Macro uncertainties and tests of capital structure theories across renewable and non-renewable resource companies

Abstract

Capital structure is one of the most critical decisions for firms in business. This study examines the role of macro (economic and non-economic) uncertainties in affecting firms’ capital structure management. Three prominent capital structure theories are tested for global resource firms: (1) static trade-off, (2) pecking order, and (3) market timing theory. The results suggest that no single theory prevails, although both pecking order and market timing theories have certain explanatory power to explain sample firms’ financing behaviour. The pecking order theory is strongly supported by the results of the leverage target adjustment model. However, the downward cyclical patterns of pecking order coefficients suggest that the resource firms tend to choose debt financing less and less over time, particularly after 2008. The market timing theory holds strong, as indicated by the significance of macro condition (uncertainties) variables in determining sample firms’ capital structure, especially after 2008 and for non-renewable firms. However, the main proxies of the cost of debt are not statistically significant. In conclusion, this study finds that resource firms have a particular pecking order preference when they need financing, and the influence of macro uncertainties are vital in determining their capital structure.