Type of paper: Report

Topic: Education, Company, Study, Firm, Leverage, Creditor, Debt, Relationships

Pages: 3

Words: 825

Published: 2021/02/21

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Study Review

Introduction
The study analyzed the relationship between creditor protection and a firm use of debt. The author predicted that there is a negative relationship between creditor protection and firm leverage. This is because increase creditor protection reduces the attractiveness of debt financing reducing the demand of debt and consequently firm leverage. Managers would be afraid of losing control in case of strong creditor protection. In addition, it increases the risk of bankruptcy in case the firm faces financial distress. The article does not provide detailed theoretical backing of the objectives of the study and its predictions.

Methodology Review

The population of interest for the study was firms from 95 countries. The study used a sample from the target population in the analysis. However, the study does not provide details on the sample selection method applied and the sampling process. The study used regression analysis. Leverage was regressed on creditor rights protection and a vector of control variables that influence leverage. Leverage was measured using long-term debt ratio. Debt ratio is an appropriate measure of leverage since it shows the extent that a firm’s assets are financed by long-term debt. The study also used total debt ratio as a robustness check. The study performed limited robustness test to evaluate the results. The researchers measured creditors’ rights using La Porta et al Creditors Rights Index as updated by Djankov et al. The creditors’ rights index is appropriate since it considers the four key elements that creditors are most concerned about when making their investment decision. These four category of rights are; secured creditor paid first, no automatic stay, no management stay and restrictions on reorganization. The vector of country-level variables used includes; shareholders rights, inflation and GDP growth. Shareholders rights were measured as a dummy variable which is one if a country has a credit registry and zero otherwise. I think it would have been more appropriate to measure the actual rights of shareholders using an index as was the case with creditors’ rights. The inflation rate was measured using the annual inflation rate while GDP growth was measured using the official GDP growth rates. The measures for inflation and GDP growth are appropriate and readily available without further computations. Firm level control variables include; profitability, firm size, asset tangibility, research and development, tax and liquidity. Profitability was measured by return on assets, asset tangibility was measured using the ratio that net property plant and equipment contribute to total assets. Firm size was measured using the natural logarithm of sales. Research and development was measured using the expense o research and development. Liquidity was measured using the current ratio while the tax rate was measured using the proportion of pre-tax income paid as taxes. All the firm level control variables were appropriately measured since they used values that directly represent them. All the country level and firm level variable influence the leverage of a firm. Therefore, the suggested relationship is valid.

Analysis of Results

The study found significant results for the various models at 1 per cent significant level. Therefore, the study concluded that there significant negative relationship between creditors’ rights and leverage which varied from -0.017 and -0.019. Similar findings were reported when the four components of creditors’ rights were analyzed separately. All the four components reported a significant negative relationship with the leverage level of a firm. The study also revealed that there is a significant negative relationship between creditors’ rights and the issuance of new debt. Therefore, the study concludes that strong creditor protection negatively influences firms leverage. It also concludes that the relationship is influenced by the demand side; strong creditor protection negatively influences the decision of firm to issue additional long debt instruments.

Conclusion

I agree with the authors’ interpretation of the results. The authors correctly perform the test and take several precaution to eliminate bias. Almost all plausible variable that can influence leverage were included hence minimizing omitted variable bias. Various models were also estimated hence minimizing the possible effects of an over specification. The results are rightly evaluated at 1 per cent significance level. A high threshold was selected showing the authors’ confidence. The hypothesis for the study were also grounded in theory. Therefore, they were correctly stated and supported. However, the possibility of authors’ bias cannot be ignored. First, the sampling method is not discussed. It is plausible that the sample was selected in a biased manner. Secondly, the purposely selected to achieve a certain objective. For instance, the authors only evaluate the demand side and ignore the supply side in their analysis yet they conclude that the demand-side is stronger.

References

Cho, S.-S., Ghoul, S., Guedhami, O., & Suh, J. (n.d.). Creditor Rights and Capital Structure:Evidence from International Data. 1-44.

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WePapers. (2021, February, 21) Example Of Report On Finance. Retrieved August 04, 2021, from https://www.wepapers.com/samples/example-of-report-on-finance/
"Example Of Report On Finance." WePapers, 21 Feb. 2021, https://www.wepapers.com/samples/example-of-report-on-finance/. Accessed 04 August 2021.
WePapers. 2021. Example Of Report On Finance., viewed August 04 2021, <https://www.wepapers.com/samples/example-of-report-on-finance/>
WePapers. Example Of Report On Finance. [Internet]. February 2021. [Accessed August 04, 2021]. Available from: https://www.wepapers.com/samples/example-of-report-on-finance/
"Example Of Report On Finance." WePapers, Feb 21, 2021. Accessed August 04, 2021. https://www.wepapers.com/samples/example-of-report-on-finance/
WePapers. 2021. "Example Of Report On Finance." Free Essay Examples - WePapers.com. Retrieved August 04, 2021. (https://www.wepapers.com/samples/example-of-report-on-finance/).
"Example Of Report On Finance," Free Essay Examples - WePapers.com, 21-Feb-2021. [Online]. Available: https://www.wepapers.com/samples/example-of-report-on-finance/. [Accessed: 04-Aug-2021].
Example Of Report On Finance. Free Essay Examples - WePapers.com. https://www.wepapers.com/samples/example-of-report-on-finance/. Published Feb 21, 2021. Accessed August 04, 2021.
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