Financial decisions and growth opportunities: a Spanish firm's panel data analysis

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Financial decisions and growth opportunities: aSpanish firm's panel data analysisPablo de Andrés Alonso , Félix J. López Iturriaga & Juan A. Rodríguez Sanza Universidad de Valladolid , Facultad de Ciencias Económicas y EE , Avda. Valle del Esgueva6, 47011 Valladolid, Spainb Universidad de Valladolid , Facultad de Ciencias Económicas y EE , Avda. Valle del Esgueva6, 47011 Valladolid, Spain E-mail:Published online: 02 Feb 2007.

To cite this article: Pablo de Andrés Alonso , Félix J. López Iturriaga & Juan A. Rodríguez Sanz (2005) Financial decisionsand growth opportunities: a Spanish firm's panel data analysis, Applied Financial Economics, 15:6, 391-407, DOI:10.1080/09603100500039201

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Financial decisions and growth

opportunities: a Spanish firm’s

panel data analysis

Pablo de Andres Alonso, Felix J. Lopez Iturriaga*and Juan A. Rodrıguez Sanz

Universidad de Valladolid, Facultad de Ciencias Economicas y EE,Avda. Valle del Esgueva 6, 47011 Valladolid, Spain

This paper analyses the influence of financial leverage decisions, dividendpayout policies and the ownership structure on the firm market value whencompanies either face, or do not face, profitable growth opportunities.A sample of 101 large non-financial publicly-traded Spanish companiesis used. The results confirm the relevance of debt and dividends interms of firm value creation by showing a negative relationship betweenfirm value and both leverage and dividend payments in the presence ofgrowth opportunities. On the contrary, this relationship turns out to bepositive when firms have no profitable investment projects. The resultsalso demonstrate the relevance of ownership structure in the allocationof firm resources.

I. Introduction

The influence of leverage and dividends on firm value

has been a traditional topic that both academics

and practitioners have paid much attention to. In a

world of frictionless markets, leverage and dividends

are irrelevant, in terms of firm market value, as

long as they do not alter the set of firm investment

opportunities at the firm disposal (Modigliani and

Miller, 1958; Miller and Modigliani, 1961). On the

contrary, in an imperfect market framework, the

irrelevance propositions no longer held. The

evolution of corporate finance in the last 40 years

can be understood as the process to introduce

market imperfections – basically transaction costs

and taxes – in this analysis benchmark.

Recently, new perceptions about the nature of

debt (types and maturity) along with its impact and

that of dividends on the problems arising from the

stakeholders’ interest conflict have provided new

answers (Jensen, 1986; Barclay and Smith, 1996).

Both decisions affect the agency relationships in two

ways: (i) according to the agency explanation, lever-

age and dividends modify the interest conflict among

the cash flow claimholders and (ii) according to the

asymmetric information explanation, both decisions

convey information to capital markets, mitigating

adverse selection problems (Harris and Raviv, 1991;

Miller and Rock, 1985).

Underlying this approach is a deep redefinition of

corporate financial decisions, so that the interrelation

of all these topics becomes more and more important.

The independence among financial decisions is no

longer accepted and the optimal value-maximizing

combination is intended to be found. However,

given the manager discretionality and the control

*Corresponding author. E-mail: [email protected]

Applied Financial Economics ISSN 0960–3107 print/ISSN 1466–4305 online # 2005 Taylor & Francis Group Ltd 391

http://www.tandf.co.uk/journalsDOI: 10.1080/09603100500039201

Applied Financial Economics, 2005, 15, 391–407

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systems limitations, it is not unusual that managersseek to maximize their own utility, even at theexpense of shareholder’s wealth. There is, in turn, arelationship between fund sources and investment,that holds both when firms face positive NPVopportunities and when they do not.

In the presence, or absence, of growth opportu-nities, the ownership and control structure also playan important role in reducing the above mentionedagency problems. Although corporate governancemechanisms can reduce the interest conflict in bothsituations, its role could be more important whenthere are no growth opportunities since undertakingunprofitable projects or perquisite consumptionmight exacerbate agency problems. Firm value, finan-cial structure, corporate governance, growth oppor-tunities and dividends policy then become moreclosely related.

The aim of this study is to disentangle, at leastpartially, those relationships in face of the presence,or absence, of growth opportunities from a sampleof Spanish companies during the 1991–1995 period.This research follows that of Andres et al. (2000) anddraws also on the contributions of Myers (1977),Jensen (1986), Morck et al. (1988), Stulz (1990),Smith and Watts (1992), Lasfer (1995) and, veryheavily, on McConnell and Servaes (1995).

These last two authors are among those proposingto sort out companies according to their growthopportunities using variables like price earning ratio(PER), or the market-to-book ratio (Smith andWatts, 1992; Lasfer, 1995; McConnell and Servaes,1995). However, the present study deviates from thatresearch by focusing, not only on debt influence, butalso on another strategic financial decision (dividendpolicy) in order to expand the analysis framework.Dividend policy has been considered a disciplinarymechanism as long as it allows for the releasing ofresources when a firm has no profitable projectsand, at the same time, conveys information abouta firm’s future expectations to capital markets.Therefore, in addition to specifying the effects onfirm market value, the simultaneous considerationof leverage and dividends permits us to knowtheir interrelationships more in depth and to shedsome light on the possible complementarity orsubstitutability of both decisions.

The results show that leverage, dividends andownership structure remarkably affect firms’ value;the kind of influence depending on the presenceor absence of investment opportunities. Whenfirms have positive growth opportunities debt hasa negative influence on market value, whereas whenfirms do not have growth opportunities, controlmechanism are more necessary so that debt and

dividends become complementary – but notexcluding – mechanisms to deal properly withmanager discretionality. The ownership structurealso comes out related to firm market value.

To achieve these goals the paper is divided into fivesections, this introduction being the first one. SectionII surveys previous research, presents theoreticalfoundations of the work and introduces the hypoth-esis that the study will try to test. In Section III, somemethodological issues can be found, along with thesample and variables description, while Section IVdisplays and comments on the results achieved andreports a sensitivity analysis to alternative specifica-tions of the model. The final section draws someconclusions from the most outstanding results andpoints out some future research directions that thepaper proposes.

II. Theoretical Foundations

Debt, dividends and growth opportunities

As stated above, the existence or lack of profi-table growth opportunities affordable by the com-pany influences the managers–shareholders interestconflict. In order to shed some light on this contro-versy one considers the role that debt, dividends andcorporate governance structure play both in thepresence, and in the absence, of profitable projects.

In the first scenario, the underinvestment problemis likely to arise (Myers, 1977). In essence, and as it iswidely known, the underinvestment problem stressesthe shortcoming of excessive debt financing in thepresence of growth opportunities since too muchdebt can prevent managers from undertaking positiveNPV projects. If this is the case, under the pressureof high financial leverage ratios, managers, acting onbehalf of the shareholders, may forgo some profitableprojects. The rationality underlying this fact is thepriority bondholders have over firm cash flowsrelative to shareholders. If debtholders are the priorclaimholders, managers do not find it worthwhileundertaking investment projects whose cash flowswill not be perceived by company owners but bycreditors. The consequences over firm value of thisbehaviour are clear, so that a decrease in the valuecan be expected due to the missing of profitableopportunities.

In order to mitigate this problem, growth opportu-nities should be financed with equity instead of debt.As Myers (1977) and McConnell and Servaes (1995)assert, the higher the growth opportunities are set, thelower the leverage rate should be or, in other terms,a negative relationship between debt and firm value in

392 P. de A. Alonso et al.

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the face of profitable opportunities is forecast. The

capitalization process consists of not only using

equity rather than debt, but also of cutting dividend

payments to raise the resources needed to fund invest-

ment opportunities (Fazzari et al., 1988; Lang and

Litzenberger, 1989; Gonzalez, 1995). Hence, the

chances are that a negative relationship between

firm value and dividend payments holds if a company

has profitable projects.1

The second scenario, defined by the absence of

growth opportunities and closely related to the free

cash flow hypothesis and the overinvestment prob-

lem, has been the core of a number of recent

researches (Jensen, 1986, 1993; Smith and Watts,

1992; Lasfer, 1995; McConnell and Servaes, 1995;

Lang et al., 1996). The free cash flow hypothesis

underlines the negative consequences of an excessive

amount of resources within the reach of the managers

after financing the positive NPV investment projects,

especially when firms no longer have profitable

growth opportunities. The free cash flow should be

reduced by issuing new debt or paying dividends.

Otherwise, it would be wasted in inefficient uses.

Consequently, when firms have too much free cash

flow and no investment opportunities, dividends and

debt will probably have a positive effect on firm

value. In order to test, empirically, this idea, a second

hypothesis is formulated according to when compa-

nies lack growth opportunities, manager disciplinary

mechanisms – like debt or dividends – must be posi-

tively correlated with firm value.

As in the previous case, the appropriate interpre-

tation of the mixed influence of debt and dividends

on firm value requires to take into account some

caveats. This is due not only to the fact that both

decisions may be substitutable – either of them

being able to become useless if the other one is fully

used – but also due to the interaction between both of

them. The dividend policy may provide evidence of

the shareholders versus bondholders conflict as long

as a high, or low, enough payout ratios could give rise

to wealth transfers to the first or second group

of claimholders, respectively (Smith and Warner,

1979). From this point of view, debt and dividend

decisions may enhance firm value creation by

reducing manager discretionary behaviour at the

same time that are the consequence of a trade-off

between shareholders’ and creditors’ rights. To

some extent this could distort the interpretation of

the results.

Ownership structure and growth opportunities

Debt and dividend decisions are not the only deter-

minants of firm value because ownership structure

can have a significant influence too. The separation

between ownership and control, so widely spread in

most of the companies, causes some agency problems

that, unless being properly dealt with by the external

corporate control mechanisms, demand a more active

role of the owners of the firm (Fama and Jensen,

1983). This can be inferred from Demsetz (1983),

Demsetz and Lehn (1985), Stiglitz (1985), Jensen

(1986), Shleifer and Vishny (1986) Bergstrom and

Rydqvist (1990), and McConnell and Servaes

(1990), who summarize previous research analysing

the relationship between ownership structure and

firm results on top of the influence of ownership

structure on the resolution of agency problems

between owners and managers.

One of the most outstanding issues in this set of

relationships is the proportion of the ownership in the

hands of the managers because a higher proportion

can make the interest of shareholders and managers

to converge (Jensen and Meckling, 1976; Leland and

Pyle, 1977). So, the higher the participation of man-

agers in the firm ownership, the more efficient their

behaviour, and a positive relationship between firm

value and managers ownership is likely to hold.2 In

addition, managers’ participation in firm ownership

can be understood in capital markets as a signal

conveyed in order to show the managers’ reliance

on the firm investment projects (Morck et al., 1988;

McConnell and Servaes, 1990).

However, managers’ participation is not the only

way to align shareholders’ and managers’ interests.

Stiglitz (1985) and Jensen (1986) suggest to concen-

trate the ownership in the hands of a few share-

holders since these have more incentives to monitor

managers’ work. Otherwise, in a widely dispersed

1Notwithstanding, both debt and dividends can be used as signalling mechanisms to convey good firm investment expecta-tions to capital markets (Bhattacharya, 1979; Campbell, 1979). Firms with the most profitable opportunities, relying ontheir future cash flows, could display higher leverage or dividend payout ratios in order to persuade the investors abouttheir good prospects.2 This inference may appear as too simple since some authors have shown how a linear and positive relationship between firmvalue and managers’ ownership proportion does not hold (Morck et al., 1988; Stulz, 1988). A non-linear relationship seems tobe more plausible, combining the alignment (positive relationship) and entrenchment (negative) hypothesis. This issue is dealtwith in the sensitivity analysis section.

Financial decisions and growth opportunities 393

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ownership structure, the free-rider problem arises

due to the unbalanced trade-off between the effort

required and the benefits the monitoring task entails.

Notwithstanding, an excessive concentrated owner-

ship can produce adverse consequences since it can

become an obstacle when the firm faces profitable

growth opportunities demanding the ownership and

control specialization (Burkart et al., 1997). Hence,

ownership concentration may originate two possible

effects: on the one hand, it reduces agency problems

by enhancing a more in-depth control and, on the

other hand, it could prevent growth opportunities’

exploitation.

This section ends with a brief comment about the

main shareholder nature. The underlying intuition is

that financial intermediaries seem to be more suitable

to monitor and control manager discretionality given

their emphasis in producing and channelling reliable

information about borrowers (Bhattacharya and

Thakor, 1993). As a result, it is quite probable that

firm value will be higher when the main shareholder

is a bank or another financial intermediary,3 but

a priori differences depending on the growth oppor-

tunities cannot be defined.

After having surveyed the theoretical foundations,

let us focus on a sample of large Spanish companies

in order to test the impact of financial decisions and

ownership structure on firm value conditional on

growth opportunities’ availability. Six hypotheses

are proposed: (1 and 2) Debt and dividends nega-

tively affect firm value when companies have growth

opportunities. (3 and 4) Debt and dividends have a

positive influence on firm value when there are not

profitable growth opportunities. (5) The dual role of

investors being, at the same time, directors or man-

agers is a significant determinant of value creation.

And (6) ownership concentration should have a

significant effect on firm value except when invest-

ment projects require a specialized ownership and

control structure. In addition, the test of hypotheses

1 to 4 can be useful to analyse the substitutable

versus complementary role of debt and dividends in

order to solve underinvestment and overinvestment

problems.

III. Research Design

Sample

The sample includes 101 non-financial Spanish

companies publicly traded in capital markets for the1991–1995 period. Combining the 101 companies for

five years we have formed a 505-observationsbalanced panel data which will be dealt with by the

appropriate panel data methodology. Although the

number of companies is not too high – the sampleaccounts for just about half of the Spanish quoted

companies4 – the included companies are the mostimportant ones. The sample accounts for between

72% and 80% of quoted companies capitalizationand assets value is, on average, 66.13% of all quoted

companies’ assets.

The sample selection process has been led by mar-ket data significance. In the Spanish stock market

there are a very large number of quoted companieswhose shares are not traded but a few days every

year. It means that, in spite of being quoted compa-

nies, the price of the shares do not fully reflect futureexpectations. Therefore, the selected 101 companies

are those more often quoted.5 From the study’s pointof view, the number of the companies in the sample

should not be considered as a shortcoming of thestudy since the analysed companies are the most

representative of Spanish capital markets ones. In

any case, the importance of market data would bestressed because growth opportunities’ identification

is critically affected by the market as a benchmarkand this is why investors’ judgement must be expli-

citly taken into account.

The source of information has been the ComisionNacional del Mercado de Valores (Spanish Stock

Exchange Commission), hereinafter CNMV. Allthe data were publicly available and were obtained

from the Companies Register, the Significant

Ownership Participation Register and from theAudited Financial Statements.6 The CNMV provides

financial information about non–financial companiesand financial statements had to be complemented

with ownership structure data (proportion of sharesowned by directors, ownership concentration and

3This assertion not only concerns a financial intermediary but it also may be extended to other non-financial companies likemultinational firms or non-financial domestic firms. In any case, we would like to underline the more specialized control thiskind of main shareholders could exercise.4 This proportion ranges from 44% to 54% depending on the year.5 In Spain there are two kinds of stock markets depending of the trade frequency: the mercado continuo (continuous market)and the mercado de corros (ring market). Basically, the sample comprises the companies in the mercado continuo along with themost often traded companies in the mercado de corros.6 The original name of the databases are the Registro de Empresas, the Registro de Participaciones Significativas en el Capitaland the Estados Financieros Auditados.


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information about the main shareholder status).

Given that ownership data disclosure in Spain ismore constraining and it is reported only in the

Significant Ownership Participation Register, a num-ber of companies had to be dropped, so the sample

was reduced up to a final balanced panel data with101 companies.

Certainly, the companies in the sample are basi-cally medium to large companies compared with the

average Spanish firm size either in terms of assets,sales or employees. This could raise some caveat

about a possible sample bias. Notwithstanding, asTable 1’s descriptive statistics show, firm size (in

terms of assets) is quite heterogeneous and highlydispersed around the mean value, so the results are

not supposed to be biased by size issues. The samplecomposition is quite industry-balanced, although

there is a slight bias towards Building firms at theexpense of Trade and retailing companies that can

be explained by the heavier concentration overweightof the former in the Spanish market.

One should take into account that the Spanish cor-porate system has much in common with European

corporate governance models and does not showso much ownership and control specialization as the

Anglo-Saxon one. In Spanish companies, like inother European countries, ownership is more concen-

trated (Berglof, 1990; Allen and Gale, 1994; Andresand Lopez, 1997) there are significant blockholders

(Becht and Roell, 1999) and banks play an activerole in funding and monitoring (Prowse, 1994).

More specifically, Spanish corporate systems couldbe defined by three features: (1) A high percent-age of shares owned by main shareholders, whichimplies a majority control such as that of France,Germany or Italy and different from the US system(Berglof, 1990; Prowse, 1994; La Porta et al.,1999). (2) The importance of blockholders (23.76%of the companies have a multinational firm and23.17% have a family as the main shareholder).(3) The outstanding fraction of shares owned bycorporate board directors.

These characteristics mean a lower ownershipand control separation compared to Anglo-Saxoncompanies. On the one hand, agency problems stem-ming from ownership and control separation couldbe smaller than US companies. But, on the otherhand, some problems such as risk concentration,the forgoing of specialization advantages (managersability, specific investment, etc.) in face of profitablegrowth opportunities (Burkart et al., 1997) orminority shareholders expropriation (La Porta et al.,1998) could arise.

Variables

The available data were intended to comprise a num-ber of features of the companies as the existence orabsence of valuable growth opportunities, capitalstructure, dividend payout policy, ownership andcontrol structure and market valuation. In the appen-dix a list of all the variables and how they have been

Table 1. Descriptive statistics

Descriptive statistics for the 1991–1995 and 101 Spanish firms panel data. Data about the main

shareholder nature are also reported in Table 2 along with ownership variables. Assets in millions of

pesetas. 1E 166866 pesetas (m) stands for market values whereas (b) stands for book values.

Mean Std. dev. Median Max. Min.

DTA (b) 0.4576 0.2529 0.4617 0.965 0.005DTA (m) 0.4960 0.2565 0.511 0.960 0.010DBDT 0.4068 0.2746 0.419 0.964 0C1 (%) 44.3469 25.8327 42.28 98.5 0.011C2 (%) 53.8924 25.0461 54.99 99.27 0.011C5 (%) 61.3461 23.9857 69.89 99.69 0.011ALFA (%) 20.6589 25.3130 8.03 96.3 0ADJALFA (%) 10.2014 18.0505 0.89 89.5 0DOM 0.2198 0.4145 0 1 0MULT 0.2376 0.4260 0 1 0FAM 0.2317 0.4223 0 1 0BA 0.1941 0.3959 0 1 0STAT 0.1406 0.3479 0 1 0LOGMV 4.5206 0.7258 4.480 6.587 2.080Q 1.0360 0.4556 0.941 3.643 0.213DIVTA 0.0122 0.2258 0.0029 0.189 0MB 1.0556 0.8258 0.854 8.096 0Assets 139 939.5 421 444.3 28 063 3 909 311 558


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constructed can be found, whereas Table 1 displayssome of their basic statistics. Now let us describebriefly the most important issues related to thespecification of the variables.

A key aspect of the study is the identification ofthe availability of growth opportunities, so that thechoice of the way to measure that feature becomescrucial. The PER (price-earning ratio)7 has beenchosen. There is a general agreement that thisvariable is a good indicator of future growth oppor-tunities by incorporating the market point of viewabout the firm ability to generate cash flows in thefuture (Smith and Watts, 1992; Lang and Stuz, 1994;Berger and Ofek, 1995). PER is positively related togrowth opportunities, so that the higher the PER, thelower the equity value due to assets-in-place and, inturn, the higher the impact of growth opportunitieson firm value (Chung and Charoenwong, 1991). Asa consequence of this reason, the sample was splitinto two sub-samples (firms with or without profit-able growth opportunities) according to McConnelland Servaes’ (1995) procedure by dividing the wholenumber of firms into three groups as a function ofthe PER value. Those companies in the upper thirdare certain to have more growth opportunities, whilethose in the lowest third could be quite reasonablycharacterized by the lack of valuable projects.

As far as capital structure is concerned, the debt-to-total asset ratio (DTA)8 has been chosen whiledividend policy has been measured by the dividendpayments over total assets ratio (DIVTA). Firm mar-ket valuation was proxied by an indicator of value

creation as the financial q (Q) or the asset market-to-book ratio (see the variables glossary in the appen-dix for a more systematic definition of all thevariables and Table 1 for some descriptive statistics).

Regarding the governance structure, the ALFAvariable has been defined as the proportion of sharesowned by the members of the board of directors. Thisvariable was later redefined in order to take intoaccount the directorships held by ordinary peopleand to exclude banks, firms and other legal entities,obtaining a more accurate proxy of the incentivesdirectors have to run the company more efficiently:the so-called adjusted-� (ADJALFA). The ownershipconcentration was measured by the proportion ofthe total number of shares held by the main (C1),the two main (C2) and the five main (C5) share-holders. These variables can show a majority control(C1 equals 44.346% as displayed in Table 2) andproxy the extent of ownership and control specializa-tion. A brief overview of the equity concentrationand the ownership distribution among shareholderstypes can be found in Table 2.

Nevertheless, C1 may not be an informativeenough indicator, so a set of five complementarydummy variables was defined to describe the natureof the main shareholder: STAT for State, MULT fora multinational firm, BA for a bank, DOM for otherdomestic firm and FAM for a family or a privateindividual or group. This classification may makesense since managers monitoring and control reliesheavily on the expertise, experience and incentivesof the main shareholder.9

7 Some authors use other variables relating assets or equity market value to assets or equity book value (McConnell andServaes, 1995). The difference between market and book value proxies growth opportunities’ value facing the firm and issupposed to be inversely related to the asset-in-place value. The market-to-book ratio will be used later as a sorting variable inorder to test the robustness of the results. Some other variables having been used are the market equity value to total assetratio (Lasfer, 1995), the market asset value to cash flow ratio (Smith and Watts, 1992) or sales’ rate of growth (McConnell andServaes, 1995; La Porta et al., 2000).8 This ratio was computed by using equity book value. As a robustness test, calculations based on market value were run.Results remain basically unchanged as displayed in Table 1.9 Perhaps the theoretical justification of this group of variables was not highlighted enough in the first sections of the paper.Now we would like to underline their appropriateness given the remarkable Spanish firm ownership concentration comparedwith other countries with a more market oriented financial system, more dispersed ownership and less important role forblockholders – such as the UK or the USA (Berglof, 1990; Allen and Gale, 1994; Prowse, 1994; Andres and Lopez, 1997;Franks and Mayer, 1997).

Table 2. Corporate ownership descriptive statistics

Equity concentration and ownership distribution among different shareholders status.

Average Domestic Multinational Family Banks State All

C1 45.71 57.52 28.17 40.83 51.85 44.34ALFA 20.94 17.27 39.36 4.78 17.50 20.65ADJALFA 4.46 3.24 35.25 1.65 0.26 10.20% of companies 21.98% 23.76% 23.17% 19.41% 14.06% 100%


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Besides the above mentioned variables, it is usual in

this kind of research to include some control vari-

ables in order to embody some additional deter-

minants of value creation like R&D investment

or publicity expenses (Lang and Stulz, 1994;

McConnell and Servaes, 1995). Unfortunately, this

information is unavailable, so the study has been

able just to control for the other two of the most

often cited issues: firm size and industry classification.

First, LOGMV variable (market value logarithm)

represents firm size and, to some extent, it proxies

the problems stemming from asymmetric information

(Devereux and Schiantarelli, 1990). Second, dummy

industry variables were included and more in-depth

comments about their influence can be found in the

sensitivity analysis paragraphs.

Table 3 provides some information about mean

values in the groups the sample was divided into10

and a test for the different mean value hypothesis.

As shown, variable means depend heavily on growth

opportunities’ avalilability and are quite similar,

specially in the PER and MB-based classifications.

Perhaps it is worth stressing dividend value since a

positive relationship between growth opportunities

and dividend payout can be found. It is very consis-

tent with La Porta et al. (2000) results showing that

Spain seems to be one of the few countries supporting

the ‘substitute model’ and high growth companies

tend to pay more dividends.

Methodology

As stated before, the sample combines 101 obser-

vations with five cross-sections originating a 505-

observations panel data. Given the aim of the

study, the panel data methodology seems to be the

most accurate for at least two reasons (Arellano and

Bover, 1990; Arellano, 1993). On the one hand, this

method allows the control of the so-called unobserv-

able constant heterogeneity. It is quite convincing

that each one of the firms in the sample has its own

specificity – e.g., the way it is run by the managers,

the impression it makes to the market, the way it

generates growth opportunities, etc. This specificity

is different from a company to another one and it is

almost certain to be kept throughout the study

period. A pooling analysis of all the companies

without noticing these peculiar characteristics could

cause an omission bias and distort the results. On theother hand, the dynamic dimension of a panel dataenhances testing long time adjusting processes anddetermining the firm value reaction when theexplanatory variables change.

With regard to the basic model to be estimated, amultivariate regression model has been built includ-ing most of the previously cited variables. It simulta-neously takes into account some issues such ascorporate financing, dividend payout and ownershipstructure. This model can be expressed with thefollowing equation, where i refers to the firm andt to the year (i¼ 1 . . . 101; t¼ 1 . . . 5)

Qit ¼ �i þ �1DTAit þ �2DIVTAit þ �3ADJALFAit

þ �4LOGMVit þ �5C1it þ �6BAit þ �6MULTit

þ �7DOMit þ "it

The so-specified model was independently testedfor each one of the two sub-samples into which theinitial sample had been split.11 The results of thepanel data estimation are displayed in Tables 4–6.The estimations were run not only for the basic spec-ification (Tables 4a and 4b) but also the State ownedcompanies were dropped out (Tables 5a and 5b)and firm industry characteristics were introduced(Tables 6a and 6b). The F-test value underlines theexistence of an individual effect to the extent thatthe null hypothesis of individual effect absence isrejected nearly at a 99% confidence level andcorroborates the appropriateness of a panel dataapproach. Furthermore, the Hausman test revealsthe importance of the fixed effect component – closelycorrelated with the remainder explanatory variables –so that the within groups estimation methodbecomes necessary in order to deal with the constantunobservable heterogeneity.

IV. Results

Results report

A general outlook to the basic results shows someinteresting issues. For instance, there is a group ofexplanatory variables coming out significant to anacceptable level. Moreover, the significance of thewhole model – both in terms of the R2 and theadjusted R2 coefficients – is high enough, specially forthose companies having more growth opportunities.

10 Although the sorting out criteria will be explained later, it may be interesting to report now the mean value of all thevariables for each group.11 Since regression results could be affected by multicollinearity problems, possible multicollinearity was previously controlledfor by running multicollinearity tests and single regressions. The results do not support the existence of multicollinearity.


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These results confirm the hypothesis about theinfluence of leverage, dividends and ownership struc-ture on firm value. First, the financial leverage ratio issignificant in all the estimations, although its role isquite different depending on the existence or theabsence of growth opportunities. When firms lack

those profitable projects (Tables 4a, 5a and 6a), theDTA positive sign suggests the debt contribution tofirm value creation by disciplining managers. If this isthe case, the debt burden reduces the free cash flowproblem (Jensen, 1986) and prevents managers fromwasteful uses from the shareholders’ point of view.

Table 4. Value creation determinants conditional on growth opportunities

The sorting out criteria was the PER ratio: we divided the whole sample into three groups (each one containing 170

observations) and selected the upper and the lowest third as those firms with more, and less, growth opportunities respectively.

The table shows estimated coefficients, t-statistics, p-value and the (adjusted) determination coefficient. Hausman test allows

to test fixed versus random effects hypothesis. Hausman test follows a �2(8) distribution. The model to be estimated is

Q ¼�þ �1DTAþ �2DIVTAþ �3ADJALFAþ �4LOGMV þ �5C1þ �6BAþ �7MULT þ �8DOM þ " :

(a) (b)

Absence of growth opportunities Presence of growth opportunities

Within Coefficient t-statistic p-value Coefficient t-statistic p-value

DTA 0.632966 6.39101 [0.000] �0.309555 �1.59504 [0.113]DIVTA 0.051433 2.35028 [0.020] �0.69649E-03 �0.078157 [0.938]ADJALFA 0.21460E-02 0.457513 [0.648] 0.014829 2.80334 [0.006]LOGMV 0.227256 1.84139 [0.068] 0.586986 8.64295 [0.000]C1 �0.39847E-02 �1.14315 [0.255] �0.50503E-02 �2.39484 [0.018]BA �0.367624 �1.30900 [0.193] 0.479124 2.72095 [0.007]MULT 0.051162 0.283669 [0.777] 0.985452 5.37656 [0.000]DOM 0.050707 0.312308 [0.755] 0.123302 1.04082 [0.300]R2 0.624260 0.837846Adj.-R2 0.503906 0.785906F(33, 128) 2.7071 [0.000] 8.4351 [0.000]Hausman test 22.263 [0.004] 30.427 [0.000]

Table 3. Descriptive statistics

Mean values for the groups the sample was divided into and p-value for the test for the different mean value hypothesis. (m)

stands for market values whereas (b) stands for book values.

Criteria

PER MB SRGR

Lowgrowth

Highgrowth p-value

Lowgrowth

Highgrowth p-value

Lowgrowth

Highgrowth p-value

DTA (m) 0.6426 0.3984 0.000 0.6950 0.3115 0.000 0.5139 0.4947 0.551DTA (b) 0.5527 0.3932 0.000 0.5060 0.4153 0.002 0.4713 0.4715 0.992DBDT 0.4481 0.3963 0.226 0.5046 0.3211 0.000 0.3929 0.3983 0.858C1 (%) 45.5977 46.2818 0.403 43.4877 46.4777 0.291 43.3502 46.1947 0.357C2 (%) 54.8376 57.0434 0.202 53.0559 56.8831 0.160 53.9117 55.9295 0.515C5 (%) 62.3188 65.2179 0.122 59.8302 65.1569 0.039 62.4772 63.6716 0.707ALFA (%) 23.9933 20.7860 0.130 20.1313 20.4221 0.913 21.8542 20.9316 0.729ADJALFA (%) 12.3525 9.3329 0.058 9.2664 10.1693 0.622 11.7999 10.8668 0.661DOM 0.1548 0.2367 0.029 0.2262 0.2249 0.976 0.2667 0.2132 0.288MULT 0.3214 0.2308 0.031 0.2619 0.2426 0.684 0.2963 0.2426 0.303FAM 0.2679 0.2426 0.298 0.2440 0.2189 0.586 0.2667 0.2279 0.440BA 0.1726 0.2130 0.174 0.1190 0.2308 0.006 0.1778 0.2132 0.388STAT 0.0893 0.1065 0.298 0.1607 0.1183 0.262 0.0148 0.1250 0.000LOGMV 4.1915 4.6886 0.000 4.3284 4.7618 0.000 4.2102 4.5051 0.000Q 0.9131 1.1674 0.000 0.6970 1.4674 0.000 1.0213 1.0434 0.702DIVTA (%) 0.5170 1.6650 0.000 0.4369 1.9959 0.000 1.0052 1.6045 0.037Assets 34 057 265 561 0.000 116 491 114 955 0.948 109 065 54 796 0.110


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On the contrary, DTA coefficient becomes negativein the estimation for the most highly priced compa-nies (Tables 4b, 5b and 6b), emphasizing the negativeimpact that debt can have on firm value when firmsface growth opportunities, as suggested by the under-investment hypothesis (Myers, 1977). In comparisonwith the values in Tables 4a–6a, the confidence level

is slightly lower – although fairly acceptable – andthe absolute value of the coefficient is around halfof the value achieved in the absence of growthopportunities. This last result could be understoodas the more important role that debt plays inthe overinvestment framework related to theunderinvestment one.

Table 6. Value creation determinants (with industry effects)

Original regressions are run including industry dummies. The industries included are: Food and Beverage, Building, Property,

Transportation and Communication, Electrical, Chemicals, Metal-mechanical, Mining and Textile and Paper. Automobile

and Trade and Retailing were excluded in order to avoid multicolineality.

(a) (b)


Random Coefficient t-statistic p-value Coefficient t-statistic p-value

DTA 0.616459 6.69826 [0.000] �0.399162 �2.21145 [0.027]DIVTA 0.081163 4.09519 [0.000] 0.010658 1.21879 [0.223]ADJALFA 0.40038E-2 1.43320 [0.152] 0.018632 4.63449 [0.000]LOGMV 0.172668 2.14686 [0.032] �0.514839 8.69286 [0.000]C1 0.11536E-3 0.059415 [0.953] �0.3138E-02 �1.81514 [0.070]BA 0.071736 0.464097 [0.643] 0.221984 1.55699 [0.119]MULT 0.047322 0.379349 [0.704] 0.540189 4.22334 [0.000]DOM 0.18178E-2 0.013924 [0.989] 0.199290 1.99969 [0.046]FOOD �0.029371 �0.187903 [0.851] 0.211593 0.840284 [0.401]BUILD 0.062524 0.439239 [0.660] 0.077113 0.348929 [0.727]PROP 0.325907 1.74166 [0.082] �0.032228 �0.113552 [0.910]TRANS 0.169121 1.15447 [0.248] �0.410314 �1.37640 [0.169]CHEM �0.036876 �0.270871 [0.786] 0.025676 0.082483 [0.934]MET 0.079845 0.420783 [0.674] 0.173098 0.720033 [0.472]TEXT �0.013962 �0.111499 [0.911] �0.116519 �0.437270 [0.662]C �0.279429 �0.715493 [0.474] �1.33008 �4.59069 [0.000]R2 0.503880 0.770277Adj.-R2 0.301297 0.676473Hausman test 26.470 [0.001] 33.642 [0.000]

Table 5. Non-State firms value creation determinants

Original regressions are run after dropping State owned and electric companies.

(a) (b)



DTA 0.633354 6.3976 [0.000] �0.384598 �1.8626 [0.065]DIVTA 0.052062 2.3537 [0.020] 0.7206E-4 0.7638E-2 [0.994]ADJALFA 0.4227E-2 0.81398 [0.417] 0.014864 2.6967 [0.008]LOGMV 0.203861 1.6453 [0.102] 0.565303 7.9572 [0.000]C1 �0.4590E2 �1.2825 [0.202] �0.57181E-2 �2.4519 [0.016]BA �0.277176 �0.9049 [0.367] 0.494302 2.6943 [0.008]MULT 0.169111 0.7306 [0.466] 0.968261 5.0626 [0.000]DOM 0.157497 0.7709 [0.442] 0.119041 0.9642 [0.337]R2 0.636264 0.828131Adj.-R2 0.517006 0.770290F(32, 122) 2.7680 [0.000] 6.327 [0.000]Hausman test 26.123 [0.001] 26.914 [0.000]


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Second, dividend policy (DIVTA) also takes part inthe determination of firm value. Since dividends canbe conceived as a way to reduce manager discretion-ality, a different sign of the variable is forecastdepending on the growth opportunities’ availability.The results confirm this dual behaviour, although theconfidence level is notably different. When companiesdo not have growth opportunities DIVTA is sig-nificant and positively related to firm value (seeTables 4a–6a), whereas if companies face profitableinvestment projects dividends exhibit a scarce – andsometimes negative – impact (see Tables 4b–6b).This evidence comes to confirm the hypothesisconcerning the disciplinary role of dividends, whilethe pertinence of earnings retention to fund valuablegrowth opportunities has no empirical support in thepresent study.

The significance of dividend policy is compatiblewith the leverage influence since both of them seemto have remarkable impact on firm value. Theunderlying intuition is that debt and dividends arecomplementary mechanisms to cope with managers’discretionality rather than alternative ways of moni-toring and control: a company having a high leverageratio does not imply the rejection of dividend policyas a disciplinary mechanism and vice versa.

Third, as far as the ownership structure variablesare concerned, it is worth noticing the negativeimpact the ownership concentration (C1) has inboth sub-samples, although it only comes out sig-nificant when firms have growth opportunities.In the authors’opinion, this result is consistent withthe previous set of results and demonstrates againthe existence of some agency problems inside thecompanies. In the face of growth opportunities, amajority control seems to be disadvantageous, theneed of specialized managers can be inferred, andthe ownership-control separation arises not to be soharmful – for shareholders’ wealth – as usuallythought (Burkart et al., 1997). Furthermore, theexistence of blockholders in the ownership structureof companies with growth opportunities could lead,to some extent, to waste of these opportunities asCarlin and Mayer (1998) have suggested.

Regarding the proportion of the shares thedirectors own (ADJALFA), this variable behaves aspredicted, although only partially. In spite of the factthat the coefficient, as forecast, is always positive,it supports only partially the proposed hypothesisbecause the variable is significant only in the sub-sample of companies with growth opportunities.Obviously, its positive correlation with firm valuedenotes the convergence of directors and share-holders interests. The more prominent effect in thegroup of firms with growth opportunities could be

reasonably explained on the basis of the signallingtheory since companies with the best growthopportunities set will try the market to notice theiropportunities in order to overcome the informationasymmetries, so that the market reacts positively inface of the signal.

The ownership structure effect is completedby introducing a number of dummy variables con-cerning the nature of the main shareholder. Somecaveats are required to rightly analyse these resultsbecause the lack of hypothesis about their possibleinfluence – mainly as a result of the lack of an appro-priate theoretical framework – prevents one fromdrawing concluding evidence. In general, it is foundthat, for companies with growth opportunitiesfirm value is positively correlated with the mainshareholder being a bank or a multinational firm,consistently with some recent research (Khanna andPalepu, 1999). However, one is not able to assertif this kind of owner positively affects firm value or,on the contrary, these main shareholders select thecompanies with the best growth opportunities. Inthis last case, ownership structure would not be thecause but the consequence of firm valuation.

The last comments focus on the control variables.Company size (LOGMV) was no object of theoreticalprediction because this feature is out of the initialpurpose. Nevertheless, that variable was includedin order to control for the size effect. Firm sizecomes out to be clearly significant and positivelyrelated to firm value in all the estimations. There isa wide range of possible explanations, but most ofthem rely on the idea of information asymmetriesor, in other words, the size of the company as a syno-nym of being better known in capital markets and,hence, of better reputation. Finally, neither individu-ally, nor together, were the industry dummies foundto have any significant effect in each one of thesub-samples. It should be noted that this set ofvariables makes sense only in the random effectsmodel (Table 6) since industry variables are constantthroughout the period and hence their effect isremoved by estimating the within groups method –the most suitable method as the Hausman testindicates.

Sensitivity analysis

One of the study’s concerns is to know whether theresults that have been obtained are contingent uponthe specification of the model. In order to assess therobustness of the results to alternative specificationsand variable measurements a sensitivity analysis isadded consisting of four different tests: a change insample composition, an alternative identification of


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growth opportunities, the incorporation of industry

specific features and a non-linear relationship with

directors’ ownership.

Regarding sample composition, one wonders if the

inclusion of State owned companies could bias the

results. State owned companies may be affected by

a number of very specific and not easy to generalize

circumstances like non-profit but public service aim,

potential monopoly situations, specially regulated

industries, State subsidies policies, etc.12 Based on

these particular features, the regressions have been

run after dropping the 16 State companies and

utilities.13 The results for non-State firms, reported

in Table 5, shows no noticeable change respective

of the whole sample estimation with the only excep-

tion of leverage increasing its signification and

becoming significant to a 93.5% confidence level.

As previously stated, growth opportunities

identification is a key aspect in the study and this is

why an analysis of the influence of the way one mea-

sures these growth opportunities is considered vital.

In addition to the PER ratio, the same regressions

have been run using the market-to-book equity

ratio and sales rate of growth. Regarding the first

variable, it is a meaningful proxy to market

expectations about firm projects profitability: those

companies with more valuable opportunities should

have higher equity market value – relative to

book value – and hence, should display higher ratios

than those lacking of profitable projects. Therefore,

the sample has been ranked on the basis of this ratio

and the upper and the lowest third taken as those

companies with the widest and narrowest set of

profitable growth opportunities respectively.

Table 7 reports the results, which are greatly

consistent with those previously obtained both in the

presence and in the absence of growth opportunities.

Debt not only keeps on being highly significant when

firms lack valuable projects but also becomes signifi-

cant at 99% in the presence of growth opportunities.

Also consistent with PER estimations, dividend

payment significantly contributes to value creation

in the absence of growth opportunities, although

there is a slight reduction in the confidence level –

none the less, this level remains higher than 90%.

Similarly, ownership and control variables remain

basically with the same influence that was previously

detected, with the only change in the nature of the

main shareholder. When firms have some profitable

growth opportunities, ownership concentration and

directors’ ownership percentage carry on having

significant impact on firm value whereas they do

not have any significant effect in their absence. As

far as other ownership variables are concerned, the

conclusion remains unaffected: the positive contribu-

tion of companies – either banks or multinational

firms – to managers’ monitoring and agency conflicts

resolution. Firm size also seems to have a positive

role in firm value creation. As regards to the model

explanatory power (R2 and adjusted-R2 coefficients),

although it shows some changes (it increases and

decreases in the absence or in the presence of growth

opportunities respectively) it seems to remain quite

acceptable. Finally, it should be noted that the

Hausman test reveals the lack of correlation between

the fixed individual effects term and the set of the

independent variables, suggesting the generalized

least squares regression as the most efficient method

rather than within groups estimation (Arellano,

1990). The market-to-book ratio regressions were

also run after excluding State companies. The results

(Table 8) require no further comments and are

consistent with previous ones.

In spite of relying on the past as a proxy for the

future, sales rate of growth has also been used to

proxy growth opportunities (McConnell and

Servaes, 1995; La Porta et al., 2000). This is why

the sample has been ranked by the sales rate of

growth (SRGR) and the previous regressions run

in each one of the two usual groups. Results are

presented in Tables 9–10 and show how debt and

dividends can mitigate agency problems in low

growth firms while they have no significant influence

when profitable projects are available. Compared

with the PER or MB models, the only remarkable

difference is the impact of C1 on firm value. This

result highlights the dual role for ownership concen-

tration, so that it enhances value creation if compa-

nies have no profitable projects but it may destroy

value when companies face growth opportunities.

There are some other variables related to the

main shareholder nature (MULT, BA and DOM)

coming out as partially significant determinants of

value and underlining the necessity to control for

12 State incumbency in firm ownership has dramatically changed since 1996 when Spanish Government undertook aprivatization programme. However, since the sample covered the 1991–1995 period it has been considered pertinent to testthe possible bias due to State companies inclusion. From the point of view of the present study, the privatization processmight make this caveat no longer necessary if the sample was extended to more recent years.13Utilities have been excluded because of the many aspects they have in common with State firms in Spain.


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ownership structure. R2 and adjusted-R2 coefficientsexhibit similar values to those of previous regressionsranging from 0.7 to 0.8.

This sensitivity analysis section is continued byintention to control for industry heterogeneity incase different industries were in different businesscycle positions, faced different regulatory frameworks

and, in turn, had very different growth opportunities.If this was the case, one could have found spuriousrelationships since two firms belonging to quitedifferent industries are not comparable on the basisof their growth opportunities because of the veryindustry-specific content of these opportunities. Tocontrol for industry heterogeneity a set of dummy

Table 7. Value creation determinants conditional on growth opportunities (with MB)

Original regressions are run after changing the sorting out criteria. The sorting out criteria was the

valuation ratio (MB): the whole sample was divided into three groups (each one containing 170 observa-

tions) and the upper and the lowest third selected as those firms with more, and less, growth opportunities

respectively. The leverage extreme values have been dropped out. The table shows estimated coefficients,

t-statistics, p-value and the (adjusted) determination coefficient Hausman test allows to test fixed vs.

random effects hypothesis. The model to be estimated is

Q ¼�þ �1DTAþ �2DIVTAþ �3ADJALFAþ �4LOGMV þ �5C1þ �6BAþ �7MULT þ �8DOM þ ":

(a) (b)



DTA 0.592585 14.9779 [0.000] �1.013400 �2.9180 [0.004]DIVTA 0.015215 1.7125 [0.087] 0.3210E-2 0.2785 [0.781]ADJALFA 0.4723E-3 0.6841 [0.494] 0.012034 1.9279 [0.057]LOGMV 0.038523 2.8726 [0.004] 1.124610 6.7811 [0.000]C1 0.6656E-4 0.1907 [0.849] �0.6744E-2 �2.7192 [0.008]BA 0.032170 1.0797 [0.280] 0.580646 3.3007 [0.001]MULT 0.022328 1.0031 [0.316] 0.836602 4.9720 [0.000]DOM 0.036772 1.7465 [0.081] 0.139186 0.7770 [0.493]C 0.200101 3.3343 [0.000]R2 0.766351 0.501003Adj.-R2 0.600147 0.140026F(60,94) 5.6029 [0.000]Hausman test �2(8) 8.8342 [0.356] 51.000 [0.000]

Table 8. Non-State firms value creation determinants (with MB)

Original regressions are run after dropping State owned and electric companies.

(a) (b)



DTA 0.598570 14.1491 [0.000] �1.195800 �3.2427 [0.000]DIVTA 0.016750 1.7159 [0.086] 0.6563E-2 0.5561 [0.580]ADJALFA 0.4014E-3 0.5154 [0.606] 0.7984E-2 1.2512 [0.215]LOGMV 0.036282 2.1903 [0.028] 0.951189 5.4426 [0.000]C1 0.1878E-3 0.4624 [0.644] �0.7792E-2 �2.9013 [0.005]BA 0.028478 0.8003 [0.424] 0.546805 3.1265 [0.002]MULT 0.015587 0.5309 [0.595] 0.831025 4.9678 [0.000]DOM 0.031768 1.1493 [0.250] 0.074640 0.4143 [0.680]C 0.205584 3.1227 [0.000]R2 0.808239 0.841075Adj.-R2 0.664418 0.714750F(54, 78) 5.8922 [0.000]Hausman test �2(8) 9.4739 [0.303] 39.265 [0.000]


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variables have been added to the independent vari-ables concerning the industry the firm belongs to(Table 6). For the sake of brevity there is no commenton the results since, broadly speaking, they agree withthose previously exposed, specially as far as debt anddividend influence is concerned.

The last sensitivity analysis has dealt with theinclusion of a quadratic term for directors’ ownership(ADJALFA2). As proved by some authors (Morck

et al., 1988), a non-linear relationship between firmvalue and directors’ ownership can be found becauseof a trade-off between convergence and entrenchmentmotivations. This is why a quadratic term or even apiecewise regression would be worthwhile. Table 11shows the regression results when ADJALFA2 isincorporated. It comes out significant only forthe high growth firms and, as forecast by theory, ithas a negative impact on firm value, just the

Table 9. Value creation determinants conditional on growth opportunities (with SRGR)

Original regressions are run after changing the sorting out criteria. The sorting out criteria was the sales rate of growth

(SRGR): the whole sample was divided into three groups (each one containing 170 observations) and the upper and the lowest

third selected as those firms with more and less growth opportunities respectively. The leverage extreme values have been

dropped. The table shows estimated coefficients, t-statistics, p-value and the (adjusted) determination coefficient Hausman test

allows to test fixed vs. random effects hypothesis. The model to be estimated is

Q ¼�þ �1DTAþ �2DIVTAþ �3ADJALFA þ �4LOGMV þ �5C1þ �6BAþ �7MULT þ �8DOM þ ":

(a) (b)



DTA 0.655851 7.11206 [0.000] 0.220634 1.4538 [0.148]DIVTA 0.024091 2.21566 [0.028] �9.14E-03 �0.494296 [0.622]ADJALFA 1.65E-03 0.333207 [0.740] 0.01427 4.82812 [0.000]LOGMV 0.416804 3.53662 [0.001] 0.3875 6.43566 [0.000]C1 5.17E-03 1.84671 [0.067] �8.67E-03 �5.07287 [0.000]BA �0.052771 �0.27141 [0.787] 0.263386 1.66016 [0.099]MULT 0.335069 2.60505 [0.010] 0.586934 4.23683 [0.000]DOM 0.049459 0.461061 [0.646] 0.410526 3.33986 [0.001]

R2 0.804116 0.773285Adj.-R2 0.741371 0.700665F(33,128) 7.89949 [0.0000] 6.3011 [0.0000]Hausman test �2(8) 18.153 [0.0201] 23.436 [0.0028]

Table 10. Non-State firms value creation determinants (with SRGR)

Original regressions are run after dropping out State owned and electric companies.

(a) (b)



DTA 0.65587 6.66766 [0.000] 0.139059 0.981197 [0.329]DIVTA 0.022499 1.90616 [0.059] �0.014207 �0.830741 [0.408]ADJALFA 2.54E-03 0.465187 [0.643] 0.013991 5.23 [0.000]LOGMV 0.391722 3.05769 [0.003] 0.353328 6.41619 [0.000]C1 4.89E-03 1.49153 [0.139] �8.63E-03 �5.57107 [0.000]BA 4.65E-03 0.021578 [0.983] 0.26107 1.82137 [0.071]MULT 0.402445 2.6339 [0.010] 0.561004 4.4755 [0.000]DOM 0.093679 0.69623 [0.488] 0.394524 3.54139 [0.001]R2 0.785755 0.788424Adj.-R2 0.711743 0.719115F(30, 110) 6.0931 [0.0000] 6.5274 [0.0000]Hausman test �2(8) 18.546 [0.0175] 20.076 [0.0101]


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opposite of ADJALFA. In any case, the remainingvariables present no remarkable change, nor do R2

and adjusted-R2 coefficients.

V. Concluding Remarks

The classical debate about the relevance of financialdecisions on firm value is notably broadened by intro-ducing the set of growth opportunities at the reachof the firm. Then, traditional frameworks fade anddebt, dividend payout and ownership and controlstructure arise as different factors affecting thoseopportunities’ utilization. In essence, these mechan-isms try to give managers the incentive to efficientlyuse firm cash flows and to impede wasteful uses.

On the one hand, following the underinvestmentincentive (Myers, 1977), very highly leveraged firmscould forego profitable investment projects. On theother hand, as stated by Jensen (1986), debt couldlead managers to reject unprofitable projects thatmay increase managers’ utility. Similarly, dividendpayments, as long as it may reduce free cash flows,acts in the same way, specially when companies donot face growth opportunities and, hence, moreintense the overinvestment problem can become.

The relevance of financing and dividend decisionsis reinforced by including some ownership structurevariables. In fact, there is a growing stream in recent

literature focusing on the relationship between someownership and control structure issues – such as own-ership concentration or the monitoring role of theboard of directors – and firm growth opportunities.

This theoretical framework has been applied to asample of large Spanish companies publicly traded incapital markets for the 1991–1995 period. The resultsconfirm most of the predicted hypotheses concerningthe role of debt, dividends and ownership and controlstructure. First, leverage assumes a double and activerole: it helps to create value by disciplining managersin those companies with no or very scarce growthopportunities, while it has a negative effect in thosefirms with the best opportunities due to the propen-sity to forgo profitable projects. Second, dividendinfluence basically follows the same pattern, and apositive and significant correlation between dividendpayment and firm value has been found in theabsence of growth opportunities – the situationwhen a too high earnings retention could more likelyoriginate inefficient investments. An outstandingfeature of the results is the fact that debt anddividends do not seem to be mutually excludingmechanism: those companies requiring a morein-depth monitoring and control use simultaneouslydebt and dividends as complementary ways toavoid possible free cash flow abuses.

Regarding ownership structure, we have found anunequivocal linkage to firm value, although we have

Table 11. Value creation determinants conditional on growth opportunities (with ADJALFA2)

The sorting out criteria was the PER ratio: the whole sample was divided into three groups (each one containing 170

observations) and the upper and the lowest third selected as those firms with more, and less, growth opportunities respectively.

The table shows estimated coefficients, t-statistics, p-value and the (adjusted) determination coefficient. Hausman test allows

testing fixed versus random effects hypothesis. Hausman test follows a �2(8) distribution. The model to be estimated is

Q ¼�þ �1DTAþ �2DIVTAþ �3ADJALFAþ �4ADJALFA2þ �5LOGVM þ �6C1þ �7BAþ �8MULT þ �9DOM þ ":

(a) (b)



DTA 0.631797 6.38501 [0.000] �0.314459 �1.66349 [0.099]DIVTA 0.050478 2.30713 [0.023] 0.00474149 0.533224 [0.595]ADJALFA �0.00974437 �0.83749 [0.404] 0.057373 3.5931 [0.000]ADJALFA2 0.00020393 1.11662 [0.266] �0.00079805 �2.81497 [0.006]LOGMV 0.197797 1.56873 [0.119] 0.586879 8.87203 [0.000]C1 �0.00495088 �1.37973 [0.170] �0.0027791 �1.25933 [0.210]BA �0.432706 �1.50999 [0.134] 0.546871 3.15764 [0.002]MULT 0.02347 0.12904 [0.898] 1.01012 5.65145 [0.000]DOM 0.044833 0.276252 [0.783] 0.242047 1.97017 [0.051]R2 0.627913 0.847369Adj.-R2 0.504861 0.796893F(33, 127) 2.5524 [0.0001] 8.6003 [0.0000]Hausman test 24.327 [0.0039] 30.32 [0.0004]


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not always been able to identify the underlying caus-ality relationship. We have detected some influence ofmanagers ownership and ownership concentration onfirm value, along with some features of the mainshareholder nature – being a bank or a multinationalfirm– positively related to value creation. Theseresults are largely consistent with a test for a non-linear relationship between directors ownership andfirm value as suggested by the convergence andentrenchment hypothesis. The explanation of theseresults relies on an incentive and monitoringapproach, emphasizing the usefulness of ownershipas a way to give managers incentive and to give riseto an efficient control.

To sum up, it is thought that, broadly speaking, thestudy confirms the already existing intuitions aboutthe possible relationship between financing and divi-dend decisions, contractual structure, growth oppor-tunities and firm market valuation. The resultsachieved are consistent with those obtained by anumber of authors from other countries. Some futureresearch directions can be pointed at as the extensionof the sample to an international basis in order toelucidate if country-specific factors such as the finan-cial system design or the firm–bank relationshipnetwork can dramatically modify the conclusionsachieved. The authors would also like to examine ingreater depth the causality relationship among someof the most significant variables, and incorporate amore detailed industry classification.

Acknowledgements

The authors are grateful to M. Fernandez, S. Gomezand M. Ewing, seminar participants in the IV Work-shop in Finance (Segovia), 2000 European FinancialManagement Association Meeting (Athens), 10thAsociacion Cientıfica de Economıa y Direccion de laEmpresa Conference (Oviedo) for their commentson earlier versions of the paper. This researchhas received financial support from the SpanishDireccion General de Ensenanza Superior eInvestigacion Cientıfica (PB97-0594) and from theJunta de Castilla y Leon (VAOS204). All the remain-ing errors are the authors’ own responsibility.

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Appendix: Variables Glossary

Abbreviations: equity market value (EMV ); equity book value (EBV ); total debt (D); dividend payment (DIV ); total assets

(TA); net income (NI ); Sales (S).

Abbreviation Definition Mean Std. dev.

DTA D/(DþEBV) Total debt/Total asset (book value) 0.4576 0.2529DIVTA DIV/(DþEBV) Dividends/Total asset (%) 0.012231 0.22586C1 Main shareholder

participation (%)Ownership concentration. 44.346 25.832

ALFA Directors ownershipparticipation (%)

Directors’ ownership participation (%) 20.658 25.313

ADJALFA Directors ownershipparticipation (%)

Directors’ ownership participation(only natural people)

10.201 18.050

DOM (¼1 for domestic companies) Main shareholder nature 0.2198 0.4145MULT (¼1 for multinational companies) Main shareholder nature 0.2376 0.4260FAM (¼1 for families and individuals) Main shareholder nature 0.2317 0.4223BA (¼1 for banks) Main shareholder nature 0.1941 0.3959STAT (¼1 for State owned) Main shareholder nature 0.1406 0.3479LOGMV LOG(EMVþD) Size proxy 4.5206 0.7258Q (EMVþD)/(EBVþD) Financial q. Value creation 1.0360 0.4556PER EMV/NI Price-earning ratio. Growth

opportunities proxy33.095 43.861

MB EMV/EBV Valuation ratio. Growthopportunities proxy

1.0556 0.8258

SRGR (St�St�1)/St�1 Sales rate of growth. Growthopportunities proxy

0.7054 4.5594


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Documents

Financial decisions and growth opportunities: a Spanish firm's panel data analysis