The Dynamics of Capital Structure: Panel Data Analysis. Evidence from New High-Tech German Firms

Abstract

In this research, we investigate the dynamic of the capital structure, using panel data techniques. A sample of new high-tech German firms over the period 1998-2002 is used to specifically establish the determinants of a time-varying optimal capital structure. We consider the dynamic models, introducing the Anderson and Hsiao (1981) estimators and the critical distinction between fixed and random effects. This is the first time the scope of studying the dynamic of the capital structure has been extended to new high-tech firms with the use of many techniques of panel data. Confirming the pecking order model but contradicting the trade off model, we find that more profitable firms use less leverage. We also find that large companies tend to use more debt than smaller companies, and that firms which have high operating risk can lower the volatility of the net profit by reducing the level of debt. Leverage is also closely related to tangibility of assets and to the ratio of non-debt tax shield. Finally, estimating a dynamic panel data model, we find that new high-tech German firms adjust their target ratio very quickly.