FIRM`S VALUE & CAPITAL STRUCTURE DETERMINANTS: REGIONAL EVIDENCE FROM PALESTINE, JORDAN and EGYPT STOCK EXCHANGES By SHADI ALI HAMAD Thesis Submitted in Fulfilment of the Requirements for the Degree of Doctor of Philosophy 1
Presentation Contents Introduction Background of Study Problem Statement Literature Review Research Flow Methodology of Market Integration Methodology of Pearson Correlation Pooled OLS & Generalized Method of Moments (GMM) Methodology Empirical Findings Conclusions and Discussion 2
INTRODUCTION Background : A study of Palestinian Stock Market (PEX)and its evolvement Palestine, Israel, Egypt and Jordan are neighboring countries with long shared history. Despite the territorial disputes and hostility among them, the four countries have been sharing economic resources, particularly labor factor for decades. Following the Israeli occupation of Palestinian territories in 1948 and in 1967, many Palestinians were expelled out of their home country and reside in neighboring countries, mainly in Jordan and Egypt. PEX started its first trading session on 18 February 1997. In early February 2010, it was converted into a public shareholder company in conformity with good governance and transparency rules. According to the Arab and international classification of financial markets, the Palestinian exchange has attained advanced status in 2009. On 5 Nov 2012, a total of forty- eight companies were listed on the Palestinian exchange, with a market value of $2.7 billion. Palestinian listed companies operate in five major sectors - banking and financial services, insurance, investment, industry, and services. 3
BSE DSE Map of Palestine PEX ASE TA-100 EGX 4
Background of the Financial Markets ( Volatile Arab Region) Description/2014 PEX ASE EGX TA-100 (Palestine) ( Jordan) (Egypt) (Israel) Year of Establishment 1997 1999 1903 1953 No of Companies 48 243 213 622 Market Capitalization 2.8 30.86 220 386 ) billion) USD Nominal GDP 4.5 36.8 265 286 (billion) USD Population (Million) 5.1 7.2 82 7.6 5
Problem Statement 1. The tested markets except TA-100 lost more than half of their market value in the recent five years, and the investors refrain from any additional investment in these developing markets. The volume of trade is in its Research Objectives : minimum in all the four exchanges. Does the way of financing contribute and increase value to these firms 1-To study and analyze the degree of financial and then the financial managers must draw more market integration involving Palestine, Jordan, attention to their capital structure? Egypt and Israel. 2. Palestine is occupied by Israel and totally neglected, the 2-To examine the most credible factors that United Nations did not recognize the 12 million influence firm`s value within the capital Palestinians . This could be the reason why no one pays structure theory. attention to the financial market development of Palestine and the limitation of external financing. My 3- To explore the financing choice of the listed study is an attempt to instill foreign investors confidence companies in the region and the significant in Palestine Stock Exchange. determinants that affect capital structure and the financing decision. 3. No much researches were done to investigate the determinants of capital structure of the Palestinian stock exchange or other exchanges in the neighboring countries ( Jordan and Egypt). 6
Index values (PEX, ASE, EGX and TA-100) 2008-2012 1400 180000 TA-100 160000 1200 1203 140000 1088 1065 1000 120000 912 800 795 100000 ASE 80000 600 PEX 60000 400 40000 200 20000 EGX 6651 5511 5643 4992 5082 0 0 2008 2009 2010 2011 2012 EGX30 5511 6651 4992 5082 5643 ASE 168674 118756 102477 84753 96841 PEX 624 504 498 488 482 TA-100 1065 912 795 1088 1203 EGX30 ASE PEX TA-100 7
LITERATURE GAP Filling the gap to the existing theories 1- Financial Market Development Theory ( 2013): This is the first study ever done on the stock market integration between PEX and the neighboring stock markets ASE, EGX and TA-100. 2- Capital Structure Theories: This is one of the researches that provides valuable empirical results from the deployment of the four theories stated below and their relevance to individual stock market in the volatile Arab region (market index and sectorial effects). a- MM proposition 1 & 2 c- Pecking Order Theory b- Trade-Off Theory d- Market Timing Theory 3- Capital Structure Determinants: This empirical study on the volatile Arab region provides some new determinants within capital structure theory. 8
RESEARCH FLOW ON FIRM`S VALUE AND CAPITAL STRUCTURE DETERMINANTS Research Objectives 1-To study and analyze the degree of financial market integration involving Palestine, Jordan, Egypt and Israel. 2-To examine the most credible factors that influence firm`s value within the capital structure theory. 3- To explore the financing choice of the listed companies in the region and the significant determinants that affect capital structure and the financing decision. Literature Review and Gap • Financial Market Development theory (FMDT) Step1 Financial Theories • Capital structure theories Step2 Mathematical models Step3 Econometric models Step4 • Time series (EG- Granger Co-integration test) Data • Panel data analysis ( Pooled OLS and GMM) Step5 Hypothesis testing Step6 Forecasting or prediction Step7 Conclusions 9
RESEARCH STRUCTURE Step 1: Economic Theory Capital Structure Theories and Firm`s Financial Market Development Theory (FMDT) Determinants of Capital Structure Value • • Stock market plays an important role in developing and sustaining Non-debt tax shield, liquidity, profitability, growth, asset economic growth via efficient allocation of financial resources structure, tangibility, size and debt ratio • MM1, Trade-Off and Pecking-Order Step 2:Mathematical model 1- Modigliani – Miller theorem Proposition I Two-step GMM Engle-Granger: (With taxes)1963: Augmented Dickey-Fuller Unit Root Test (ADF Test) VL=VU+ PV of Tax shield (T*D) Y t = 0 + 1 T + 2 Y t-1 + i Y t-i + t where i = 1, 2, 3 …k VL: value of levered firm VU: value of unlevered firm EG Co-Integration Test via Error Correction Model (ECM) PV: present value Sargan Test: T: taxes n n D: debt ΔY μ ΔY ξ Θ A v .......... .......... .......... .......... .......... .2) t i i t i i t i 1 i 1 t i 2- Trade-off Theory of Capital Structure Granger Causality Test VL=Vu+ PV of Tax shield (T*D)- PV of Bankruptcy Cost y t = α + ρ 1y t − 1 + ··· + ρky t −k + z 0 t − 1 γ 1 + ··· + z0 t −kγk + etc y y , Autoregressive AR1-AR2 Test t t 1 t 3- Pecking Order: 2 WN (0, ) Retained earnings , debt , equity . t Step 3: Econometric model Engle-Granger Co-Integration model: Pearson Correlation: Two-step GMM model: PEX t = β 0 + β 1ASE t + ε t …………( 1) Dit = α+β 1 EBITDA it + β 2 TANGIB it + β 3 LIQ it + β 4 NTDS it + PEX t = β 0 + β 1EGX t + ε t …………( 2) β 5 LNSALES it + β 6 GROWTH it +β 7 DEBT it+ ε it PEX t = β 0 + β 1TA-100 t + ε t …………( 3) Step 4: Data Pearson Correlation data: Two-step GMM data: Data: quarterly Balanced (2008-2012) Observations: Balanced (1998-2012) Observations : Time series analysis Balanced ( 2008-2012) Observations: 169 observation for each of (PEX, ASE, EGX and TA-100) Panel data analysis panel data analysis Note : I did not add the Simple Impulse Response Function Variance 63 companies without any negative, missing or zero values ( 18 companies in ASE. 58 EGX, 22 PEX Decomposition(VDC) PEX, ASE and EGX). Step 5: Hypothesis Pearson Correlation hypothesis : Two-step GMM hypothesis : Engle-Granger Co-Integration hypothesis: Ho: Closing price is not correlated with debt equity ratio (D/E) H0:1-There is no relationship between capital structure and its H0: Data series are non-stationary (unit root problem) Ho: Closing price is not correlated with debt equity ratio EPS determinants - non-debt tax shield, liquidity, profitability, growth, H0: No long-term relationship exists between PEX and (ASE, EGX, TA-100) H0: No short run relationship exists between PEX and (ASE, EGX, TA-100) H0: EPS is not correlated with debt equity ratio (D/E). asset structure, tangibility, size and debt ratio. 10
RESEARCH FLOW ON ENGLE-GRANGER CO-INTEGRATION TEST Step 1--5: Economic theory – Hypothesis testing (PEX, ASE, EGX & TA-100) Financial Market Models: PEX=f (ASE) Development Theory PEX=f (EGX) PEX=f (TASE) Augmented Dickey-Fuller Unit Root Test ( ADF Test) EG Co-Integration Test Pass when ê is Fail when ê is not stationary stationary Vector Auto-Regressive Bi-variate Error Correction Model (VAR) Model (ECM) Causality Test Causality Test Forecasting Forecasting END END 11
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