Characteristics of firms that issue redeemable convertible preferred stock: Evidence from South Korea
1
조회
0
다운로드
0
인용
0
참고문헌
키워드
초록
Purpose: The issuance of redeemable convertible preferred stock (RCPS) has been steadily increasing in Korea since the revision of the Commercial Act, which allows firms to issue various types of stocks, in 2010. This study aims to verify equity financing behavior by examining the characteristics of firms that issue RCPS. Design/methodology/approach: Using a sample of 12,768 firm-year observations of Korean listed companies from 2011 to 2018, this study conducts univariate and multivariate analyses to examine the factors that affect firms' decisions regarding RCPS issuance. For multivariate analysis, logistic regression analysis is used. Findings: This study shows that firms issuing RCPS have higher debt ratios and lower operating cash flows than non-issuing firms. It is also found that firms issuing RCPS are smaller and younger than non-issuing firms. These findings indicate that firms with higher costs of financial distress, lower internal cash flow, and lower credibility/reputation are more likely to issue RCPS because they are constrained by debt capacity. Research limitations/implications: According to pecking order theory, firms prefer debt over equity if external funds are required. The results of this study support the pecking order theory by providing evidence that firms rely on hybrid securities financing like redeemable preferred stock, a priority after debt when they are constrained by debt capacity. Originality/value: This study sheds light on financing decisions related to the issuance of hybrid securities from the perspective of pecking order theory. It also contributes to broadening the scope of research on hybrid securities by providing empirical evidence on the financial characteristics of firms that issue RCPS.
Abstract
Purpose: The issuance of redeemable convertible preferred stock (RCPS) has been steadily increasing in Korea since the revision of the Commercial Act, which allows firms to issue various types of stocks, in 2010. This study aims to verify equity financing behavior by examining the characteristics of firms that issue RCPS. Design/methodology/approach: Using a sample of 12,768 firm-year observations of Korean listed companies from 2011 to 2018, this study conducts univariate and multivariate analyses to examine the factors that affect firms' decisions regarding RCPS issuance. For multivariate analysis, logistic regression analysis is used. Findings: This study shows that firms issuing RCPS have higher debt ratios and lower operating cash flows than non-issuing firms. It is also found that firms issuing RCPS are smaller and younger than non-issuing firms. These findings indicate that firms with higher costs of financial distress, lower internal cash flow, and lower credibility/reputation are more likely to issue RCPS because they are constrained by debt capacity. Research limitations/implications: According to pecking order theory, firms prefer debt over equity if external funds are required. The results of this study support the pecking order theory by providing evidence that firms rely on hybrid securities financing like redeemable preferred stock, a priority after debt when they are constrained by debt capacity. Originality/value: This study sheds light on financing decisions related to the issuance of hybrid securities from the perspective of pecking order theory. It also contributes to broadening the scope of research on hybrid securities by providing empirical evidence on the financial characteristics of firms that issue RCPS.
참고문헌 (29)
- Almeida, H., "The cash flow sensitivity of cash", The Journal of Finance, 59(4), pp.1777~1804 (2004)
- Altman, E. I., "Financial ratios, discriminant analysis and the prediction of corporate bankruptcy", The Journal of Finance, 23(4), pp.589~609 (1968)
- Barnes, P., "The prediction of takeover targets in the UK by means of multiple discriminant analysis", Journal of Business Finance & Accounting, 17(1), pp.73~84 (1990)
- Beaver, W. H., "Financial ratios as predictors of failure", Journal of Accounting Research, 4, pp.71~111 (1966)
- Carter, M. E. Jr, "Evidence on the role of taxes on financing choice: Consideration of mandatorily redeemable preferred stock", Journal of Financial Research, 18(1), pp.103~114 (1995)
- Choi, W. W., "Management of accrual components in response to corporate income tax rate changes: evidence from Korea", Journal of Applied Business Research, 29(5), pp.1421~1436 (2013)
- Diamond, D. W., "Monitoring and reputation: The choice between bank loans and directly placed debt", Journal of Political Economy, 99(4), pp.689~721 (1991)
- Economist, "Exit unicorns, pursued by bears", ~ (2020)
- Ely, D. P., "Taxes and the choice of issuing preferred stock vs. debt", Journal of the American Taxation Association, 24(1), pp.29~45 (2002)
- Fama, E. F., "Testing trade-offand pecking order predictions about dividends and debt", The Review of Financial Studies, 15(1), pp.1~33 (2002)
- Forbes, "The unicorn bubble is bursting", ~ (2019)
- Frank, M. Z., "Testing the pecking order theory of capital structure", Journal of Financial Economics, 67(2), pp.217~248 (2003)
- Frischmann, P. J., "Innovation in preferred stock : Current developments and implications for financial reporting", Accounting Horizons, 13(3), pp.201~218 (1999)
- Heinkel, R., "The role of debt and perferred stock as a solution to adverse investment incentives", Journal of Financial and Quantitative Analysis, 25(1), pp.1~24 (1990)
- Kimmel, P., "The usefulness of hybrid security classifications : Evidence from Redeemable preferred stock", Accounting Review, 70(1), pp.151~167 (1995)
- Leary, M. T., "The Pecking Order, Debt Capacity, and Information Asymmetry", Journal of Financial Economics, 95(3), pp.332~355 (2010)
- Lee, H. W., "Characteristics of firms that issue convertible debt versus convertible preferred stock", The Quarterly Review of Economics and Finance, 39(4), pp.547~563 (1999)
- Lemmon, M. L., "Debt capacity and tests of capital structure theories", Journal of Financial and Quantitative Analysis, 45(5), pp.1161~1187 (2010)
- Levi, S., "The impact of debt-equity reporting classifications on the firm's decision to issue hybrid securities", European Accounting Review, 24(4), pp.801~822 (2015)
- McCarthy, M. G., "Classification of Financial Instruments with Characteristics of Both Debt and Equity : Evidence Concerning Convertible Redeemable Preferred Stock", Academy of Accounting and Financial Studies Journal, 5(2), pp.1~14 (2001)
- Modigliani, F., "Corporate income taxes and the cost of capital : a correction", The American Economic Review, 53(3), pp.433~443 (1963)
- Moyer, R. C., "Nonconvertible preferred stock financing and financial distress: A note", Journal of Economics and Business, 39(1), pp.81~89 (1987)
- Myers, S. C., "Determinants of Corporate Borrowing", Journal of Financial Economics, 5(2), pp.147~175 (1977)
- Myers, S. C., "The Capital Structure Puzzle", Journal of Finance, 39(3), pp.575~592 (1984)
- Myers, S. C., "Corporate financing and investment decisions when firms have information that investors do not have", Journal of Financial Economics, 13(2), pp.187~221 (1984)
- Rajan, R. G., "What do we know about capital structure? Some evidence from international data", The journal of Finance, 50(5), pp.1421~1460 (1995)
- Smith Jr, C. W., "The investment opportunity set and corporate financing, dividend, and compensation policies", Journal of financial Economics, 32(3), pp.263~292 (1992)
- Barclay, M. J., "On the debt capacity of growth options", The Journal of Business, 79(1), pp.37~60 (2006)
- Standard and Poor's, "Corporate Ratings Criteria", 26~ (2006)