Corporate Financing Strategy: Exploring the Role of Analysts and Competitors

This two-year project aims to explore the potential determinants of corporate financial policy from the role of analysts and competitors respectively in affecting capital structure. The first-year study strengthens the argument on earnings benchmark that creates “earnings pressure” (EP) and relates prior arguments to debt markets. Based on agency theory, a number of prior studies have documented that the cost of debt financing is economically germane to analyst forecasts. The author sheds further light on the pressure felt by managers to beat or meet the number that analysts want to deliver to the market, which is crucial to the debt market because earnings pressure conveys the meaning of risk management to both managers and creditors. Therefore, this first-year study argues that the firms under earnings pressure would strive to increase profits by seeking less costly financing policy and turn to debt market instead of equity market. In addition, socially responsible investing (SRI), acting as a governance and insurance role, enables managers to manage corporate risks and thus be aspired in pursuit of less costly financing strategy that benefits the affiliated stakeholders. In the second year of this project, the effect of multimarket contact (MMC) is introduced to examine whether the intensity of rivalry will have an impact on corporate financing strategy. The actions and characteristics of competitors in shaping financial policy are of significant importance that matter for capital structure. Grounded on mutual forbearance hypothesis in multi-point competition perspective, the author tries to explain the disposition of corporate financing strategy among rival firms in virtue of MMC concept relating to resource and capability heterogeneity. Therefore, not only would this study hypothesize and tests the direct effect of MMC on financing strategy, but also highlight the role of corporate financial slack in governing the relationship between the effect of MMC and corporate financial policy. The expected contributions in this two-year project are twofold. First, earnings benchmark is no longer a static condition in finance and accounting research, but a dynamic notion when the dialogues are achieved in debating perceptual earnings pressure. This is of significant importance to finance scholars because earnings pressure presents a discipline against empire building behavior that are widely interpreted managerial motives. On this ground, since corporate financing strategy is tightly related to managerial thoughts, a natural question to ask whether earnings pressure is associated with financing strategy is accordingly established. Second, apart from financial policy mimicking and herding behavior arisen from peer effects in capital structure, the author introduces MMC to discuss corporate financing strategy because the conceptual characters of MMC can bridge micro- and macro-perspectives. In other words, multinational corporations do not make financing decisions in isolation. Given that interdependencies among rivals drive the presence of spillover effects that occur when making financing decisions, a further open empirical question will continue on asking whether MMC orients to a value-enhancing possibility to firms.

Project ID:PF10406-2009
External Project ID:MOST104-2410-H182-003