Capital Structure, Payout Policy, and Financial Flexibility

I review the research on master limited partnerships (“MLPs”) in the accounting, economics, and finance literature. I begin by outlining the scope of the review and providing a brief background on the structure, taxation, and governance of master limited partnerships. Next, I describe the various sources from which MLP data is derived. I then review the research, aggregating it into four broad categories: (1) taxes and organizational form; (2) taxes, capital structure, and payout policy; (3) valuation; and (4) governance research. Within each section, I present possible avenues for future research in accounting, economics, and finance.

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Valuing firm’s financial flexibility under default risk and bankruptcy costs: a WACC based approach

International Journal of Managerial Finance ◽

10.1108/ijmf-05-2018-0151 ◽

2019 ◽

Vol 15 (5) ◽

pp. 688-699

Author(s):

Carlo Mari ◽

Marcella Marra

Keyword(s):

Capital Structure ◽

Default Risk ◽

Weighted Average ◽

Debt Management ◽

Costs And Benefits ◽

Debt Structure ◽

Financial Flexibility ◽

Content Type ◽

Bankruptcy Costs ◽

Debt Capacity

PurposeThe purpose of this paper is to present a model to value leveraged firms in the presence of default risk and bankruptcy costs under a flexible firm’s debt structure.Design/methodology/approachThe authors assume that the total debt of the ﬁrm is a combination of two debt components. The ﬁrst component is an active debt component which is assumed to be proportional to the ﬁrm’s value. The second one is a passive predetermined risk-free debt component. The combination of the two debt categories makes the ﬁrm’s capital structure more realistic and allows us to include ﬂexibility into the ﬁrm’s debt structure management. The ﬁrm’s valuation is performed using the discounted cash flow technique based on the weighted average cost of capital (WACC) method.FindingsThe model can be used to define active debt management strategies that can induce the firm to deviate from its capital structure target in order to preserve debt capacity for future funding needs. The firm’s valuation is performed by using the WACC method and a closed form valuation formula is provided. Such a formula can be used to value costs and benefits of financial flexibility.Research limitations/implicationsThe proposed approach provides a good compromise between mathematical complexity and model capability of interpreting the various economic and financial aspects involved in the firm’s debt structure puzzle.Practical implicationsThis model offers a realistic approach to practical applications where real financing decisions are characterized by a simultaneous use of these two debt categories. By comparing costs and benefits deriving from using unused debt capacity for future funding needs, the model provides a quantitative support to investigate if financial flexibility can add value to firms.Originality/valueTo the authors knowledge, the approach the authors propose is the first attempt to build a valuation scheme that accounts for firm’s financial flexibility under default risky debt and bankruptcy costs. Including financial flexibility, this model fills an important gap in the literature on this topic.

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Financial Flexibility and Capital Structure Decision

SSRN Electronic Journal ◽

10.2139/ssrn.1108850 ◽

2011 ◽

Cited By ~ 26

Author(s):

Soku Byoun

Keyword(s):

Capital Structure ◽

Financial Flexibility

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Payout Policy, Financial Flexibility, and Agency Costs of Free Cash Flow

SSRN Electronic Journal ◽

10.2139/ssrn.1096146 ◽

2012 ◽

Cited By ~ 4

Author(s):

Jacob Oded

Keyword(s):

Cash Flow ◽

Agency Costs ◽

Payout Policy ◽

Free Cash Flow ◽

Financial Flexibility

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Three Corporate Finance Practices in Pakistan: A Review of Previous Studies and Way Forward

Journal of Finance and Accounting Research ◽

10.32350/jfar.0301.04 ◽

2021 ◽

Vol 3 (1) ◽

pp. 61-84

Author(s):

Umar Farooq ◽

Bilal Haider Subhani

Keyword(s):

Capital Structure ◽

Corporate Finance ◽

Net Present Value ◽

Capital Budgeting ◽

Payout Policy ◽

Debt Financing ◽

Rate Of Return ◽

Internal Rate Of Return ◽

Present Value ◽

Dividend Payout

This study reviews the empirical studies arranged on Pakistani capital market and specifies the pattern of three corporate finance practices. The subject of corporate finance discusses the various activities performed at firm level such as capital budgeting, capital structure, and dividend payout policy. The capital budgeting technique consists of six methods i.e., net present value, discounted cash flow, payback period, and internal rate of return etc. but Pakistani firms often interested in net present value and internal rate of return for capital investment evaluation. Similarly, the capital structure decision carries the debate on two options of financing i.e., debt financing and equity financing but literature shows that the Pakistani firms generally follow the pecking order theory and prefer more debt financing. Similarly, as for concern dividend payout policy, literature discusses the different theories and determinants but still unable to generalize the dividend payout trend specifically in Pakistani context. Corporate managers and policymakers can use the conclusion for strategic purposes.

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What Determines The Capital Structure of Property, Real Estate and Building Construction Companies? Evidence from Indonesian Listed Companies

Management Analysis Journal ◽

10.15294/maj.v9i4.40634 ◽

2020 ◽

Vol 9 (4) ◽

pp. 370-382

Author(s):

Sari Fitri Fatimah ◽

Rini Setyo Witiastuti

Keyword(s):

Real Estate ◽

Capital Structure ◽

Firm Size ◽

Stock Exchange ◽

Building Construction ◽

Business Risk ◽

Financial Flexibility ◽

Significant Negative Effect ◽

Negative Effect ◽

The Capital Structure

This research is intended to prove the influence of financial flexibility, asset structure, firm size, profitability and business risk on the capital structure. The population on this study are property, real estate and building construction sector that are listed on the Indonesia Stock Exchange in 2009-2018. The number of samples used were 28 companies with a purposive sampling method. The data studied was obtained from the Indonesia Stock Exchange (IDX). Methods of data analysis used in this study is multiple linear regression. The results showed that financial flexibility has not significant negative effect on capital structure. Asset structure and firm size have a significant positive effect on capital structure. The profitability and business risk have a significant negative effect on capital structure. Further research is needed to use another proxies such as ROE for profitability variables or standard deviations from ROE for business risk on capital structure and add another sectors or the number of observation periods.

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