Capital Structure of Internet Companies: Case Study

Miglo, Anton and Liang, Shuting and Lee, Zhenting (2014): Capital Structure of Internet Companies: Case Study.

Abstract

We analyze the financing decisions and capital structure of internet companies and relate observed findings to the common capital structure theories. Large internet companies usually have low debt and small internet companies have high debt. We find that the trade-off theory of capital structure, pecking order theory, market timing theory and other theories cannot individually explain a firm’s capital structure. However, they can compliment each other in describing some patterns of observed behavior. We also suggest a number of recommendations for capital structure theory and practice.

• Item Type: MPRA Paper
• Language: English
• Keywords: capital structure, internet companies, financing strategy, sources of financing
• Subjects: G - Financial Economics > G3 - Corporate Finance and Governance > G32 - Financing Policy ; Financial Risk and Risk Management ; Capital and Ownership Structure ; Value of Firms ; Goodwill

References

Almeida, Heitor, and Thomas Philippon, 2007, The Risk-adjusted Cost of Financial Distress, Journal of Finance 62(6), 2557-2586.

Altinkilic, Oya and Robert Hansen, (2000), Are There Economies of Scale in Underwriting Fees? Evidence of Rising External Financing Costs. Review of Financial Studies 13(1), 191-218.

Antweiler, Werner, and Murray Z. Frank, (2006), Do U.S. Stock Markets Typically Overreact to Corporate News Stories? Working Paper, University of British Columbia and University of Minnesota.

Baker Kent H., Gary E. Powell, and E. Theodore Veit, (2003), Why Companies Use Open-Market Repurchases: A Managerial Perspective, Quarterly Review of Economics and Finance 43(3), 483-504.

Baskin, J. (1989). An empirical investigation of the pecking order hypothesis. City University of New York.

Bertus, Mark, John S. Jahera Jr., and Keven Yost, (2008), Capital Structure, Corporate Governance, and the Effect of Sarbanes-Oxley, Corporate Ownership and Control. Forthcoming.

Bharath, Sreedhar, Paolo Pasquariello, and Guojun Wu, (2008), Does Asymmetric Information Drive Capital Structure Decisions? Review of Financial Studies 22(8), 3211-3243.

Brealey, R. A, Stewart C. & Myers F. A. (2006). Principles of Corporate Finance (8th Ed.) NY: McGraw-Hill/Irwin B.S Program details (2010). Retrieved October 21, 2010 from http://www.bridgeport.edu/academics/undergraduate/businessadminbs/default.aspx

Byoun, Soku, (2008), Financial Flexibility and Capital Structure Decision, working paper. Available at SSRN: http://ssrn.com/abstract=1108850

Campbell, D. E. & Kelly, J. S. Social Choice and Economic Theory. Retrieved September 18, 2010 from http://www.jstor.org/pss/2117871

Chang, Xin, and Sudipto Dasgupta, (2007), Target Behavior and Financing: How Conclusive Is the Evidence, Journal of Finance 64(4), 1767-1796.

Chirinko, Robert, and Anuja Singha, (2000), Testing Static Trade-off Against Pecking Order Models of Capital Structure: A Critical Comment, Journal of Financial Economics 58(3), 417-425.

Choe, Hyuk, Ronald Masulis, and Vicram Nanda, (1993), Common Stock Offerings across the Business Cycle, Journal of Empirical Finance 1(1), 1-29.

Damodaran, Aswath. Corporate Finance: Theory and Practice (Wiley Series in Finance), 2003.

Diamond, Douglas W, (1991), Monitoring and Reputation: The Choice between Bank Loans and Directly Placed Debt, Journal of Political Economy 99(2), 689-721.

D’Mello, Ranjan, and Stephen P. Ferris, (2000), The Information Effects of Analyst Activity at the Announcement of New Equity Issues, Financial Management 29(1), 78-95.

Eckbo, B. Espen, (1986), Valuation Effects of Corporate Debt Offerings, Journal of Financial Economics 15(1), 119-151.

Financesholar.com. Modigliani & Miller (M&M Propositions I&II) – Capital Structure of Corporations. Retrieved October 4, 2010, from http://www.financescholar.com/ odigliani-miller-propositions.html

Fama, Eugene, and Kennett R. French, (2002), Testing Trade-off and Pecking Order Predictions about Dividends and Debt, Review of Financial Studies 15(1), 1-33.

Frank, M. Z. & Goyal, V. K. (2003). Testing the pecking order theory of Capital Structure. Journal of Financial Economics 67(2), 217-248

Gamba, Andrea and Triantis, Alexander J., (2008), The Value of Financial Flexibility, Journal of Finance, Forthcoming.

Gordon, Roger, and Young Lee, (2007), Interest Rates, Taxes and Corporate Financial Policies, National Tax Journal 60(1), 65-84.

Graham, John R., (2000), How Big Are the Tax Benefits of Debt? Journal of Finance 55(5), 1901-1941.

Graham, J. R. & Harvey, C. R. (2001). The theory and practice of corporate finance: Evidence from the field. Journal of Financial Economics 60 (2-3), 187-243.

Green, Richard, and Burton Hollifield, (2003), The Personal-tax Advantages of Equity, Journal of Financial Economics 67(2), 175-216.

Gulflink. Survey and sample description (n.d). Retrieved November 8, 2010 from http://www.gulflink.osd.mil/library/randrep/pesticides_survey/mr1018.12.chap2.html

Hackbarth, Dirk, (2008), Managerial Traits and Capital Structure Decisions, Journal of Financial and Quantitative Analysis 43(4), 843-881.

Harris, M. & Raviv, A. (1991). The Theory of Capital Structure. The Journal of Finance. 46 (1) 297-355

Investopedia, Weighted Average cost of capital. Retrieved October 11, 2010 from http://www.investopedia.com/terms/w/wacc.asp

Jain, Bharat, and Omesh Kini, (1994), The Post-Issue Operating Performance of IPO Firms, Journal of Finance 49(5), 1699-1726.

Jensen, Michael C., (1986), Agency Costs of Free Cash Flow, Corporate Finance, and Takeovers, American Economic Review 76(2), 323-329.

Jensen, Michael C., and William H. Meckling, (1976), Theory of the Firm: Managerial Behavior, Agency Costs and Ownership Structure, Journal of Financial Economics 3(4), 305-360.

Kamath, Ravindra, (1997), Long-term Financing Decisions: Views and Practices of Financial Managers of NYSE Firms, Financial Review 32(2), 331-356.

Kayhan, Ayla, and Sheridan Titman, (2007), Firms’ Histories and Their Capital Structures, Journal of Financial Economics 83(1), 1-32.

Klein, Linda Schmid, O’Brien, Thomas J. and Peters, Stephen R (2002), Debt vs. Equity and Asymmetric Information: A Review. The Financial Review 37(3), 317-350.

Kraus, Alan, and Robert H. Litzenberger, (1973), A State-preference Model of Optimal Financial Leverage, Journal of Finance 28(4), 911-922.

Leary, Mark T., and Michael R. Roberts, (2010), The Pecking Order, Debt Capacity, and Information Asymmetry, Journal of Financial Economics 95(6), 332-355.

Leland, Hayne E., and David H. Pyle, (1977), Information Asymmetries, Financial Structure, and Financial Intermediation, Journal of Finance 32(2), 371-378.

Lemmon, Michael L., and Jaime F. Zender, (2008), Debt Capacity and Tests of Capital Structure Theories, Working Paper, University of Utah and University of Colorado.

Loughran, Tim, and Jay R. Ritter, (1997), The Operating Performance of Firms Conducting Seasoned Equity Offerings, Journal of Finance 52(5), 1823-1850.

Malmendier, Ulrike, Geoffrey A. Tate, and Jun Yan, (2005), Corporate Financial Policies with Overconfident Managers, Working Paper, Stanford University and University of Pennsylvania.

Masulis, Ronald W., (1980), The Effects of Capital Structure Change on Security Prices: A Study of Exchange Offers, Journal of Financial Economics 8(2), 139-177.

Masulis, Ronald, and Ashok Korwar, (1986), Seasoned Equity Offerings: An Empirical Investigation, Journal of Financial Economics 15(1), 91-118.

Mello, A. S. & Parsons, J. E. (1992). Measuring the Agency cost of debt. Journal of Finance 47 (5), 1887-904.

Miglo, A. (2011). Trade-off, pecking order, signaling and market timing models. Ch. 10 In Capital Structure and Corporate Financing Decisions, Ed. Baker K., and G. Martin. Wiley.

Miglo, A. (2010). Capital structure theory: where do we stand after crisis? University of Bridgeport working paper.

Mikkelson, Wayne H., M. Megan Partch, and Kshitij Shah, (1997), Ownership and Operating Performance of Companies that Go Public, Journal of Financial Economics 44(2), 281-307.

Modigliani, Franco, and Merton H. Miller, (1958), The Cost of Capital, Corporate Finance and the Theory of Investment, American Economic Review 48(3), 261-297.

Molina, Carlos A., (2005), Are Firms Underleveraged? An Examination of the Effect of Leverage on Default Probabilities, Journal of Finance 60(3), 1427-1459.

Myers, Stewart C., (1977), Determinants of Corporate Borrowing, Journal of Financial Economics 5(2), 147-175.

Myers, Stewart C., and Nicolas S. Majluf, (1984), Corporate Financing and Investment Decisions When Firms Have Information That Investors Do Not Have, Journal of Financial Economics 13(2), 187-221.

Parrino, Robert, and Michael S. Weisbach, (1999), Measuring Investment Distortions Arising from Stockholder-bondholder Conflicts, Journal of Financial Economics 53(1), 3-42.

Rajan, Raghuram, and Luigi Zingales, (1995), What Do We Know about Capital Structure: Some Evidence from International Data, Journal of Finance 50(5), 1421-1460.

Ross, Stephen A., (1977), The Determination of Financial Structure: The Incentive Signaling Approach, Bell Journal of Economics 8(1), 23-40.

Sarbanes-Oxley Act, (2004), Available at http://www.gpo.gov/fdsys/pkg/PLAW-107publ204/pdf/PLAW-107publ204.pdf.

Shah, Kshitij, (1994), The Nature of Information Conveyed by Pure Capital Structure Changes, Journal of Financial Economics 36(2), 89-126.

Shyam-Sunder, Lakshmi, and Stewart C. Myers, (1999), Testing Static Tradeoff against Pecking Order Models of Capital Structure, Journal of Financial Economics 51(2), 219-244.

Stiglitz, J. E. (1967). A re-examination of the Modigliani-Miller Theorem. Yale University.

Titman, Sheridan, and Roberto Wessels, (1988), The Determinants of Capital Structure Choice, Journal of Finance 43(3), 1-21.

Wright, Stephen H., (2004), Measures of Stock Market Value and Returns for the US Nonfinancial Corporate Sector, 1900-2002, Review of Income and Wealth 50(4), 561-584.