Abstract
The purpose of this study is to carry out a comprehensive and robust analysis of the determinants of the capital structure of the Federation Bosnia and Herzegovina (FBiH) companies at the industry level. A large number of hypotheses of different classes of theories are tested. Estimating the dynamic panel models using the system of generalized method of moments (GMM) estimator, we captured both cross-sectional and inter-temporal relationships between the leverage in companies and its determinants. The results show that profitability, collateral value of the assets and the risk, measured by earnings volatility, negatively affect company's leverage, while inconsistent results were for the relationship between different proxies for firm's future growth opportunities and leverage, whereby the firm size overall has no relationship with the firm' s leverage. The findings reflect the transitional nature of the FBiH corporate environment.They suggest that some of the insights from modern finance theory of capital structure are applicable in the FBiH in that certain firm-specific factors that are relevant for explaining capital structure in developed economies are also relevant in the FBiH. Overall, the empirical evidence presented in this Study finds it difficult to demonstrate the validity of the trade-off and the pecking order theories as stand-alone models. The Study’s results also point at several unique aspects of financing behavior in developing countries, from which specific implications for further research follow. DOI: 10.5901/mjss.2015.v6n2s5p188
Highlights
Determinants are variables successfully used as leverage predictors
The empirical analysis focused on 10 years (2003-2012) of the data on a sample of private non financial companies in order to test the relationship between the capital structure and the leverage determinants, combining all variables affecting the determination of the capital structure
Most of the research studies on capital structure have used the data from the US and European companies. This Study provides a unique opportunity to examine the validity of the above statements and whether the capital structure of Federation Bosnia and Herzegovina (FBiH) firms can be explained by the finance theory
Summary
Determinants are variables successfully used as leverage predictors. A large number of factors have been identified in the extent literature that influence the financing decisions of companies based on financial theories of capital structure.there is no consensus in the literature whether such theories adequately explain the capital structure adopted by firms in the context of developing economies. In an attempt to clarify those variations, the academics and practitioners have developed a number of theories and the theories have been subjected to many empirical tests. This Study is an attempt to give a comprehensive and robust analysis of the determinants of the capital structure of FBiH firms at the industry level to reveal the differences between the industries in the capital structure during the period of ten years including the economic up - and down turns. The empirical analysis focused on 10 years (2003-2012) of the data on a sample of private non financial companies in order to test the relationship between the capital structure and the leverage determinants, combining all variables affecting the determination of the capital structure. The explanatory variables included in the model vary across both firms and time and in our empirical investigation we use two capital structure measures
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