Analysis of the determinants of funding policies of companies listed on the stock

market in Romania
Author: Grasu Ana-Georgiana
Coordinator: Ingrid Dragot
Abstract

This study examines the importance of six factors in funding policy decisions of
companies listed on the Bucharest Stock Exchange, analysis useful for Romanian and foreign
investors and companies, especially since the study is positioned as the 2008-2012 time being a
sensitive period in terms of economy. The main conclusion of the research was that the listed
firms in Romania finances its assets through equity, debt and short term trade and long-term debt
or financial, in the order specified.
Key words: capital structure, trade-off theory, pecking order theory, Romanian
companies.
Introduction
The study tried to investigate the determinants of the capital structure in the emerging
countries particularly the Romanian companies listed on BSE and highlight important factors
that influence a company's capital structure. The aim was to determine these factors for
companies operating on the Romanian market especially in the last five years, given the current
global economic situation, namely the economic crisis and recent financial years 2008-2012 debt
crisis. Theories of debt financing have been growing over the past two decades.

The Theoretical Framework and Previous Research

The capital structure has long been examined in the corporate finance literature of
developed countries; few studies emerged to examine the capital structure in developing markets.
Since the classic paper of the Modigliani and Miller (1958), many theories embarked a number
of determinants that affect the capital structure of the firms, the most well-known theory are the
trade-off theory and the pecking order theory where a variety of variables that are potentially
responsible for determining capital structure decisions in companies can be found in the
literature. Modern finance theory and empirical work have been trying to give answers to what
are the factors that affect the decisions to change firms capital structure. Change in capital
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structure brings about changes in the relative position of capital providers (e.g., stockholders and
debtors). The trade-off theory assumed that the firms sets a target debt-equity ratio and
eventually move toward achieving this target. The financing decision is based on cost benefit
analysis of debt financing versus equity financing, the cost associate with each choice is the key
determinants of the financing decision. The theory suggests the existence of a target optimal
capital structure within the firm tries to reach by balancing its investment and financing plans.
The pecking order theory states that firms follow a hierarchy of financial decision when
establishing its capital structure. Initially firms prefer to finance their projects through internal
financing i.e. retained earnings. In case they need external financing, first they apply for a bank
loan then for public debt. As a last resort, the firm will issue equity to finance its project. Thus
according to pecking order theory the profitable firms are less likely to incur debt for new
projects because they have available internal funds for this purpose. The reason firms are
reluctant to issue equity is because of asymmetric information between the management and the
new stockholders. Another theory is the asymmetrical information phenomenon is present in a
developed country and more or less in a developing one: some investors are more informed than
others, and, in this case, the market efficiency hypothesis is put under questions. Also the
financial literature developed signalling theory which sustain that managers know the true
distribution of firm returns, but investors do not. Managers will gain if the securities of the firm
are higher valued by the market, but are penalized if the company goes bankrupt. Investors take
larger debt levels as a signal of higher quality.
Data Base
The paper employed different measure of the capital structure such as leverage,
indebtedness and coverage of interest in operating profit. In this study, the selection of
explanatory variables is based on the alternative capital structure theories and previous empirical
work. The choice was limited because of lack of relevant data. As a result, the final set of
explanatory variables includes: tangibility, profitability, market to book ratio, size, capital
intensity and the financial crisis for 29 Romanian companies.
All information has been obtained from:

Internet sites providing information on companies listed on BSE, such as

www.bvb.ro. www.ktd.ro.

The Financial Statements published on the company website.

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In the following I present the media of these indicators that represent the capitl structure
of our companies for the five years.
Table no. 1 Median capital structure indicators
An

Levier
(DAT/CPR)

Datorii totale/AT

Grad de ndatorare
(DTS/DT+CPR)

2008

45.70%

36.36%

33.40%

2009

28.26%

22.08%

29.18%

2010

31.42%

21.24%

33.74%

2011

36.70%

22.51%

29.18%

2012

34.06%

22.29%

33.57%

The conclusions would be likely to notice are that the main source of financing for
Romanian companies domestic financing remains closely watched by foreign financing through
bank loans. Romanian companies prefer private financing in exchange for the public.

Table no. 2 Descriptive statistics of the independent and dependent variables of listed companies
in Romania
Levier

DAT_AT

Grad_Indat

Tang

Profitab

Size

Oprt_Crest

Intenst_Capit

Mean

0.6846

0.7063

0.3865

0.5783

0.3932

2.7338

2.7753

0.6219

Median

0.3664

0.3929

0.3171

0.5878

0.7083

2.7569

2.4275

0.4213

Standard
Deviation

0.1622

0.1756

0.1923

0.0258

0.1783

0.0551

0.0575

0.0885

Minimum

0.0022

0.0045

0.0012

0.0028

-0.9987

2.3263

0.8109

-1.0095

Maximum

1.2117

1.3680

0.9925

0.9879

0.8762

3.0063

1.9168

0.9987

Sum

147.6889

45.9444

57.9762

86.7467

34.1619

385.4707

391.3199

66.4721

Count

141

141

141

141

141

141

141

141

These values emphasize the application of corporate financing policy in Romania based
on equity in most of them followed by foreign loans are the loans of the bank and the suppliers.
We remark the median of 58.80% for tangibility suggesting that our businesses can opt for bank
loans with what vouch for them. But profitability is present in a relatively high 90.83% which
marks its use funding policy, specifically companies in Romania will opt to reinvest in various
investment projects.

It can be noticed that for the three dependent variables differences between minimum and
maximum values lead to the idea of different capital structures in Romanian companies. But
between variables such as maximum and minimum values are close, with some proportionality in
the use of each debt category. The explanatory variables except the company size differences
leading to the conclusion that the listed companies in our country have different financial
situations. The small difference can be seen in company size indicator suggesting no matter large
and small companies as in other states, where small businesses are dominated by large
corporations.

Table no. 3 Correlation matrix of the independent and dependent variables listed companies in
Romania
Levier

DAT_AT

Grad_Indat

Tang

Profitab

Size

Oprt_Crest

Levier

DAT/AT

0.07491

Grad de indatorare

0.09399

0.10881

Tang

0.27333

-0.18735

-0.28427

Profitab

-0.47018

-0.28600

-0.35376

0.12435

Size

0.35127

0.17517

0.34930

0.08147

0.14858

Oprt_Crest

-0.33178

-0.35537

-0.29621

-0.09176

-0.10761

0.0187

Intenst_Capit

-0.21206

-0.28627

0.18356

0.05149

0.09375

-0.2287

-0.01858

Intenst_Capit

The matrix is used to detect any multicollinearity between the independent and dependent
variables. From the correlation matrix of the variables used can be seen that between dependent
and independent variables are an acceptable degree of association so there is the influence of
explanatory variables on the dependent. Among the independent variables is remarkable that
capital intensity has a weak correlation with the degree of leverage and indebtedness, the total
indebtedness influence.
It may also be noted that as between the independent variables and the correlation
between the dependent variables is weak or ineffective. Thus, they do not influence one another,
and by the inclusion / exclusion of a variable in the model group, the remaining variables can

provide significant information, which was not the case if they were highly correlated with each
other.
Research Methodology
Dependent indicators used in this model are leverage, interest of coverage ratio of
operating profit and borrow capital structure related to total active.
Leverage indicates the proportion of equity and debt to finance long-term assets of the
company, being an indicator of the company's risk.
Leverage = DAT/CPR
Indebtedness can be explained in principle as leverage, but in this case short-term debt
relative to total capital of the company (owned and borrowed).
Grad de ndatorare = DTS/(DT+AT)
Operating profit debt coverage is an indicator that can be covered cost of debt of its
operating activities. This indicator is directly linked to profitability and its high value will lead to
better profitability. If a company has a lower value than its value in a company issues debt
management that will be unable to meet payments to creditors.
Datorii totale/Active totale = DT/AT
Indicators used as explanatory variables to the dependent variables are the following.
A. Tangibilitatea activelor = AF/AT
Structure of assets has a direct impact on capital structure, gives tangible more likely to
receive bank loans or issuing shares realization. Lenders require assets to be used as collateral to
offset the chance to deal with the problem of asset substitution. For companies that can not offer
collateral, lenders may require higher credit terms. Therefore, external financing is more costly
than internal financing. Moreover asset substitution problem is less likely to occur when firms
have more assets in place. If the banks do not have sufficient information on companies who
offer loans, they will give less credit to those who have more intangible assets. Therefore, a
positive correlation between tangible and leverage will reveal the presence of information
asymmetry. However, if there is collateral, the debtor could be put on hold to invest in risky
projects or ineffective. Accordingly, the theory of "pecking order" identified a positive
correlation between the percentage of these assets in total assets and leverage of studies showing
this correlation can include Brinkhuis and Maeneseire (2009), Psilaki and Daskalakis (2008),

Sinan (2010). But studies in Romania provides a negative correlation Dragot and Semenescu
(2008).
B. Profitabilitatea = EBIT(1-)/AE
Regarding profitability indicator, the theory of "pecking order" suggests that profitable
firms first use internal funds and then will turn to external funding. This highlights that
companies with high profits should have a lower debt ratio., Leading to a negative relationship
supported by De Haas & Peters (2004), Sinan (2010), Viet (2010) on the United Britain. In
another prospective lenders prefer to lend to firms with high cash flow stream. Thus capital
structure is a tool signaling performance and prospects of the company, and this is why a positive
value of the correlation coefficient between the two variables can be expected. Profitability is the
indicator that will highlight and emphasize the efficiency of company assets, correlation and
Hennessy and Whited observed (2006) Strebulaev (2007), Rafiu and Akinlolu (2010).
C. Mrimea companiei = Ln(CA)
Most studies argue that large companies tend to be more diversified and therefore have a
lower risk before the bankruptcy. Therefore large firms tend to provide more information to
lenders than smaller firms and the cost of monitoring is lower for large companies. This
argument supports a positive relationship between the information provided and the size of
companies and Zongjum Nadeem (2011). But although the size of the company can be inversely
proportional to the level of asymmetric information between investors within the company and
outsiders, large companies can support equity financing, which implies a negative relationship.
D. Oportunitile de cretere = PER =Pre de inchidere/EPS12
In general literature provides a negative relationship between leverage and growth
opportunities (Jong et.al, 2008). If a company's management objectives tend to increase the
interests of managers and shareholders are the same for those companies with strong investment
opportunities. For companies without growth opportunities, debt serve to limit agency costs.
According to the trade-off theory, firms with growth opportunities tend to borrow less,
opportunities are considered intangible assets compared to those who hold tangible assets as
growth opportunities can not be colaterizate.
E. Intensitatea capitalului = AT/CA
Thus, increasing capital intensity implies future growth of income fluctuation risk. Top
managers want to have control of the company and the main concern of creditors is to limit the
6

risk of default of the company's debts, which could be achieved through a low debt companies
choosing its automation instead of manual labor. On the other hand the conservative argument is
that the higher capital intensity in a company greater the need for more long-term debt to meet
financial requirements and will also have access to assets that will become collateral damage. So
capital intensity is negatively correlated with total debt and short-term and positively correlated
with long-term debt.
F. Criza financiar variabil dummy
The financial crisis may affect leverage both directly and indirectly, through the
emergence of this global economic event all banks and lenders to cover unforeseen
circumstances require collateral and interest to a much higher level. By "more expensive" loans
increasingly fewer companies will be able to meet the requirements and therefore will give up
this method of financing. On the other side with the arrival of this unwanted phenomenon more
companies will need financial resources not only to make certain investments but also to
maintain operating activities and in extreme cases will resort to these external sources even at a
much higher price than would have been expected.
Results
First I made a table used for modeling the determinants of capital structure to see later if
we get the same answers. The results are obtain in most studies.
Table no.4 Expected signs of the independent variables
Factor determinant

Formula

Efect

asupra

structurii

capitalurilor
Tangibilitate

Active Fixe/Active Totale

(-)

Profitabilitate

EBIT(1-)/AE

(-)

Mrimea companiei

Ln(CA)

(+)

Oportunitatea de cretere

PER

( + )/( - )

Intensitatea capitalului

AT/CA

(+)

Criza financiar

dummy

(+)

After running the regressions we pooled all the data in the following table to provide an
overview of the three models made. A pattern in which the six independent variables are
included in the pattern B includes all of the variables except for the financial and C The intensity
excluding capital.

Table no. 5 Results of regression models A, B, C including the three dependent variables
Varibile dependente
Variabile independente

Levier

Datorii totale/Active Toatel

Grad de ndatorare
Model A

Model A

Model B

Model C

Model A

Model B

Model C

Model C

-0.4251*

Model
B
-0.1241*

Tangibilitate

0.3514*

0.4624*

0.3571*

-0.6325*

-0.1288*

-0.4333*

Profitabilitate

-0.4530*

-0.3246*

-0.2472*

-0.5347*

-0.1349*

-0.2354*

-0.2594*

-0.1595*

-0.2571*

Mrimea Companiei

0.3379*

0.3379*

0.3313*

0.1216*

0.1122*

0.3207*

0.3485*

0.1460*

0.1511*

Oportunitatea de cretere

-0.1743*

-0.3687*

-0.1358*

-0.1561*

-0.0341*

-0.1211*

-0.1382*

-0.1983*

-0.2031*

Intensitatea Capitalului

0.1026*

0.0127**

n/a

-0.4358*

-0.2387**

n/a

-0.1110*

-0.1025**

n/a

Criza Financiar

-0.1737*

n/a

-0.1741**

-0.2714*

n/a

0.7713**

-0.4191*

n/a

-0.3193**

Variable in the model showed that company size is positively correlated with the three
dependent variables, and tangibility, profitability, growth opportunities and the financial crisis
are negatively correlated with capital intensity. This variable presents a mix of signs is
influenced by the form of debt. Regarding this tangibility is positively correlated with leverage,
but negatively with total debt and short term. This is conclusive with the literature mentioned in
the first two chapters. Tangible assets sustain a negative correlation between them and dependent
variables, the result is logical, because this is how the companies finance the investments in
current assets, while the financial debt is used to finance the fixed assets. The profitability is
negative correlated; this sustains the conclusion of pecking order theory. Size is positively
correlated big firms sent a more direct signal to the creditors and could obtain a credit more
easily, especially in the context where a bigger turnover is associated to a smaller risk exposure.
The correlation of market-to-book-ratio is negative which sustain that the companies with good
growth opportunities will offer greater gains to shareholders than to creditors, fact that sustained
the hypotheses of the pecking order theory. Capital intensity is negatively correlated with total
debt and short-term and positively correlated with long-term debt. Last financial crisis indicator
is showing a negative relationship with all categories of debt which indicates that this
phenomenon does not allow unwanted economic entities to seek external resources due to risk
aversion creditors. Therefore companies will not have the internal resources you need to plan
their great investments and current activity to avoid bankruptcy costs. Therefore, in these
8

-0.0229*

difficult financial terms many companies having a policy of long-term funding made arrived in
bankruptcy situations.
The financing decision at micro-economic level is strongly influenced by the evolution of
macroeconomic indicators (inflation, interest rate, economic growth), as well as by corporate
governance problems that Romania, practically has not solve yet, although the regulation can be
a starting point in this direction.
Conclusions
The overall conclusion is that Romanian companies face the problem of information
asymmetry and a more analytical perspective we can say that companies are funding policy
based on pecking order theory. Factors influencing capital structure shows that the
macroeconomic level you can influence on the microeconomic level. An underlying problem is
given financing and corporate governance in Romania which is at an early stage and therefore
management does not take the best decisions in this matter.
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www.bvb.ro

www.ktd.ro

www.kmarket.ro

http://epp.eurostat.ec.europe.eu

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