Bulletin Autumn‧Winter 1995

Variation s i nDeb t and Dividen d Policies Several explanations for variations i n debt a nd d i v i d e n d policies have b e en p ut f o r wa r d, b u t t h e v a l i d i t y a n d a p p r o p r i a t e n e ss o f t h e se explanations is still n ot f u l ly confirmed. Even i n t he US a n d t he UK , w h e r e t he re has b e en research regarding these issues, the evidence i s still far f r om conclusive. I n Asia, capital markets are a relatively n ew p h e n ome n on (e.g. China) a n d the emergence o f these markets presents ma n y uncertainties, a s also opportunities, f o r capital ma r k et participants. Theories d e v e l o p ed i n the West ma y have little o r n o relevance for these markets w h i c h are e v o l v i ng i n a totally different cultural a nd e c o n om ic environment. The Aim s of the Researc h Projec t Prof. Gul's research covers debt a nd d i v i d e nd policies o f firms based i n the Asia-Pacific region. His studies can be g r o u p ed under t wo b r o ad categories ： (1) T h e first category examines debt financing a n d d i v i d e nd po l i c i es o f p u b l i c ly t r a d ed c omp a n i es i n Ch i n a, J apan, Ko r e a, a n d Thailand. (2) T he second category focuses o n corporate financing policies. These studies demonstrate that debt determination is a c omp l ex process, a n d that factors such as the f i rm size a nd p r o f i t a b i l i t y l e v e l s, a l o n g w i t h g r o w t h opportunities, de t e rm i ne debt levels. Ac c o r d i n g to Prof. Gul, the studie s are based o n the Contracting Cost Theo r y, the basis o f w h i c h i s thatc o r po r a t i ons 'are legal fictions w h i c h serve as a nexus for a set of contracting relationships amo ng individuals' (Jensen a nd Meckling, 1976, p. 310). For example, there is a contractual relationship b e t we en debt holder s a nd share holders a nd the control or resolution of the debt holder-shareholder conflict t h r o u gh financial contracts can increase the value of the firm. I n simple terms, the Contracting Cost Theo ry attempts to l o o k b e y o nd corporations as pu r e ly legal entities, a nd i n to the relationship b e t we en managers, debt holders, a nd shareholders. T h e theory postulates that management acts o n behalf of shareholders to the detriment of debt holders, a n d this relationship ultimately determines the debt a nd d i v i d e nd policies o f firms as w e l l a s their willingness to undertake risky n e w projects . Firms w i t h higher g r o w t h opportunities n o r ma l ly have mo re diversified activities, w h i c h i n t u r n makes i t mo re difficult to mo n i t or the activities of managers. Growth Opportunitie s I n theory, g r o w th opportunities are d e f i n ed i n terms of existing assets a nd th e value of the firm. The l ower the existing assets are i n relation t o the total value o f the firm, the higher are the g r o w t h o p p o r t u n i t i es f o r t he f i r m.Po t e n t i al investors value a f i r m not o n l y for its existing Prof. Ferdinand A. Gul is professor of accountancy in the Faculty of Business Administration. Prior to joining the University in June 1990, Prof. Gul was a professor of accountancy at Griffith University in Queensland, Australia, before which he was deputy dean, Faculty of Economics and Administration, University of Malaya in Kuala L u m p u r , Malaysia, where he started his academic career. Prof. Gul's research interest is mainly in the area of behavioural accounting, but lately he has developed an interest in the use of capital market data to analyse and understand how managers choose corporate finance policies, compensation schemes, and accounting procedures to either increase or decrease income. Prof. Gul is currently supervisingfive Ph.D. students who are working in these areas. Research 25