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Critical Review On ‘Revisiting The Capital Structure Puzzle: Uk Evidence’

1814 words - 8 pages

Critical Review on ‘Revisiting the Capital Structure puzzle: UK Evidence’

Assignment for PGBS0140 Accounting & Finance for Managers

Plymouth Business School
Module No.:PGBS0140
Module: Accounting & Finance for Managers
Group Members and Student No.:

Word count: 1492

Critical Review on ‘Revisiting the Capital Structure puzzle: UK Evidence’

Al-Najjar, B. and Hussainey, K. (2011). Revisiting the capital structure puzzle: UK evidence. The Journal of Risk Finance, 12 (4), 329- 338.
This essay will summarise and critically review the report of Al-Najjar and Hussainey (2011) in which the effects of potential drivers of corporate capital structure are differing for three ...view middle of the document...

Debt to equity ratio = total debt / (total equity capital + reserves)
They analyse the influences of corporate characteristics and corporate governance components on three definitions of capital structure. The test results showed that the potential drivers have different effects on different definitions of capital structure. This article indicates that the puzzle in the definition of capital structure makes the comparison between the capital structure studies difficult and even incorrect.
Analysis and Evaluation
Above all, there are several strengths in this research. Authors presented a comprehensive and concentrated abstract in which the research’s objectives, findings, methods, and value are illustrated clearly. However, there are many problems in the main body of this article: arguments are lack of support evidence; the explanations of others’ researches are too short; methodologies are lack of assumptions and theoretical explanation; the findings are not specific and not sufficient.
The introduction provides basic theories, and explains different arguments on the potential drivers of capital structure. Authors also presented the potential drivers of capital structure, and explained the structure of this research article. However, in the part of prior literature, some of the early studies are lack of explanation as they just summarise analysts’ findings by one sentence. At least, Al-Najjar and Hussainey should explain how those results are found or what the selected sample data is.
The first one is the findings of Barclay and Smith (2005), Al-Najjar and Hussainey should write that Barclay and Smith have revisited the benefits of debt in controlling overinvestment, information costs, and analysed the determinants of corporate leverage policy. It is necessary to explain the process of prior research before using the finding that different capital-structure theories result in different and even opposite outcomes of firm-specific factors.
Secondly, the authors just listed several citations without any explanation on the viewpoint – corporate governance system influences the capital-structure. They should demonstrate the main ideas of each report to support this argument. Wen and others (2002) found that the board composition and CEO tenure have a significant relation with the financial leverage. Julan and Dai (2005) indicated that the corporate leverage is statistically significant with the ultimate corporate ownership structure, control rights, and the separation of cash flow rights. La Rocca (2007) and Driffield (2007) found that the corporate governance has influence on firm value and capital structure.
These researchers investigated the effects of components of corporate governance on capital structure specifically. But Al-Najjar and Hussainey did not provide sufficient explanations.
Theoretical background and hypotheses
In the second part of article, Al-Najjar and Hussainey clearly illustrated 9 hypotheses with...

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