Determinants of Capital Structure: Empirical Evidence from Turkey

Merve Gizem Cevheroglu-Acar

doi:10.5539/jms.v8n1p31

Abstract

The primary aim of this study is to identify the firm-specific determinants of the capital structure of non-financial firms in Turkey and to test whether the determinants offered by financial theory are able to provide convincing explanations for non-financial firms in Turkey. Because the relationship between liquidity and capital structure is not well examined for Turkish market in the context of capital structure theories, we include liquidity as independent variable in our models in addition to profitability, growth, non-debt tax shields, size, tangibility, and risk. We use panel regression as econometric model and cover the period from 2009 to 2016. Our results show that profitability, non-debt tax shield, size, tangibility, and liquidity are significant determinants of the capital structure, size being the most robust one. On the other hand, growth and volatility are not significantly related with the leverage. Moreover, we conclude that capital structure decisions of non-financial firms in Turkey are mostly consistent with the hypothesis of pecking order theory rather than trade-off theory.

Highlights

In the past six decades, the linkage between the capital structure and the firm value has been largely investigated
The primary aim of this study is to identify the firm-specific determinants of the capital structure of non-financial firms in Turkey and to test whether the determinants offered by financial theory are able to provide convincing explanations for non-financial firms in Turkey
We conclude that capital structure decisions of non-financial firms in Turkey are mostly consistent with the hypothesis of pecking order theory rather than trade-off theory

Summary

Introduction

In the past six decades, the linkage between the capital structure and the firm value has been largely investigated. Several financial theories on capital structure have been developed; each of them having their own perspectives for determining the optimal capital structure. The pecking order theory is based on asymmetry in information; free cash flow theory put an emphasis on agency cost; while trade-off theory underlines the tax benefit of leverage. Since each theory differs in its relative emphasis, the optimal capital structure provided by each of them is different. They do not arrive at a consensus or, as Myers (2001) puts, there is no universal theory for optimal capital structure. Each of them provides great benefits in identifying the possible determinants of the capital structure

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Discussion

Conclusion