The relationship between goodwill and capital structure and the moderating effect of financial market development
Keywords:
Capital structure, Goodwill, Information asymmetry, Financial market development, Panel data analysisAbstract
PurposeThis study empirically investigates the relationship between goodwill assets and capital structure (i.e. debt ratio) of firms and the moderating effect of financial market development on the relationship between goodwill assets and capital structure.
Design/methodology/approachThis research applied a quantitative method. The article collects large samples of listed firms from 23 developing and nine developed countries and applied the panel data techniques. This research used firm-level data from the DataStream database for both developed and developing countries. The study uses 4,912 firm-level data from 23 developing countries and 4,303 firm-level data from nine developed countries.
FindingsThe findings reveal a significant positive relationship between goodwill assets and capital structure in developing countries, but goodwill assets have a significant negative relationship with capital structure in developed countries. Moreover, financial market development positively moderates the relationship between goodwill assets and the capital structure of firms in developing countries. The results inform firm managers that goodwill assets serve as additional collateral to secure debt financing. Moreover, policymakers should formulate a debt market policy that recognizes goodwill assets as additional collateral for the purpose of obtaining debt capital.
Research limitations/implicationsThe study has several implications. First, goodwill assets are identified as a factor of capital structure in this study. Fixed assets have been identified as one of the drivers of capital structure in previous research, although goodwill assets are seldom included. Second, this article shows that along with demand-side determinants, supply-side determinants also play an important role in terms of the firms' choice about the capital structure. Therefore, firms should take both the demand-side and supply-side factors into consideration when sourcing for external financing (i.e. debt capital).
Originality/valueThe study considered goodwill as a component of capital structure. The study analysis includes a large sample of enterprises, including 4,912 big firms from 23 developing countries and 4,303 large firms from nine industrialized or developed countries, which adds to the current capital structure information. Furthermore, a large sample size increases the results' robustness and generalizability.
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Further reading
Aguinis, H., Ramani, R.S. and Alabduljader, N. (2018), “What you see is what you get? Enhancing methodological transparency in management research”, Academy of Management Annals, Vol. 12 No. 1, pp. 83-110, doi: 10.5465/annals.2016.0011.
Barney, J. (2018), “Editor's comments: positioning a theory paper for publication”, Academy of Management Review, Vol. 43 No. 3, pp. 345-348, doi: 10.5465/amr.2018.0112.
McCarthy, M.G. and Schneider, D.K. (1995), “Market perception of goodwill: some empirical evidence”, Accounting and Business Research, Vol. 26 No. 1, pp. 69-81, doi: 10.1080/00014788.1995.9729499.
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Copyright (c) 2024 Oli Ahad Thakur, Matemilola Bolaji Tunde, Bany-Ariffin Amin Noordin, Md. Kausar Alam, Muhammad Agung Prabowo
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