Question

What are the determinants of borrowing ?(500words)

Discuss how managers makes their financing decision according to pecking order of financing. What are some of expectations for this pecking order behavior. (400Words)

Answer 1

Borrowing are also reffered as loans been taken for one's personal use.

Determinants of borrowings are :-

1) knowledge about loans

2) Media awareness

3) perception towards loans

4) Family influences

5) Religious/ ethic belief

These all have a effect on loan borrowings.

1) Knowledge about loans or borrowings helps to determine from where borrowings have to done. Borrowings that are being provided at best rates have to utilised. Therefore knowledge about the borrowings is a major determinant of borrowings.

2) Media also helps and create awareness about various borrowings available in the market. It guides borrowers to choose borrowing platforms by judging properly where to borrow from. Generally borrowers prevent themselves from being misguided by getting aware of various borrowing by what media is conveying.

3) Perception makes motive for borrowing clear and therefore according to motive the borrowing medium and platform is determined accordingly. Having a clear perception is very important. It leads to open ways further for deciding criteria for borrowing.

4) Family influences also creates a perception in mind of borrowers that influence the borrowings by the borrowers. There is a culture influcing the individual which driven by family forces.

5) Religious beliefs have their own effect which drives the borrowing to a great extent. Each borrowing have a particular consequences and are related to various religious beliefs.

If we discuss about pecking order of financing, it is related to failure of information where a situation occurs when one side is having more relevant information from the other and this generally creates imbalance.

The managers are obviously having more information about the company than the external parties. So it is riskier for external parties to take interest in companies. Therefore, companies pay a retained earning finances to those investing. This earning paid to externals are huge amount.

Therefore managers like to do internal financing more than in external financing. External financing usually high demands. The two sources of financing - debt and equity, managers prefer to select debt, as its cost to company is less compared to equity'S cost.

If we consider management taking decisions on pecking order, the assets claims seniority is considered. The management decides which sources will lead to less cost of capital which is opposite of what stockholders want. Therefore, company looks for first using the retained earnings, then debts and at last the equity, as the equity leads to amount being paid among all the three, where retained earning needs no any amount to be given.

Some of the expectations from pecking order behavior would be that investors should be rewarded for their risk taking attitude to compensate them, and that is being done as the return they get is the highest of all.

Management also feels that it should take care of its costs and adopt ways to minimize its costs.

Hence an ethical behavior would be toaintaining a balance between both the situations. The investor as well as the management, none of them should be facing loss. This could be done through proper management and balancing the two situations.

Thus we saw expectations from pecking order behavior and management concerns towards it.