Analyzing financing strategy of public manufacturing companies
| Date | 26 June 2009 |
| DOI | https://doi.org/10.1108/02635570910968036 |
| Pages | 775-792 |
| Published date | 26 June 2009 |
| Author | Kuang‐Hsun Shih,Kang‐Chi Fan |
| Subject Matter | Economics,Information & knowledge management,Management science & operations |
Analyzing financing strategy
of public manufacturing
companies
Kuang-Hsun Shih
Department of Banking and Finance, Chinese Culture University,
Taipei, Taiwan, Republic of China, and
Kang-Chi Fan
FIOS R&D Centre, Chinese Culture University,
Taipei, Taiwan, Republic of China
Abstract
Purpose – This paper focuses on Taiwanese-funded manufacturing companies operating in
mainland China to analyze the factors affecting funding decision-making before and after initial public
offering (IPO).
Design/methodology/approach – This research investigates the impact and usefulness of various
paths in the data system by using the structural equation modeling (SEM) to examine how the overall
economy aspect and the basic aspect before IPO affect the initial returns (IRs) during the IPO and the
debt ratio (DR) volatility after listing.
Findings – The results show that the IR, percent change of stock index, and exchange rate volatility
before IPO are negative associated with the DR after IPO. The age of IPO companies is positive
associated with the DR after IPO. This research also finds that the interest rate volatility before and
after IPO have no direct effect upon companies’ financial strategies after IPO, but may indirectly affect
companies’ financial strategies after IPO through the IRs, which conform with the market information
feedback hypothesis proposed by van Bommel and Vermaelen.
Research limitations/implications – This paper investigates Taiwanese-funded traditional
manufacturing companies in mainland China. The paper obtains the sample from the Taiwan Stock
Exchange from 1990 to 2005; electronic companies and samples lacking complete data are eliminated.
Finally,the sample consists of 122companies from traditionalmanufacturing sectors.The results may be
applied to companies not from high-tech sectors and emerging markets only. The incentive of debt
financing would be lower for IPO companies with high IRs, percentage changes of stock index, and
exchange rate fluctuation before listing. The paper suggests further research can investigate IRs for
establishingan optimal capitalstructure to minimize financingcosts and appreciate companyvalue when
choosing financing strategies. The new pubic companies will infer the IR and future capital structure
through market interest before listing. It suggests future research may be directed at companies from
financial and high-techsectors, and may apply the methodologies to developed economies.
Practical implications – It is suggested that IPO companies may closely examine to determine the
performance of stock market, tendencies of exchange rate movement, as well as IRs in order to
establish an optimal capital structure to minimize financing costs and appreciate company value.
Besides, the new pubic companies will infer the IR and future capital structure through market
interests before listing.
Originality/value – This research implicated that IPO companies should fully understand the stock
market circumstance and exchange rate volatility tendencies. Then, the new pubic offering companies
will be able to infer the IR and future capital structure through market interest to judge relative
financing costs of manufacturing companies.
Keywords Financing, Capitalstructure, Manufacturing industries, China
Paper type Research paper
The current issue and full text archive of this journal is available at
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Analyzing
financing
strategy
775
Received 31 December 2008
Revised 20 February 2009
Accepted 29 March 2009
Industrial Management & Data
Systems
Vol. 109 No. 6, 2009
pp. 775-792
qEmerald Group Publishing Limited
0263-5577
DOI 10.1108/02635570910968036
Introduction
Companies usually continuously develop their financial energies and operating
performance through acquisition and merger or outsourcing (Espino-Rodriguez and
Rodriguez-Diaz, 2008) and extend their expanding plants and equipment, updating
technologies, and innovating products to maintain competitive advantages and
sustainable development (Kongkiti and Rapee, 2008). Consequently, companies
generally keep their competitiveness to rely on successful capital expenditures
strategies and funding sources during an effective promotion of strategies and
planning. According to the Pecking Order Theory, Donaldson (1961) and Myers and
Majluf (1984) indicate that companies use internal financing by funds from their
operations. If internal funds are not sufficient, companies would use external financing.
Then, companies’ investment strategies possibly have relations associated with
financing strategies. Public offering is an important financing method. Investors would
analyze relative financial and operating circumstance of the company to make their
investment decision. However, they cannot incompletely and correctly evaluate the
actual value of companies for public offering to listed market. In general, investors
expect to gain back their initial return (IR) (Kiymaz, 2000; Aaij and Dirk, 2002) from
new equity issues, and thus, the public is interested in subscribing for shares.
Hovakimian et al. (2001) found that higher market-to-book value (M/B) has lower
target debt ratio (DR). Companies with high M/B usually obtain higher inv estment
evaluation in equity securities from investors. When companies issued equity
securities for financing, they will increase price per shares to reveal good performanc e
for attracting investors. Hovakimian et al. (2001) also indicated that capital structure of
ex ante IPO companies would affect future financing choices of ex post IPO companies.
This research investigates Taiwanese-funded traditional manufacturing companies
in Mainland China to discuss factors on overall economy aspect (including four
variables: percent change of stock index, interest rate volatility, change of business
cycle, and exchange rate volatility) and basic aspect (including three variables:
company scale, age, and capital expenditure rate) affecting the IRs and DR volatility by
using structural equation modeling (SEM) to find the correlation with IRs and DR
volatility after public offering for strategies of financing modes.
Capital structure theory
Modigliani and Miller (1958) issued the “Capital structure irrelevance hypothesis” to
describe capital structure, not related to corporation value, when the corporation has no
tax bearing, transaction costs, risks, agency costs, bankruptcy costs, or perfect market
of asymmetric information. The Modigliani and Miller (1958) (MM) theory, in which
corporate income tax is considered, was put forward. It is considered that the income
tax paid by corporations to government will lower the market value of the corporation.
Thus, corporations can reduce tax expenditures through interest costs on debt, and
enjoy the tax shields by tax saving from debt. Higher degrees of debt financing mean
higher corporation value. In other words, the hypothesis aims at a description of the
factors affecting capital structure to lay the foundation for a capital structure research.
Jia (2002) conducted an empirical research on the MM theory using 1,226 S&P 500
companies as samples, which are divided into five groups. The expansion and
recession of the economy can be divided into four cycles. The relation between
business cycles and capital structure is verified in the four cycles. The research results
IMDS
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