Essays on capital structure, debt maturity, trade credit, and default probability
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To finance investments, a firm needs to decide which sources are to be used to attract funds; that is how the financial structure of the firm should be. The main subjects of this thesis are how the firm’s financial structure is determined and how the chosen financial structure affects the firm’s probability of default. The thesis consists of five essays studying the financial structure of firms and one popular scientific paper on financial behavior. In the first paper, a theoretical model is developed explaining the probability of default, based on the chosen capital structure. This model contains five variables that explain the probability of default: leverage, bankruptcy costs, taxes, and the expectation and standard deviation of the cash flow. Numerical experiments with the resulting comparative statics show that a U-shaped relation exists between the standard deviation of the firm’s cash flow, often used to indicate business risk, and default probability. The relation is found to be more complex than commonly assumed in empirical models. The theoretical model developed in this paper can be used to guide empirical research, thus preventing the results to be sample-specific. In the second paper, the hypotheses for the five variables based on the default model are tested empirically. Support is found for the U-shape in a sample where business risk is calculated over time. Leverage has a positive effect on the probability of default, and bankruptcy costs and cash flow have a negative effect. These variables are significant in explaining the probability of default, while taxes are not significant. The determinants from different theories have different effects on the various components of capital structure. Therefore, the next three papers look at leverage at an increasingly detailed level. In the third paper, the determinants of maturity structure of listed and unlisted firms in Norway are examined. We find support for the tax theory, and for the maturity matching principle. Only the maturity structure of unlisted firms is found to be influenced by information asymmetry and firm size. The free cash flow hypothesis is supported for the listed firms. In the fourth paper, the determinants of short-term debt are examined more closely, as it is not given that short-term debt and long-term debt are determined in the same way. Short-term debt may be influenced by operational determinants as well as by financial determinants. Using a nonlinear model on data from the US, Spain and Japan, the results indicate that in certain sectors short-term debt is for a large part being influenced by operational factors. In the final paper, the determinants of trade credit are investigated. Accounts receivable and accounts payable are estimated in a simultaneous model, as they are found to be simultaneously determined. The empirical results of research on trade credit are expanded with this analysis on eleven European countries over a period spanning twenty years. The tax effect on trade credit receives some support, which is not found in previous studies. The results indicate a large effect of marketing and asymmetric information theories on trade credit.