1.1: A Succinct Overview

The research aimed at determining the impact of the historic low rates in the capital structure of the Financial Times Stock Exchange (FTSE) 100 companies. Therefore, the introductory section entailed the brief demonstration of the relationship between the historic low rates and how they affected the capital structure of FTSE100 companies. It was also important giving out definitions of such key terms and phrases concerning the study in the background section. Research also included the rationale section, where it was justified why the review was necessary. It was also aimed at highlighting some of the significant reasons why it was important using secondary data in coming up with findings of the research. Creation of the research aim and four objectives and hypotheses, on the other hand, was also deemed a matter of priority during the completion of the introductory section. It was important underscoring on the research limitations, as well as the delimiting factors in addition to creating a brief trend of the proposed methodology. As a researcher, one was also expected to develop an outline of the research.

1.2: Background of the Study

According to Bessler, a capital structure is a phenomenon where a firm utilizes funds from diverse sources to keep alive its operations[1]. Therefore, the funds may come in the form of debts where the firm may use either long-term payable notes or bonds. The equity is often considered a preferred stock, common stock, or a type of retained earnings. The capital structure can also accommodate short-term debts where the investors in the firm may use working capital[2]. Therefore, several external, as well as internal factors have a significant impact on the proper development of the capital structure. The historic low-interest rate is one of such factors considering that the firmness of the capital structure relies on how well a company funds its operations through acquiring debts. According to Walter, proper management of debts calls for the determination of trend of charging interests on the acquired funds[3]. Therefore, it was evident that the capital structures of FTSE100 companies were more likely to be affected by the existence of historic low-interest rates.

FTSE100 is an index of 100 best companies listed and contained on the London Stock Exchange (LSE)[4]. Their strength is usually assessed using the market capitalisation structure[5]. The market capitalisation system is the market value of a publicly-traded firm, primarily based on its outstanding shares[6]. Therefore, the strength of the companies listed on the FTSE100 is usually determined by their share prices times the overall exceptional shares[7].Morgan & Richard found out that there was a continuous decrease in the level of interest rate since the beginning of the 20th century[8]. Today, interest rates have been identified to be at their lowest level since the downward trend started being experienced[9]. Therefore, the trend had compelled the investors to be highly keen as they have been obliged to cut down their investment on the long-term bond bets. They still harbour the fear of losing their financial proposition in the long term. Mazouz & Dima state that real rates can be described as the difference between the yields made by treasury notes and the impact of inflation[10]. Therefore, the investors could have harboured some fears on the probability of experiencing a reduction on the gains made from fixed rates of their returns because of the negative impact of inflation. Therefore, this means that FTSE100 companies were likely to experience a significant reduction in the capital structure because of the decrease in total funding. The historic low-interest rates were likely to have rendered some fear among the potential investors, thus, scaring them away from advancing debts in the form of funds to these companies. It was also highly possible to experience an exacerbating trend in the reduction on the market capitalisation of each of the companies listed under the FTSE100 structure to the mentioned ripple effect.  Nevertheless, the pattern was subject to investigation, which necessitated the development of the study.

1.3: Rationale of the Study

The primary objective of financial management is to ensure that the value of the firm and shareholder wealth is increased. An understanding of the factors that influence the choice of capital funding is important. Tax shield benefit and cost of financial distress also make it important for managers to determine the best mix of capital financing that will result in optimum value.

The debate about the capital structure has been ongoing among scholars and researchers. It is however not clear how interest rates affect the mix of capital financing especially among leading companies in the UK[11]. It was therefore necessary to study the market capitalisation structure of some of the most influential companies (such as those had been listed in FTSE100 companies for more than 10 years consecutively). It was necessary determining the shift in share values of such capitals over the specified period to help assess the impact of historic low-interest rates on the capital structure of FTSE 100 companies. Thus, this could have been impossible if the researcher resulted in using primary data from individual persons working in the FTSE100. It was also relevant using various government policy papers to determine how the trend was established of the interest rate.

Similarly, research has a chance to estimate the impact of the inflation on the ‘fixed rate of returns’ on various long term bonds placed by the potential investors on any of the listed companies. Again, it could have been almost impossible determining the change in trend had researcher tried to obtain such data through primary means. The use of relevant journal articles and books, among other sources, which were related to the subjected under study also played a significant role in understanding the unfolding of the financial and economic trend. Therefore, the researcher had to use various past sources that had first-hand information on the change in the interest rates and their impact on the capital structure of FSTE100 companies. Therefore, this helped to create a clearer picture of the issue under study.

1.4: Limiting and Delimiting Factors of the Study

The study was not limited to any part of the UK as companies being invested came from various parts of the country. Therefore, the researcher was at liberty to choose FTSE100 companies coming from different parts of the country to ensure equal distribution of the anticipated results. It was also worth indicating that the trend also helped to erase any doubts that may have existed on the validity of the results had research opted to concentrate in companies in major urban centres such as London and Manchester.

However, one of the limitations spanned from the fact that the researcher was only allowed to use secondary data. Therefore, this infringed his capability to employ primary data, especially in instances particular phenomena called for the application of the same. The study also called for the employment of data from FTSE1000 companies with the impossibility of using relevant data from the non-listed. Thus, the researcher was only limited to such companies, even in instances where it was clear some outside companies could have proper data with the capability of high-ending those from FTSE.  It was also impossible differentiating between the credit-worthy borrowers and the actual investors, thus, limiting the capacity of research explaining the situation.

1.5: Aim, Objectives, and Hypotheses of the Study

1.5.1: Aim

            To examine the impact of historic low-interest rates have had on capital structures of FTSE100 companies.

1.5.2: Objectives

1. To scrutinise whether historic low-interest rates have led to a change in capital structures of FTSE100 companies
2. To assess whether change in trend in the market capitalisation of critical companies in FTSE100 has affected liquidity ratios.

iii.    To determine whether change in trend in the market capitalisation of critical companies in FTSE100 has affected Financial Gearing ratios

1.5.3: Hypotheses

Ho1: Historic low-interest rates have not led to an increase or decrease in capital structures of FTSE100 companies

Ho2:  Change in trend in the market capitalisation of critical companies in FTSE100 has not affected liquidity ratios

Ho3: Change in trend in the market capitalisation of critical companies in FTSE100 has not affected financial gearing ratios.

1.6: Outline of the Study

The research study was divided into four major chapters. The first chapter was meant to create brief information of what was expected in the rest of the survey. It highlighted the aim and objectives of the study, thus, creating a rationale on how they were to be achieved. It also indicated the anticipated limiting, as well as delimiting factors that could be expected during the development of the research. The literature review, on the other hand, was about demonstrating crucial information concerning the study that could be shown the existence of the trend that was about to be investigated. Thus, research had to conduct a systematic review of various related works to gain a clear view and concept of the study. The methodology chapter demonstrated different research methods employed during the development of the study. It was intended to create a proper justification of processes used to collect and to analyse data. The results and discussion section was one of the most critical chapters as it employed figures and tables to demonstrate how historic low-interest rates had had an impact on the capital structures of FTSE100 companies. Therefore, research also had to make a detailed discussion on the derived results demonstrating whether there was an affiliation between them and the set aim and objectives. Conclusion and recommendation was the last chapter, which aimed at assessing the achievement of the set goals. The researcher was expected to determine whether the null hypotheses were rejected or not. He was also expected to give appropriate recommendation on how the dire situation could be rectified. The trend could also be based on the thoughts of the implication of the study.

 

 

CHAPTER TWO

2.0 LITERATURE REVIEW

2.1: Introduction

The literature review section aimed at demonstrating an interpretation, as well as the synthesis of various published works. As one of the essential chapters, the literature review Begins by explaining the Capital Structure Irrelevancy Theory which is based on the seminal works of Modigliani and Miller. It explains the relevance and causes of capital structure changes.  The literature review also showed how the historic low-interest rate created an impact on the economy. Therefore, it was imperative demonstrating how various interest rates operated to the extent of being deemed to have a negative spiral effect on various economic sectors. It was also important showing how it affected the development of economic units in different countries. The literature review section also aimed at demonstrating how the historic low-interest rates changed the capital structure of FTSE100 companies in the UK. Thus, this enables the researcher to come up with a properly developed gap that could be used to advance the research study to the next stage.

2.2: Capital Structure Theories

The capital structure of a firm refers to how a company finances its assets. A company can either finance its assets by either debt, equity or both. The capital structure of a company can have different mix of debt and equity. Modigliani and Miller argue that a firm’s value is not affected by changes in the capital structure so long as there are no taxes or transaction costs.[12] Their capital Structure irrelevancy theory posits that the value of a firm does not depend on its capital structure but it is rather dependent on the operating profits. The argument that the value of a firm is unaffected by the capital structure is based on a series of assumptions. Modigliani and Miller assumed that securities were traded in a perfect capital market, there is no asymmetry of information between buyers and sellers and there are no transaction costs, bankruptcy costs and taxation.

According to Abeywardhana the Capital Structure Irrelevancy theory is based on a set of unrealistic assumptions. Even though it is theoretically valid, there is no business environment in which taxes do not exist[13]. By incorporating corporate tax, the tax shield causes an acceptable deduction from the firms income and hence a decrease in the net payment. Using debt capital becomes more advantageous because there is a lowering of the cost of capital. Even though the Capital Structure Irrelevancy theory has weaknesses, it cannot be completely ignored. Other theories, which contribute to the Capital Structure Theorem, have been developed, based on the Modigliani and Miller theory.

Robichek and Meyers proposed the tradeoff theory as a development from the Capital Structure Theory. According to the tradeoff theory debt finance has got more tax benefits and therefore the balance between bankruptcy cost and tax benefits of debt determine the optimal debt equity ratio that a firm can choose to maximize its value[14]. Stewart and Meyers argue that a certain level of debt capital can contribute to balance the cost of bankruptcy and interest tax shield. A capital structure that provides tax benefits, reduces bankruptcy costs and agency cost can be considered as the optimal capital structure. Agency cost is considered in the tradeoff theory because the separation of ownership and control gives rise to costs brought about by conflict of interest[15]

Firms are faced with the choice of issuing debt capital or equity capital. The tradeoff theory posits that there is an optimal capital structure in which the tax shield balances that cost of financial distress. The choice of capital structure therefore depends on tax rates.

Another variant of the Modigliani and Miller theory is the Pecking order theory. According to Myers and Majluf, managers prefer internal sources of capital over external ones[16]. Firms prefer to utilize internal funds first after which they resort to debt financing and finally equity funding as a last resort[17]. Firms prefer debt financing over equity funding because of information asymmetry between managers and owners. Debt financing tends to portray confidence in the firm’s management[18].

One of the more recent theories on capital structure is the Brusov-Filatova-Orekhova (BFO) theory.[19] The theory of capital cost and capital structure finds serious limitations of the Modigliani-Miller theory. Filatova et al. argue the lifetime of a company is finite, as opposed to Modigliani-miller who suggest that companies are perpetual. By lifting this limitation, Filatova et al find that in the presence of corporate taxes the value of a firm is affected by the capital structure, the cost of equity and the weighted average cost of capital.

2.3: Interest Rates

The interest rate can be referred to the level of interest that should be gained over a given period and is often measured as the proportional of the lent amount or borrowed and deposited funds[20]. It is usually calculated and based on the entire principal sum. Therefore, the accumulation interest depends on the level of compounding frequency, as well as the duration of time spent on a lent, funds borrowed, as well as funds deposited on any account[21]. In most cases, the interest rate is often calculated on an annual basis where the annual interest rate can be regarded as the estimated rate made every year[22].

The interest rate is influenced by different factors such, which also determines its effectiveness. First, the directives from the government to the primary or central bank help to accomplish its goals by controlling the level of interest rates[23]. The value of the currency used during the creation of the principal sum borrowed or lent plays a significant role in determining the level of the interest rate[24]. The maturity term of the invested funds also determines the rate of interest one should gain[25]. Other factors that may determine the level of interest rate are collateral level and market forces of demand and supply, among others[26].

However, interest rates may keep on changing depending on several economic forces. Change in politics is perceived as one of the significant contributors to the variation in the rate of interest. Politics may hugely influence the adjustment of interest to suit the key players’ interests, which often lead to the short term gains. Therefore, to limit the negative impact emanating from the political influence, it would be advisable to minimize political involvement.

Creation of a deferred consumption is also deemed as another factor that leads to variation in interest rates. The lender is usually forced to defer the expenditure immediately after giving out money to others. Therefore, this attracts a positive rate of interest, which is generally based on the time value of money. The perception of inflation has also deemed another factor that determines the level of interest rate. It is often expected that the interest rate will keep on the rising because of the tendency to increase in inflation[27].  Morgan & Richard are of the view that the existence of alternative investments is a strong determinant of the change in interest rates[28]. Therefore, the arising competition based on the importance of each investment ends up acting as the pacesetter for the new interest rate. The level of the imposed taxes also determines the rate itself, considering the taxes could embezzle a significant amount of the generated funds.

The occurrence of tax rates is often determined by several theories, such as the non-market-based concept invented by Karl Marx. According to Khan, the level of interest rates is not usually determined by the level of competition in the market[29]. It is also noted that both nominal and real interest rates are often other vital aspects that determine whether the economic phenomenon is perceived. The nominal interest rate is often regarded as the interest earned before the actual inflation adjustment. The real interest rate, on the other hand, refers to the tangible earned financial resources.

The market rates may be reflected in different ways and scenario such as in investment, money market, stock market, current market, banking, and bond market. Therefore, the rates are depicted in the expected inflation, transaction costs, capital that is free of risk, and risk premium[30]. This is a clear indication that inflationary forces are often based on rational expectations. Both borrowers, as well as the lender often determined how the inflation will be reflected later. Therefore, the initial real interest rate is usually determined by the level of agreed nominal interest between the two parties. The anticipated inflation also plays a significant role in demonstrating how interest rates are adjusted in the future. Furthermore, the investment level also plays a vital role in determining various bonds that can be used to improve interest that can be earned. The pricing, basis, optionality, and yield curve risk are examples of risk faced in any investment. Thus, this is often reflected as part of the economic aspects that determine how interest rates are depicted.

Gehriner and Mayer argue that neither the institutional setup of credit markets nor data supports the neo-classical model of interest rate determination[31]. The neo-classical model posits that interest rates are determined by market forces of demand and supply. Gehriner and Mayer recognize the role of central banks in determining interest rates and therefore support the Wiksell-Mises-Hayek model. Based on the model it is concluded that central bank policies are mostly responsible for the low interest rates. However there are other variables that have contributed to the low interest rates. Because interest rates are influenced by the perceptions of central banks rather than by the perceptions of market players, interest rates are often pushed to levels that are not consistent with economic fundamentals causing misalignment of market rates, severe economic distortions and disruptions[32].

2.4: Low-Interest Rates and Its Impact

Low-interest rates are often regarded as the macroeconomic phenomena that describe various economic conditions that have minimal nominal interest rate[33]. The low-interest rate is, therefore, portrayed as an aspect that affects the economy in different ways. It is deemed to have a significant impact on economic growth policies. The government is often aware of the affiliation between the two and can end up incentivizing investment and saving by ensuring that relative costs are changed. The government has enormous vested interests in strengthening the two to improve economic productivity. The creation of appropriate monetary policies if often regarded as one of the essential tools that determine how the interest rates can be maintained through the banking system.

The level of interest rates is a critical indicator of the economic situation of a country. Wuhan and Khurshid tested the impact of interest rates on investment in China[34]. Jiangsu province, which was under investigation, is the leading province in China in terms of investment. The study found a significant relationship between interest rates and investment. Interest rates have a negative impact on investment in the long run but a positive impact in the short run. Although there are other factors affecting investment, reducing interest rates was considered critical in promoting investment. It was also found that the impact was different in different industries.

The manifestation of low-interest rates may be useful for enticing borrowers but not at attracting real investors. They will always habour some fear of the possibility of benefitting from the slow accumulation of interest. However, the existence of low-interest rates may also lead to more investment while discouraging saving. Therefore, the governing body is compelled to adjust the investment and saving culture.

The government is also compelled to incentivize investment and savings in different ways. Therefore, in most cases, it is obliged to create a proper adjustment system for enhancing tax rates. Thus, the path to the creation of low tax rates can also be traced back from the actions of the firms and individuals. Therefore, the imposition of fixed interest rates may also lead to the lowering of the same among the major investment companies in the country. On the other hand, the constant encouragement to create a more saving culture may lead to an increase in the proposed interest rate.

Low-interest rates also have the capability of improving education, as well as health outcomes. The existence of a low level of interests may lead to the manifestation of positive impact in the development of human capital, as well as healthcare investments. The low-interest rates often lead to the rise in GDP and the eventual expansion of education. Therefore, it is deemed to have a considerable impact on the existence of an effective education system. However, low-interest rates are also deemed to have an immense negative impact on the expansion of the investment sector, especially when investor doubt the feasibility of gaining from a particular investment of a specified duration. The low-interest rates may lead to a boom in some parts of the economy, which may eventually lead to the existence of inflation. The after-tax income decreases as it is affected by the presence of a high level of inflation[35]. The creation of a penchant not to save but to spend may lead to the release of more money in the circulation, thus, leading to the eventual increase in taxes to correct the issue. The existence of low-interest rates also leads to the mitigation of the level of profit in the money market and its funds. Thus, this may eventually affect the capability of the short-term providers of credit, especially to the large firms to dwindle.

2.5: The Impact of Historic Low-Interest Rates in the World

According to Bean et al., in a report on the World Economy, it was determined that persistent, as well as consistent low rates of interest, had the capability of initiating various negative consequences[36]. It was determined that low-interest rates were more likely to induce a  saving culture while reducing the propensity to invest. According to, the occurrence of the trend could be best based on the concepts of risky, as well as safe assets[37]. It can also be explained through the use of the portfolio shift. There is usually a tendency for an increase in demand for assets deemed to be safer. Therefore, the existence of low-interest rates often leads to holding a high level of foreign-exchange buffers as this may signal the presence of a crisis in the world economy. It was observed that the recent Asian economic crisis led to the holding of more foreign-currency, especially in the US Treasuries. The tendency was worsened by the increased awareness of the need to have safe assets. The action was meant to erase or mitigate the perception hold on the uncertainty, which was based on the macroeconomic factors. The situation was also observed in the UK when the local banks hoarded most of its funds to act as a loss-absorber during inflation. They had to make sure that it was highly possible to maintain bonds that would lead to the manifestation of a high level of security.

The Case Study of Japan

The Japanese experience was one of the essential phenomena that demonstrated how well inflation and other forms of economic crises could be handled. The Japanese government was made to restructure its industrial sector after struggling to manage the worsening low real and nominal interests. They were more persistent for over a decade, which made the country’s central bank to use unconventional monetary strategies such in the case of using quantitative easing. However, the continuous holding of corrective measures led to the use of increase asset-price or a bubble. The holding of more currency made the Japanese equity, as well as the real estate to triple the initial prices when compared to what was being charged in the 1980s[38]. The higher collateral values had emanated from, the earlier misconception on reasonable and profitable investment. The banks had lent a lot of funds to the promising developers, as well as construction companies, to earn more. However, the prices kept on depreciating as there was a boom in the supply. Therefore, this led to the inevitable change in enshrined strategies. The primary aim was to ensure that there was a vast bank reserve to cautious the country against investing in projects that may not have compelling yields[39]. Thus, this ended up delaying the release of funds to developers as saving was the most preferred option. Both the Japanese banks, as well as serious investors, became highly cautious as they did not want to engage in businesses that could lead to losses. They were more likely to engage in saving as it was deemed the most secure option than participating in an investment.

Impact of Low-Interest Rates in China

Williamson noted that it was out of wrong for the Chinese government to continue lowering its minimal interest rates[40]. The easing of various measures enshrined when charging interest may induce immense challenges on the financial system and the broader Chinese economy. The Asian country’s economy is deemed to be sputtering as the deflation looms. The businesses are also operating at their all-time low as the banks are not ready to offer sufficient funds to the potential lenders. Despite the country’s central bank lending money to big ones at more affordable rates, it has become hard to extend such funds to the small, as well as private enterprises. However, to the utter surprise, the People’s Bank of China maintained its policies by lending funds to the commercial banks at even more lower rates. Therefore, this has led to the existence of the adverse monetary policy, especially during the transmission of the funds to the businesses.

Therefore, the management of the new lending structure had cautioned the Chinese government on the probability of facing high risk. The effective lending of the private sector, as well as small enterprise, called for the establishment of even higher funds’ reserve to caution the country against negative impacts of inflation. Furthermore, this appealed to the lowering of the funding costs and the money market rates[41]. The option has the capability of affecting other essential lending facilities, which were not necessarily based on the indicated market rates. Therefore, this could create long term negative impact on the economic operations as this would mean that such lending facilities could be rendered not operational and unable to lend funds to businesses. The low-interest rates portrayed a big blow to the small-sized companies as this would lead to insufficient flow of funds. The banks feared to advance loans to such companies because of the high risk involved. Therefore, the existence of a deposit-rate ceiling, as well as lending-rate floor could create more harm than it could benefit or improve Chinese economy.

The Possible Negative Impacts of Low-Interest Rates in the US

The Federation Reserve Board (Fed) asserts that the US is most likely going to experience another significant recession in the mid-2020. Even though the Trump administration prefers to lower interest rates to improve lending, several significant observations have been made. Over the last two years, it has been observed that the natural interest rate has shrunk compared to what was recorded earlier. On the other hand, the existence of low rates of interest may induce later economic challenges despite having created contemporary positive impacts. Therefore, the reduced work of the Fed meant that it could no longer react appropriately to the market forces of demand and supply when controlling the currency rates. Surprisingly, the economy is not doing any better compared to its performance in earlier 2000s when the interest rates were deemed to be very high. The existence of low-interest rates is likely to lead to a rise in long-term capital costs. The side effects of the low-interest rates can be traced from the initial action of the Fed of forecasting the growth rate to 2.1% down from the earlier predicted rate of 2.3[42].

Furthermore, it is also worth indicating both interest rates are lower compared to what was observed in the previous physical years as the rate was capped at 2.9%[43]. Therefore, despite the current US administration harbouring high hopes on the growth of the economy, lowering interest rates is deemed to lead to even difficulties in the acquisition of funds. The investors are more likely to shy away from lending their funds to various development projects because of the high risk involved.

According to Chen, low-interest rates led to the prolonged economic recession soon after its onset in 2008[44]. The investors were not guaranteed to making god earnings in terms of return on investment, considering that it leads to the sudden spur in development. This had the potential of creating a glut in sectors such as housing, thus, leading to the sudden lowering of the prices. The trend was more likely to induce losses to investors in the industry, therefore, scaring them away from engaging in more investment. This also meant that they were expected to sell such assets cheaper or even below their initial investment costs, thus, discouraging them from continuing investment[45]. The trend, therefore, created a tendency of not engaging in any meaningful economic activities, thus, slowing the economic growth in the long run. It is worth indicating that the private sector constitutes one of the key players in the New York Stock Exchange. This also served as a major below towards the operations of the world most renowned stock exchange. The decrease in profitability in the construction sector, for instance, had the potential of scaring away investors, thus, lowering the capital structure among the concerned companies. This means that the trend is likely to worsen if the US continues to hold onto the low-interest policy[46]. The capital structure among the companies engaged in the stock exchange is expected to shrink. This will be bad news to the advancement of the US economy now and in the future.

2.6: Impact of Historic Low-Interest Rates in the Capital Structure of FTSE100 Companies

The impact on the capital structure of FTSE100 Companies can be traced back from the decrease in investors’ appetite for engaging in development matters. The top FTSE100 refers to the most renowned corporations in the UK LSE[47]. However, the uncertainty existing in the UK economy can be partly blamed for the existence of low investment. Soon after the Brexit Vote, the UK economy became uncertain as the potential investors from other European nations, as well as those from different parts of the world, were not willing to engage in further investment. They were afraid of the policy the government was going to introduce. Therefore, the historic low-interest rates were cut to an all-time low of 0.25% to help improve the economic growth soon after outcomes of the Brexit.

FTSE100 was not spared either as the potential investors had or have also continued shying away from engaging in any active investment in such companies. The market capitalization structure of the renowned companies had to lower signaling a devastating impact on the stock prices. They were not more appealing to the potential investors, as well as consumers as they were not more profitable. Lowering of interest rates often leads to the overall rise in share prices[48]. However, the bonds become less attractive and cheaper, which eventually lead to the general decrease in the propensity and likelihood to borrow for new investments.

The lowering of the rates of interest has also led to the increased reluctance among the banks and other financial institutions from lending the businesses in the UK. FTSE100 Companies have not been spared either as they have been caught up in this mix. The trend has also led to halting of their investment activities as they are less likely to engage in more proactive projects without sufficient funding. The UK banks are less reluctant to lend funds because of the fears of being entangled in the ‘house of debt’[49]. The continued existence of historic low-interest rates means that it is even more unlikely to apply appropriate monetary policy to spur economic growth[50]. The presence of this dilemma also means that FTSE1000 Companies are only capable of attractive high-net-worth individuals and households. The share prices will eventually skyrocket, making them remain out of reach of the majority and who come from the middle-income bracket. The majority of the investors are aware that the middle-income earners are the most relevant for the improvement of any economy. Therefore, this means that banks are not likely to lend funds to companies for fears of having poor returns on investment. Thus, this had led to the eventual shrinking in the market capitalization as the number of shares held by FTSE1000 companies has reduced. However, the final pricing per share seems to rise to limit the capability to buy them to the hands of a few wealthy individuals. The current trend has led to devastating impacts on the growth of FTSE100 companies and the entire LSE. 

 

 

CHAPTER THREE

3.0 METHODOLOGY

3.1: Introduction

The methodology section delved on determining and elaborating various research methods used during the collection and analysis of the appropriate research data. Therefore, it portrayed the proper sampling procedures that were employed during the data collection exercise. The methodology section concentrated on determining how, where, when, who, and why the data was collected. It also explained why any changes in the results were made. However, it was worth indicating that the research was based on the use of secondary data where appropriate information was obtained from government policy papers, LSE, and journal articles, among others. Therefore, it was highly relevant to determine the analysis procedure that was employed. As a researcher, one was compelled to make use of the mixed method research approach. He used both qualitative and quantitative research approaches to improve the validity of the anticipated results. The purpose of this research mechanism was also meant to improve reliability, as well as the validity of the expected research findings. The research could be easily relied on by others as they were deemed not only accurate but also trustworthy. It also demonstrated various ethical approaches considered as imperative in the development of the study. Therefore, the methodology section had an overall aim of justifying the appropriate mechanisms, as well as processes that could be applied during the data collection, as well as analysis procedure.

3.2: Research Approach

The researcher employed the mixed method research approach where both qualitative, as well as quantitative mechanisms, were used. Therefore, the mixed method was more of an integrated tool where two criteria had to be employed to offer an improved and synergistic approach of utilising data. The researcher managed to attain optimal benefit associated with the use of both quantitative and qualitative research approaches.

The use of qualitative research mechanism was hugely employed to determine various social trends associated with the change in historic low-interest rates. The research approach plays a significant role, especially in improving data collection as it is usually based on opinions, behaviours, social contexts, and values concerning a defined population and on a given problem[51]. Thus, this meant that the qualitative research mechanism aimed at demonstrating various social, economic phenomena, and their changes, especially on the key players on FTSE100 companies such as potential investors. The use of a qualitative mechanism helped the researcher identify the primary strengths related to the research as he managed to employ various textual descriptions on the issue under study. The research method portrayed different experiences of an FTSE company based on the change in interest rates and other economic factors such as inflation. Its effectiveness was based on its ability and come up with intangible evidence on the issue under study. The researcher concentrated on the use of observation on essential phenomena such as focusing on the change in the capital structure of FTSE100 companies over a specified period. Therefore, the manifestation of the results was deemed not to be numerical but textual.

The use of the quantitative method was employed to create a close relation between various variables developed and the issue under study. According to Aellah, the use of quantitative research method enables the researcher to use different variables in the area under investigation[52]. Therefore, the researcher had to concentrate on the use of numerical data to improve the delivery of the anticipated results based on the set objectives.  Hassan states that statistical data could also be deemed as convergent reasoning, which was highly reliant on unchanging statistics[53]. Therefore, the use of a quantitative mechanism plays a significant role in improving experimental designs, as well as descriptive techniques when one is determining different traits concerning the study[54]. Thus, the researcher had to continue measuring essential variables that were under investigation to also enhance the deliverability of the anticipated results. Therefore, he was able to establish the existence of a connection between the variables and the presence. It was also worth indicating that the quantitative approach paved the way for the portrayal of the generalized findings considering that the study was well designed, consistent, reliable, and contained precise numerical data.

3.3: Research Population

The target population for this study consisted of all the companies listed in the UK FTSE 100 companies. This study places its main focus on these companies and it is conducted for their benefit. The companies have a similar characteristic of having the highest market capitalization in the London Stock Exchange. This population was chosen because its high market capitalization could give insight into trends in capital structures as they relate to interest rates. Companies in the FTSE 100 Index are also considered as a gauge of prosperity for UK businesses.

Since it was not possible to obtain the relevant data required to draw conclusions from the entire population a subset of the target population was selected based on availability of data on the companies capital structure and risk profile for a 10 year period starting from the end of 2007. Companies that were also not part of the index during the whole period were also exempted from the study.

3.4 Data Collection Methods

The study entailed the manifestation of a comprehensive literature analysis where valuable study materials were used to improve the findings of the study. The research made use of secondary sources to come up with answers on the created questions. Therefore, one had to rely on data from critical secondary sources such as the peer-reviewed articles, government policy papers, European strategic papers, and London Stock Exchange database. Therefore, the researcher had to engage in using peer review journals and databases to attain information and other relevant data ranging from the past 10-15 years. The use of this approach was meant to establish more renowned outcomes of the anticipated results considering that one could be able to portray the impact of the historic low interest rates on the capital structure of FTSE100 companies. It could not be possible to represent this trend if the research focused on using only the most recent peer-reviewed articles and relevant foreign exchange databases. However, the researcher was also encouraged to make use of recent journal articles to portray their understanding of whether the persistently low-interest rates were advantageous or disadvantageous in restructuring the capital components of the target companies.

[1]Wolfgang, Bessler, et al. “Factors Affecting Capital Structure Decisions.” Capital Structure and Corporate Financing Decisions, 2011, pp. 15-40.

[2] Bierman, Harold. “Capital Structure Decision With Corporate and Investor Taxes.” The Capital Structure Decision, 2003, pp. 55-68.

[3]Hubert, Walter, C. “International Debts.” Foreign Exchange and Foreign Debts, 2018, pp. 213-236.

[4] Yousuf, Khan. “Cash Flows as Determinants of Dividends Policy in Mature Firms: Evidence from FTSE 250 and Aim Listed Firms.” SSRN Electronic Journal, 2009.

[5] Ibid

[6] Glenn, Morgan, and Whitley, Richard. Capitalisms and Capitalism in the Twenty-First Century. Oxford UP, 2012.

[7] Yousuf, Khan. “Cash Flows as Determinants of Dividends Policy in Mature Firms: Evidence from FTSE 250 and Aim Listed Firms.” SSRN Electronic Journal, 2009.

[8] Glenn, Morgan, and Whitley, Richard. Capitalisms and Capitalism in the Twenty-First Century. Oxford UP, 2012.

[9] Khelifa, Mazouz, and Alrabadi, Dima, W. “Systematic Liquidity Risk and Stock Price Reaction to Shocks: Evidence from London Stock Exchange.” SSRN Electronic Journal, 2009.

[10] Khelifa, Mazouz, and Alrabadi, Dima, W. “Systematic Liquidity Risk and Stock Price Reaction to Shocks: Evidence from London Stock Exchange.” SSRN Electronic Journal, 2009.

[11] Kouki, M. and Said, H. B. ‘Capital Structure Determinants: New Evidence from French Panel Data’. International Journal of Business & Management 7 (1),2012,  214-229

[12] Modigliani, F. & Miller, M.. “The cost of capital, corporation finance, and the theory of investment”. American economic Review, 48, June, 261-197.

[13] Abeywardhana, D.K.Y. “Capital Stucture Theory: An Overview”. Accounting and Finance Research, Vol. 6, No. 1, pp. 133-139.

[14] Robichek, A.A. and Myers, S.C. Problems in the Theory of Optimal Capital Structure. Journal of Financial & Quantitative Analysis, 1, pp. 1-35.

[15] M.C. Jensen,. & W. H. Meckling,. Theory of the firm: Managerial behavior, agency costs and ownership structure. Journal of Financial Economics, 3(4), 305-360.

[16] Myers, S. C. & Majluf, N. S. Corporate financing and investment decisions when firms have information those investors do not have. Journal of Financial Economics, 13, 1984, pp. 187-221.

[17] Al-Tally, H. A. An investigation of the effect of financial leverage on firm financial performance in Saudi Arabia’s public listed companies (Doctoral dissertation, Victoria University) 2014.

[18] Abeywardhana, D.K.Y. “Capital Stucture Theory: An Overview”. Accounting and Finance Research, Vol. 6, No. 1, pp. 133-139.

[19] Т. Filatova, N. Orehova & A. Brusova. Weighted average cost of capital in the theory of Modigliani–Miller, modified for a finite life-time company. Bull FU 48, 2008, pp. 68–77

[20] Bessler, Wolfgang, et al. “Factors Affecting Capital Structure Decisions.” Capital Structure and Corporate Financing Decisions, 2011, pp. 15-40.

[21] Bessler, Wolfgang, et al. “Factors Affecting Capital Structure Decisions.” Capital Structure and Corporate Financing Decisions, 2011, pp. 15-40.

[22] Bean, Charles.,  Duquesne, Broda.,  Ito, Takatoshi , and Kroszner , Randall.

Low for Long? Causes and Consequences of Persistently Low Interest Rates, Geneva Reports on the World Economy 17, 1-104.

[23] Davies, George. Factors Determining the Interest RateThe Quaterly Journal of Economics, 34(3), pp. 445-461.

[24]ibid

[25] ibid

[26] ibid

[27] Bean, Charles.,  Duquesne, Broda.,  Ito, Takatoshi , and Kroszner , Randall.

Low for Long? Causes and Consequences of Persistently Low Interest Rates, Geneva Reports on the World Economy 17, 1-104.

[28] Morgan, Glenn, and Richard Whitley. Capitalisms and Capitalism in the Twenty-First Century. Oxford UP, 2012.

[29] Khan, Yousuf. “Cash Flows as Determinants of Dividends Policy in Mature Firms: Evidence from FTSE 250 and Aim Listed Firms.” SSRN Electronic Journal, 2009.

[30] Ibid

[31] Gehringer, Agnieszka, Thomas Meyer. Understanding Low Interest Rates: Evidence from Japan, Euro Area, United States and United Kingdom. Scottish Journal of Political Economy, 66(1), 2019, pp. 28-53

[32] Ibid

[33] Khan, Yousuf. “Cash Flows as Determinants of Dividends Policy in Mature Firms: Evidence from FTSE 250 and Aim Listed Firms.” SSRN Electronic Journal, 2009.

[34] Wuhan, Li Suyuan, Adnan Khurshid “The effect of interest rate on investment; Empirical evidence of Jiangsu Province, China”, Journal of International Studies, Vol. 8, No 1, 2015, pp. 81-90

[35] Bierman, Harold. “Capital Structure Decision With Corporate and Investor Taxes.” The Capital Structure Decision, 2003, pp. 55-68.

[36] Bean, Charles.,  Duquesne, Broda.,  Ito, Takatoshi , and Kroszner , Randall.

Low for Long? Causes and Consequences of Persistently Low Interest Rates, Geneva Reports on the World Economy 17, 1-104.

[37] Bean, Charles.,  Duquesne, Broda.,  Ito, Takatoshi , and Kroszner , Randall.

Low for Long? Causes and Consequences of Persistently Low Interest Rates, Geneva Reports on the World Economy 17, 1-104.

[38] Kurihara, Yutaka. “Demand for money under low interest rates in Japan.” Journal of Economic & Financial Studies, vol. 4, no. 04, 2016, p. 12.

[39] Ibid

[40] Williamson, Stephen D. “Low real interest rates and the zero lower bound.” Review of Economic Dynamics, vol. 31, 2019, pp. 36-62.

[41] Ibid

[42] Reuters. Fed Keeps Interest Rates Steady As U.S. Economy Motors Along. U.S, 1 May 2019, www.reuters.com/article/us-usa-fed-instantview/fed-keeps-interest-rates-steady-as-us-economy-motors-along-idUSKCN1S74I2.

[43] Trainer, David. “The Fed Is Irrelevant: Low Interest Rates Are The New Normal.” Forbes, 1 Feb. 2019, www.forbes.com/sites/greatspeculations/2019/02/01/the-fed-is-irrelevant-low-interest-rates-are-the-new-normal/#2686813476ae.

[44] Chen, James. What a Low Interest Rate Environment Really Means. Investopedia, 18 Feb. 2016, www.investopedia.com/terms/l/low-interest-rate-environment.asp.

[45] Reuters. Fed Keeps Interest Rates Steady As U.S. Economy Motors Along. U.S, 1 May 2019, www.reuters.com/article/us-usa-fed-instantview/fed-keeps-interest-rates-steady-as-us-economy-motors-along-idUSKCN1S74I2.

[46] Yen Nee Lee. “Trump Can’t Have a Strong US Economy and Low Interest Rates at the Same Time, Says Ex-Fed Governor.” CNBC, 21 Mar. 2019, www.cnbc.com/2019/03/21/trump-cant-have-strong-us-economy-low-interest-rates-robert-heller.html.

[47] Congdon, Tim. “SIR CHARLES BEAN ON THE UK’S DECADE OF SUPER-LOW INTEREST RATES: COMMENT.” Economic Affairs, vol. 38, no. 2, 2018, pp. 257-264.

[48] Congdon, Tim. “SIR CHARLES BEAN ON THE UK’S DECADE OF SUPER-LOW INTEREST RATES: COMMENT.” Economic Affairs, vol. 38, no. 2, 2018, pp. 257-264.

[49] Ibid

[50] Ibid

[51] Aellah, G. “Do anthropologists know best?: relationships between social scientists and medical researchers.” Global health research in an unequal world: ethics case studies from Africa, pp. 200-203.

[52] Ibid

[53] Hassan, Fahad M. “Muted Masculinities – Ethical and Personal Challenges for Male Qualitative Researchers Interviewing Women.” The SAGE Handbook of Qualitative Business and Management Research Methods: History and Traditions, 2018, pp. 400-414.

[54] Ibid