Julio Pindado García Ignacio Requejo Puerto Juan Camilo Rivera Ordóñez

Transcription

1 Julio Pindado García Ignacio Requejo Puerto Juan Camilo Rivera Ordóñez Diversification strategies, corporate governance and capital structure: New evidence from an international panel data

2 Objective We investigate how product diversification strategies affect corporate debt decisions. We go a step further by differentiate related and unrelated diversification. We also investigate how family ownership moderates the relations above.

3 Outline of Presentation Literature review & hypotheses The coinsurance effect theory Transaction costs theory Agency theory The effect of ownership structure The effect of related and unrelated diversification strategies Data, & estimation method Data, sources and sample Unobservable heterogeneity Model specification & Results Conclusions

4 Previous related research Debt Diversification (O'Brien, David, Yoshikawa & Delios, 2014) Diversification Debt (single country context) (Barton & Gordon, 1988; Fatemi, 1988; Burgman, 1996; Chen, Cheng, He & Kim, 1997; Kochhar & Hitt, 1998; La Rocca, La Rocca, Gerace & Smark, 2009) Diversification Debt (International coverage) (Kwok & Reeb, 2000; Low & Chen, 2004) Product Diversification Debt (Barton & Gordon, 1988; Kochhar & Hitt, 1998; Low & Chen, 2004 and La Rocca, La Rocca, Gerace & Smark, 2009)

5 Previous related research Diversification strategy Context Effect on debt Barton & Gordon (1988) United States + Kochhar & Hitt (1998) United States Related diversification - Unrelated diversification + Anderson, Bates, Bizjak & Lemmon (2000) United States + Jordan, Lowe & Taylor (1998). United Kingdom Non significant effect (SMEs) Ngah Kiing Lim, Das & Das (2009) Singapore Related diversification Non significant effect Unrelated diversification Non significant effect Menéndez-Alonso (2003) Spain Non significant effect La Rocca, La Rocca, Gerace & Smark (2009) Italy Related diversification - Unrelated diversification + Low & Chen (2014) International sample +

6 Coinsurance Effect Theory Diversification reduces operational risk (Lewellen, 1971; Kim & McConnell 1977). This effect is stronger in firms that prefer unrelated correlation given the smaller, or even the lack of correlation among cash flows. Consequently, diversified firms are able to contract higher levels of debt, and thus, can take advantage of leverage tax shields (Bergh, 1997). In this regard, Hann, Ogneva & Ozbas, (2013) find a lower cost of capital in diversified firms caused by a reduction in their systematic risk.

7 Transaction CostsTheory Diversification depends on the specificity of its assets (Chatterjee & Wernerfelt, 1991; Mahoney & Pandian, 1992). Firms with more specific assets will prefer related diversification strategy because these assets are easy to move among different business. Conversely, it will be easier to adopt an unrelated diversification strategy, when firms assets are non-specific, since this kind of assets could be transferred among different sectors (La Rocca, La Rocca, Gerace & Smark, 2009). Firms finance non-specific assets using debt, while equity is the choice for specific assets (Williamson, 1988; Kochhar & Hitt, 1998).

8 Agency Theory Corporate debt as a mechanism to reduce managerial discretion regarding free-cash flow, and therefore, a mechanism to discipline managers (Jensen,1986). Diversification becomes an agency problem since managers in general tend to withhold free cash flows, and diversification opens new underinvestment opportunities for these resources (Jandik & Makhija, 2005). Diversification increases agency problems helping to make the manager indispensable to the firm (Shleifer & Vishny, 1989; Aggarwal & Samwick, 2003).

9 Main Hypotheses Diversification strategy Ownership structure H1 -a Related Non-Family firms Low Coinsurance Effect and High Managers avoid debt (mechanism of transaction costs control) ( - ) ( - ) ( - ) H1 -b Related Family Firms Low Coinsurance Effect and High Family firms prefer debt to mantain transaction costs control ( - ) ( + ) Inverted U-shape H2-a Unrelated Non-Family firms High coinsurance effect and low Managers avoid debt (mechanism of transaction costs. Underinvestment risk. control) ( + ) ( - ) ( - ) Inverted U-shape H2-b Unrelated Family Firms High coinsurance effect and low Family firms prefer debt to mantain transaction costs. Underinvestment risk. control ( + ) ( - ) ( + ) Inverted U-shape (Higher inflection point)

10 H4 -b Unrelated Shareholder manager Inverted U-shape Long-term orientation and higher performance ( + ) Higher inflection point Secondary Hypotheses (only for Family Firms) Heterogeneity in the mechanisms of control The nature of the second shareholder H3 -a Related Financial firm Inverted U-shape Lower agency conflict between Shareholders and creditors H3 -b Unrelated Financial firm Inverted U-shape Lower agency conflict between Shareholders and creditors ( + ) Higher inflection point ( + ) Higher inflection point Managerial ownership H4 -a Related Shareholder manager Inverted U-shape Long-term orientation and higher performance ( + ) Higher inflection point

11 Data, sources and sample Data sources Financial statements Worldscope 1,902 listed companies. 16,653 firm-year observations. 546 Family firms 1,356 Non-family firms Ownership structure Orbis (BvD) 18 European Countries Historical GDP and inflation World Bank Time period from 1998 to 2013 (at least five consecutive years)

12 Estimation method Unobservable individual heterogeneity Error term Time-specific effect = Dummies Country specific effect = Dummies System GMM Random disturbance t-1 to t-4 Instruments t-2 to t-5 for the lagged variables Only one instrument for the equations in levels, as suggested in Blundell & Bond (1998).

13 Model specification Full sample H1A: Related diversification strategy has a negative effect on non-family firms leverage. H1B: Related diversification strategy affects positively family firms debt, but discourages the use of debt when the degree of diversification exceeds the optimal point. H2A: The unrelated diversification strategy on non-family firms has a positive effect on firms leverage, as long as the degree of diversification does not exceed the optimal point, where the agency conflict discourages firms indebtedness. H2B. The effect of unrelated diversification strategy on family firms debt is positive if the degree of diversification does not exceed the optimal level. This optimal level of unrelated diversification is higher than the optimal for nonfamily firms

14 Model specification Family firms sub-sample H3A: The effect of related diversification strategy on family firms with a financial firm as a second shareholder is non-linear (an inverted U-shape). The positive effect of this strategy in this kind of firms is more prolonged that in family firms with another type of second shareholder. H3B: The effect of unrelated diversification strategy on family firms with a financial firm as a second shareholder is non-linear (an inverted U-shape). The positive effect of this strategy in this kind of firms is more prolonged that in family firms with another type of second shareholder. H4A: The effect of related diversification strategy on family firms managed by a shareholder is non-linear (an inverted U-shape). The positive effect of this strategy in this kind of firms is more prolonged that in family firms directed by an external manager. H4B: The effect of unrelated diversification strategy on family firms managed by a shareholder is non-linear (an inverted U-shape). The positive effect of this strategy in this kind of firms is more prolonged that in family firms directed by an external manager.

15 Model specification - Main variables

16 Model specification Inflection points H1A H1B H2A H2B H3A H3B H4A H4B IP NFF - b 1 - b 1 2 b 1 2 b 1 IP FF - (b 1 + g 1 ) - (b 1 + g 3 ) - 2 (b 2 + g 2 ) - 2 (b 2 + g 4 ) IP OSH - b 1 2 b 1 IP FSH - (b 1 + g 5 ) - 2 (b 2 + g 6 ) IP OM IP SM - b 1 2 b 1 - (b 1 + g 7 ) - 2 (b 2 + g 8 )

17 Model specification Linear restriction tests H1B H2B H3B H4B t 1 H 0 : b 1 + g 1 = 0 t 2 H 0 : b 2 + g 2 = 0 t 3 H 0 : b 1 + g 3 = 0 t 4 H 0 : b 2 + g 4 = 0 t 5 H 0 : b 1 + g 5 = 0 t 6 H 0 : b 2 + g 6 = 0 t 7 H 0 : b 1 + g 7 = 0 t 8 H 0 : b 2 + g 8 = 0

18 Regression results H1, H2 H1A - H1B Inverted U-shape H2A Inverted U-shape H2B Inverted U-shape (Higher inflection point) H1A - H1B b 1 RELDIV i,t (0.0037)** b 2 RELDIV 2 i,t (0.0026) g 1 DUMFAM i RELDIV i,t (0.0059)*** H2A - H2B g 2 DUMFAM i RELDIV 2 i,t (0.0040)*** b 1 UNRELDIV j,t (0.0044)* b 2 UNRELDIV 2 j,t-1 g 3 DUMFAM i UNRELDIV i,t-1 g 4 DUMFAM i UNRELDIV 2 i,t (0.0037)*** (0.0062)** (0.0049)* b 3 DUMFAM i (0.0024) (0.0023) t (0.0044)*** (0.0045)*** t (0.0029)*** (0.0033)*** IP NFF 0,373 IP FF 0,524 0,596

19 Related diversification This figure shows the negative effect of related diversification on non-family firms leverage and inverted U-shape relation between related diversification and family firms debt. The graphic representation is based on the quadratic specification in Equation (6). The derivation of the inflection point is based on this specification. The IPFF=-β1+γ12β2+γ2 is the inflection point at which the relation between related diversification and total debt turns from positive to negative. Total debt (%) Related diversification Non-family firms Family firms

20 Unrelated diversification This figure shows the inverted U-shape relation between unrelated diversification on non-family and family firms debt. The graphic representation is based on the quadratic specification in Equation (6). The derivation of the inflection point is based on this specification. The IP _NFF=-((β _1 )) 2(β _2 ) and IP _FF=-((β _1+γ _1 )) 2(β _2+γ _2 ) are the inflection points at which the relation between diversification and debt turns from positive to negative in the two types of firms considered. Total debt (%) Unrelated diversification Non-family firms Family firms

21 Regression results H3A, H3B H3A Inverted U-shape H3B Inverted U-shape (Higher inflection point) H3A b 1 RELDIV i,t-1 0,0121 (0,0027)*** b 2 RELDIV 2 i,t-1-0,0116 (0,0019)*** g 5 DUMBANK i RELDIV i,t-1 0,0236 (0,0041)*** H3B g 6 DUMBANK i RELDIV 2 i,t-1-0,0223 (0,0031)*** b 1 UNRELDIV i,t-1 0,0127 (0,0021)*** b 2 UNRELDIV 2 i,t-1 g 7 DUMBANK i UNRELDIV i,t-1 g 8 DUMBANK i UNRELDIV 2 i,t-1-0,0081 (0,0018)*** 0,0301 (0,0031)*** -0,0029 (0,0002)*** b 3 DUMBANK i 0,0015 (0,0007)** -0,0010 (0,0007) t 1 0,0357 (0,0033)*** 0,0428 (0,0029)*** t 2-0,0339 (0,0023)*** -0,0110 (0,0017)*** IP OSS 0,520 0,778 IP FSS 0,527 1,943

22 Related / Unrelated diversification Total debt (%) Total debt (%) Related diversification Unrelated diversification Non financial firm Financial firm Non financial firm Financial firm

23 Regression results H4A, H4B H4A Inverted U-shape H4B Inverted U-shape (Higher inflection point) H4A b 1 RELDIV i,t-1 0,0133 (0,0037)*** b 2 RELDIV 2 i,t-1-0,0181 (0,0023)*** g 9 DUMSHMAN i RELDIV i,t-1 0,0158 (0,0048)*** H4B g 10 DUMSHMAN i RELDIV 2 i,t-1 0,002 0(0,0031) b 1 UNRELDIV i,t-1 0,0198 (0,0033)*** b 2 UNRELDIV 2 i,t-1 g 11 DUMSHMAN i UNRELDIV i,t-1 g 12 DUMSHMAN i UNRELDIV 2 i,t-1-0,0113 (0,0027)*** 0,0738 (0,0050)*** -0,0410 (0,0041)*** b 3 DUMSHMAN i 0,0096 (0,0019)*** 0,0164 (0,0015)*** t 1 0,0292 (0,0026)*** 0,0936 (0,0079)*** t 2-0,0181 (0,0023)*** -0,0523 (0,0065)*** IP OM 0,369 0,875 IP SM 0,806 0,894

24 Related / Unrelated diversification Total debt (%) Total debt (%) Related diversification Unrelated diversification External manager Managerial ownership External manager Managerial ownership

25 Conclusions This study provides new insight on the capital structure of companies in response to the gap between corporate strategy and financial decisions. Specifically, our empirical evidence remarks the important of diversification strategies on corporate leverage in an international context. our findings reveal that the degree of related diversification has a negative impact on corporate leverage in non-family firms. However, we find a non-linear effect, more precisely an inverted U-shape in the family firms group.

26 Conclusions Our empirical evidence shows that the effect of unrelated diversification strategy on capital structure also exhibits an inverted U-shape, regardless of the ownership structure of companies. However, the positive effect is more prolonged in the group of family firms. Regarding the effect of diversification strategies on corporate leverage in which a financial firm is the second shareholders, we find that, regarding the type of diversification (i.e., related or unrelated diversification), the positive effect is more pronounced and thus, the optimal point is higher.

27 Conclusions Similar results are obtained when the manager is also a shareholder. For both types of diversification strategies, the positive effect is also more pronounced if the controlling family is involved in the managerial team.

28 GRACIAS