Capital structure topics in European manufacturing– Endogenous, simultaneous and identifiable relations.

Abstract

How do firms finance their activities? How large are the piles of cash on average in these firms? Do dividend paying firms have more cash than firms that do not? Is trade credit something firms use actively? Is trade credit larger or smaller than cash holdings or other assets of the firms? Do firms have a target level for leverage, if so, do they adjust towards this target? Do firms invest in fixed assets on a regular basis? How large are these investments? Are larger firms more likely to invest more and use more debt than smaller firms? These are some of the many questions that I have asked myself in my work on this doctoral thesis. It all starts out as a question and a curiosity for finding answers to how things are related and how they work. During my work with this thesis I have tried to answer many questions and tried to find ways of interpreting the results of the many analyses made. This has resulted in 4 research papers that investigate endogenous, simultaneous, dynamic and identifiable relations for manufacturing firms in Europe. In the first paper I propose a simultaneous model between cash holdings and dividends. This proposition is made due to findings in previous empirical and theoretical articles regarding common firm specific factors that influence both cash holdings and dividends. I test the proposed simultaneous relation and find that dividends are endogenously determined in the cash holdings relation. I find that this endogeneity produces a large bias in the estimated effect of dividends on cash holdings. The estimated effect becomes almost five times higher when endogeneity is modeled. Firms that pay dividends have on average 70% higher cash holdings than firms that do not. In addition we cannot document any significant time trends in our data for cash holdings or other explanatory variables. Paper 2 proposes, tests and estimates a simultaneous model of trade credit. We find that accounts payable depend on accounts receivable and vice versa. Trade credit receives little attention in journals although trade credit constitutes on average a higher amount and a larger share of total assets than, for example, cash holdings. I find limited support for the use of trade credit as an arbitrage instrument. The operational use of trade credit as a product quality guarantee, as an instrument to discriminate prices and reduce transaction cost are supported. The main finding is that receivables and payables depend upon each other, and that this simultaneity is highly significant, well behaved and pervasive across regional subsamples. The third paper estimates a dynamic model of leverage. The dynamic estimator that is used is the Blundell-Bond estimator, that is shown to produce the best (and least biassed) dynamic estimates. The trade-off theory receives the broadest support and there is no support for the pecking order theory. In addition I analyse if there are differences in the optimal leverage and the speed of adjustment (towards optimum) for different regions and current growth, both moderate and strong. Overall, Nordic firms have the highest speed of adjustments while firms in the region South have the lowest speed of adjustments. Firms experiencing moderate current growth close, on average, a larger part of the gap between optimal and actual leverage than firms with strong current growth. The final paper investigates how investments in fixed assets are financed in European manufacturing. I argue for using cash inflow instead of cash holdings in order to better identify cash usage in these firms, and if cash is used as a source of capital in investment. I also include long term debt as a measure of external capital (with a matched maturity) for these investments. I find in my analyses that firms rely on long term debt as a source of capital, but the dependency on internally generated funds is stronger. On average firms finance about 75% of their investments with internally generated funds. This casts a different light on the discussion of the piles of cash in firms. Firms use cash for investments in fixed assets, and this usage is a significant and large part of their cash inflow.