Bulletin Autumn‧Winter 1995

assets, but for future opportunities wh i ch cou ld bring higher returns. Gr ow th opportunitie s could be related to capacity expansion projects, n ew products, o r asset acquisitions. In this setting, firms w i t h h i gh g r ow th opportunities (and the attendant problems and difficulties of monitoring managers) are less likely to issue debt because o f u n d e r i n v e s t me nt a nd asset s u b s t i t u t i on problems. Underinvestmen t Underinvestment suggests that firms/manager s are on ly w i l l i ng to issue debt to the extent that liabilities can be offset by existing assets. W i th h i g h g r ow th opportunities (i.e. l ow levels o f assets i n place) managers, acting o n behalf of shareholders, may decide no t to bo r r ow anything more for potentially profitable projects, because, should the projects not actually yield the hoped for profit and result i n a loss instead, any assets remaining w o u l d have t o be used t o pay o ff d e bt ho l de r s. One w a y o f c o n t r o l l i ng this underinvestment p r ob l em i s t o finance g r ow th options w i t h equity rather than debt. Thus, other t h i ng s b e i ng equal, the h i g h er the g r o w t h options, the lower the level of debts for firms. Asse t Substitution Given that firms have already issued debt , the asset substitution problem occurs wh en managers tend t o substitute h i gh risk assets w i t h lower risk assets. I n this way, wea l th is transferred to shareholders p r ov i ded that the debt was priced o n the basis of l ow variance assets. For instance, i f l o w i n t e r es t rate d e bt has b e en issued, managers c ou ld then try to substitute more risky assets w i t h less risky assets, thereby transferring wea l th to shareholders. Asset substitution is less likely w h e n there are a large amount o f existing assets, since it is easy for outsiders (e.g. auditors) to mo n i t or the existence and value o f these assets, such as land, building, and machinery. Howe v e r, w h e n a f i rm has mo re intangible g r ow th opportunities, asse t substitution is more likely since outside monitoring of these assets is more difficult . Thus, firms w i t h mo re g r ow th opportunities ( wh i ch are normally mo re risky) are less likely to issue debt, other things be i ng equal. Similarly, it seems logical that firms w i t h l ow g r ow t h opportunities w i l l have a higher level of d i v i dends. Thos e f i rms that have adequa te profitability but f ew g r ow th opportunities w i l l tend to distribute free cash flows to shareholders, as i t i s i n the interest o f the shareholders t o recover cash rather than invest i n projects that do not bring adequate return. Thus , firms w i t h limited g r ow th opportunities w i l l have higher levels o f dividends, other thing s being equal. Research Finding s and Futur e Directions Data collected f r om PACAP (Pacific-Basin Capital Markets) for the period 1988-1992 for Japanese, Korean and Thai companies was used t o test the above theories. Though the three economies have significant differences, statistical analysis seems to confirm the theoretical results described above, particularly for the relationship be t ween g r o w t h o p p o r t u n i t i es a nd d e b t f i n a n c i n g. Howe v e r, the c o r r e l a t i on b e t w e en g r o w t h o p p o r t u n i t i e s a nd d i v i d e nd p o l i cy was n ot significant, and, i n some cases, n ot i n the predicted direction. The reason for the latte r may be that some key variables were not covered and/or the model used was mis-specified i n some sense. For example, managerial ownership may affect th e choice o f dividends. Studies so far have given Prof. G u l a p r e l i m i n a ry i n s i g ht i n t o w h a t motivates managers i n their corporate decisionmaking. He intends, i n the course o f future studies, to re-examine the effects of a wider range of variables o n dividend policies. He also hopes to extend his analysis to evaluate the impact of g r o w t h o p p o r t u n i t i es a nd debt po l i c i es o n ac coun t i ng p o l i cy and management c o n t r ol choices. Such findings w i l l p r o v i de a better u n d e r s t a n d i ng o f the factors that mo t i v a te ma n a g e rs i n t he s e l e c t i on o f a c c o u n t i ng procedures and corporate policies. Research 26