Financial economics had made significant progress in asset management, the coordination between firms cash inflows with cash outflows by matching the maturity of income generated by assets with the maturity of interest incurring debts. People knew little about the maturity structure of firm’s assets and liabilities, because willingly obtainable and thorough information regarding a firm’s liabilities and liabilities like commitment were not easy and time overwhelming to gather in our country, while many papers had explained how imbalances in the maturity period of asset and liability structure could be the main reason of currency and financial crises in the emerging markets, the factors that create such imbalances in the first place had established comparatively little attention so far. The agency costs could be reduced if firms issue short-term debt and, thus, were evaluated periodically. Information asymmetry and conflict between shareholders and debt holders could be intensified in transition economies for three reasons: (i) lack of shareholder and creditor protection owing to the imperfect legal system; (ii) the high level of uncertainty enables firms with overdue debt to switch to high-risk assets, which increases flotation and/or transaction costs; and (iii) the ownership structure of companies in emerging markets could create potentially higher agency costs because managers dominate the board of directors and comparatively greater control rights (Harvey, Lins and Roper (2004).
Smith and Warner (1979) argued that riskier and smaller companies had higher agency related costs because managers of small companies had mutual interests with the shareholders since they were holding a larger proportion of the equity. The managers were interested in progress of the equity value even it reduced the firm’s total value. The purpose of the study was to seal the gap of maturity mismatch between firm’s assets and liabilities, and theoretically how mismatch might lead to and exacerbated maturity mismatch due to market uncertainty, and how maturity mismatch increased output instability on the non/financial firms. Second, this research provided empirical results that supported the predictions that firm’s debt maturity had positive impact on maturity of its assets, however little support for firm size and the impact of growth options were inversely related to debt maturity to test these predictions the study made the model which depended on the following variable like debt maturity ratio, asset maturity ratio, market to book value ratio, and firm size. A common recommendation was that firms should compare the maturity period of its assets to that of its long term liabilities. If long term liabilities had less maturity period with respect to assets, then there might not be sufficient cash on hand to pay back the principal when it was outstanding. On the other hand, if debt had a greater maturity period with respect to assets, then cash flows from assets moved toward an end, whereas debt expenses stay outstanding. Maturity matching could lessen these risks and then structure of corporate hedging that decreased predictable expenditure of financial distress. In a related element, Myers (1977) disputed that maturity matching could control agency conflicts between equity holders and debt holder ensured that debt reimbursements were planned to communicate with the reduction in the worth of assets. In a model of this fact, Chang (1989) revealed that maturity matching could reduce organization expenditure of debt financing. Hoven and Mauer (1996) study also revealed well-built support for the standard textbook recommendations that firms should compare the maturity period of their assets to that of their liabilities.
Research investigation specified that asset maturity was an important aspect in explaining distinction in debt maturity structure. The sample of firms were taken from non/financial firms listed on the Kse-100 index and their financial data consisting from year 2003 to 2008 and those firms were used to analyzed the distinctive financial characteristics. The reasons for choosing non-financial firms, because it played significant role in the economy of this country and the measurement of maturity matching of assets and liabilities and reduction in agency cost would help these firms to avoid risks like liquidation and fluctuation in interest rates. If the period of the maturity of assets was larger than the maturity period of its liabilities, then the maturity structure was at risk to growing interest rates, because the higher maturity period assets were more responsive to interest rates than the lower maturity period liabilities. If interest rates went up then the assets were turned down in value more rapidly than the liabilities.
If interest rates remained constant, then there might be a deficit in supporting the liabilities. One way to diminish this problem was to rebalance the assets such that the maturity period of the assets were equal to the maturity period of the liabilities, then any interest rate had a minor effect on outcome. If in the above case, the asset maturity period was too high, the maturity period must be shortened. This short fall might be achieved by either rebalancing the structure with shorter maturity period assets or by shorting longer maturity period assets, and if the firm’s debts and debt like obligations were larger than its assets in amount then this mismatch between the maturity period of assets and liabilities could lead it towards liquidation so to keep away from that liquidation the firms should keep up matching between the amount of its assets and liabilities, and companies that had a greater reliance on external finance faced a comparatively weaker agency problem. De Haas and Peeters (2006) agency cost issue could be alleviated by the higher variability of firm value, which could interfere with the firm’s ability to pay off its obligations. The main advantage that Non-Financial firms listed on KSE-100 Index could acquire from this study was to avoid the mismatch between the maturity period of its assets to that of its debts and the agency cost problem.
The objective of this study was to seal the gap of maturity mismatch between firm’s assets and liabilities, and the importance of agency cost problems, which showed theoretically how mismatch might lead to and exacerbated maturity mismatch due to market uncertainty, and how maturity mismatch increases output instability in the Non-Financial firms listed on KSE-100 Index. The purpose of this study was to observe the debt maturity structure described by Shah and khan (2005); Myers (1977); Titman (1992); Diamond (1991); Barnea, Haugen, and Senbet (1980); Jalilvand and Harris, (1984); Ozkan, 2000, Yi, 2005 and Whited, (1992); Warner (1979); Hoven and Mauer (1996); Barclay and Smith (1995); Barnea, Haugen, and Senbet (1980, 1985); and Hart and Moore (1995) presented the detail regarding the debt maturity structure. The scope of study was to analyze the maturity matching structure between firm’s assets and liabilities, and agency cost problem.
H0: There was a positive impact of asset maturity on Debt maturity. H1: There was a positive impact of Firm Size on Debt maturity. H2: There was an inverse impact of Market to Book Ratio on Debt maturity.
The outline of the study processed as follows. Chapter one based on the introduction of the thesis, which contained introduction about debt maturity structure by different researchers, the statement of problem, and hypotheses etc. Chapter two contained literature review given by different researchers, theories on debt maturity structure, and factors which were directly or indirectly related to debt maturity structure. In chapter three, research methods were described, which contained method of data collection, sampling technique, sample size, research model developed, and statistical technique. Chapter four contained on findings and interpretation of the results. Chapter five contained the conclusion, discussions, implications, recommendations, and future research. Chapter six contained those references of different authors, which were related to this study.
The literature included two types of theories about the debt maturity structure: agency cost theory, and maturity matching theory.
Myers (1977) discussed that risky debt financing caused low investment benefits when a firm’s investment had chances to look for growth option and low investment benefits could be assured by providing short-term debt to mature before the growth options were utilized. The hypothesis was that the firm’s assets had a greater ratio of growth options in shorter-term debt. Titman (1992) presented that if growing firms had the greater chances of bankruptcy and positive future-outlook then those firms could acquire incentives from borrowing short-term debt. There was an acceptance in the literature that growth (market-to-book ratio of assets) should be inversely correlated to debt maturity in the agency/contracting costs perspective. Hart and Moore (1995) defined the role of long-term debt in controlling management’s capability in increasing funds for future projects. It was analyzed that long-term debt may restrict self-interested managers from financing non-profitable investments entailed a direct variation of long-term debt with market-to-book ratio. Therefore, the relationship between growth options and debt maturity structure had an experimental issue. Diamond (1991) defined liquidity risk as the risk that debtors were lost control rents because creditors do not want to refinance, and therefore they decided to liquidate the firm. Because short-term debt had seen by Diamond as debt that mature before the profits of an investment were received, it was necessary to refinance short-term debt. For firms with high credit worthiness, the liquidity risk was not relevant.
A decreased in credit worthiness did not lead to a ‘crunch’ of credit to the firm. For this reason, firms with a high credit rating were expected to borrow on the short term. For firms with a medium credit rating, the liquidity risk could be important, but they also interested to borrow on the long term. Firms with a low credit rating were therefore forced to borrow on the short term. Barnea, Haugen, and Senbet (1980) found that organization conflicts, similar to Myers’s (1977) underinvestment problem, could be restrained by reducing the maturity of debt. Therefore, smaller firms which faced additional harsh agency conflicts then larger well-maintained firms might use shorter-term debt to mitigate these conflicts. In most cases, the costs of a public debt issue were fixed, and these costs were therefore self-determining of the size of the debt. Because public debt had a longer maturity than private debt, a positive relation between the size of a firm and the maturity of debt was proposed. However, those reasons did not apply to small unlisted firms, because these firms make very little use of public debt. The present study also included leverage and industry affiliation as determinants of debt maturity. Arguably, larger firms had lower asymmetric information and agency problems, higher tangible assets relative to future investment opportunities, and thus, easier access to long-term debt markets. The reasons why small firms were forced to use short-term debt include higher failure rates and the lack of economies of scale in raising long-term public debt. It was further argued that larger firms were tend to use more long-term debt due to firms remaining financial needs (Jalilvand and Harris, 1984).
Agency problems (risk shifting, claim dilution) between shareholders and lenders may be particularly severed for small firms. Bondholders attempt to control the risk of lending to small firms by restricting the length of debt maturity. Large (small) firms, thus expected to had more long (short)-term debt in capital structure. Consequently, these arguments implied a positive impact of firm size on debt maturity. It was widely accepted by the current literature that larger firms had lower agency costs of debt (Ozkan, 2000, Yi, 2005 and Whited, 1992), because these larger firms were believed to an easier access to capital markets, and a stronger negotiation power. Hence both these arguments favored larger firms for issuing more long-term debt compared to smaller firms. In addition to it Smith and Warner (1979) argued that smaller firms were more likely to face higher agency costs in terms of a conflict of the interest between shareholders and debt holders. Hoven and Mauer (1996) found out only little evidence for the agency cost aspect that debt maturity used to restrict the conflicts of interest between share holders and debt holders.
Although smaller firms in the sample used short term debt, findings also suggested that firms with big amounts of growth options small leverage, and hence small to moderate incentive of debt maturity structure to reduced the conflicts of interest above the utilization of those options. Barclay and Smith (1995) tested the determinants of corporate debt maturity hypothesis that firms with greater growth choices in investment opportunity sets issued large amount of short-term debt, study also found that firms issue large amount of long-term debt. The findings were robust to surrogate measures of the investment opportunity set, techniques as well which proposed to growth options in the firm’s investment opportunities be key in discussing both the time-series and cross-sectional fluctuation in the firm’s maturity structure. Study also supported strong relationship among firm size and debt maturity: superior firms issue a considerably bigger proportion of long-term debt. This was uniformed with the observance that small firms were dependent more heavily on bank debt that traditionally had shorter maturity than public debt. Smaller firms had large growth options, which indicated to employ shorter-term debt to reduce the agency conflicts; these indications assumed debt as uncertain. Though, the capital structure theory suggested that these firms employed moderate amounts of leverage to mitigate the risk of financial loss. As such, firms with low leverage and low chances of financial loss would likely be unbiased to employ debt maturity structure to restrict agency conflicts, all other matters remain constant. Agency cost theory also proposed that smaller to medium size firms relatively faced higher agency costs problems because the possible divergence of risk shifting and reducing the concentration between equity holders and managers (Smith and Warner, 1979). To overcome this issue and to control the agency cost short-term debts were recommended Barnea, Haugen, and Senbet (1980, 1985). The large constant flotation cost of constant securities comparative to the small size of the firm had an additional barrier that stops all small firms’ access to the capital market. Smith (1986) argued that managers of regulated firms had less discretion over investment decisions, which reduced debt’s agency costs and increased optimal leverage. Shah and khan (2005) evidenced the blended support for the agency cost, study results showed that smaller firms employed more shorter term debt then longer term debt; even there was no evidence that growing firms employ more of short-term debt as assumed by (Myers, 1977) that debt maturity varied inversely to proxies for firm’s growth options in investment opportunities, The implication of firm size variable also verify the information asymmetry hypothesis, established it costly to access capital market for long term liabilities.
A frequent recommendation in the literature discussed that a firm should compare maturity structure of its assets to that of its debt. Maturity matching could concentrate on these threats and thus a structure of corporate hedging that decreased projected expenses of financial suffering. In a related element, Myers (1977) explained that maturity matching could control agency conflicts between equity holders and debt holders by ensuring that debt repayments had planned to match up with the reduction in the worth of assets in place. At the final stage of an asset’s life, the firms encountered a reinvestment judgment, concerning to debt that matures at that time assists to restore the suitable investment benefits as soon as new investments were needed. Though, this analysis specified that the maturity of a firm’s assets did not the only determinant of debt maturity. Growth options also played a vital role as well. Chang (1989) revealed that maturity matching could reduce organization expenses of debt financing. Stohs and Maurer (1996) and Morris (1976) argued that a firm could face risk that did not cover sufficient cash in case the maturity of the debt had shorter maturity than the maturity of the assets or even vice versa in case the maturity of the debt was greater than asset maturity (the cash flow from assets necessary for the debt repayment terminated). Following these arguments, the maturity matching principle belongs to the determinants of the corporate debt maturity structure. Emery (2001) argued that firms avoid the term premium by matching the maturity of firm’s liabilities and assets. Hart and Moore (1994) confirmed matching principle by showing that slower asset depreciation signified that longer debt maturity. Therefore, this study expected a positive relationship between debt maturity and asset maturity.
Hoven and Mauer (1996) found well-built support for the regular textbook recommendations that firms should compare the maturity period of firm’s liabilities to that of firm’s assets. Study results were indicating asset maturity a key aspect in discussing instability in debt maturity structure. Shah and khan (2005) found unambiguous support for maturity matching hypothesis. Study findings revealed that the fixed assets varied directly with debt maturity structure. Myers (1977) argued that maturity matching of firm assets and liabilities could also partially serve as a tool for mitigation of the underinvestment problem, which was discussed in the agency costs theory section. Here the maturity matching principle ensured that the debt repayments should be due according to the decrease of the asset worth. Comparing the maturities as an effort to list debt repayments to match up with the decrease in expected worth of assets now in place. Gapenski (1999) differentiated two strategies of maturity matching namely the accounting and financing approach. The accounting approach considered the assets as current and fixed ones and called for the financing of the current assets by short-term liabilities and fixed assets by long-term liabilities and equity. The financing approach considered the assets as permanent and temporary.
In these terms the fixed assets were definitely permanent ones and some stable parts of the fluctuating current assets were also taken as permanent. This approach then suggested financing the permanent assets by long-term funds (long-term liabilities and equity) and temporary assets by short-term liabilities. Consequently, the financing approach generally employed ceteris paribus more long-term liabilities than the accounting approach did. The financing approach brought more stable interest costs than the accounting approach; but as the yield curve was usually upward sloped, the financing approach was also more costly. The financing approach versus accounting approach decision making was thus a classical risk return trade-off relationship. In praxis, the corporate commonly favored the accounting approach before the finance approach. Based on these maturity matching arguments, balance sheet liquidity implied an impact on the corporate debt maturity structure. Guedes and Opler (1996) stated that the estimation of asset maturity did not appear to be very much between firms, those issued debt (term of one to nine years) and firms that issued debt up to twenty nine years term. But firms that issued debt for greater than thirty years term had assets with significantly long lives. Assumptions expected that firms should compare the maturity of assets and liabilities showed that partially correct. Morris (1976) argued that such a strategy allowed firms to decrease uncertainty both over interest costs over the asset’s life as well as over the net income those were derived from the assets. (Emery (2001) the higher the term premium, the stronger should be the firm’s incentive for maturity matching.
This study mainly focused on the impact of asset maturity, firm size, and market to book ratio on debt maturity structure of Pakistani non-financial firms. According to the Capital Market of Pakistan, this study employed on publicly listed firms on KSE-100 index. Firms were evaluated based on several factors. All the listed non financial firms were taken and following steps were adopted to conduct this study:
Secondary data comprised on non-financial firms listed on KSE-100 Index, collected from the different sources i.e. Karachi Stock Market, Balance sheet analysis report published by State Bank of Pakistan for year 2003-2008. The data comprised on following variables: debt maturity as dependent variable, asset maturity, firm size, and market to book value ratio as independent variables. Debt maturity was measured by dividing debt maturing more than one year to total debt; asset maturity was obtained by dividing fixed assets to depreciation; firm size was takes as natural log of total assets; market to book value ratio measured as market value of firm’s assets divided by book value of firm’s assets. This research had supported the predictions that firm’s debt maturity had positive impact on maturity of its assets, however little support for firm size and the impact of growth options had inverse impact on debt maturity to test these predictions the study made the model which contained following variable like debt maturity ratio, asset maturity ratio, market to book value ratio, and firm size.
Multiple linear regression models were used in this study such as all variables were scale variables. One dependent and three independent variables were used. This study mainly focused on impact of independent variables on dependant variable. To satisfy the regression normality assumption study used transformation on dependant variable and two independent variables, which ultimately gave the simple linear models as described below Sqrt of DEBTMAT = AZA± + Ln of ASSETMAT (AZA²1) + AZA¼ Sqrt of DEBTMAT = AZA± + + SIZE (AZA²1) + AZA¼ Sqrt of DEBTMAT = AZA± – Ln of MV/BV (AZA²1) + AZA¼ Where: Sqrt of DEBTMAT was transformation of firm’s debt maturity (Debt maturing more than one year / Total debt) Ln of ASSETMAT was firm’s asset maturity transformed (Fixed Assets / Depreciation) SIZE was firm size (Log (natural) of total assets) Ln of MV/BV was firm’s market-to-book ratio transformed (Market value of firm’s assets / Book value of firm’s assets) Aµ was error term AZA± was the Constant 3.3 Sample Size Non-financial firms varied from each other on the basis of their capital formation. This research eliminated all those non-financial firms which had some inconsistencies in their financial data. Sample of 58 firms were used from non-financial firms listed on the Kse-100index
Non-financial companies listed on the KSE-100 index selected for the purpose of conducting this research study.
After collecting the data from the selected population, it was analyzed by using SPSS software to study the impact of dependent variable (sqrt_Debt Maturity) on independent variables (ln_asset maturity, firm size, and ln_market to book ratio). The statistical technique Multiple Linear Regression was used to classify the variables that impact the debt maturity.
In this study, multiple linear regression analysis exercised to examine data collected from listed Pakistani non-financial firms for period 2003-08. Regression analysis used to measure the long term debt employed by non-financial firms. Debt maturity had taken as a dependent variable in this study where as asset maturity, firm size, and market to book value ratio were independent variables to measure their effect on debt maturity structure.
This study concluded that the most important variables were debt maturity, and asset maturity. According to this study, these variables were most important in the prediction/ anticipation of maturity structure of firms’ asset and liabilities. According to this study, asset maturity played important part for the model to predict the debt maturity structure. Asset maturity was positively impacted by debt maturity. This study confirmed matching principle by showing that slower asset depreciation resulted in longer debt maturity. These results were also supported by Hart and Moore (1994). Firm size was also one of the important variables for this study, this study found out only little evidence for the agency cost aspect that debt maturity used to restrict the conflicts of interest between share holders and debt holders, these results were matching with the study conducted by Hoven and Mauer (1996). These results were varied in various countries, because there had been dissimilarity in environments and circumstances. Though firms made decision accordingly, it also showed that smaller firms employed shorter term debt then longer term debt, which was consistent with the results of Shah and khan (2005). There was an acceptance that growth (market-to-book ratio of assets) should be inversely correlated to debt maturity in the agency/contracting costs perspective in this research, which was supported by Titman (1992).
All variables were considered to be in line with the literature, however, based on regression coefficients shown by many variables along with dependency problem, the final model comprised of independent variables; asset maturity, and firm size had significant value of less than 0.05 which suggests that these variables had significant impact on the debt maturity of non-financial firms listed on KSE-100 index. On the other hand, results also revealed that market to book value ratio had significant value greater than 0.05 therefore it might not necessarily lead to an impact on non-financial firms listed on KSE-100 index.
This research was limited to the non-financial companies listed on KSE-100 index. The data had taken from 58 non-financial firms for the year 2003-08. It was suggested that such type of study should be carried out in other countries of Asia as well, as to comprehensive idea about the debt maturity structure. Moreover, it also suggested that other factors except ones examined in this study should be researched as to perfect idea about the debt maturity structure. Besides that, this study could also be replicated in other developing countries.
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