A lot of research has already been conducted in the field of identifying the best determinants of Corporate Borrowing by various researchers. Most of the research work suggested that the corporate borrowing vary from company to company and similarly from decision factor to factor.
Barclay and Smith (1995) showed that credit quality and size moderately effect on firm's to augment its debts term to maturity, and firm's debt falls with growth opportunities. In a related article, Stohs and Mauer (1994) defined that larger firms most likely used the long term debt to avail the growth opportunity of its sales.
The earlier studies examine the corporate debt maturity on behalf of issues of incremental debt rather than to investigate the maturity of all liabilities on balance sheet of a firm. By studying the liabilities to assets on balance sheets could answer some uninvestigated questions about impact of sales growth on corporate borrowings.
The Mayers' (1977) suggested that agency cost and problems of debt can be controlled by firm to shortening the worth of its debt with respect to the volume of its sales. While some firms gain incentives from liquidity risk to borrow long term debt, it may not be able to compensate investors to bear credit risk of long-term debt for the sake of sales growth; it may indicate the low quality projects (Diamond, 1991a. Stiglitz and Weiss,1981). Hence the low-quality firms can't sustain their position or can be screened out from long-term debt market, only high credit quality firms can be stable and able to borrow long-term debts. In contrast, larger firms are much more likely to survive in the long run than smaller firms (Queen and Roll, 1987).
Brick and Ravid (1985) examined that interest payments of different time patterns affect the borrowers and lenders with respect to firms' volume of sales. It was argued that borrowers seek to maximize the present value of interest tax shields by accelerating interest payments, while lenders seek to minimize the present value of their tax liabilities by slow down interest payments.
Leff (1979), Khanna & Palepu (2000) addressed that the dominant perspective and minimizing perspective of transaction costs on business groups plays a crucial role on firm's affiliations with these groups to overcome the barriers in an inefficient market. The view of transaction cost minimizing is characterized by weak governance system of firms, in part due to weak legal institutions or under developed intermediaries. Increase in the external financing investment cost may occur due to association of agency cost problems with market imperfections. However, this study will not develop and test the hypothetical views of business groups.
Mitchell (1991) finds no support on the firm choice to match their asset maturities with maturity of debt issues. In a similar on debt issues, Guedes and Opler (1994) argue that high grade firms with large investment issue short-term debt. Diamond's (1991a) predicted that active participant's part in short-term credit markets are taken by the higher-rated firms.
Auerbach (1985) also argues that growth rate of sales and leverage are inversely proportion because the interest payment of tax deductibility is less valuable to the larger or fast growing firms. The firm's annual sales growth rate in total assets was used as a growth rate of proxy.
Corporate Borrowing:
Asset maturity is an important factor for corporate borrowing and plays stable role to predict the debt maturity of a firm. Myers (1977) argued that long-term assets of firm can support to gain more long-term debt. In contrast, Titman and Wessels (1988) analyzed debt maturity on the basis of balance sheet and viewed the evidences that smaller firms rely on higher proportion of short-term debt with objective to minimize long-term debt flotation costs. Barclay and Smith (1995) both addressed that smaller firms more likely with growth opportunities rely on a smaller proportion of debt that would exceeds 3 years. Myers's (1977) view on these evidences was that debt maturity is used by firms to control interest conflicts between debt and equity holders.
The preceding papers provided useful approaches for firms' debt maturity choices; hence the measure had various limitations. First, the term-to-maturity in the corporate borrowing provide information just about incremental financing choices. The debt maturity average of the firm's existing liabilities test relate to the terms-to-maturity of debt issues to balance sheet variables such as asset maturity or return on assets (Stohs & David C, 1996).
Myers (1977) defined the borrowing decisions of firms by using two indicators for growth: sales growth and growth of firm total assets. Examined the behavior of firm borrowing decision and concluded that; to prevent the agency cost of long term debt, most of the firms proffer short term debt decisions instead of long term debt. While Simon and Bonini (1958), Lucas (1967, 1978), and Jovanovic (1982) were examined the firm growth with three indicators of growth: sales growth, growth of firm total assets and growth of employed size of firm, and concluded that firm growth is independent of firm size. To study firms' complete size distribution the several alternative forms of samples were used, so, the variables were leading each others, while the definite relationship for alternative form of samples were crucially assumed and it was derived that firm growth decreases with all three indicators for agency cost of long-term debt financing, hence the sales growth were certain.
Mansfield (1962) accentuated the importance of firm growth, debt financing decision and changes in market structure. Mansfield addressed that debt financing is better when growth opportunities of firm were available and demanded, so the profitability of firm is certain and debt financing were benefited the tax advantage of firm.
DeAngelo and Masulis (1980) were examined the financing decision of firm and shown that firm value was being affected by the financing decisions of the firm, if the firm has to avail certain growth opportunities, the debt financing decisions were provided an effective tax advantage and resulted to decline in non-debt tax shields. Firm financing decision except debt financing resulted without tax shield beneficiaries, debt interest and principle payment were excluded from earnings of firm before tax applied and include net short term losses in taxable income and then the corporate taxes were be applied over taxable income. Hence it was addressed that the profitability of firm and the proportion of profitability over assets was affected by the corporate tax.
Gan. J (2007) addressed to normalizing the loan payment balances of prior debts and lending decisions. It was explained that the payment of debts balances loan slowly and present value of generated profit were exceeded the present value of total payment which were gradually paid. It has also an impact over firm capital and the proportion of debt over capital, the ratio of firm capital reduced with the excess of debt. Firm health with proportion of debt to capital were explained that healthy capital showed both from the borrowers willingness to repay gradually loan payment, and lenders willingness to lend. Debt financing and loan payments has also an impact over firm net profitability and the proportion of net earnings over firm total assets or return on assets, it must be paid even in bed time of firm, so well, it reduces the firm profitability and return on assets. The proportionate of earning over total assets showed the efficiency of firm that how well the firm is utilizing its assets to bear the cost of financing. Return on assets and prior debt to capital worth were used by means of lenders amount implicitly measure the worthiness of firm capital.
Dedoussis and Afroditi (2010) argued the problems with characteristics of a firm such as assets value or growth opportunities were communicated inability of firm to outside lenders, so that investment decisions were affected by net worth of firm if the discrepancy exists between firm internal and external financing.
Hayashi (1982) explained that marginal profitability was covered by firms to expanding the business and sales of firm with bearing moderate changes of expenditures. This expansion were done by corporations with various financing decisions, it was suggested that the debt financing is better to avail if the market was shown under green signal demand, if the market demand were not shown so firm prevent the debt financing because of interest payment which must be paid even in bad time of cash flow.
Hadlock (1998) assumes that backers are indecisive about the factual value of firm's assets, so expectations were formed that are based on the investment amount that firm requests to carry out. If the firm requested for the maximum amount subsequently the investors were not capable to discriminate between a firm with large resources or low resources. So the large assets of firm with low claims send a green signal to investor to putting money for debt investors. While it send the signal to equity provider to cutting the amount of investment if the money is required for new project establishment because it shorten its net earnings as well as the earning of shareholders.
