On the Determinants and Dynamics of UK Capital Structure

Abstract

In this paper we analyse the determinants of the capital structure for a panel of 1,054 listed UK companies from 1991 to 1997, giving a total of 6,001 firm-year observations. We find significant differences in the results depending on whether the estimation is undertaken using OLS or panel estimation, suggesting OLS results are inconsistent due to their failure to take into account firm effects. We extend the fixed effects panel estimation by incorporating time interactions with the intercept and each of the independent variables. Analysis of the dynamics in the panel reveals significant changes over time in the relationship between gearing and the level of growth opportunities, company size, profitability and tangibility. Over the period of analysis, there is a trend for larger companies to use more long-term securitised debt, with smaller companies making increasing use of long-term bank borrowing and trade credit. Companies with high levels of growth opportunities are in general reducing their level of indebtedness, particularly at short maturities. During the early years of the analysis, there is a strong negative relationship between gearing and profitability. However, there appears to be a significant shift during the 1990s, with short-term bank borrowing and trade credit becoming significantly positively related to profitability by the mid 1990s. Our results suggest the nature of the credit market in the UK has changed significantly during the 1990s.