Abstract
Empirical studies suggests that banks' capital structure is time invariant and bank-specific. Unobserved time invariant bank-specific effects are important in explaining the financial decision of the banks regarding capital structure. Two theories of finance explaining the target capital structure decisions are tested based on bank specific variables using traditional and advanced panel data econometric models. The study used twenty-seven listed commercial banks in Bangladesh over a period of 2009-2013. The results suggest that profitability, tangibility, liquidity, dividend payment and growth rate have statistically significant effects on capital structure. Five bank specific variables out of the seven confirm the trade-off theory and remaining two confirm pecking order theory. The implication of this study is that the bank specific determinants of capital structure are same as in the finance theory, suggesting that the finance managers of the sample banks may consider these determinants as a benchmark in capital structure decision.
Highlights
The capital structure is defined by the composition of the capital of a firm from different sources of finance e.g., debt and equity, which a firm considers appropriate for improving and continuing its operations over time
It is because the differences in assumptions; for instances the trade-off and pecking order theory assume that differences in capital structure is due to the differences in taxes and information respectively
According to the argument placed at the methodology part, the data is analyzed with pooled OLS (POLS), fixed effects (FE) and random effects (RE) model framed in Eqs. (1), (2 and 3) and (4)
Summary
The capital structure is defined by the composition of the capital of a firm from different sources of finance e.g., debt and equity, which a firm considers appropriate for improving and continuing its operations over time. The selection of target capital structure is an important strategic financial decision for every finance manager (Gropp and Heider, 2010; Modigliani and Miller, 1958) It is because the costs of capital and financial risks mainly depend on the choice of capital structure (Mishkin et al, 2000), which encouraged the academics and professionals to carry many empirical works focused on the determinants of capital structure. The study of Fama and French (2002) concluded that both theories have some explanatory power of explaining financial behavior of the firms and neither of these can be uniformly accepted or rejected It is because the differences in assumptions; for instances the trade-off and pecking order theory assume that differences in capital structure is due to the differences in taxes and information respectively
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