| || || Rika, Nacanieli.|
| || || Capital structure of publicly listed companies and state-owned entities in Fiji|
Institution: University of the South Pacific.
Call No.: pac In Process
Copyright:Under 10% of this thesis may be copied without the authors written permission
Abstract: The present study provides evidence that the determinants and theories of capital structure are applicable, relevant and transferable to small island states. Among firms in Fiji, leverage is positively correlated with firm size and inversely correlated with tangibility and both past and present profitability. In addition, the study finds that state-ownership is a significant and positive predictor of leverage. State-owned entities have a significantly higher propensity to borrow than publicly listed companies. This can be explained by several differences between the two groups. First state-owned entities carry higher levels of non-current assets which must be financed through debt or equity. Second state-owned entities are demonstrably less profitable and carry lower levels of retained profits. This conundrum leads them to acquire debt, in line with the pecking order theory. Third, some state-owned entities are able to borrow under government guarantee. This discounts their cost of debt and facilitates greater borrowing. The results conflict with a previous study in China which reported an inverse correlation between state-ownership and leverage (Chen and Strange 2005). This contradiction may be explained by different political systems and governance structures in the two countries. A Vietnamese study attributed higher leverage among state-owned entities to preferential treatment from stateowned banks (Nguyen and Ramachandran 2006). The present study clarifies that state-owned entities are more highly leveraged even when they have to obtain loans from commercial banks. Compared to state-owned entities, publicly listed companies are found to be more profitable and less leveraged. They also carry a lower proportion of noncurrent assets. In spite of the prospects of such benefits from privatization, divestment remains limited. Government may be reluctant to divest ownership for three reasons. First it may fear that listed companies would place less emphasis on social obligations. Second, certain state-owned entities may be retained for reasons of national importance and security. Third, profitable stateowned entities reduce budget deficits by generating regular dividend streams. Government can reduce budget deficits by withdrawing guarantees and soft loans currently provided to several entities. This may force such entities to exercise greater financial discipline. However government is subject to political pressure from lobby groups representing various interests. As such, it must demonstrate strong political will if it is committed to public enterprise reform. State-owned entities must also be encouraged to utilise their assets more efficiently and divest those which are not productive. Firms in Fiji employ more equity than debt. Equity financing is generally represented by retained profits rather than the issue of new shares. This is consistent with the pecking order theory which asserts that firms prefer internal funding to external funding. Only the smallest firms on the South Pacific Stock Exchange (SPSE) have issued additional shares since they were listed. However such issues have been restricted to directors, employees and existing shareholders. This highlights the need for the Capital Markets Development Authority (CMDA) and SPSE to encourage the issue and trading of shares. In this regard, CMDA and SPSE may encourage government to divest some of its shares in profitable state-owned entities through initial public offerings. The inverse relationship between leverage and profitability provides comprehensive support for the pecking order theory but is contrary to expectations based on the static trade-off theory. Similarly, the wide variation in debt levels for each organisation does not support the existence of a welldefined target debt ratio as predicted by the static trade-off theory. However, larger firms employ higher leverage than smaller ones which is consistent with both the static trade-off theory and the political cost hypothesis. While the regression model is able to explain more than half of the variation in leverage, it also indicates that there are other determinants of capital structure, which have not been identified in the present study. Future studies may investigate how leverage is affected by other variables such as firm age, governance structures and shareholder diversification.