Javaheriafif, Sadegh
(2017)
UK corporate capital structure and zombies: an econometric analysis.
PhD thesis, University of Nottingham.
Abstract
This Thesis examines the determinants of corporate capital structure during a period characterised by significant changes in the overall economic conditions. Empirical studies of capital structure generally concentrate on identifying the firm-specific factors that managers should consider in making capital structure decisions, while ignoring the possible implications of the overall economic conditions that could affect the firms’ financing decisions. Given that the 2007 Global Financial Crisis (GFC) was accompanied by an economic recession, this provides a unique opportunity to investigate the impact of the overall economic conditions on firm’s capital structure.
There have been a number of unique factors to the 2007 GFC and the following economic recession that are not observed in previous economic downturns in the UK. These include near-zero interest rate (which was reduced by the Bank of England from a pre-crisis peak of 5.75% in July 2007 to 0.5% in March 2009), the extraordinary level of support to the troubled firms offered by the government (e.g., the Business Payment Support Service; the Asset Protection Scheme; and the Funding for Lending Scheme), and the unprecedented banks’ forbearances on non-performing loans (e.g., granting waivers to breaches of pre-agreed loan covenants; switching to an interest-only loans; offering payment holidays; and rolling over the loan). These factors while protecting many viable businesses, may have contributed to the survival of some technically insolvent firms that would have defaulted otherwise. Recent evidence from insolvency practitioners have suggested the emergence of such “zombie” firms in the UK over the course of the GFC and the following economic recession.
Accordingly, the objective of this Thesis is fourfold. The main objective is to investigate the impact of the recent GFC and the firm-specific determinants of the capital structure on firms’ leverage ratios. The second objective is to identify zombies, thirdly to develop an empirical model to identify the determinants of zombieness status, and fourthly to estimate their impact on the probability of becoming a zombie. The same dataset on the constituents of the FTSE 250 Index is utilised in achieving all these objectives.
Identifying zombies via a two-condition criteria, and using a population-averaged logit procedure, we show that the probability of becoming a zombie increases with the degree of financial leverage and viability of the business (as perceived by firm’s top management). However, it is negatively affected by firm’s profitability, cash-generating ability, and the ability to pay dividends. Our results thus show that there was a prevalence of zombie firms in the UK which evolved from the GFC.
Using data on the constituents of the FTSE 250 Index over the period 2004-2012 and estimating a two-step System GMM procedure, we find that the leverage ratio is positively affected by the tangibility of assets, the size of the firm, the amount of non-debt tax shields, growth opportunities and business risk, but declines with an increase in firm profitability. Furthermore, the recent GFC is found to exert a significant impact on firms’ leverage ratio. The results also confirm that firms have target leverage ratios with a fairly fast speed of adjustment.
Applying the same estimation technique to a post-crisis model, we find that, despite the substantial differences in their ability to meet financial obligation, the leverage ratios of zombies and non-zombies do not seem to be determined differently. We further establish that except for business risk and growth opportunities, other commonly used firms-specific determinants of capital structure, maintain their empirical relevance over the post-crisis period.
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