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  ACR Vol. 20 (3&4), 2012 75 DEBT IN THE CAPITAL STRUCTURE OF SERVICE ENTERPRISES LISTED ON THE MEXICAN STOCK EXCHANGE FROM 2000-2007 Juan Gaytan-Cortes, Guillermo Vázquez-Avila, Juan Antonio Vargas-Barraza and Jose Trinidad Ponce-Godinez ABSTRACT The purpose of this study was to identify and analyze the main factors of the country and firm, as well as to determine their mathematical relationship to include debt in the capital structure of companies that belong to the services sector. In the analysis, financial information from the Mexican Stock Exchange from the period 2000-2007 was used. The long-term debt was the dependent variable and using the technique of panel data the mathematical relationship exercising independent factors was estimated. Keywords: Capital structure, Service sector, Business factors, Country factors  INTRODUCTION The lack of proves in the real world of a company's financial normative structure led us to the need of revising existing hypotheses and theories, empirical studies and principles with their different approaches. We reviewed theories and empirical studies in order to gain a solid foundation for the questions, challenges and problems that we considered. We began by reviewing the literature on theories regarding capital structure and then looked at the empirical research that has identified and determined the mathematical relationship between some of the major factors that act as determinants to incorporate the structure of debt capital. Afterwards, we estimated the overall mathematical relationship between the main factors. The multivariate technique demanded prior exploration data through univariate and bivariate analysis. Sorted data, plotted and analyzed, were used to power the E-Vews program version 4.1, identifying the positive or negative relationship exercising the principal factors of the company and the country to incorporate debt to build its capital structure.  ACR Vol. 20 (3&4), 2012 76 Finally, the results were confronted with theories and empirical studies reviewed in order to stand out or exclude their application in our national economic environment and particularly in the service sector, considering the total number of companies listed on the Mexican Stock Exchange, with the aim of showing an overview of the main factors to incorporate long-term debt in its capital structure and, in turn, provide more input on decisions of firms in the services sector The tertiary sector, better known as services sector, corresponds to all of those activities that are not involved in the production of material goods, which means, activities that cannot be exchanged, remain as stock or marketed separately from production. On most of these, property rights cannot be establish and generally consist of changes in the conditions of the units that consume them. It is a key feature that their products are ephemeral, since they only last the time of the transaction; they are intangible or simply not material (WTO, 2008). In the report presented by the World Trade Organization (WTO, 2009), world´s exports of services amounted up to $3.8 billion for 2008, a growth of 12 percent over the previous year, while growth in the year 2007 was 19.7 percent. In Mexico, the tertiary or service activities accounted for 56 percent of the economically active working population according to the PEA (INEGI, 2001), which can manifest itself in this context as a country in an area of development and kept away from stereotypes marked by the weight of the agricultural and extractive activities. THEORETICAL FRAMEWORK The existence of an optimal capital structure on a company just like the way it should be determined, has been one of the most controversial issues in the finance literature since Modigliani and Miller (1958) published their article and presented their proposals for the irrelevance of capital structure on firm value. It has been 52 years since the publication of this seminal work that gave rise to corporate finance we know today and which in turn caused a study of the capital structure of companies that captured and received much attention in the areas of finance and economy. Nonetheless, in spite of the extensive research, the theory of capital structure does not provide a conclusive answer. The theoretical models developed in recent years have tried to validate and generalize, sometimes, the irrelevance of Modigliani and Miller (1958); the theory of maximum debt (Modigliani & Miller 1963) to empirical evidence that the market limits the borrowing capacity of the company. The convergence of two lines of research in the decade of the sixties of a renewed theory of capital structure emerged and it postulated the existence of an optimal solution to the problem, which must be achieved before the company runs out of debt capacity that the market offers. In this investigation the following theories were reviewed: optimal capital structure, tax base theory, asymmetric information theory, theory of hierarchy or pecking order of preference theory (POT), which was formally proposed by Myers and Majluf (1984) built on the preliminary work of Donaldson (1961), theory of agency costs and the theory of free cash flows, together with  ACR Vol. 20 (3&4), 2012 77 studies that support these theories, highlighting a study by Rajan and Zingales (1995) among the others, and the study of Wald (1999). These papers provide empirical evidence for the G-7 countries. They analyzed some institutional factors of the company, such as: the size of the firm, earnings, growth rate, and risk. As in the study of financial theories, knowledge has grown and evolved, but it has not been able to build a model that includes all the factors considered as determinants of capital structure in the various empirical research, citing those by Filbeck and Gorman (2000), Bradley and Chung (1993), Van Der (1989), Kester (1986), Harrell & Kim (1984). The empirical evidence suggests that in addition to company-specific factors, macroeconomic and institutional factors in each country turn out to be important determinants of capital structure (Booth, Aivazian, Demirguc-Kunt, & Maksimovic, 2001; Antoniou, Guney, & Paudyal, 2008; Gaytan & Bonales 2009; Dias, Thosiro, & Cruz, 2009; Dias & Toshiro, 2009). However, most of the theoretical and empirical debate regarding business financing has been conditioned by well-developed capital markets and financially well-structured architecture. (Zingales, 2000). Arias, Pelayo, and Cobián, (2009) argue that specialized research is needed on this issue of Mexican companies in order to achieve a better understanding of its funding decisions, in order to design appropriate financial instruments to their needs that enable and facilitate their growth. The Capital Structure and Macroeconomic and Institutional Factors in the Country Recent empirical evidence suggests that country-specific factors are important determinants of capital structure in emerging markets. Booth et al. (2001) and Antoniou et al. (2008), suggest that specific factors in explaining the decisions of indebtedness of the company are related to the economic environment and institutional arrangements in each country, as it is: I) the structure of the financial sector, II) tax system, III) the legal system and IV) generally accepted accounting practices. In the study of the characteristics of the countries, it has already been demonstrated that they have a significant impact as determining factors in the capital structure of Mexican companies, including: I) inflation, II) the interest rate risk free, and III) the exchange rate. Inflation In studies of Latin American trade companies (Mexico, Brazil, Argentina, Chile and Peru) Dias et al. (2009) and Dias and Toshiro (2009), when considering the average annual inflation rate as an independent variable, found no significant evidence of this variable borrowing short and long term. The results of the analysis of the relationship of macroeconomic factors of national concern and the company in the capital structure of 20 subsidiaries of multinational companies belonging to the electronics sector set out in state of Jalisco, Mexico, throughout the period 1995-2002 showed that the inflation rate has a positive relationship with the capital structure (Gaytan & Bonales, 2009).  ACR Vol. 20 (3&4), 2012 78 Free Interest Rate Risk In the study carried out by Barry, Mann, Mihov, and Rodriguez, (2008), it was found that firms issue more debt when interest rates are low compared with historical levels. Exchange Rate The study by Burgman (1996) analyzed and included 1,072 companies (410 domestic companies and 662 multinational corporations) that were listed on the NYSE during the period 1987 to 1991, and concluded that the leverage of multinational corporations is positively related to exchange rate risk. This result is consistent with the use of capital structure as a tool to cover the financial risk of the exchange rate. Capital Structure and Firm-Specific Factors There has been extensive research to identify the firm-specific factors that might be significant determinants in deciding the capital structure and the validity of theories that give sustenance. In the companies we studied the characteristics that may act as determinants in the capital structure. Dias et al. (2009), Gaytan and Bonales (2009), and Dias and Toshiro (2009) determined the mathematical relationship between the specific factors of companies established in Mexico and companies based in Latin America. In their empirical studies they found significant evidence in the following factors: i) size, ii) profitability, iii) risk, and iv) growth. In the current investigation all these factors were considered. Size The size seems to be the most important factor in access to finance, especially for long-term debt (Vigra, 2009). On this issue, classic research was carried out by Rajan and Zingales (1995) who investigated companies’ determinant factors of capital structure of the Group of Seven industrialized countries (G-7), during the period 1987 to 1991, and found that size is a factor, arguing that large companies tend to have a higher level of indebtedness. Other research such as Frank and Goyal (2009) was similar to that of Rajan and Zingales. But authors such as Titman and Wessels (1988), Chung (1993) and Ozkan (2001) found a negative relationship between firm size and indebtedness. Some other authors such as Dias et al. (2009), and Dias and Toshiro (2009) also obtained evidence that the size of Latin American companies, including Mexico, is positively related to debt. Profitability As for profitability, Rajan and Zingales (1995), in their investigation, identified that profitability is a determinant of capital structure and most profitable companies have a lower debt level, so that profitability will be negatively related indebtedness. Other researchers and Ozkan (2001), Frank and Goyal (2000, 2009) also found significant relationship between profitability and debt of the company being negative. However, Teker, Tasseven and Tukel (2009), in their study with panel data of42 companies listed on the Istanbul Stock Exchange, Turkey in the period 2000-2007, found a significant positive relationship between profitability and debt. In recent studies of  ACR Vol. 20 (3&4), 2012 79 Latin American companies (Mexico, Brazil, Argentina, Chile and Peru), Dias et al. (2009) and Dias and Toshiro (2009) found a negative relationship between returns on assets and debts of the company. Risk The risk of profits derived from investment and operating activities of the company is independent of funding decisions in accordance with the theory of static equilibrium. But with the volatility of earnings, business risk can be measured. The risk is expressed by uncertainty in the results for capital investment; why stockholders registered on the balance sheet are considered a factor in including debt in the capital structure of companies. Vigra (2009) argues that increased business risk impairs the ability to sustain financial risks and increases the likelihood of financial difficulty. Consequently, firms with higher business risk have a lower ratio of debt relative to equity. Growth Antoniou et al. (2008) conducted an investigation with 4.854 companies belonging to the commercial sector or market (Ukrainian 1.562 and 1.127 U.S.) bank-oriented economies (244 French, 479 German and Japanese 1.442) and determined their capital structure in the period 1987-2000 using panel data. They found that the debt ratio is negatively correlated with increased growth opportunities expressed as the ratio of market value to book value, in agreement with other authors such as Rajan and Zingales (1995) and Myers (1977). Hall, Hutchinson, and Michaelas (2000 ) examined 3,500 small and medium enterprises (SMEs) in the United Kingdom which were not listed and using the percentage increase in sales volume growth as an indicator variable found that the level of short-term debt relates with growth of the company. Recent studies of Latin American trade companies (Mexico, Brazil, Argentina, Chile and Peru) Dias et al. (2009) and Dias and Toshiro (2009), in their investigations found evidence of negative growth companies as a percentage of sales volume increase in both the short-term debt to book value as short term onerous to financial indebtedness. OBJECTIVE Studies of the structure of capital in Mexico are critical; there is the lack of a robust model to explain the financing decisions of Mexican companies that belong to the services sector. This study is aimed at identifying key institutional factors of the country and institutional factors of the company and its positive or negative relationship to include debt, by forming capital structure used by service companies that traded steadily in the period from 2000-2007 in the Mexican Stock Exchange.
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