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6. Summary and Conclusions
In this thesis, we studied the behavior of marginal-debt companies. We defined marginal-debt companies as those that had less than 5% debt-to-equity ratio for three consecutive years between 2011 and 2013 and were financially healthy with revenues more than $100 million.
Those that were financially healthy with similar revenues but great than 5% debt-to-equity ratios were defined as indebted companies. Limiting our search to the U.S. non-financial public sector, we have identified 167 marginal-debt and 551 indebted companies.
In order to explain the behavior of marginal-debt companies, we first compared them with indebted companies based on the trade-off theory. However, we found that marginal-debt companies have a higher corporate tax rate and bankruptcy cost similar to indebted companies.
The trade-off theory cannot explain the corporate finance strategy of marginal-debt companies.
We then suspected that the absence of debt for those companies might be explained by its manager´s preferences in terms of financial management strategy. We reasoned that some managers are more likely to be able to decide the capital structure of their companies. Moreover, we believed that those managers are more likely to have a higher degree of aversion to debt. In order to validate our assumptions, we suggested a survey questionnaire to quantify this aversion to debt.This survey covers four topics: the relationship between the manager and shareholders, benefit of financial leverage, value of flexibility and control resulting from financial debt, and inclination to risk aversion. Answers from this survey should help future research better understand marginal-debt companies by identifying the reasons for such a capital structure.
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References
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Novaes W., and Zingales L. (1995), Capital Structure Choice when Managers are in Control:
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http://www.reuters.com/article/2008/10/27/us-financial-inditex-idUSTRE49Q01R20081027
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Appendix
Relationship between Managers and Shareholders I consider shareholders to be CEO friendly
Strongly
disagree Disagree Neutral Agree Strongly agree
I consider my position within the company as being secured Strongly
disagree
Disagree Neutral Agree Strongly agree
I receive pressure from shareholders to use more debt Strongly
disagree Disagree Neutral Agree Strongly agree
I work for a family owned company Yes No
Perceived Benefits of Financial Leverage
Overall, I consider financial debt as a useful tool for companies Strongly
disagree Disagree Neutral Agree Strongly agree
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Debt allows companies to enjoy tax shield Strongly
disagree
Disagree Neutral Agree Strongly agree
I believe a superior debt-to-equity ratio can significantly increase company value Strongly
disagree Disagree Neutral Agree Strongly agree
Increasing debt could help diminishing the threat of takeover Strongly
disagree
Disagree Neutral Agree Strongly agree
Perceived impact of debt on flexibility and control
I consider debt to have a negative impact on the company´s flexibility Strongly
disagree
Disagree Neutral Agree Strongly agree
Debt holders might prevent me from making the optimal decisions for the company Strongly
disagree Disagree Neutral Agree Strongly agree
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In order to increase my debt level, I would accept to provide collateral Strongly
disagree
Disagree Neutral Agree Strongly agree
In order to increase my debt level, I would accept restrictions on my future investments Strongly
disagree Disagree Neutral Agree Strongly agree
In order to increase my debt level, I would accept restrictions on some financial ratios Strongly
disagree
Disagree Neutral Agree Strongly agree
I believe my company has a high threat of takeover Strongly
disagree Disagree Neutral Agree Strongly agree
Manager´s Risk-Averse Inclination
Having debt in my company significantly increases its probability of default Strongly
disagree Disagree Neutral Agree Strongly agree
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In case of bankruptcy of the company I work for, I would be in a difficult financial situation Strongly
disagree
Disagree Neutral Agree Strongly agree
My past experience would allow me to compensate the negative impact of the bankruptcy of the company I am currently managing
Strongly disagree
Disagree Neutral Agree Strongly agree
In case of bankruptcy of the company I work for, I would have difficulties to find a new position Strongly
disagree Disagree Neutral Agree Strongly agree
I rather sacrifice growth opportunity than using financial debt Strongly
disagree
Disagree Neutral Agree Strongly agree
The following questions only apply to family owned businesses:
The family I work for owns a well diversified portfolio of companies and/or investments Strongly
disagree
Disagree Neutral Agree Strongly agree
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Many family members are involved in the group Strongly
disagree
Disagree Neutral Agree Strongly agree
The long term survival of the company is a key objective over optimal profitability Strongly
disagree Disagree Neutral Agree Strongly agree
Additional information
What is your current debt-to-equity ratio? ___%
What is your target debt-to-equity ratio? ___%
What is the maximum debt-to-equity ratio your company could bear? ___%
What is the maximum debt-to-equity ratio you would accept? ___%