The effects of economic development on corporate financial structure

Chen, Lan
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This dissertation investigates corporate financial structure, ownership structure, and their relationships with economic development. It is composed of three chapters. The first chapter investigates the Modigliani-Miller Irrelevance Theorem under risk-neutrality and positive profit. It models the entrepreneur as the residual risk-bearer in a world of risk-neutral agents. The percentage of entrepreneurial equity holding increases as the firm issues more debt. Stockholders bear greater risk than debt holders, but both receive the same expected rate of return. Using this framework, I obtain a transparent explanation of the effect of capital structure on the cost of capital. The framework is fully operational and suitable for numerical illustrations. It also lays the groundwork for operational agency models of optimal corporate finance. Chapter 2 examines the relationship between corporate financial structure and economic development (per capita income) using data from four economies: U.S.A., Canada, Australia, and Taiwan. This chapter has two major findings. First, over the last few decades, the corporate financial structure in these four economies did not demonstrate any downward trend during the sample period when all economies experienced income increases. Second, income affects the link between the economic growth rate and the debt-equity ratio. I find that the economic growth rate and the debt-equity ratio move in the same direction in higher-income countries and in opposite directions in lower-income countries. Chapter 3 models the link between corporate financial structure, ownership structure, and economic development. It shows that the under the assumptions of asymmetric information and moral hazard, debt and outside equity are part of the optimal contract paid to an investor by his manager. The manager receives a profit share that equals his marginal cost of effort. The chapter then shows that economic development raises the reservation utility for all managerial types by increasing the opportunity wage for managers. Consequently, lower types drop out of the managerial group and prefer to be workers. As a result, the average percentage of inside equity (averaged over the higher managerial types) increases as an economy develops. The effect of economic development on the average debt-equity ratio is generally indeterminate.
Mode of access: World Wide Web.
Thesis (Ph. D.)--University of Hawaii at Manoa, 2004.
Includes bibliographical references (leaves 112-118).
Electronic reproduction.
Also available by subscription via World Wide Web
xvii, 118 leaves, bound ill. 29 cm
Economic development, Corporations -- Finance
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