Determinants Of Capital Structure Choice Research Articles

Dynamic Panel Data Analysis of Capital Structure Determinants: Evidence from Iraqi Banks

This study investigates if the choice of capital structure of Iraqi banks could be interpreting through factors which have been studied by prior studies, which represented by determinants of capital structure choice (i.e., bank size, bank profitability, bank growth, tangibility, bank age). Using dynamic panel GMM for the period 2005 to 2019, this study maintains the explore on the determinants of capital structure of Iraq banks "developing country" that has circumstances likely to be quite different from those in developed and other major developing countries, particularly in terms of it deteriorating economic environment. The findings indicate that the bank size, bank profitability, bank age have a dominant role in explaining the variation in the long-term debt ratios of Iraqi banks. Meanwhile, only bank size, bank profitability, bank growth, bank age has a leading role in interpreting the variation of short-term debt ratios in the Iraqi banks. The current study has initiated some basis to discover the capital structure determinants of Iraqi banks upon which a more detailed evaluation could be based. Moreover, the experimental results can help Iraqi banks directors to choose the optimum structure of capital.

The Determinants of Capital Structure Choice: Evidence from Bangladeshi FMCG Companies

This paper offers empirical proof of Bangladesh's theories of capital markets and analyses the effects of the failure to introduce a secondary capital market in relation to Bangladesh. The findings from the cross-sectional OLS regression demonstrate that both the static deal theory and the cost theory of the organisation are applicable to the capital structure of the Bangladesh Fast-moving consumer goods (FMCG) companies. The lack of a secondary market will affect the costs of an entity because shareholders unable to decommission their shares may place pressure on management to behave in their best interests. We analyse in this paper, using a sample of 5 Bangladeshi FMCG companies for the period from 2014 to 2019, the determinants of Bangladesh's Debt to Total Asset. This study reveals that Bangladesh's listed Food and Allied company's average leverage ratio is close to that of other countries in the growth of the economy. The study also shows that the Company's Profitability is strongly and positively linked to the asset structure, Size, Profitability, growth and business risks. A firm's Size has a statistically significant negative impact on Debt to Total Asset.

Dynamic Panel Data Analysis of Capital Structure Determinants: Evidence from Iraqi Banks

This study investigates if the choice of capital structure of Iraqi banks could be interpreting through factors which have been studied by prior studies, which represented by determinants of capital structure choice (i.e., bank size, bank profitability, bank growth, tangibility, bank age). Using dynamic panel GMM for the period 2005 to 2019, this study maintains the explore on the determinants of capital structure of Iraq banks "developing country" that has circumstances likely to be quite different from those in developed and other major developing countries, particularly in terms of it deteriorating economic environment. The findings indicate that the bank size, bank profitability, bank age have a dominant role in explaining the variation in the long-term debt ratios of Iraqi banks. Meanwhile, only bank size, bank profitability, bank growth, bank age has a leading role in interpreting the variation of short-term debt ratios in the Iraqi banks. The current study has initiated some basis to discover the capital structure determinants of Iraqi banks upon which a more detailed evaluation could be based. Moreover, the experimental results can help Iraqi banks directors to choose the optimum structure of capital.

Dynamic Panel Data Analysis of Capital Structure Determinants: Evidence from Iraqi Banks

This study investigates if the choice of capital structure of Iraqi banks could be interpreting through factors which have been studied by prior studies, which represented by determinants of capital structure choice (i.e., bank size, bank profitability, bank growth, tangibility, bank age). Using dynamic panel GMM for the period 2005 to 2019, this study maintains the explore on the determinants of capital structure of Iraq banks "developing country" that has circumstances likely to be quite different from those in developed and other major developing countries, particularly in terms of it deteriorating economic environment. The findings indicate that the bank size, bank profitability, bank age have a dominant role in explaining the variation in the long-term debt ratios of Iraqi banks. Meanwhile, only bank size, bank profitability, bank growth, bank age has a leading role in interpreting the variation of short-term debt ratios in the Iraqi banks. The current study has initiated some basis to discover the capital structure determinants of Iraqi banks upon which a more detailed evaluation could be based. Moreover, the experimental results can help Iraqi banks directors to choose the optimum structure of capital.

The Impact of Capital Structure on Firm Performance of Vietnamese Non-financial Listed Companies Based on Agency Cost Theory

This paper investigates the impact of capital structure on firm performance using a sample of 3,122 observations of 446 non-financial listed companies on the Vietnam stock market during 2011-2017. Using firm performance measures, namely ROE and Tobin Q, we examined if higher leveraged firms are more efficient or less in their performance. We employed the fixed effect model to prove that there is an inverse U-shaped relationship between leverage and ROE, and then we can find a preferred capital structure for Vietnam non-financial firms. To deal with endogeneity problem of the leverage variable, we employ two stage least squares (2SLS) regression with instrument variable estimators, which helps us strengthen the above results.
 Keywords
 Capital structure, firm performance, leverage, efficiency, instrument variable estimator, agency cost theory
 References
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Determinants of capital structure choice: Empirical evidence from Vietnamese listed companies

This paper examines the impact of firm-specific and industry characteristics on capital structure during a sample period spanning from 2007 to 2013. We used panel regression with fixed effects and found strong evidence that capital structure is most affected by firm-specific factors such as tangibility, non-debt tax shields, liquidity, firm size, taxes paid, profitability, Tobin’s Q ratio, and growth assets. In addition, the empirical results indicate that firms operating in different industries have dissimilar capital structures.

The determinants of capital structure choice: Evidence from Western Europe

This paper examines corporate leverage and its determinants on panel of 921 large Western European companies from 2003 to 2010. The results proved a substantial influence of estimated variables on changes in target debt or leverage ratio. Apart of the determinants from the “core” model, I test the influence of stock price variations on changes in capital structure to conclude if companies “time” the market. The estimation procedure of target debt ratio was performed using Fixed-Effect and FGLS methods. The results were compared to the results of often used methodology in previous research – OLS and Tobit regression. I found statistically significant and negative correlation between target leverage ratio and tangibility, market to book, profitability, product uniqueness and total return (average stock return) and statistically significant and positive correlation between target leverage ratio and size. The results suggest the mix of trade-off and pecking order theory predictions and are consistent with findings of previous studies. Future research should focus on impact of leverage deficit (deviations from target leverage ratio) on corporate decisions in Europe.

The relationship between business cycles and capital structure choice: The case of the international shipping industry

Research on capital structure choice depicts firm size, profitability, and asset tangibility as the main determinants of capital structure. The trade-off and pecking order theories of optimal capital structure predict contradictory relationships between each of these determinants and firm leverage. We attempt to reconcile the conflicting results in the literature by incorporating the impact of different phases of the economic cycle upon the choice of capital structure in a concentrated ownership setting. Studying 117 internationally listed shipping companies (about 60% of the entire population), we explore potential determinants of capital structure choice in periods of expansion (2003Q4), peak (2007Q4), trough (2008Q4), and sideways movement (2010Q4). Our finding that size, tangibility, and corporate performance constitute the main determinants of capital structure in the shipping sector is consistent with the literature. We employ the Generalized Method of Moments (GMM) to estimate the interaction between capital structure choice, corporate profitability and structure of ownership. Our model asserts bidirectional positive relationships between leverage and profitability and leverage and concentrated ownership in the peak period of 2007, but bidirectional negative relationships amongst these variables in all other periods. We conclude that the sentiment of the ship-owner during different phases of the business cycle, along with ownership concentration are key elements in explaining the relationship between profitability and leverage in the shipping sector.

Capital Budgeting Decisions of Private Equity: Evidence from India

An efficient allocation of capital is the most important finance function in the modern times. It involves decisions to commit the firm’s funds to the long term assets. Capital Budgeting or investment decisions are of considerable importance to firm, since they tend to determine the value by influencing its growth, profitability and risk. This paper studies the determinants of capital structure choice of selected Indian Industries. Our main objective was to investigate whether and to what extend the main capital structure theories can explain the capital structure choice of Indian firms. In this paper we report results from executives of companies of different industries. We document interesting insights by analyzing how theoretical corporate finance concepts are applied by the experts in practice. We have applied multiple regression models on the selected industries by using survey data for the period 2005-2011. The results of the study indicate that the determinants of the capital structure of Industries in India are agency cost, assets structure, non-dept. tax shield and size. The coefficients of these variables are significant at one percent or five percent level.

The determinants of capital structure choice: evidence from Greek listed companies

This article investigates the capital structure determination of firms listed on the Athens Stock Exchange, using both cross-sectional and nonparametric statistics. The data set is mainly composed of balance sheet data for 259 firms over a 9-year period from 1998 to 2006, excluding firms from the banking, finance, real estate and insurance sectors. The first part of the study assesses the extent to which leverage depends upon a broader set of capital structure determinants, while the latter provides evidence that capital structure varies significantly across a series of firm classifications. The results document empirical regularities with respect to alternative measures of debt that are consistent with existing theories and, in particular, reasonably support the pecking order hypothesis. Overall, this study tries to shed more light on corporate financing behaviour in a way to loosen the capital structure puzzle.

Financial Reforms and Dynamics of Capital Structure Choice: A Case of Publically Listed Firms of Pakistan

The present paper is an attempt to integrate financial reforms and corporate finance in a dynamic setup. Determinants of capital structure choice are analyzed dynamically using panel data of 374 non-financial firms listed on Karachi Stock Exchange (KSE) of Pakistan for the period 1988-2008. To capture the dynamic nature of capital structure choice the Arellano-Bond Dynamic Panel-Data Estimation technique is used to avoid the problems of endogeneity, heteroscedasticity and autocorrelation which arise due to dynamic panel data estimation. Reforms, it is found, has a negative impact on leverage of the firm suggesting that with liberalization and strengthening of institutions, there is a massive decrease in leverage; indicating that firms shifted from debt to equity market once the financial constraints are eased out. Lagged leverage, it is found, affects leverage positively, substantiating the fact that capital structure requires costs for adjustment; hence the adjustment process is delayed. The results furthers confirms the use of tangible assets as collateral; tangibility is positively correlated with Leverage which is contrary to Pecking Order Hypothesis but well explained by the trade-off theory of capital structure choice. However, the results substantiate Pecking order Hypothesis for profitability, size and growth. Profitability, size and growth, as espoused by pecking order hypothesis, are negatively correlated with leverage. That is highly profitable firms use equity financing instead of debt financing. Similar is the case with big firms and firms with high growth opportunities. As firms size increase its leverage decreases. Earning volatility confirms the trade off theory of capital structure choice. Moreover, the results reveal that firms owned by government are financed heavily through debt using banks loans as their primary instrument for financing their projects. In addition to these findings, the results suggest that the choice of capital structure varies across different industries.

محددات اختيار هيكل رأس المال: دراسة حالة في الشركات الصناعية الاردنية

This paper analyzes the explanatory power of some of the recent theories of optimal capital structure. In this paper, an attempt has been made to examine the determinants of capital structure –age of firm, size of firm, asset structure (tangibility and liquidity), business risk, growth rate, earning rate (ROA), non tax shield as independent variables and degree of operating leverage-of the industrial companies listed to Amman Stock Exchange from the period 2004-2007. The results of this study have delivered some insights on the capital structure of Jordanian industrial firms. The issue of capital structure is an important strategic financing decision that firms have to make. It is therefore important for policy to be directed at improving the information environment. The simple and multiple regression test used to analysis the determines of capital structure independent variables and leverage, the multiple regression test results indicate from the period 2004 to 2007, and there is a positive significant relationship between the firm size, asset structure/ tangibility, growth rate, and non tax shield and the degree of leverage at different sign level 1% and 5%. But there is a negative significant relationship between earning rate (ROA) and leverage at sign level 5%. Also the model is significant as overall variables independent variables and leverage at highly significant at level 1%. Finally, the results show there is no significant relationship between the number of age firm, assets structure / liability and business risk as independent variables and degree of leverage. The study provides useful recommendations for policy direction and management of these firms through emphasis on the facilitation of equity capital since it provides a base for further borrowing, reduces businesses’ sensitivity to economic cycles. There could also be policies intended to encourage establishing financing schemes to assist firms in specific industries. There is a need to develop validated databases as more data becomes available in future. Using such databases can help examining and identifying additional variables that could influence the financing behavior of Jordanian companies. Finally, focus should be placed on the ownership structure of Jordanian companies to examine how firms make their financing decisions. تقوم هذه الدراسة على تحليل القوة التفسيرية لبعض النظريات الحديثة للهيكل الأمثل لرأس المال، حيث تحاول هذه الدراسة فحص محددات هيكل رأس المال مثل (عمر الشركة، حجم الشركة، هيكل الأصول (السيولة – الملموسة)، مخاطر الأعمال، معدل النمو، معدل الايرادات (العائد على الأصول) والضريبة كمتغيرات مستقله مع درجة الدين التشغيلي وذلك للشركات الصناعية الأردنية المدرجة في سوق عمان المالي للفترة ما بين 2004 ولغاية 2007. تركزت نتائج هذه الدراسة حول هيكل رأس المال في الشركات الصناعية الأردنية من حيث اصدار هيكل رأس المال ومحدداته وأهمية ذلك في القرار المالي الاستراتيجي الذي تتخذه الشركة بالإضافة الى أهميته في الاشراف وتحسين بيئة المعلومات. تم استخدام اختبار الانحدار البسيط والمتعدد لتحليل محددات هيكل رأس المال كمتغيرات مستقله مع الدين وتضمنت نتائج الانحدار المتعدد وذلك للفترة ما بين 2004 ولغاية 2007 وجود علاقة ايجابية ذو دلالة إحصائية ما بين حجم الشركة ، هيكل الأصول (الملموسة)، معدل نمو والضريبة مع درجة الدين وذلك عند مستويات مختلفة ما بين 1% و5%، كما أظهرت وجود علاقة سالبه وذو دلالة إحصائية ما بين العائد على الأصول ودرجة الدين عند مستوى دلالة 5%، أظهر النموذج علاقة ذو دلالة إحصائية بين المتغيرات المستقلة مجتمعه ودرجة الدين عند مستوى دلالة مرتفع 1%. أخيرا، أظهرت النتائج عدم وجود علاقة ذو دلالة إحصائية ما بين (عمر الشركة، هيكل الأصول (السيولة) ومخاطر الشركة كمتغيرات مستقله مع درجة الدين. يوصي الباحث بضرورة الاهتمام في اتجاه السياسة وادارتها في الشركات من خلال التأكيد على التسهيلات في ملكية رأس المال وخاصة أنها تؤثر على الاقتراض، تقليل حساسية الأعمال للدورات الاقتصادية، بالإضافة الى أن السياسات تميل للتشجيع على تأسيس مخططات مالية تساعد الشركات في بعض الصناعات المحددة، بالإضافة الى الحاجة الى تطوير شرعية وقوة قاعدة البيانات بشكل يعكس مدى توفرها في المستقبل، حيث أن استخدام هذه البيانات تساعد في تحديد وفحص عدد أضافي من المتغيرات التي من الممكن أن تؤثر على السلوك المالي في الشركات الاردنية. أخيرا، يجب التركيز على هيكل الملكية للشركات الأردنية وذلك لفحص كيفية قيام الشركة باتخاذ القرارات المالية.

Financial Reforms and Dynamics of Capital Structure Choice: A Case of Publically Listed Firms of Pakistan

The present paper is an attempt to integrate financial reforms and corporate finance in a dynamic setup. Determinants of capital structure choice are analyzed dynamically using panel data of 374 non-financial firms listed on Karachi Stock Exchange (KSE) of Pakistan for the period 1988-2008. To capture the dynamic nature of capital structure choice the Arellano-Bond Dynamic Panel-Data Estimation technique is used to avoid the problems of endogeneity, heteroscedasticity and autocorrelation which arise due to dynamic panel data estimation. Reforms, it is found, has a negative impact on leverage of the firm suggesting that with liberalization and strengthening of institutions, there is a massive decrease in leverage; indicating that firms shifted from debt to equity market once the financial constraints are eased out. Lagged leverage, it is found, affects leverage positively, substantiating the fact that capital structure requires costs for adjustment; hence the adjustment process is delayed. The results furthers confirms the use of tangible assets as collateral; tangibility is positively correlated with Leverage which is contrary to Pecking Order Hypothesis but well explained by the trade-off theory of capital structure choice. However, the results substantiate Pecking order Hypothesis for profitability, size and growth. Profitability, size and growth, as espoused by pecking order hypothesis, are negatively correlated with leverage. That is highly profitable firms use equity financing instead of debt financing. Similar is the case with big firms and firms with high growth opportunities. As firms size increase its leverage decreases. Earning volatility confirms the trade off theory of capital structure choice. Moreover, the results reveal that firms owned by government are financed heavily through debt using banks loans as their primary instrument for financing their projects. In addition to these findings, the results suggest that the choice of capital structure varies across different industries.

Institutional characteristics and capital structure: A cross-national comparison

The main objective of this paper is to investigate whether differences in institutional characteristics result in different capital structure determination among countries. First, we analyze the institutional setting in Greece compared with that of other countries. Second, we provide survey information about the determinants of capital structure in Greece and compare our findings with those of similar surveys in the United States and Europe based on Graham and Harvey [Graham, J., & Harvey, C. (2001). The theory and practice of corporate finance: Evidence from the field. Journal of Financial Economics, 60, 187–243], Bancel and Mittoo [Bancel, F., & Mittoo, U. (2004). Cross-country determinants of capital structure choice: A survey of European firms. Financial Management, 33(4), 103–133 Winter 2004] and Brounen, de Jong and Koedijk [Brounen, D., de Jong A., & Koedijk, K. (2006). Capital structure policies in Europe: Survey evidence. Journal of Banking and Finance, 30, 1409–1442] respectively. Greek firms seem to follow an own-business policy and seem to care more about the disadvantages of debt than try to exploit its advantages. Financial distress considerations, market timing and competitiveness are important factors, whereas agency costs of equity, pecking order and the signalling theory do not seem to apply. Conclusions are relatively similar with those of other countries, though specific differences that can be attributed to the different institutional settings do exist. In general however, we conclude that differences in institutional characteristics do not seem to affect the way of thinking of financial managers when they decide on capital structure issues.

Capital Structure Choice in an Emerging Market: Evidence from Listed Firms in Pakistan

This study empirically examines the determinants of capital structure choice of listed firms in Pakistan. A pooled sample of 535 public listed non-financial companies from 1988 to 2005 is used to establish the relationship between leverage and its determinants by using autoregressive distributed lag (ARDL) econometric framework. The results indicate that size of the firm and growth opportunities are positively related to debt ratio. A highly consistent result is that more profitable and highly liquid firms will avoid debt and will rely mainly on equity financing. Similarly firms with high risk and more tangible assets will use less debt. Moreover the results suggest that state owned firms have been financed heavily through bank loans and that there is a substantial decrease in leverage after the reforms in financial and corporate sector of 1990s in Pakistan. The secondary market development and financial liberalization has been associated with shift of firms from debt market to equity market. There is strong evidence indicating that choice of capital structure differs significantly across industries.

Determinants of capital structure choice: A structural equation modeling approach

In their seminal research on the determinants of capital structure choice using structural equation modeling (SEM), Titman and Wessels [Titman, S., & Wessels, R. (1988). The determinants of capital structure choice. Journal of Finance, 43, 1–19] obtain weak results and hence call for further investigation. We apply a Multiple Indicators and Multiple Causes (MIMIC) model, with refined indicators, to a pooled sample for the period 1988–2003 and find more convincing results than those obtained by Titman and Wessels. With the capital structure measured simultaneously by the ratios of long-term debt, short-term debt, and convertible debt to the market value of equity, our results show that growth is the most important determinant of capital structure choice, followed in order by profitability, collateral value, volatility, non-debt tax shields, and uniqueness. Moreover, we find that long-term debt is the most important proxy of capital structure, followed by short-term debt, and then convertible debt.

The capital structure determinants of REITs. Is it a peculiar industry?

Purpose – Unlike previous studies on capital structure decisions, the purpose of this paper is to focus on US real estate investment trusts (REITs) in order to find out the main determinants of capital structure choice for real estate companies and in order to verify if they are related to factors similar to those affecting the decisions of public firms in other sectors.

The Determinants of Capital Structure Choice: Evidence from Polish Companies

The main objective of this paper is to investigate which of the two competing capital structure theories – the pecking order of financing choices or the traditional static trade-off model – better describes the financing decisions in Polish companies traded on the Warsaw Stock Exchange (WSE). The data come from financial statements of the companies and cover a 5-year period, 2000–2004. First, a correlation is run in order to separate a set of significant factors influencing the capital structure from the list of the following independent variables: assets structure, profitability, growth opportunities, liquidity, firm size, product uniqueness, earnings volatility, non-debt tax shields, dividend policy, and the effective tax rate. Next, in order to test the relationship between capital structure and its potential determinants, multiple regression is run. The evidence generally suggests the relevance of the pecking order hypothesis in explaining the financing choices of Polish firms.

An empirical investigation on the determinants of capital structure: the UK and Italian experience

This article investigates the empirical determinants of capital structure choice by analysing security issues made by companies in the UK and Italy between 1992 and 1996, and examines how companies actually select between financing instruments at a given point in time and in different financial contexts. A descriptive model of choice is developed and then estimated using Logit and Probit estimation procedures, and using data of two samples, which are assumed to be representative of a particular financial environment. The results provide evidence of interesting differences between the two financial markets, generally supporting the idea of the UK market being more testable and in principle more consistent with the main prescriptions of the more recent developments of capital structure theory; on the whole, the results provide support for positive effects of size and profitability, and negative impact of liquidity conditions and bankruptcy risk on the financial leverage of companies. This, together with the negative effect displayed by the available reserves which are taken as a proxy of internally generated funds, lends support to the pecking order theory of capital structure. It is also suggested that firms in well developed financial systems (UK) may have long-term target leverage ratios, while in less efficient markets (Italy) an optimal debt level does not seem to be a major concern. Finally, for both markets, the results are consistent with the notion that the tax advantage of debt financing plays a relevant role in capital structure decisions.

Determinants of capital structure choice: a study of the Indian corporate sector

Existing empirical research on capital structure has been largely confined to the United States and a few other advanced countries. This paper attempts to study the capital structure choice of Less Developed Countries (LDCs) through a case study of the Indian Corporate sector. The objective is to develop a model that accounts for the possibility of restructuring costs in attaining an optimal capital structure and addresses the measurement problem that arises due to the unobservable nature of the attributes influencing the optimal capital structure. The evidence presented here suggests that the optimal capital structure choice can be influenced by factors such as growth, cash flow, size, and product and industry characteristics. The results also confirm the existence of restructuring costs in attaining an optimal capital structure.