Firm-specific, industry-wide and country-wide determinants of corporate capital structure

Abstract

This study examines the relative speed of adjustments of debt ratios and explanatory powers of three groups of determinants of capital structure: firm-specific, country-wide and industry-wide. The sample includes non-financial firms listed in the DJIA and NASDAQ for quarterly periods 1992–2010. For industry-wide variables, the results show that the prospects of many products in the industry call for higher debt ratios. For the effects of country-wide variables, a positive relationship exists between unemployment rates and debt ratios, constituting a warning signal that excessive use of debt financing adds to unemployment problems. In addition, the negative relationship between inflation and debt financing indicates that when inflation rises, firms prefer equity financing to avoid increasing interest burdens on earnings. A positive relationship also exists between debt financing and productivity growth, exports and unemployment rate growth. The comparative effect between firm-specific, industry-wide and country-wide variables shows that firms characterised by high debt ratios are much more influenced by assumptions of the theories of capital structure and macro variables than firms characterised by low debt.