Operating leverage and the cost of debt in European agri-food firms

  1. Grau, Alfredo 1
  2. Reig, Araceli 1
  1. 1 Universitat de València, Facultat d'Economia. Avda. de los Naranjos s/n. 46022 Valencia
Revista:
Spanish journal of agricultural research

ISSN: 1695-971X,  2171-9292

Año de publicación: 2020

Volumen: 18

Número: 3

Tipo: Artículo

DOI: 10.5424/SJAR/2020183-16254 DIALNET GOOGLE SCHOLAR lock_openDialnet editor

Otras publicaciones en: Spanish journal of agricultural research

Objetivos de desarrollo sostenible

Resumen

Aim of study: To analyse the effect that operating leverage exerts on the cost of debt of agri-food firms in Europe, both in isolation and indirectly through its other risk factors.Area of study: We used panel data made up of 18,360 European firms from 2009 to 2016 (146,880 observations).Material and methods: The data were extracted from the ORBIS database and EUROSTAT. The econometric approach was estimated by the Generalized Method of Moments.Main results: The results obtained confirm that operating leverage or cost structure, in addition to affecting the cost of debt, also affects the relationship between that cost and other sources of risk. More specifically, indebtedness, size, specificity and age all affect the cost of debt to a greater or lesser extent, depending on the level of operating leverage of the company.Research highlights: The main contribution was the study of the cost of external financing as a function of the cost structure, because this directly influences the competitiveness of companies in a key sector of the European economy. We also demonstrated the country effect, taking into account the different policies and practices regarding the assumption of risk by firms. The agri-food sector has been subject to special aid programs of research & development distributed unevenly across countries. If we add to this the national subsidy programs, the level of indebtedness is not a clear determinant of the cost of debt. The main determinant of that cost is the operating leverage.

Referencias bibliográficas

  • Afonso A, 2003. Understanding the determinants of sovereign debt ratings: Evidence for the two leading agencies. J Econ Finan 27 (1): 5674. https://doi.org/10.1007/BF02751590
  • AgFunder, 2014. AgTech Investing Report. Year in review 2014. https://research.agfunder.com/2014/AgFunder-Agtech-Investing-Report-2014.pdf
  • AgFunder, 2015. AgTech Investing Report. Year in review 2015. https://research.agfunder.com/2015/AgFunder-AgTech-Investing-Report-2015.pdf
  • AgFunder, 2016. AgTech Investing Report. Year in review 2016. https://research.agfunder.com/2016/AgFunder-Agtech-Investing-Report-2016.pdf
  • Allard J, Blavy R, 2011. Market phoenixes and banking ducks are recoveries faster in market based financial systems? IMF Working Papers 11/213, International Monetary Fund. https://doi.org/10.5089/9781463902292.001
  • Arellano M, Bond S, 1991. Some tests of specification for panel data: Monte Carlo evidence and an application to employment equations. Rev Eco Studies 58: 277-297. https://doi.org/10.2307/2297968
  • Baltagi NH, 2001. Econometric analysis of panel data (2nd Ed.). Wiley, NY.
  • Baños-Caballero S, García-Teruel PJ, Martínez-Solano P, 2012. How does working capital management affect the profitability of Spanish SMEs? Small Bus Econ 39: 517-529. https://doi.org/10.1007/s11187-011-9317-8
  • Baños-Caballero S, García-Teruel PJ, Martínez-Solano P, 2013. The speed of adjustment in working capital requirement. Eur J Financ 19 (10): 978-992. https://doi.org/10.1080/1351847X.2012.691889
  • Beck T, Demirguc-Kunt A, 2006. Small and medium-size enterprises: Access to finance as a growth constraint. J Bank Financ 30 (11): 2931-2943. https://doi.org/10.1016/j.jbankfin.2006.05.009
  • Berger A, Klapper L, Udell G, 2001. The ability of banks to lend to informationally opaque small businesses. J Bank Financ 25: 2127-2167. https://doi.org/10.1016/S0378-4266(01)00189-3
  • Cao VN, 2015. What explains the value premium? The case of adjustment costs, operating leverage and financial leverage. J Bank Financ 59: 350-366. https://doi.org/10.1016/j.jbankfin.2015.04.033
  • Cleassens S, Djankov S, Nenova T, 2000. Corporate risk around the world. The World Bank. Policy Research Working Paper 2271. https://doi.org/10.1017/CBO9780511572159.017
  • Dass N, Kale JR, Nanda V, 2014. Trade credit, relationship-specific investment, and product market power. Review of Finance 19: 1867-1923. https://doi.org/10.1093/rof/rfu038
  • Demerguc-Kunt A, Levine R, 1999. Bank-based and market-based financial systems - cross-country comparisons. Policy Research Working Paper 2143. The World Bank.
  • Fee CE, Hadlock CJ, Thomas S, 2006. Corporate equity ownership and the governance of product market relationships. J Finance 61: 1217-1251. https://doi.org/10.1111/j.1540-6261.2006.00871.x
  • FIAB, 2016. Economic report 2015. Spanish Federation of Food and Beverage Industries, IVIE. http://fiab.es/wp-content/uploads/2017/12/Informe-Económico-2015.pdf
  • Francis JR, Khurana IK, Pereira R, 2005. Disclosure incentives and effects on cost of capital around the world. Account Rev 80 (4): 1125-1162. https://doi.org/10.2308/accr.2005.80.4.1125
  • García-Feijoo L, Jorgensen RD, 2010. Can operating leverage be the cause of the value premium? Fin Manage 39 (3): 1127-1154. https://doi.org/10.1111/j.1755-053X.2010.01106.x
  • Grau AJ, Reig A, 2015. Vertical integration and profitability of the agri-food industry in an economic crisis context. Span J Agr Res 13 (4): e0107. https://doi.org/10.5424/sjar/2015134-7487
  • Grau AJ, Reig A, 2020. Operating leverage and profitability of SMEs: Agri-food industry in Europe. Small Bus Econ, in press. https://doi.org/10.1007/s11187-019-00294-y
  • Harjoto MA, 2017. Corporate social responsibility and degrees of operating and financial leverage. Rev Quant Fin Account 49: 487-513. https://doi.org/10.1007/s11156-016-0598-5
  • Hausman JA, 1978. Specification tests in econometrics. Econometrica 46 (6): 1251-1271. https://doi.org/10.2307/1913827
  • Hernández-Cánovas G, Martínez-Solano P, 2010. Relationship lending and SME financing in the continental European bank-based system. Small Bus Econ 34: 465-482. https://doi.org/10.1007/s11187-008-9129-7
  • Houmes RE, MacArthur JB, Stranahan H, 2012. The operating leverage impact on systematic risk within a context of choice: An analysis of the US trucking industry. Manage Fin 38 (12): 1184-1202. https://doi.org/10.1108/03074351211271283
  • Hyytinen A, Pajarinen M, 2007. Is the cost of debt capital higher for younger firms? Scot J Polit Econ 54 (1): 55-71. https://doi.org/10.1111/j.1467-9485.2007.00404.x
  • Kahl M, Lunn J, Nilsson M, 2014. Operating leverage and corporate financial policies. Working paper, University of Colorado.
  • Kale J, Shahrur, H, 2007. Corporate capital structure and the characteristics of suppliers and customers. J Financ Econ 83: 321-365. https://doi.org/10.1016/j.jfineco.2005.12.007
  • KPMG, 2015. VenturePulse Q4-2015. Global analysis of venture funding. https://assets.kpmg/content/dam/kpmg/pdf/2016/01/venture-pulse-q4-report.pdf
  • KPMG, 2016. VenturePulse Q4-2016. Global analysis of venture funding. https://assets.kpmg/content/dam/kpmg/xx/pdf/2017/01/venture-pulse-q4-2016-report.pdf
  • La Porta R, López-de-Silanes F, Shleifer A, Vishny R, 1997. Legal determinants of external finance. J Financ 52 (3): 1131-1150. https://doi.org/10.1111/j.1540-6261.1997.tb02727.x
  • Lev B, 1974. On the association between operating leverage and risk. J Financ Quant Anal 9 (4): 627-641. https://doi.org/10.2307/2329764
  • Mandelker GN, Rhee SG, 1984. The impact of the degrees of operating and financial leverage on systematic risk of common stock. J Finan Quant Anal 19 (1): 45-57. https://doi.org/10.2307/2331000
  • Martínez-Sola C, García-Teruel P, Martínez-Solano P, 2013. Corporate cash holdings and firm value. Appl Econ 45: 161-170. https://doi.org/10.1080/00036846.2011.595696
  • Mattermark, 2014. Mattermark Startup Traction Report 2014. https://mattermark.com/mattermark-startup-traction-report-2014-released-today/
  • Neter J, Wasserman W, Kutner MH, 1989. Applied regression models Homewood. IL: Irwin.
  • Novy-Marx R, 2011. Operating leverage. Rev Financ 15: 103-134. https://doi.org/10.1093/rof/rfq019
  • O'Brien T, Vanderheiden P, 1987. Empirical measurement of operating leverage for growing firms. Fin Manag 16 (2): 45-53. https://doi.org/10.2307/3666003
  • Sargan JD, 1958. The estimation of economics relationships using instrumental variables. Econometrica 26: 393-415. https://doi.org/10.2307/1907619
  • Sengupta P, 1998. Corporate disclosure quality and the cost of debt. Account Rev 73 (4): 459-474.
  • Serfling M, 2016. Firing costs and capital structure decisions. J Financ 71 (5): 2239-2286. https://doi.org/10.1111/jofi.12403
  • Simintzi E, Vig V, Volpin P, 2014. Labor protection and leverage. Rev Fin Stud 28 (2): 561-591. https://doi.org/10.1093/rfs/hhu053
  • Van Binsbergen J, Graham J, Yang J, 2010. The cost of debt. J Financ 65 (6): 2089-2136. https://doi.org/10.1111/j.1540-6261.2010.01611.x
  • Wooldridge JM, 2002. Econometric analysis of cross section and panel data. The MIT Press, London.
  • Ylhäinen I, 2017. Life-cicle effects in small business finance. J Bank Financ 77: 176-196. https://doi.org/10.1016/j.jbankfin.2017.01.008
  • Zhang L, 2005. The value premium. J Financ 60: 67-103. https://doi.org/10.1111/j.1540-6261.2005.00725.x
Fuente de los datos: Dialnet