Effects of foreign ownership and International Financial Reporting Standards on debt maturity in Chilean firms/Efectos de la propiedad extranjera y Normas Internacionales de Informacion Financiera sobre la madurez de la deuda en firmas chilenas/Efeitos da propriedade estrangeira e das Normas Internacionais de Relato Financeiro no vencimento da divida em empresas chilenas.
| Autor | Munoz-Mendoza, Jorge A. |
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Introduction
Debt maturity has been a widely studied subject in corporate finance. A large part of specialized literature has found that company characteristics, such as size, credit quality, asset tangibility, debt level, ownership structure and agency costs, are factors which determine corporate debt maturity.
Recently, a topic that has attracted the interest of researchers is the presence of foreign investors in companies' ownership structure. This presence may have important effects on debt maturity, although limited international evidence has not been able to determine this relationship in a consistent manner. Some studies highlight that greater participation by foreign investors in corporate ownership leads to greater debt maturities (Ezeoha, Ogamba & Onyiuke, 2008; Li, Yue & Zhao, 2009; Tanaka, 2015). These studies argue that foreign ownership exercises a complementary supervisory role on long-term debt and that such monitoring can constitute great advantages and improvements to corporate management. On the contrary, other studies argue that the negative relationship between foreign ownership and debt maturity reflects the convergence of interest between managers and external shareholders. This convergence makes foreign ownership play a substitute monitoring role with long-term debt (Choi & Choi, 2013). Although there are several studies in Chile that analyze corporate debt maturity determinants, none have analyzed the potential effects of foreign ownership and its implications.
In Chile, the growth of opening trade and investor confidence in the country's institutions have led to increased foreign ownership of companies. According to World Bank data, between 2007 and 2015, foreign direct investments increased from 7.81% to 8.44%. Along the same lines, the presence of foreign investors in the ownership structure of Chilean companies also increased for the same period. This figure increased from 18.40% to 19.15% for large firms, while for small firms this rise was much more pronounced, increasing foreign investments from 2.35% to 8.12% (Table 1).
Changes in ownership structure have also coincided with the mandatory adoption of International Financial Reporting Standards (IFRS) by Chilean companies. The objective of converging financial reports with IFRS standards is to allow domestic and foreign investors to standardize accounting rules and international financial statement comparability (Bae, Tan & Welker, 2008; Bhat, Callen & Segal, 2016). Although there is a wide range of literature to support the significant advantages of IFRS adoption in reducing information asymmetries affecting investors, its effects on debt maturity have been scarcely discussed. Currently, the literature has not reached a clear conclusion. The positive effect on long-term debt generated by lower information asymmetry (Sengupta, 1998; Florou & Kosi, 2008; Kim, Tsui & Yi, 2011; Simmer de Lima, Sampaio & Gotti, 2018) is opposed to the negative effect with which IFRS mitigates agency conflicts through short-term debt (Zhang, 2008; Kosi & Florou, 2009; Chen & Zhu, 2013). In Chile, this matter has not yet been addressed. Moreover, differentiated adoption between large firms (since 2009) and small and medium enterprises (since 2013) may impose a differentiated effect of IFRS on the debt maturity of these firms. Given that small and medium enterprises (SMEs) are not obliged to report financial information, the degree of information asymmetry that characterizes them is greater when compared to large companies.
The general objective of our study is to determine the effects of foreign ownership and mandatory IFRS adoption on the debt maturity of Chilean companies. Our work contributes to national empirical literature and that of emerging markets in three aspects. First, we evaluate the effects of foreign ownership on debt maturity. Second, we evaluate the impact of mandatory IFRS adoption in both large companies and SMEs. It should be considered that adoption periods differ according to size. Third, we evaluate the interactive effects of foreign ownership and IFRS implementation according to firm size and credit quality. This point is to determine if these variables have conditional and interactive effects on debt maturity.
A grouped data set composed of 20,586 companies was used. This information was obtained from the Longitudinal Business Survey (LBS) for the 2007, 2009, 2013 and 2015 periods. Our results show that foreign ownership reduces debt maturity, which is consistent with the idea that investors use debt maturity to control agency costs. The effects of IFRS adoption differ according to firm size. In large firms, the adoption of this regulation reduces debt maturity, while in SMEs it increases it significantly. This effect is related to changes in information asymmetries since IFRS adoption by a firm. In any case, debt maturity increases when adoption occurs in firms with high credit quality. These results are relevant for firms, investors and policymakers. For firms and investors, our results help them to know the effects of foreign ownership on debt maturity as well as its control implications on corporate governance. It even allows them to know the relevance of IFRS in controlling information asymmetries, promoting foreign participation in corporate ownership and its impact on debt maturity decisions. In addition, regulators and policymakers can quantify the differentiated effect of IFRS according to firm size, and thereby strengthen policies aimed at facilitating firms' access to debt with more favorable terms.
This article is structured as follows. Following the introduction, section 2 reviews the literature related to the effects of foreign ownership and the adoption of IFRS on debt maturity. This section also states the research hypotheses. Section 3 presents the data and analysis methodologies. Section 4 shows the results obtained. Finally, section 5 groups the conclusions of this article.
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Theoretical framework and hypothesis
This section presents a literature review and research hypothesis derived from its analysis. This section has been divided into two parts. The first part details the theoretical and empirical evidence at an international level and analyzes the effect of foreign ownership on debt maturity. The second part focuses attention on studies, which analyze the impact of IFRS on debt maturity.
2.1. Effects of foreign ownership on debt maturity
Ownership structure is a fundamental determinant of the corporate debt maturity decision and its effects can hardly be separated from the agency problem. The degree of ownership concentration, either by controlling shareholders or by managerial participation in corporate ownership, can have positive or negative effects on debt maturity. Some studies argue that ownership concentration has a negative effect on debt maturity. This fact could be explained by the controlling effect of ownership concentration on company management being met through the issuance of short-term debt. This decision would inhibit the use of investment policies to expropriate wealth from various stakeholders (Ozkan, 2000; Guney & Ozkan, 2005; Jiraporn & Tong, 2008). On the contrary, other studies have argued that an increase in managerial or controlling shareholder ownership would lead companies to issue long-term debt as a way of entrenching corporate management (Shleifer & Vishny, 1986; Berger, Ofek & Yermack, 1997; Gompers, Ishii & Metrick, 2003; Datta, Iskandar-Datta, & Raman, 2005; Arslan & Karan, 2006; Benmelech, 2006; Harford, Li & Zhao, 2008; Tanaka, 2015). Despite the contradictory nature of this research, ownership structure continues to be relevant to debt maturity.
The effect of foreign ownership arouses investigative interest due to its increased relevance in recent years of growing globalization (Schmukler & Vesperoni, 2006). Empirically, some works have highlighted that foreign investors participating in corporate ownership can assume the role of a relevant institutional investor capable of influencing corporate policies (Shleifer & Vishny, 1986; Gillan & Starks, 2003; Cronqvist & Fahlenbrach, 2009). In fact, several studies show that foreign ownership can have an important effect on various business areas such as corporate performance, dividend policy and firm value (Dahlquist & Robertsson, 2001; Chevalier, Prasetyantoko & Rokhim, 2006; Baba, 2009; Kimura & Kiyota, 2007; Jeon, Lee & Moffett, 2011; Cao, Du & Hansen, 2017).
Schmukler and Vesperoni (2006) point out that company access to international capital markets and national financial liberalization can have significant effects on the debt term decision. However, international evidence analyzing the effects of foreign ownership on debt maturity is still scarce and no consensus has been reached regarding this relationship. Some studies argue that foreign ownership has a positive effect on debt maturity, which is known as the foreign ownership monitoring hypothesis. Tanaka (2015) corroborates this relationship in a study of Japanese companies between 2005 and 2009. The author argues that foreign ownership is a means of control which disciplines corporate management, allowing them to access longer term debt and lower costs. In this case, foreign ownership prolongs its supervising function with the issuance of long-term debt. Although Jones (2006) warns that there may be conflicts between foreign and national owners, Li et al. (2009) argue that the described supervision effect has greater advantages, such as the attraction of new capital, technological improvements and corporate management. This view is also supported by Ezeoha et al. (2008).
Other studies indicate that foreign ownership has a negative impact on debt maturity, which supports the risk modification hypothesis. Relying on the theory of agency, these researchers have indicated that company administrators can expropriate wealth from bondholders through...
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