Capital structure determinants: An empirical study in Taiwan

Abstract

The purpose of this paper is to present empirical evidence on the determinants of capital structure and firm value in a newly industrialized country. The firm characteristics are analyzed as determinants of capital structure according to different explanatory theories. Previous research mainly focused on the determinants of capital structure or the impact of capital structure on company value, while this study will discuss the effect of capital structure determinants on company value, with capital structure as mediating variable. The investigation has been performed using a sample of 647 companies listed on the Taiwan Stock Exchange (TSE) from 2005 to 2009. The findings of this study suggest that firm size, profitability and asset structure can be considered explanatory variables of capital structure. The firm size, profitability and capital structure affect book value. The determinants of market value are profitability and firm size. In addition, there are some differences in the capital structure among industry types. When the dependent variable is book value, firm size and growth opportunity have a greater impact on this in the electronic industry. Meanwhile, profitability and firm size have a greater impact on capital structure in non-electronic industries. When the dependent variable is market value, larger companies can borrow more debt and create more market value in the electronic industry. The capital structure negatively affects market value in electronic firms, but does not affect market value in non-electronic ones. Key words: Capital structure, firm value, corporate finance, trade off theory, pecking order theory.