Preliminary communication
https://doi.org/10.22598/iele.2022.9.2.4
SHARE CAPITAL MAINTENANCE IN LARGE CROATIAN GROUPS
Ana Ježovita
orcid.org/0000-0002-1740-6862
; University of Zagreb Faculty of Economics & Business, Zagreb, Croatia
Abstract
Corporate governance is a fundamental mechanism for building a reliable, transparent, accountable business environment for all stakeholders. In today’s growing, dynamic, unpredictable, unforgiving environment, it is more than ever crucial to ensure business continuity and going concern by applying proper strategies to achieve adequate financial stability. The conservative approach defines that own sources of financing must finance at least 50% of a company’s total assets. Nevertheless, favorable financial leveraging provides higher returns to shareholders than the option of not using debt. Therefore, the management of every company should find a balance between those two strategies. Usually, the shareholders bear more significant risk, which results in demanding higher returns compared to creditors. But this is the case only for newly issued shares and increased subscribed capital, but not for internally created earned equity as retained earnings. Furthermore, internally created equity is considered the cheapest source of financing assets, and there are justified reasons for companies to focus on those sources in developing financing strategies. Although higher stock prices may materialize those returns on the market for listed companies, shareholders’ expectations are more often related to the dividends distribution which directly affects the company’s sources of financing structure. Thus, to meet the shareholders’ expectations on the one side and achieve share capital sustainability objectives on the other, advanced analytical and accounting knowledge and skills are necessary. The research subject is share capital structure and financial stability as a condition for sustainability and going concerned 77 large Croatian groups in which the parent company is a public limited company from 2011 to 2020. Therefore, as an imperative and precondition of capital maintenance, we analyzed large Croatian groups that have total capital (capital & reserves) at least at the subscribed capital level. Our results indicate that many observations have subscribed capital greater than total share capital. We also concluded that a more significant percentage uses financial leverage intensively, i.e., more than 50% of assets are financed by debt rather than by equity. Furthermore, from the cases with positive financial results (net profit), almost 75% of observations distributed more than 50% of their net profit yearly. Finally, research confirms that changes in total capital primarily result from net profit and changes in retained earnings. Accounting adjustments and subsequent measurements were not significant parameters for capital change. The results are obtained using regular descriptive statistics, nonparametric tests, and panel data analysis models.
Keywords
share capital maintenance; dividends distribution; financial stability; going concern; financial ratios
Hrčak ID:
293336
URI
Publication date:
31.1.2023.
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