Capital Structure of Insolvent Companies in the Czech Republic
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Capital Structure of Insolvent Companies in the Czech Republic Dagmar Čámská 1
# International Atlantic Economic Society 2020
JEL G30 . M00 Companies can use different sources of capital for financing their activities. These capital sources can be divided into the two main categories of equity and debt. Capital structure is influenced by such factors as enterprise industry sector, enterprise size, life cycle stage, availability of capital sources, and overall economic situation (Frank & Goyal, Financial Management, 2009). Higher indebtedness generally increases financial (or leverage) risk. Therefore, insolvent companies are the main focus of this paper. Although capital sources are strictly categorized according to accounting principles, some sources have features common to both equity and debt. These capital sources include loans provided by individual owners, parent, or daughter companies, classified as debt from the accounting view point, and provided by sources closely related to the enterprise itself. The significance of these capital sources has increased in the Czech Republic over the past five to ten years and can be monitored in all industry sectors. This note describes the general capital structure and importance of specific capital sources which can influence insolvency proceedings and results. Enterprises enter insolvency proceedings in the Czech Republic either because of overindebtedness or inability to repay obligations. These proceedings combine a short-term (operational) view with a long-term view (capital sources) (Schönfeld et al., Journal of Business Economics and Management, 2018). The data for this paper were extracted from the pre-paid corporate database, Albertina. The sample contains over 1700 records, each Electronic supplementary material The online version of this article (https://doi.org/10.1007/s11294-02009789-x) contains supplementary material, which is available to authorized users.
* Dagmar Čámská [email protected]
1
Department of Economic Studies, Czech Technical University in Prague, MIAS School of Business, Kolejní 2637/2a, 160 00 Prague 6, Czech Republic
Čámská D.
describing the financial structure of one insolvent company, and over 100,000 observations describing solvent enterprises belonging to different sectors covering the whole economy. The internal sector structure of both samples is comparable (online supplemental appendix). The extracted data were analysed using absolute and relative frequencies monitoring the use of debt and specific capital sources accompanied by leverage financial ratios. The results showed that insolvent companies are 40% more indebted (median average) than their solvent counterparts, taking into account industry specifics. Many of them are even overindebted. The leverage ratio (calculated as total debt value divided by the total asset value) exceeds one. For almost 25% of insolvent records, a special capital source was used, defined as loans provided by the individual owner, parent, or daughter companies. The percentage of non-defaulte
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