IS THE CAPITAL STRUCTURE STABLE IN BRAZIL?

Pâmela A Tristão,Igor B Sonza

doi:10.1590/1678-6971/eramf190154

Pâmela A Tristão, Igor B Sonza

Open Access

https://doi.org/10.1590/1678-6971/eramf190154

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Abstract

ABSTRACT Purpose: This paper’s objective is to analyze whether the capital structure of Brazilian publicly traded companies remained stable over the last twenty years. Originality/value: The paper is focused on the Brazilian capital market, in which there is a lack in the literature about the study of the leverage behavior and its immaturity, where factors related to the companies and characteristics in contracting leverage alter the demand of credit. Design/methodology/approach: To achieve its objective, initially a graphical analysis of market and book debt evolution was carried out, and a GMM-Sys regression model through panel data was estimated to identify the stability of leverage along time. Findings: The results indicate a reduction of the market leverage with higher statistical significance after 2008, indicating, both in the graphic and the regression analysis, that the use of debt was unstable in the first period analyzed (1995-2007), behavior not observed during the second period (2008-2015) when analyzed market measures in which capital structure stability was prevalent, with considerable reduction of corporate leverage, otherwise, book measures of leverage would have shown a stability trend in leverage patterns. The principal determinants of the capital structure were the tax benefits (book debt) and the size (market debt), supporting trade-off theory.

Highlights

The firm’s capital structure consists of the long-term financing resources a company uses to invest in projects
The results indicate a reduction of the market leverage with higher statistical significance after 2008, indicating, both in the graphic and the regression analysis, that the use of debt was unstable in the first period analyzed (1995-2007), behavior not observed during the second period (2008-2015) when analyzed market measures in which capital structure stability was prevalent, with considerable reduction of corporate leverage, otherwise, book measures of leverage would have shown a stability trend in leverage patterns
By the trade-off theory, there is an optimal combination of debt and equity, which can equilibrate tax benefits and the distress costs; otherwise, according to the pecking order theory assumptions, companies might prefer internal to external resources due to the presence of asymmetric information (Myers, 1984)

Summary

Introduction

The firm’s capital structure consists of the long-term financing resources (equity capital or debt) a company uses to invest in projects. The mix of financing sources allows for companies with different debt ratios. Devos, Rahman, and Tsang (2017) state that studies in this topic tried to find a suitable debt ratio adjustment to reach an optimal capital structure. The search for the optimal capital structure originated many studies with the objective of identifying the best combination of financing sources or characteristics that interfere in this decision. By the trade-off theory, there is an optimal combination of debt and equity, which can equilibrate tax benefits and the distress costs; otherwise, according to the pecking order theory assumptions, companies might prefer internal to external resources due to the presence of asymmetric information (Myers, 1984)

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Results

Conclusion