Taking into consideration the assumptions behind classical capital structures on the one hand and the specific economic environment and the resulting behavior of firms in the emerging European economies on the other hand, it is clear that these extraordinary circumstances (different political and economic systems) influence the determination of the firms’ capital structures in these countries in a special way. The goal of this paper is to determine the driving factors for different capital structure choices in emerging European economies, compared to the one we can see for instance in Western European countries. As a result of the underlying research on this topic and also considering the fact that shareholders are slowly gaining influence in businesses in emerging European economies (like Slovenia), the financial principal behavior of these companies will probably remain different from those in mature market economies. One of the most interesting findings regarding the research topic is probably the fact that we can find a re-designed Pecking Order Theory in some Eastern and Central European (CEE) economies.
Table of Contents
1. ABSTRACT
2. INTRODUCTION
3. LITERATURE REVIEW
4. EXISTING THEORIES
4.1. MM THEORY
4.2. TRADE OFF THEORY
4.3. PECKING ORDER THEORY
4.4. FREE CASH FLOW THEORY
5. SPECIALTIES IN EMERGING ECONOMIES
5.1. CAPITAL STRUCTURE DEPARTS FROM THE CLASSICAL MODEL IN EMERGING EUROPEAN ECONOMIES
5.2. SPECIALTIES WITHIN THE ECONOMIC ENVIRONMENT AND EXPLANATIONS FOR DIFFERENT CAPITAL STRUCTURES
5.3. REFLECTION ON SELECTED CAPITAL STRUCTURE RESEARCH IN CEE COUNTRIES
5.4. PREFERRED CAPITAL STRUCTURE CHOICE IN CEE COUNTRIES
5.5. IMPLICATIONS OF THE CAPITAL STRUCTURE CHOICE
6. CONCLUSION
Research Objectives and Core Themes
This paper examines why classical capital structure theories, which are rooted in the assumption of shareholder wealth maximization, struggle to explain the financing behavior of firms in emerging European economies. It investigates how unique historical, political, and cultural factors—such as employee ownership and wage maximization—influence corporate capital decisions in these transitional markets.
- Comparison between classical capital structure theories and emerging market realities
- The influence of employee-governed business models on capital choice
- Regional characteristics of financing in Poland, Slovenia, and Hungary
- Re-evaluation of the Pecking Order Theory in Central and Eastern European (CEE) contexts
- The role of agency costs and non-shareholder stakeholders in corporate finance
Excerpt from the Book
5.2 Specialties within the Economic Environment and Explanations for different Capital Structures
The main characteristics of the economic system in most of the Central and Eastern European economies (CEE) were or still are social ownership of firms and worker self-management. Under social ownership, firms are neither owned by the state nor by private persons, but generally by everyone. This distinctive system that did not offer a transparent, independent and competitive business surrounding could not provide firms with the right incentives to improve their enterprise value and profitability including an optimal capital structure. In most of the other aspects, firms were nearly similar to those in market economies in the sense that they owned assets and had liabilities such as debt to banks and trade loans (Ribnikar 1996, 26f).
When we are looking for instance at Slovenia it can be seen, that they started the transition toward a market economic system already in the late 1980s, nevertheless the main changes occurred in the early 1990s. Slovenia followed the approach to put an end to the social ownership mainly through giving out free vouchers which was an important step to recognize the unique role of employees while offering them the opportunity to invest in the company where they were working. This led to a privatization status at the end where insider owners gained majority stakes in more than 60% of the cases. Firms that were controlled by insider owners at that time were most of the time small and medium-sized firms, because large enterprises were mostly owned by investment funds or outsider minority shareholders (Simoneti and Gregoric 2004, 11f). This distinctive feature, that employees (insiders) form such a strong corporate governance system and exercise active control over the business in order to prevent external shareholders and management from taking them over, can not only be found in Slovenia, but also in other Central and Eastern Europen (CEE) countries (Gregoric and Vespro 2003, 7).
Summary of Chapters
1. ABSTRACT: Provides an overview of how the specific economic and political systems in emerging European economies influence firm behavior and deviate from classical theory.
2. INTRODUCTION: Defines the fundamental decisions entrepreneurs face regarding investment and financing and sets the context for studying emerging European markets.
3. LITERATURE REVIEW: Traces the origins of modern capital structure theory and identifies the research gap regarding emerging markets.
4. EXISTING THEORIES: Outlines the classical frameworks including MM Theory, Trade Off Theory, Pecking Order Theory, and Free Cash Flow Theory.
5. SPECIALTIES IN EMERGING ECONOMIES: Explores how transition economies diverge from classical models due to unique governance and ownership structures.
6. CONCLUSION: Synthesizes the findings, emphasizing that capital structure in CEE countries is driven by wage-maximization motives rather than solely shareholder value.
Keywords
Capital Structure, Emerging Economies, Central and Eastern Europe, Slovenia, Pecking Order Theory, Trade-off Theory, Employee Governance, Privatization, Corporate Finance, Shareholder Value, Leverage, Wage Maximization, Transitional Economies, Agency Costs, Financing Sources
Frequently Asked Questions
What is the primary focus of this paper?
The paper explores how firms in emerging European economies determine their capital structures, contrasting their unique financial behaviors with the classical models established for mature market economies.
What are the central thematic areas?
The core themes include the impact of post-socialist economic systems, the influence of employee-governed corporate structures, and the adaptation of standard theories like the Pecking Order Theory to transitional markets.
What is the primary research goal?
The goal is to identify the driving factors behind capital structure choices in emerging economies (specifically Poland, Slovenia, and Hungary) and explain why these often differ from Western market standards.
Which scientific methods are employed?
The author utilizes a qualitative literature analysis, synthesizing empirical findings and theoretical frameworks from academic research and international corporate finance literature.
What is covered in the main part of the document?
The main sections cover classical capital structure theories, the divergence of emerging market firms from these models, the role of insider/employee ownership, and empirical research specific to Central and Eastern Europe (CEE).
Which keywords characterize this work?
The work is characterized by terms such as Capital Structure, Emerging Economies, CEE, Employee Governance, and Financial Behavior.
How does employee ownership affect the capital structure?
Research suggests that employee-governed firms tend to minimize debt to avoid the pressure of interest payments, which could threaten their short-term cash flow and, consequently, their objective of maximizing wages.
What is the "re-designed Pecking Order Theory" mentioned?
In the context of CEE countries, empirical observations suggest a modified hierarchy of financing: retained earnings are used first, followed by equity, and lastly debt, which differs from the traditional Western sequence.
- Arbeit zitieren
- Master of Science in Management Swen Beyer (Autor:in), 2010, Capital Structure - Specifics in Emerging European Economies, München, GRIN Verlag, https://www.grin.com/document/152750
