Abstract
This paper presents an empirical study of the capital structure of Portuguese companies where the main objective is to find key explanatory factors for indebtedness decisions. The relations between indebtedness and its determinants are tested in the light of the Trade-Off Theory and the Pecking-Order Theory. The motivation of this work was to contribute to the scientific research on the influential determinants of the capital structure and to deepen the knowledge of the Portuguese market. The quantitative methodology is used, through an econometric model for panel data using accounting information of 55 Portuguese companies between 2014 and 2016. Statistical tests such as the F test, the Lagrange Multiplier Breusch-Pagan test and the Hausman test were used to identify the most appropriate method of estimation, which resulted in a panel data model with random effects for individuals. The findings of this study suggest that indebtedness have a positive relation with tangibility and the size of the company, which supports the Trade-Off Theory. However, the positive relationship with the non-debt tax benefits suggests the importance of taxes, contrary to Trade-Off Theory. The negative relationship with cash flows, coupled with the positive relationships between size and growth opportunities, suggest the use of funding only when internal funds become insufficient, supporting the Pecking-Order Theory. The general results support that both theories partially explain the financing decisions of Portuguese companies. Doi: 10.28991/esj-2020-01249 Full Text: PDF
Highlights
There are several theories on capital structure to understand the factors that justify corporate financing decisions
The methodology underlying the identification of the determinants of financing decisions, and the capital structure of Portuguese companies, is characterized by a quantitative study using the Ordinary Least Squares (OLS), Least Squares Dummy Variables (LSDV), and Random Effects regression models (Figure 1)
Using the panel data model with random effects for individuals, we investigated the determinants that underlie the decisions on capital structure of Portuguese companies, considering the assumptions of Trade-off Theory (TOT) and Pecking Order Theory (POT) theories
Summary
There are several theories on capital structure to understand the factors that justify corporate financing decisions. There is no consensus on the determinants of the structure, nor on the best explanatory theory of behavior in the choice of financing. This problem was driven by the theory proposed by Modigliani and Miller in 1958, based on perfect markets, and improved in 1963. The main objective of the study is to test empirically which determinants exert influence over indebtedness, if these factors fit the referred theories, and which one tends to be followed by corporations in decisions about capital structure. The traditional theory holds that there is an optimal combination of equity and debt in order to maximize the firm's market value by minimizing the weighted average cost of capital [1]
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