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The Determinants of Capital Structure Choice: A Survey of European Firms

Franck Bancel(ESCP-EAP)

Email: [email protected]

Usha R. Mittoo(University of Manitoba, Canada)Email: [email protected].

ABSTRACT

We survey managers of firms in seventeen European countries on their capital structurechoice and its determinants. Our main objective is to explore the link between theory and

practice of capital structure. Preliminary analysis of the survey shows some interestingfindings. Financial flexibility, credit rating and tax advantage of debt are the most importantfactors influencing the debt policy while the earnings per share dilution is the most importantconcern in issuing equity. Evidence also supports that the level of interest rate and the shareprice are important considerations in selecting the timing of the debt and equity issuesrespectively. Hedging consideration are the primary factors influencing the selection of thematurity of debt or when raising capital abroad. We also propose to compare the responses ofEuropean managers with those of the U.S. in Graham and Harvey (2001) as well as across

countries based on the English, French, German and Scandinavian law. This analysis wouldbe completed by March 2002.

Keywords: Capital Structure, European Managers, Survey, Debt, Equity

JEL Classification: G32, G15, F23.

Acknowledgements:

Mittoo acknowledges part of the funding from the Social Sciences and Humanities ResearchCouncil and from the Bank of Montreal Professorship.

All correspondence to:

Usha R. Mittoo


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The Determinants of Capital Structure Choice: A Survey of European Firms

I. Introduction

How firms make their capital structure decisions has been one of the most extensively

researched area in corporate finance. Since the seminal work of Modigliani and Miller

(1958) on the irrelevance of capital structure in investment decision, a rich theoretical

literature has emerged that models firms capital structure choice under different

assumptions. For example, theories such as trade off theory rely on traditional factors

such as tax advantage and potential bankruptcy cost of debt while others use the

asymmetric information or game theoretical framework in which debt or equity is used as

a signalling mechanism or strategy tool. Many of these theories have also been

empirically tested. Yet there is little consensus on how firms choose their capital

structure and much remains to understand the link between theory and practice of capital

structure. In a recent paper, Graham and Harvey (GH)(2001) try to fill this gap by

providing evidence on the practice of corporate finance theories through a comprehensive

survey of the managers of U.S. firms. Our study attempts to do the same in the European

context but differs largely in the focus and the scope of our survey. Unlike GH who

examine many aspects of corporate finance including capital budgeting, cost of capital,


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Finland, Ireland, Italy, France, Germany, Luxembourg, Netherlands, Norway, Portugal,

Spain, Switzerland, Sweden, U.K.

Our study makes two important contributions to the literature. First, most of the capital

structure theories have been tested in the U.S. context. To what extent, these theories are

portable across different countries has become increasingly important with the

globalization of financial markets in recent years. Some recent studies have explored this

issue but the evidence is unclear. For example, Rajan and Zingales (1995) compare

capital structure choices in seven developed countries, and Booth, Aivazian, Demirquc

Kunt, and Maksimovic (2001) undertake a comparative study of capital structure policy

in ten developing countries. Both conclude that although some insights from the U.S.

context are portable across countries, much remains to understand the impact of different

institutional features on capital structure choices. One problem in such research is that

differences in legal and institutional environment as well as in accounting practices make

it difficult to compare and interpret financial data across countries. A direct comparison

of managerial responses is one way of overcoming the difficulties in data comparisons in

different countries. Our study complements this literature because despite its limitations,

survey approach allows us to collect qualitative data that may be difficult to obtain other

wise and gives us information about managerial beliefs on factors that drive financial

policy decisions In our study we compare responses of European managers in our


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Our paper also contributes to another newly emerging strand of literature. An increasing

number of studies in recent years have hypothesized that financial development in a

country is closely linked with the legal and institutional environment of that country. For

example, La Porta etc (1997) compare external finance across 49 countries based on

English, French, German, or Scandinavian law and show that the countries with better

legal protection have more external finance in the form of both higher valued and broader

capital markets. La Porta etc. (1998) also show that the differences in legal protections of

investors explain why firms are financed and owned so differently in different countries.

Other researchers also document differences in financing and ownership patterns in

different countries. The general consensus in this literature is that the differences in legal

rules regarding investor protection and the quality of their enforcement influence both the

nature and effectiveness of financial systems around the world. In our study, we examine

whether the legal environment influences capital structure choice of firms by comparing

responses of managers in countries based on the English, French, German, or

Scandinavian law.

Our survey analysis is at the initial stages and is likely to be completed by end of March

2002. Preliminary analysis on a subset of sample firms, however, shows some interesting

findings about theory and practice of capital structure. Financial flexibility, credit rating

and tax advantage of debt are the most important factors influencing the debt policy while


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consideration are the primary factors influencing the selection of the maturity of debt or

when raising capital abroad.

The rest of the paper is organized as follows. The next section discusses the research

design and methodology and discusses the characteristics of the sample firms. The

empirical analysis is presented next and summary and conclusions in the last section..

2. Methodology

2.1 Survey Questionnaire

Our survey focuses primarily on the determinants of the capital structure policy of firms

and we ask questions regarding firms debt, equity and convertible debt policies. We also

include some question on the cost of capital or other areas that are closely related to the

capital structure. For example, we ask the managers about their approximate cost of

equity, how they estimate their cost of equity (with CAPM or other methods), and how

important the weighted average cost of capital is in the determination of their capital

structure.

The first draft of the survey was developed after a careful review of the capital structure

literature pertaining to the U.S. and European countries. For ease of comparability, we

tried to keep the format and design of our survey similar to that of Graham and Harvey

(2001) but modified or added several questions that are likely to be relevant in the


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European model is driven by the philosophy that a corporations objective should be to

maximize wealth of all stakeholders including management, labour, the local community,

suppliers, creditors and even the government. To examine this difference, we ask the

CFOs about the extent to which different shareholders such as stockholders, bondholders,

etc. influence their firms financial decisions. Further, we also ask the firms whether they

have voting or non voting shares and the percentage of free float shares. Finally, a large

number of European firms are also listed on foreign exchanges. Pagano et al. (1999)

show that there are significant differences in the characteristics of foreign listed and

domestic listed European firms, especially in their debt to equity ratio, growth, and

capital raising needs. To examine whether these differences affect their capital structure

choices, we ask the firms information about their foreign exchange of listing, foreign

sales, and capital raising in foreign markets. We also ask managers about the factors that

influence their decision to issue equity debt or equity in foreign markets.

The first draft of the survey was presented to academics and was also tested by three

financial executives in summer 2001. The survey was revised after incorporated their

suggestions. Our final survey questionnaire is structured around nine topics and contains

eight questions. We limited the length of the survey to two pages to increase the response

rate; tests showed that it takes approximately 15 minutes to complete.

2 2 Sample


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differences across countries and in examining potential non response bias between

respondents and non-respondents. Our initial sample consists of a total of 737 firms from

seventeen European countries. The list of non-French firms is obtained from the French

Financial Journal La Tribune. Two types of firms are reported in this journal: one

consists of large firms in each country which are also generally part of the national stock

indexes of their country and the other includes small or technological firms belonging to

new markets such as European Nasdaq. This provides a wide representation of large and

small firms from different countries. A total of 621 non-French firms were included from

this list. Another 116 French firms were added to this list; these are part of the SBF 120

index. From this sample, 17 firms were deleted because of non-availability of addresses

and another 10 firms declined to participate in the survey leaving a final sample of 710

firms.

Table I presents the market capitalization and total sales of the population firms we

contacted to participate to the study and it shows representation of firms from several

European countries with different market values and sales levels.

The survey was mailed to the Chief Financial Officers (CFO) of the sample firms whose

names and addresses were obtained from the Bloomberg data base. The survey was

anonymous as this was an important criteria to obtain sincere responses. Three mailings

were undertaken for the survey The first mailing was done in September 2001 the


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we also promised to send a copy of the findings to those who wished to receive it. In

some cases, we also tried to contact the CFO or CEO by phone. We received the

questionnaire either by mail or by fax.

Table IIshows the description of the sample firms by country and by the legal origin of

their country. The largest number of firms (about 45%) of the sample belong to the

French law countries and about 20 percent of the sample firms belong to each of the

German law, Scandinavian law, and English law countries. Our response rate

(approximately 8-10%) is similar to that of Graham and Harvey (2001) based on the

preliminary analysis of a subset of 61 responses. Preliminary analysis shows that all

regions are represented and the response rate is similar in all regions except that it is

somewhat higher in German law countries and lower in English law countries. A majority

of firms (about 84 percent) are from non-English law countries which provides us a

reasonable sample to compare the responses of the English law countries including the

U.S. with non-English law countries. The largest percentage of firms are from the French

law countries (about 40 percent), followed by German law countries (25 percent). The

remaining are approximately equally divided between English and Scandinavian law

countries. The largest proportions of respondents are from France, Germany, and U.K.

(about 50 percent). This is not surprising keeping in view that these countries also

represent about half of the population firms as shown in Table II


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billion euros. This is not surprising since a majority of our population consists of large

European firms. The distribution of respondents is, however, more evenly distributed

when size is proxied by market value of equity. About 62 percent of sample firms have

market capitalization less than 1000 million euros or between 1000 million to 5000

million euros.

The sample firms represent a variety of industries with a larger concentration in

manufacturing and financial (17 percent each) and mining and construction (12 percent)

sectors. About one fourth of respondent firms are diversified into more than one

industrial sector. Both growth and non-growth firms are well represented. High growth

firms, defined as firms with price to earnings ratio greater than 14, comprise about 60

percent of the sample. About 67 percent of the firms are widely held public firms and

about 30 percent have multiple classes of shares. Over 90 percent of the firms are non-

utility firms and an overwhelming majority of them (98 percent) pay regular dividends.

About three fourth of firms have a target debt to equity ratio, and about half of these

firms maintain a debt to equity ratio of one. Surprisingly, a large percentage of firms

(about 60 percent) do not have a credit rating for their debt. Further, many respondents

have a large percentage (over 50 percent) of their total debt in short term. Over 70

percent of respondents have issued equity, and about 45 percent of them have issued

convertible debt during the last ten years About 75 percent of respondents report that


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A majority of the respondent firms are also internationally oriented; about 60 percent

have foreign sales greater than 50 percent, and about the same percentage have issued

debt or equity in foreign markets in the last ten years. About 40 percent of the

respondents are also listed on foreign exchanges, with about 30 percent of these listed on

the U.S. exchanges, about 20 percent on the European exchanges, and about 40 percent

on both European and US stock exchanges. Overall, our respondents are large

multinational firms that are internationally oriented, and have raised capital in both

domestic and foreign markets.

We also collect information on the characteristics of CEOs of the respondent firms.

About 60 percent of CEOs are between 50-59 age category, and about 20 percent are

older than 59. Their average tenure is evenly spread in various categories with about 37

percent having tenure of less than 4 years, 28 percent between 4 to 9 years, and 33

percent greater than 9 years. The CEOs of our sample firms are also highly educated;

about 70 percent them have a Masters degree (42 percent have an MBA), and about 16

percent have a Ph.D. degree. A vast majority of the CEOs and other top managers (about

90 percent) own less than 5 percent their firms stock; only about 6 percent own more

than 20 percent of their firms stock.

3 Results


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structure theories such as the trade off theory, the pecking order theory, and the

asymmetric information theory. The second set of factors related to the managers

selection of timing of issue when raising capital since literature suggests that managers

use windows of opportunities to issue debt or common stock and are really concerned

by financial flexibility . Finally, the last set of factors were based not on any theoretical

considerations but on commonly held beliefs among managers about impact of capital

structure changes such as the impact of debt or equity issue on earnings. We also asked

questions on the determinants of convertible debt and foreign debt and equity. The

managers were asked to rank the importance of each factor on a scale of 0 to 4 (with 0 as

not important and 4 as very important). We also examine differences in managerial

responses on selected firms characteristics: size, industry, P/E ratios, investment grade,

and the level of foreign sales. We first present the analysis of responses in each category,

and then discuss the implications of these findings.

3.2 Debt Policy

We asked three questions relating to the debt policy. The first question asked the

managers how they choose the appropriate amount of debt for their firm? Figure 2 and

Table 3 present the summary of responses. Financial flexibility is ranked as the most

important determinant of debt (mean rank=3.4). About 88 percent of the managers rate

financial flexibility as either important (rating=3) or very important (rating=4) Credit


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Other important factors include the interest tax savings (mean rank 2.63), and volatility of

earnings (mean rank 2.44). The concerns of customer/suppliers about firms financial

stability and transaction costs of debt are also considered modestly important (mean rank

>2) but potential costs of bankruptcy or debt levels of industry peers are rated less

important (mean rank


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Over 79 percent of the respondents consider the matching principle, matching the

maturity of debt with the maturity of assets, as either important or very important factor

(mean rank=3.12). About 75 percent of the managers (particularly those of small size

firms) view that issuing long term debt minimizes the risk of refinancing in bad times is

important or very important factor (mean rank=2.93). This is another evidence of the

managerial interest for financial flexibility . Again, there is some support that managers

select timing of the debt issue since many managers issue short term debt when they are

waiting for the long term interest rates to decline (mean=1.86). There is little evidence

that debt is used for strategy or tactical reasons. For example, the support for issuing

short term debt to capture higher returns for shareholders or for reducing the chance that

firm will undertake risky projects is almost negligible.

There are some differences based on size, investment grade, and the international

orientation of the firms (Tables 3-5). For example, compared to smaller firms, larger

firms are influenced more by debt levels of their industry peers but are less concerned

about potential bankruptcy costs, and about issuing long-term debt to minimize the risk of

having to finance in bad times. Internationally oriented firms place higher value on

financial flexibility and tax advantage of interest deductibility than their domestic

oriented counterparts (Tables 3-5). There are some differences among firms based on

industry and investment grade pertaining to the timing of the debt issue such as interest


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3.3 Common Stock policy

A large number of respondents (over 70 percent of respondents) have issued equity in the

last ten years. (Table 6 and Figure 4). About 64 percent of those managers who had

undertaken an equity issue view earning per share dilution as important or very important

factor in issuing equity (mean rank 2.75). A related question pertaining to the dilution of

the holding of certain shareholders was also ranked modestly important (rank=1.84). This

evidence supports the literature that there is common belief among managers that issuing

additional shares has a negative impact on earnings per share. About 27 percent of

managers also view the ability to issue common stock for paying a target as useful for

using pooling of interest method and rate this as important or very important (mean rank

1.56). This evidence suggests that the impact of equity issue on financial statements of a

firm does influence managers decision regarding equity issue.

Managers issue stock for various reasons. To maintain a target debt to equity ratio is the

most important factor; about 54 percent of managers report that this factor is important or

very important (mean rank 2.59). Other reasons that are modestly important include

shares for employee stock option plans (mean rank 2.14), and insufficient funds to

finance firms activities (rank=1.89). Inability to obtain funds from other sources, or

maintaining debt to equity ratios similar to peers are considered as relatively unimportant

factors in issuing equity


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per share dilution since issuing stock after a rise in stock prices is likely to reduce the risk

of earning per share dilution (the dilution being an inverse function of the PE ratio).

Another related question about the significance of the amount by which the stock was

overvalued or undervalued in issuing equity also received a similar ranking (mean rank

2.38). Very few managers, however, believe that common stock is the least risky source

of financing.

There are significant differences in the responses between the high growth (defined as

P/E >14) and low growth firm (defined as P/E


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mean ranking of 1.77 and 1.70 respectively. Factors relating to strategy or tactical uses of

convertible debt such as to protect bondholders against the actions of stockholders or

managers, and following industry peers are considered relatively unimportant. There are

no noticeable differences in responses on major factors based on firm characteristics.

3.5 Foreign debt or equity

A large percentage of our respondent firms have issued debt or equity in foreign markets.

Hedging issues are cited as the most important factors for raising capital abroad (Table 8

and Figure 6). Providing a natural hedge is cited as important or very important reason by

over 76 percent of managers (mean rank 2.91) who raised capital abroad. Matching the

sources of fund with its uses is rated a close second with a mean rating of 2.77. These

views are similar to and consistent with the selection of debt maturity. Favourable tax

treatment and better market conditions relative to Europe are also ranked modestly

important with a mean ranking of about 2. Surprisingly, while the level of interest rate is

considered important by managers when issuing debt in domestic market, it is relatively

unimportant (mean rank 1.47) when issuing debt abroad.

Overall, hedging consideration appears to be the driving factor in raising capital abroad.

There are few significant differences in responses based on firm characteristics.

4 Summary and Conclusions


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statements. Financial flexibility is a key issue for managers who want their firm to have

access to external financing whatever the economic outlook. This financial flexibility is

obtained by selecting the timing of the issue based on interest rate levels or market value

of equity. This evidence is consistent with the window of opportunity hypothesis

discussed in the literature.

Our survey also confirms that managers are concerned about the impact of their decisions

on financial statements. The concern about earnings per share dilution is rated as an

important concern in issuing common stock and is valued as a major advantage in issuing

convertible debt. Credit rating and target ratios are also important issues for managers,

which means that they are very sensitive to external bearings.

The weighted average cost of capital and tax advantage of debt rate are also important

for managers, but these factors do not appear to drive the determination of European

firms capital structure policies of European firms. While the cost of financing is a

concern for managers, it does not seem to be a first level constraint.

Finally, we find little evidence that firms follow industry norms of capital structure or

that managers use debt or equity for tactical reasons such as to pressure employees or to

motivate managers to work harder.

The survey analysis is at the initial stages and the above findings are only preliminary as

these are based on a subset of sample firms Future analysis would include a comparison


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21

Table 1

Description of the Population Firms by Country of Origin

Country of Origin No. of Market

Capitalization

Sales 2001

Firms Average Median St. Dev. Average Median St. Dev.

(Mil ) (Mil ) (Mil ) (Mil )

Austria 18 1,073.5 456.8 1,218.5 1,820.8 1,189.0 1,939.0

Belgium 21 4,535.7 969.7 5,589.8 6,037.0 2,204.0 6,686.4

Denmark 26 2,709.5 1,505.4 3,662.2 1,638.8 946.5 1,463.7

Finland 26 7,119.8 665.1 25,820.2 3,552.3 948.0 6,632.3

France 112 9,485.6 2,773.4 17,261.2 9,561.8 4,441.5 25,828.2

Germany 93 9,046.3 2,112.0 16,616.8 14,257.0 2,065.0 16,961.9

Greece 29 1,180.8 430.6 1,547.4 5,035.3 350.5 19,124.8

Ireland 12 5,655.8 3,346.9 4,831.2 2,788.6 1,343.0 2,745.2

Italy 59 6,953.5 2,772.2 10,302.9 7,752.3 2,408.0 12,962.7

Norway 30 980.3 335.7 2,322.4 1,946.6 373.7 4,297.0

Portugal 14 3,571.7 1,864.4 3,819.1 2,494.6 1,389.1 1,868.4

Spain 47 7,341.0 1,787.7 14,492.0 4,576.9 1,724.6 8,781.2

Sweden 22 7,989.7 5,337.9 12,581.9 8,059.9 5,602.7 6,845.4

Switzerland 25 19,475.7 5,818.3 27,585.2 5,457.0 1,565.3 7,789.6

The Netherlands 39 11,143.2 3,393.8 15,515.5 8,638.6 4,294.1 14,209.6

United Kingdom 137 15,521.5 5,420.9 32,226.7 6,987.4 2,879.0 16,828.9

Total 710 9,074.7 2,666.3 19,969.9 7,568.7 2,113.3 16,176.0


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22

Table 2

Description of the Sample by Country of Origin

Legal System of the

Country of Origina

No. of Sample

Firms

Percentage of

Sample Firms

Percentage of

Respondentsb

French Law Countries 321 45.21% 42.62%

France 112 34.9 13.11%

Belgium 21 2.9 1.64%

Greece 29 4.04 4.92%

Italy 59 8.3 3.28%

Portugal 14 1.95 6.56%Spain 47 6.6 8.20%

The Netherlands 39 5.72 4.92%

German Law Countries 136 19.15% 26.23%

Germany 93 12.97 19.67%

Austria 18 2.51 1.64%

Switzerland 25 3.48 4.92%

Scandinavian Law

Countries

104 14.65% 16.39%

Denmark 26 3.62 4.92%

Finland 26 3.62 6.56%

Norway 30 4.18 1.64%

Sweden 22 3.34 3.28%

English Law Countries 149 20.99% 14.75%

United Kingdom 137 19.38 11.48%

Ireland 12 1.67 3.28%

Total 710 100.00% 100.00%

a. Based on La Porta etc (1997).

b. Preliminary analysis based on 61 surveys


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23

Table 3

Survey response to the question: What factors affect how you choose the appropriate amount of debt for your firm?% Important

or very

important

Mean Size P/E Industry Investment Grade Foreign Sales

Small Large Growth Non-G Manu. Others Yes No 25%

g) Financial flexibility 87.93 3.40 3.42 3.32 3.33 3.41 3.67 3.30 3.43 3.40 3.08 3.48*

d) Our credit rating (as assigned by rating agencies) 72.22 2.72 2.36 3.38*** 2.35 2.96 2.87 267.00 2.51 3.5*** 2.64 2.73

a) The tax advantage of interest deductibility 59.64 2.63 2.60 2.64 2.1** 2.89 1.10 1.27 2.54 2.90 2.08 2.78*

m) The volatility of our earnings and cashflows 50.88 2.44 2.53 2.50 2.22 2.22 2.80 2.31 2.50 1.8* 2.08 2.56

h) We limit debt so our customers/suppliers are not

worried about our financial stability38.59 2.14 2.03 2.29 2.17 2.04 2.13 2.14 2.33 1.67* 2.23 2.07

e) The transactions costs and fees for issuing debt 37.94 2.03 2.19 1.73 1.56 2.07 2.45 1.37 2.19 1.50 2.15 2.00

b) The potential costs of bankruptcy or near

bankruptcy financial distress28.57 1.68 2.03 1.29** 1.83 1.35 1.60 1.71 1.71 1.33 1.75 1.63

c) The debt levels of other firms in our industry22.41 1.79 1.55 2.14** 2.00 1.67 1.87 1.77 1.76 1.90 1.92 1.71

f) The personal tax cost that our investors face when

they receive interest income10.72 0.89 0.83 0.95 0.5** 1.08 0.93 0.88 0.93 0.89 1.08 0.85

l) To ensure that upper management works hard and

efficiently10.53 0.86 1.13 0.59* 1.11 0.85 0.83 1.03 0.73 1.10 1.00 0.78

i) We try to have enough debt so that we are not an

attractive target5.26 0.84 0.93 0.82 0.83 0.78 0.67 0.91 0.90 0.60 1.08 0.71

j) If we issue debt our competitors know that we arevery unlikely to reduce our output

1.75 0.47 0.50 0.45 0.39 0.52 0.13 0.60 0.40 0.60 0.54 0.41

k) A high debt ratio helps us bargain for concessionsfrom our employees

0.00 0.25 0.33 0.14 0.22 0.26 0.13 0.29 0.17 0.20 0.31 0.22

Respondents are asked to rate on a scale of 0 (not important) to 4 (very important). We report the overall mean as well as the % of respondents

that answered 3 and 4 (important and very important). ***,**,* denotesa significant difference as the 1%, 5%, and 10% level, respectively.


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24

Table 4

Survey response to the question: What factors affect your firm's choice between short- and long-term debt?

% Important or

very importantMean Size P/E Industry Investment Grade Foreign Sales


b) Matching the maturity of our debt with the life of ourassets

79.31 3.12 3.13 3.14 3.04 3.22 2.93 3.19 3.05 3.50 3.46 3.00

f) We issue long-term debt to minimize the risk of havingto finance in bad times

75.44 2.93 3.20 2.64** 2.85 2.83 3.20 2.83 2.93 2.80 2.54 3.02*

a) We issue short term when we are waiting for long

term market interest rates to decline31.03 1.86 1.94 1.91 1.96 1.67 1.53 1.98 1.76 2.20 2.23 1.74

c) We borrow short-term so that returns from new

projects can be captured by shareholders5.17 0.98 1.10 0.86 1.11 0.78 0.87 1.02 1.02 0.70 1.15 1.00

d) We expect our rating to improve, so we borrow short

term until it does

3.64 0.84 0.86 0.86 1.04 0.64 0.53 0.95* 0.75 1.00 1.00 0.80

e) Borrowing short-term reduces the chance that ourfirm will want to take on risky projects

1.75 0.54 0.67 0.36* 0.56 0.56 0.40 0.60 0.54 0.40 0.77 0.51




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25

Table 5

Survey response to the question: What other factors affect your firm's debt policy?

Size P/E Industry Investment Grade Foreign Sales

%

Important

or veryimportant

Mean Small Large Growth Non-G Manu. Others Yes No 25%

i) With the use of debt, we try to minimize the weightedaverage cost of capital

71.93 2.79 2.77 2.95 2.78 2.56 2.67 2.83 2.90 2.1* 3.15 2.68

c) We issue debt when interest rates are low 48.27 2.24 2.42 2.09 2.33 1.89 1.73 2.42** 2.24 2.00 2.61 2.07

d) We use debt when our equity is undervalued by the

market37.93 1.95 2.16 1.82 1.89 1.94 1.73 2.02 1.83 2.00 1.85 2.05

a) We issue debt when our recent profits are not sufficient

to fund our activities29.31 1.66 1.81 1.45 1.51 1.56 2.33 1.41*** 1.83 0.7*** 1.69 1.64

b) Using debt gives investors a better impression of our

firms prospects that issuing stocks21.43 1.57 1.77 1.35 1.46 1.59 1.40 1.63 1.65 1.20 1.38 1.60

j) We prefer banks to bonds because it avoids our firm todisclose too much information

16.07 1.13 1.47 0.76** 1.23 1.11 1.06 1.14 1.20 0.60 1.15 1.18

g) Changes in the price of our common stock 12.28 1.28 1.60 0.96** 1.30 0.94 1.33 1.26 1.22 1.30 1.15 1.34

e) We use debt because of our close relationship with a

bank (house bank)5.26 0.75 1.00 0.41** 0.62 0.94 0.60 0.81 0.80 0.2** 0.58 0.81

f) We delay issuing or retiring debt because of transactions

costs and fees5.26 1.04 1.23 0.68** 0.96 0.83 1.00 1.05 1.15 0.3*** 0.92 1.04

h) We issue debt when we have accumulated profits 0.00 0.63 0.70 0.52 0.69 0.56 0.47 0.68 0.63 0.60 0.77 0.58




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26

Table 6

Survey response to the question: Has your firm seriously considered issuing common stock? If yes, what factors

affect your firms decisions about issuing common stock?

% Important orvery important

Mean Size P/E Industry InvestmentGrade

Foreign Sales


m) Earning per share dilution 63.89 2.75 2.63 3.06 NA NA NA NA NA NA 2.89 2.67

a) If our stock price has recently risen, the price at which we

can issue is high56.76 2.57 2.69 2.56 2.81* 2.11 2.63 2.55 2.6 2.3 2.88 2.43

e) Maintaining a target debt-to-equity ratio 54.05 2.59 2.38 2.67 2.38 2.33 3.13 2.45 2.71 2.43* 2.50 2.57

c) Providing shares to employee stock option plan 50.00 2.14 2.31 1.88 2.38*** 0.75 2.63 2 2.2 2 1.88 2.15

k) The amount by which our stock is undervalued orovervalued by the market

45.95 2.38 2.38 2.56 2.62 1.89 2.63 2.31 2.33 2.57 2.38 2.36

j) Diluting the holdings of certain shareholders 35.14 1.84 1.89 1.94 2.05* 0.77 2.63 1.62* 1.67 2.29 1.25 2.00

g) Whether our recent profits have been sufficient to fund

our activities27.03 1.89 1.94 1.72 1.76 2.11 2.13 1.83 2.08 1.57 2.63 1.68**

n) In case of paying a target by shares, the ability to use the

pooling of interest method26.47 1.56 1.93 1.19 1.6 0.71 1.5 1.6 1.46 1.67 1.86 1.38

b) Stock is our "least risky" source of funds 24.32 1.32 1.76 0.78*** 1.62* 0.78 1.38 1.31 1.67 0.3*** 1.88 1.11*

f) Using a similar debt/equity ratio as is used by other firmsin our industry

21.62 1.73 1.69 1.72 1.48 1.78 1.75 1.72 1.79 1.59 1.75 1.64

d) Common stock is our cheapest source of funds 8.11 0.62 0.81 0.17** 0.71* 0.22 1.13 0.48 0.79 0.29 0.63 0.50

h) Issuing stock gives a better impression of our firm'sprospects than using debt

8.11 1.08 1.31 0.89 1.29* 0.67 0.5 1.24** 1.29 0.71 1.65 0.89*

i) The capital gains tax rates faced by our investors (relative

to tax rates on dividends)8.11 0.97 1.13 0.89 1.1** 0.33 0.63 1.07* 1.67 0.29*** 1.38 0.86

l) Inability to obtain funds using other sources 2.70 0.84 1.13 0.56* 0.67 0.78 1.38 0.69* 0.92 0.29** 0.63 0.90




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27

Table 7

Survey response to the question: Has your firm seriously considered issuing convertible debt (or issued debt in last ten years)?

If yes, what factors affect your firm's decision to issue convertible debt?

% Important or

very importantMean Size P/E Industry Investment Grade Foreign Sales


g) Ability to "call" or force conversion of convertible debtif/when we need to

55.56 2.37 2.30 2.55 2.47 2.60 2.14 2.45 2.50 2.00 2.20 2.38

e) Avoiding short-term equity dilution 51.85 2.19 2.46 2.00 2.80 1.4** 1.42 2.45* 2.10 2.20 3.00 2.10

f) Our stock is currently undervalued 51.85 2.48 2.69 2.10 2.46 2.40 2.29 2.55 2.50 2.60 3.00 2.33

a) Convertibles are an inexpensive way to issue "delayed"

common stock50.00 2.27 2.00 2.36 2.29 2.00 2.43 2.21 2.22 2.50 2.00 2.40

h) To attract investors unsure about the riskiness of ourfirm

29.63 1.70 1.92 1.36 1.53 1.40 1.90 1.65 2.00 0.6** 1.80 1.57

c) Convertibles are less expensive than debt 26.92 1.77 2.17 1.27* 1.79 1.40 2.00 1,68 1.78 1.75 2.25 1.57

d) Other firms in our industry successfully use convertibles 14.81 1.00 1.23 0.64 1.00 0.80 0.86 1.05 1.22 0.2* 1.20 0.81

b) Protecting bondholders against unfavourable actions by

managers or stockholders3.70 0.81 0.84 0.82 0.93 0.60 0.57 0.90 1.00 0.2** 1.40 0.62*




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28

Table 8Survey response to the question: Has your firm seriously considered issuing (or issued) common stock or debt in foreign

countries in the last decade? If yes, what factors affect your firms decisions about issuing in foreign markets?

Size P/E Industry Investment Grade Foreign Sales

%

Important

or very

important Mean Small Large Growth Non-G Manu. Others Yes No 25%

c) Providing a "natural hedge" 76.47 2.91 3.15 2.78 2.58 3.43 2.67 3.00 2.65 3.38 2.67 2.88

b) keeping the "source of funds" close to its

"use68.57 2.77 2.93 2.67 2.60 3.14 2.33 2.92 2.78 2.63 3.17 2.59

a) Favorable tax treatment relative to Europe 50.00 1.97 2.43 1.53 1.74 1.43 2.11 1.92 1.93 1.43 1.50 1.96

f) Market conditions may be better than

domestic conditions45.71 2.06 2.29 1.72 2.20 0.86** 1.56 2.23 1.87 2.50 2.83 1.89

d) Lower interest rates in foreign markets 21.88 1.47 1.58 1.29 1.39 0.86 1.00 1.63 1.27 1.86 1.33 1.42

e) Foreign regulations require us to issue

abroad

17.65 1.12 1.23 1.00 0.84 1.00 1.44 1.00 1.30 0.63 1.00 1.10




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29

Figure 1

C: Industry

0%

5%

10%

15%

20%

25%

30%

Retailandwholesale

Mining,Constructio

Manu

facturing

Transport./Energ

Communication/Medi

Bank/Fina

nce/Insurance

Hightech

Other

F. Long term debt ratio (%)

0%

5%

10%

15%

20%

25%

30%

35%

40%

10-

19

20-

29

40-

49

>491-90 30-

39

A: Sales ( millions)

0%

10%

20%

30%

40%

50%

100-

499

500-

999

1000-

4999>5000

H: CEO Age (Years)

0%

10%

20%

30%

40%

50%

60%

70%

50-59 >5940-4924

50%

E: Market capitalization

(million euro)

0%

5%

10%

15%

20%

25%

30%

35%

40%

>500094-9


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30

L: Percent that considered issuing...

0%

20%

40%

60%

80%

NoYesYes NoNo

Commonstock

Convertible debt

Yes

Foreigndebt

M: Foreign Listing

0%

10%

20%

30%

40%

50%

60%

70%

US &

Europe

EuropeYes USNo

List on

Foreign

Exchanges

?

Other

Foreign

Exchange

s of listing

N: Other characteristics

0%

10%

20%

30%40%

50%

60%

70%

80%

OtherCAPMYes YesNo

Multiple

calss of

shares

Use

CAPM?

No

Target

debt

ratio?

k: Exec. stock ownership

0%

20%

40%

60%

80%

100%

>20%10%-

20%

15%12%-

15%


31/34

31

Figure 2

0% 10% 20% 30% 40% 50% 60% 70% 80% 90%

Percentage of CFO 's ident ify ing factor as important or very important

Comparable f i rm debt level

Bankruptcy/distress costs

Insuff icient internal funds

Equity undervaluation/overvaluation

Transact ions costs and fees

Customers/suppl iers comfort

Leve l of Interest rate

Earnings and cashflows volatility

Interest tax savings

Credit rating

Financ ial f lexibility

Figure 3

0 % 1 0 % 2 0 % 3 0 % 4 0 % 5 0 % 6 0 % 7 0 % 8 0 %

W a i ti n g f o r l on g t e r m m a r k e t

i n te re s t r a te s t o d e c l in e

T o m i n i m i z e f in a n c i n g i n b a d t i me s

Ma tc h i n g t h e m a tu r i t y o f d e b t a n d

a s s e t s

S e l e c t i n g M a t u r i ty o f D e b t


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32

Figure 4

0,00% 10,00% 20,00% 30,00% 40,00% 50,00% 60,00% 70,00%

Using a similar debt/equity ratio as is used by

other firms in our industry

Stock is our "least risky" source of funds

In case of paying a target by shares, the

ability to use the pooling of interest method

Sufficient funds from profits

Diluting the holdings of certain shareholders

Undervalued or overvalued of stock

Providing shares to employee stock option

plan

Maintaining a target debt-to-equity ratio

High stock pice

Earning per share dilution

COMMON STOCK POLICY


33/34

33

Figure 5

0,00% 10,00% 20,00% 30,00% 40,00% 50,00% 60,00%

Less expensive than debt

To attract investors unsure about

the riskiness

Inexpensive way to issue "delayed"

common stock

Avoiding short-term equity dilution

Our stock is currently undervalued

Ability to "call" or force conversion

of convertible debt

Convertible Debt Policy

Fi 6


34/34

34

Figure 6

0,00% 10,00% 20,00% 30,00% 40,00% 50,00% 60,00% 70,00% 80,00%

Foreign regulations require us to

issue abroad

Lower interest rates in foreign

markets

Market conditions may be betterthan domestic conditions

Favorable tax treatment relative to

Europe

keeping the "source of funds" close

to its "use

Providing a "natural hedge"

Foreign Debt or Equity

Documents

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