The assessment of the applicability of financial structural theorems

This study deals with one of the central corporate finance questions; it is about to what extent the prevailing financial structural theories have provided appropriate solutions to enable practicing professionals to identify, evaluate and monitor company’s financial structures. The undertaken field survey study has adopted the analytical descriptive methodology using the descriptive and inferential statistical techniques. It has been conducted through a comprehensive questionnaire, which consists of twelve sections each one deals with one particular aspect of the research problem and includes a number of alternative options for respondents to evaluate using Likert five points scale. The study main findings include the existence of a gap between the current financial structural theories and the actual practices in the same field, thus implying the dissatisfaction of the public practitioners regarding the prevailing theorems. The study findings also supported the concept of the financial structure rather than the capital structure because the former identifies the employed capital in terms of its two key dimensions; the financial leverage and the net working capital liquidity. Also, it has evaluated the effectiveness of financial structure by assessing the value of its twin elements, which have been classified as high, medium or low. Moreover, the results of the field survey has recognized the trade-off process between the underlying factors of financial strength as the sole determinant of the effectiveness of the financial structure; and it has approved the proposed qualities of the required financial structural model for identifying, evaluating and monitoring company’s financial structure. Keywords; Financial strength , financial leverage, The dynamic financial structural model, the tradeoff process. ةلجم مولعلا ةيداصتقلاا Journal homepage: http://scientific-journal.sustech. edu/ يملعلا ثحبلا ةدامع ةلجم مولعلا ةيداصتقلاا – ( قحلم 2 ) Vol. 18 (2) 153 Journal of Economic Sciences Volume 18(2) 2017 ISSN (Print):1858-6740 e-ISSN (Online):1858-6759 Introduction: A close look at the financial analysis of the international stock markets during the period of the last international financial crisis (2007-2008), reveals that the crisis had arisen mainly due to the theoretical modeling used by the financial industry, which had been based on unrealistic assumptions. It had led to serious problems of mispricing securities in a massive unregulated market for credit default swaps that exploded upon catalytic rises in residential mortgage defaults. That is to say the debt surge and the relaxation of its conditions simultaneously had allowed financial institutions, brokers and traders to raise up corporate securities prices on the anticipation of gaining quick profit from short-term speculations and investment adventures (venture capitalists), such engineered practices may transfer the associated financial risk, but would never avoid it (The economist.com, 39:2013). The implication of the debt crisis on business corporations: Against this gloomy economic background, following the crisis, many business organizations with high financial leverage experienced financial difficulties and become technically bankrupt and unable to meet their due debt obligations. Some of these corporations struggle to survive by adopting adequate financial policies or undertaking some sort of corporate restructuring adjustments, which the financial restructuring constitutes a highest level of it. Review of contemporary relevant research activities: The following previous studies represent part of the reviewed studies in the domain; some other studies have been reviewed but not presented due to space limitation. The trade-off theory revisited on the effect of operating leverage: The authors found a theoretical and empirical evidence of a positive relationship between the operating leverage and the financial leverage. It has been shown that the relationship does not need to be process specific; instead, it is a direct result of the financial flexibility of managers. Taxes, bankruptcy costs, transactions costs, adverse selection, and agency conflicts, they have all been advocated as major explanations for the use of corporate debt financing (Kristofer et. all: 2016), the study has shed light again on the expediency and flexibility of the tradeoff theory The Determinants of Capital Structure: Evidence from the Turkish Manufacturing Sector : The authors investigated the determinants of capital structure in Turkey by using the panel data method. The sample period spans from 1993 to 2010 for 79 firms in the manufacturing sector traded on the Istanbul Stock Exchange. The base model was expanded with firm size and sector specific effects. This study compares also effects on capital structure according to the industrial sectors and firm size of variables used in models. Growth opportunities, size, profitability, tangibility and non-debt tax shields are used as the firm-specific variables that affect a firm’s capital structure decision. The empirical results present that there are significant relationships between growth opportunities, size, profitability, tangibility and leverage variables, but non-debt tax shields explanatory variable has insignificant effect on leverage, it has been using the book value of the total debt to total assets ratio as leverage variable (Acaravci, 2011). The study attempted to identify the underline factors, which governs the leverage. Capital Structure Dynamics and Transitory Debt: The research developed a model that showed how and why debt serves as a transitory financing vehicle to meet the funding needs associated with random shocks to investment opportunities. It yields a variety of new testable predictions about the time paths of leverage and institutes a link between investment and capital structure dynamics (Harry Deangelo et. All, 2008). The study allows topredict the average value over time. يملعلا ثحبلا ةدامع ةلجم مولعلا ةيداصتقلاا – ( قحلم 2 ) Vol. 18 (2) 154 Journal of Economic Sciences Volume 18(2) 2017 ISSN (Print):1858-6740 e-ISSN (Online):1858-6759 Researchers’ remarks in respect of the previous research efforts: The reviewed researches on the related subjects of the domain have concluded to the unsatisfactory performance of the current capital structure theorems and that in real life situations there have been numerous unrelated practices, the matter that indicates a research gap between theory and practice in respect of the evaluation of the effectiveness of financial structures. Nevertheless, the researchers and financial practitioners continue to exert continuous efforts to clarify the situation. Based on the reviewed literature it would be appropriate to consider the corporate financing decisions and the investment ones jointly. It has been claimed by some active theorists, who had investigated the interrelationship between the capital structure and the financial performance that they have been closely interrelated ( Javad and Akhtar,2012) . Therefore, the capital structure can virtually be considered as a core area of the corporate finance, which encompasses both the investment and finance as two faces of one coin. The strategy of the current research is to reconcile the difference between theory and practice by setting up a flexible and reliable framework to guide management decisions in respect of the effective financial structure. 1) The theoretical Framework of the study (state of the art): The importance of financial strength for all business firms: Mr. Paul J Beckert, the president of pinnacle business solutions commented on the importance of financial strength as follows; Business owners need to monitor the financial strength of their companies relative to their marketplace on an on-going basis, placing increased focus on the key areas of business profitability, liquidity and solvency, this can really have a positive impact on your financial strength” ( www.Pinnacle-business.com,2017) The concept of financial structuring: It is the concept of designing and implementing a financial structure relevant to company’s total employed capital. It shows the basic relations of the employed capital; the proportion of equity to debt capital and the net working capital ratio, which determines the proportion of long to short term finance. Financial strategy or policy: Financial strategy or policy refers to the strategic planning of company’s financial resources to attain its objectives and maximizes the value of the company. It spells out the sources and means for financing the business activities in three major stages as follows: • Determining the total amount of employed capital needed to finance firm’s investment schedule by determining the proportion of long term to short term finance. • Determining the proportion of equity to long-term debt that make up the employed capital. The main theorems relevant to financial restructuring: M&M (irrelevance theory); M&M theory (1958), postulates, “The value of the firm is not dependent on the choice of capital structure or financing decision, rather the market value of a firm depends on its operating cash flows” . This viewpoint clearly indicates that no direct relationship between firm’s financing and investment decisions, whereas it has been evidenced that the financial structure of a company changes according to the result of it operations. However the theory has severely criticized due to the many assumptions attached to it, which could hardly realized. M&M with corporation tax theory; In their second version of their theory on capital structure, Modigliani and Miller (1963) amended their earlier model by recognizing the existence of corporate tax. Their acknowledgement of the existence of corporate tax and the tax deductibility of interest يملعلا ثحبلا ةدامع ةلجم مولعلا ةيداصتقلاا – ( قحلم 2 ) Vol. 18 (2) 155 Journal of Economic Sciences Volume 18(2) 2017 ISSN (Print):1