kingdom, we can make a conclusion the MTBV from its coefficient is has very small impact on the capital structure using its coefficient value ,0.0003235.followed by the capital structure , profitability , tangibility respectively in an ascending order. Tangibility has the most impact on the capital structure in the UK, it has the highest coefficient, meaning it variation makes a big change on the capital structure.
The table below shows regression analysis for companies selected from China
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From the previous explanation, we can say t...