Capital Structure and Corporate Financing Decisions: Theory, Evidence, and Practice

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464 Answers to Chapter Discussion Questions

firm” (7 points scale, fully agree/fully disagree). The second is uniqueness

towards employees: “My employees depend upon the continuity of my firm,

because it is difficult for them to find a suitable position in another firm”

(7 points scale, fully agree/fully disagree). They do not find these two ques-

tions to be significantly related to leverage.

3. Fan and So (2004) survey managers of Hong Kong firms both before and after

the 1997 Asian crisis. Before the crisis, they find that more than three-quarters of

managers prefer the pecking order theory over the static trade-off theory. In this

setting they finance expansion first from retained earnings, then from debt, and

finally from equity issues. After the crisis, less than half the managers prefer the

pecking order theory, which implies that setting a healthy debt level has become

much more important. More than 77 percent of the managers indicate that the

Asian financial crisis has made equity look more favorable relative to debt as a

source of capital. Fan and So’s study shows that managers’ views can change

fairly rapidly.

CHAPTER 15 THE ROLES OF FINANCIAL

INTERMEDIARIES IN RAISING CAPITAL

1. Borrowing to pay off a bank loan could be good or bad news for shareholders.

By switching to public funds, the firm forgoes the monitoring benefits of banks.

This is bad news for shareholders if they rely on bank monitoring. The switch ...