Significant Determinants Of Capital Structure Research Articles

CAPITAL STRUCTURE ANALYSIS – THEORIES AND DETERMINANTS VALIDATION BASED ON EVIDENCE FROM THE CZECH REPUBLIC

The optimal capital structure is a key precondition for business, even though the task of defining the optimal capital structure can be difficult. Previous studies present many different and mutually contradictory factors that should be considered with respect to managerial strategic financial decisions. The first part of the presented contribution summarises the effects of the most frequent capital structure determinants and reviews the world’s most important theories about the behaviour of enterprises when deciding on capital structure. The aim of our contribution is the analysis of capital structure behaviour in the Czech environment. Fundamental capital structure theory is revealed by statistical hypotheses testing. Moreover, we are mainly targeting significant determinants of capital structure. The results help us to create general recommendations for the financial management of Czech companies. In the scope of our study, there are approximately a thousand national financial statements of Czech companies from the most important sectors of economic activity for the period 2016–2019. The correlation analysis with partial correlation coefficient and multiple linear regression analysis was utilised to determine the effects and significance of the individual determinants. Data show that Czech companies do not prefer debt financing recommended by some capital structure theories. Their financial management behaviour corresponds to pecking order theory with insufficient utilisation of tax shield. Sectorwise analyses prove only one exception; motor vehicles wholesale, retail trade, repair and maintenance sector generally prefers financing by debt. Based on the literature review, we selected six significant determinants of capital structure: size, return on assets (ROA), return on equity (ROE), tangibility, asset growth and duration. Advanced statistical analyses show the power and influence of each determinant on capital structure and their mutual relations. Autocorrelations can negatively affect the results of regression analyses. We can conclude that the capital structure of Czech companies is mainly influenced by tangibility and ROA.

Study on Determinants of Capital Structure in the Pharmaceutical Industry of Pakistan

This research on the determinant of capital structure is limited to pharmaceutical companies listed on Pakistan Stock Exchange (PSX). Several researchers both in developed and developing countries have attempted to identify determinant of capital structure for different industries in their economies. The results for various explanatory variables used by researchers have been somewhat mixed. Some of the variable which were found significant in explaining the capital structure in one study remained insignificant in the other studies. This empirical study makes an attempt to explore the determinants of capital structure in the pharmaceutical firms quoted on PSX (Pakistan Stock Exchange). This study coversa ten years period from 2012 to 2021( both inclusive) for seven companies using eleven explanatory variables for leverage. There are twelve companies listed on PSX, seven of these twelve quoted companies on the basis of availability of data for all 10 years have been selected. The results of the study indicate, operating leverage, firm’s specialty, return on asset and tax rate were significant determinants of capital structure. It was also observed that the size of the firm, growth rate, basic earning power, fixed charges coverage ratio, non-debt tax shield, dividend payout ratio and liquidity have a minor (insignificant) influence on the capital structure of the pharmaceutical companies in Pakistan.

Capital structure dynamics of Shariah-compliant vs noncompliant firms: evidence from Pakistan

PurposeThis study aims to compare capital structure determinants' effect on the leverage levels of Shariah-compliant (SC) and noncompliant (NC) firms in Pakistan. This study also estimates and compares the capital structure adjustment speed for both firm types.Design/methodology/approachBased on the Karachi Meezan Index screening criterion, a balanced panel of 117 SC and 68 NC firms listed on the Pakistan Stock Exchange from 2008 to 2018 was constituted. This study used the generalized method of moments to identify the significant determinants of capital structure and estimate the speed of adjustment. In addition, the F-test was used to check whether the effect of the determinants on the leverage is same for SC and non-SC firms.FindingsThe authors found that different determinants affect both firm types' leverage levels (book and market) differently. The authors also found that the adjustment speed of SC firms toward their target leverage ratio is slower than their NC peers. Lastly, significant variation was observed in the results under different screening criteria.Research limitations/implicationsThis study fills the literature gap by providing a comprehensive comparison of the capital structure decisions of the SC and non-SC firms. Because this study is limited to Pakistan, generalizability would be an issue.Practical implicationsThis study will guide the management of SC and non-SC firms about which factors are reliably important in choosing their capital structure. The findings also call for bringing harmony in the different Shariah screening criteria being in practice.Originality/valueTo the best of the authors’ knowledge, this is the first comparative study that identifies the significant capital structure determinants for SC and NC firms and investigates their effect on the leverage of both firm types. By testing joint hypotheses of same relationship, this study seeks to determine if, because of Shariah restrictions, the capital structure determinants of SC firms are similar to NC firms or they exhibit different behavior. The authors also repeat their analysis using other prominent screening criteria to assess the consistency of their results.

Determinants of Capital Structure: A Study of Original Equipment Manufacturers from Indian Automobile Industry

The main objective of this study is to identify the most significant determinants of capital structure of original equipment manufacturers from Indian Automobile Industry which are listed on the Bombay Stock Exchange for the period 2003-04 to 2016-17. To achieve the objectives of the study, hypotheses were formulated on the basis of review of various theories of capital structure viz. Pecking Order Theory, Static Trade-off Theory, etc. and empirical evidences on the subject. Descriptive statistics, analysis of correlation, and panel data regression including regression diagnostics have been used as statistical tools to identify the most significant determinants of capital structure of the sample companies. STATA software was used for the analysis of the data used in the present study. The results of the analysis carried out in the study revealed that the most significant determinants of capital structure of the sample companies during the selected time period were profitability of company, size of company, liquidity position of company, tangibility of assets, and operating cash flow, while non-debt tax shield, and effective tax rate did not show any significant relationship with the capital structure of the companies under consideration during the period of study. The study also observed evidences in support of Pecking Order Theory, and Free Cash Flow Theory, but no evidences were found in support of Static Trade-off Theory. This study provides useful insight pertaining to the financing behaviour of automobile manufacturing companies in India.

Profitability and Development of Indian firms based on Financial Dynamics

The Judicial blend of debt and equity at which cost of capital is least and estimation of the firm is most maximum is named as optimal capital structure of a firm. The capital structure decision can impact the estimation of the firm through the profit accessible to the investors which amplify the investors' wealth, notwithstanding this capital structure can influence the estimation of the organization by improving its expected income. Hence, the debt ratio changes when there is an irregularity between inside assets and genuine speculation openings and there is data asymmetry in the market. The significance of a proper capital structure is, along these lines, self-evident. Primary variables affecting Capital Structure have been examined right now distinguish the degree of their capital structure impact. The fundamental reason for existing is to look at the effect of "ten financial factors" in particular: profitability, size, risk in the business, asset structure, debt service, development, office cost, bankruptcy ratio, charge shield in tax and uniqueness on the capital structure of chosen organizations, which is spoken to by LEV D/E. Ten unique divisions from Indian corporate have been picked, to break down the significant determinants of capital structure. The information has been drawn from the official sites of the organizations for a time of 2008 to 2018; the information has been gathered for 400 recorded organizations from ten chose segments with the end goal of investigation. Multiple regressions have been applied to discover the noteworthy determinates. Profitability, Growth and Development of the firm, size have pivotal and positive relationship with leverage.

The capital structure puzzle – evidence from Indian energy sector

PurposeThe purpose of this paper is to determine the factors affecting the capital structure of companies engaged in the Indian energy sector.Design/methodology/approachCapital structure theories and empirical literature have been reviewed to formulate propositions concerning the factors/variables determining the capital structure of Indian energy companies. The examination is done using panel data techniques for the sample 141 companies operating in the Indian energy sector.FindingsThe results show firms’ age, asset turnover ratio, liquidity and firms’ size to be significant determinants of capital structure for the Indian energy companies, while profitability, debt service capacity, sales growth, non-debt tax shield and tangibility ratio to be insignificant determinants. Historically, profitability has shared a significantly negative relationship with debt ratio; however, the relation here is not significant.Research limitations/implicationsThe focus of the current study is on Indian energy sector, the results obtained will not be applicable for other sectors.Originality/valueThe current research gives an insight into the determinants of capital structure of the companies engaged in the Indian energy sector, which are mostly overlooked due to the laws, policies and regulations governing the sector as a whole.

Determinants of capital structure: an empirical study of manufacturing firms in India

PurposeThe purpose of this paper is to explore the most significant determinants of capital structure of manufacturing firms in India and to investigate whether the capital structure models derived from foreign research provide convincing explanations for capital structure decisions of Indian firms by using multiple regression model.Design/methodology/approachDifferent conditional theories of capital structure like trade off theory, pecking order theory and agency theory are reviewed to formulate testable propositions concerning determinants of capital structure of manufacturing firms. Multiple regression model and correlation matrix have been used as statistical tools to investigate the most significant determinants of capital structure of manufacturing firms in India with the help of SPSS Software for a sample of top 100 manufacturing firms listed in BSE.FindingsThe results suggest that variables like asset composition, business risk and return on assets are positively related to debt ratio whereas firm size and debt service capacity are negatively related to debt ratio. The asset composition, business risk and return on assets appear to be significant determinants of capital structure, while firm size and debt service capacity are insignificant determinants.Research limitations/implicationsThe findings of this study are consistent with predictions of trade off, pecking order and agency theory of finance which helps in understanding financing behaviour of firms in India.Practical implicationsThis study has laid some ground work to explore the determinants of capital structure of Indian firms upon which a more detailed evaluation could be based. Furthermore, empirical findings should help corporate managers to make optimal capital structure decisions.Originality/valueTo the authors’ knowledge, this study is the first that explores the most significant determinants of capital structure of manufacturing firms in India by using the most recent data. Moreover, this study also confirms that same factors affect the capital structure decisions of firms in developing countries as identified for firms in developed economies.

Determinants of Capital Structure in the Automobile Industry: Case Study Nakuru Town

The role of capital structure in an organization cannot be underestimated. Profitability, size of the firm, leverage and tangibility of assets has been cited in various studies as important determinants of capital structure in the Automobile Industry. These determinants however have been cited to have varying types of relationships with capital structure in different studies. This paradox makes firms in the automobile industry an interesting area for study. The purpose of this study was to examine the determinants of capital structure in the Automobile Industry in Nakuru Town. The specific objectives of the study included: establishing how profitability affects the capital structure decisions in the Automobile Industry; finding out how size of the firm affects the capital structure decisions in the Automobile Industry; determining how liquidity affects the capital structure decisions in the Automobile Industry and determining how tangibility of assets affect the capital structure decisions in the Automobile Industry in Nakuru Town. The study adopted the descriptive survey design and targeting a population of 40 automobile firms. A census technique was employed in sample determination, whereby all the 40 automobile companies were studied. The study collected primary data using a questionnaire. Prior to use of data collected, it was subjected to validity checks and reliability tests. Data collected was analyzed with the help of the Statistical Package for Social Sciences version 21.0 computer software for descriptive statistics and inferential statistics (correlations). The findings show that profitability and size of the firm has no significant effect on capital structure. However, liquidity and tangibility of assets was found to be significant determinants of capital structure in Automobile industries in Nakuru Town. The study recommends that, automobile firms in Nakuru Town should seek on measurers which will minimize the overall cost of capital by postponing seeking fresh capital issue by seeking use of internal sources and borrow from cheaper sources of debt.

Determinants of Capital Structure of Agricultural Firms in Kenya

This paper contributes to the capital structure literature by investigating the determinants of capital structure of agricultural firms in Kenya, using annual data for the period 2010-2015. An empirical model to analyze the determinants was specified and estimated using both fixed and random effects estimation techniques. The estimation results provide evidence that profitability, liquidity, age and size of the firm are significant determinants of capital structure. Specifically, the results reveal a negative relationship between profitability and long term debt and a positive relationship between age of the firm and long term debt. We also established a positive influence of age on short term debt, while a negative link is evident between liquidity, the size of the firm and short term debt. The evidence adduced is important for forming credit markets policies for agricultural firms both at the macro and the micro level.

The Determinants of Capital Structure: Empirical Analysis of Oil and Gas Firms during 2000-2015

This study investigates the capital structure determinants of 346 oil and gas firms that are the constituents of the Global Oil and Gas Index (OILGSWD) over the period of 2000 – 2015, taking into account the effect of the Global Financial Crisis of2007-2009 on the determinants of the capital structure. Thus, six firm level explanatory variables (namely: liquidity, profitability, growth, non-debt tax shield, tangibility and size) are selected and regressed against the appropriate capital structure measure, leverage, the ratio of total debt to book value of total assets. The data is collected from secondary sources depending on the data from the DataStream database. The major findings of the study indicate that tangibility, profitability, size, liquidity and non-debt tax shield are the significant determinants of capital structure of oil and gas firms, while growth is considered insignificant. The capital structure is analyzed in terms of the three main theories of capital structure: Trade-off theory, Pecking order theory, and Agency cost theory. Finally, the global financial crisis has to some extent a significant impact on the capital structure determinants of oil and gas firms and has no significant impact on liquidity, as indicated by the OLS regression analysis results.

A study on analysis of the determinants of capital structure with special focus on automobile sector of India

The choices of capital structure have been the most important choices to be taken by the finance professionals in a corporate sector. Capital structure has fascinated intellectual attention in company finance literature in last few years. However, in the context of financial sector particularly in automobile sector, it has received a petite attention. This study scrutinises the effect of firm level individuality on capital structure of listed automobile companies of India from 2008 to 2014. Ordinary least square regression study indicates that risk, tangibility, size, liquidity and profitability are significant determinants of capital structure of automobile firms of India. In addition, the study also indicates that profitable, more liquid, more tangible and risky automobile firms focus on equity than debt financing or preserved earnings. Thus, the finance executives of automobile companies ought to put emphasis on financing of equity or preserved earnings for the operations of their firms.

The effect of taxes on the debt policy of spanish listed companies

This study explores the role of taxes in explaining companies’ financing decisions. We test whether the corporate tax shields explanation of capital structure is applicable to firms listed on the Spanish stock exchange over the period 2007–2013. Taxes are found to be economically and statistically significant determinants of capital structure. Our results suggest that marginal tax rates affect the debt policies of Spanish listed companies, and the existence of non-debt tax shields constitutes an alternative to the use of debt as a tax shelter. Consistent with theoretical expectations, there is a stronger relation between debt and taxation in less levered firms. Finally, we empirically estimate the impact of the new thin-capitalization rule put forth by the Spanish government in 2012 on the financing behaviour of Spanish listed companies. Our empirical evidence supports the existence of a tax reform effect, where companies affected by interest deductibility limitations reduce their leverage more than companies that are not affected.

Taxes and Capital Structure

AbstractWe use nearly 500 shifts in statutory corporate and personal income tax rates as natural experiments to assess the effect of corporate and personal taxes on capital structure. We find both corporate and personal income taxes to be significant determinants of capital structure. Based on ex post observed summary statistics, across Organisation for Economic Co-Operation and Development (OECD) countries, taxes appear to be as important as other traditional variables in explaining capital structure choices. The results are stronger among corporate tax payers, dividend payers, and companies that are more likely to have an individual as the marginal investor.

Does Liquidity Determine Capital Structure? Evidence from India

We explore the relationship between liquidity of a firm’s equity and its capital structure. Firms with more liquid stocks benefit from lower costs of equity issuance. Therefore, it is hypothesized that such firms are likely to have a preference for equity in their capital structure. This article empirically investigates the relationship between liquidity and capital structure decisions on a sample of Indian firms. Contrary to the existing literature, we find no empirical evidence for an inverse relationship between liquidity and leverage among Indian firms. The results are indicative of the fact that due to distinctive features of emerging markets, namely, less sophisticated capital markets, higher information asymmetry, concentrated ownership, constrained access to debt and prevalence of family owned businesses, there are other more significant determinants of capital structure that subsume the explanatory power of liquidity variables.

Determinants of Capital Structure – A study of selected Pharma Companies

Capital structure is fundamentally permanent long term financing of a firm. The objectives of this study are to identify the significant determinants of capital structure of the listed Pharmaceutical companies in NSE/BSE during the period 1999–2013. In relation to the study determinants are considered are profitability, tangibility, growth, size, debt service capacity, tax rate, non debt tax shields, financial leverage cost of debt and cost of equity. The study uses correlations and multiple regression analysis, to find the relationship between Debt-equity ratio (i.e., Dependent variable) and determinants of capital structure (independent variables), The policy implication is that the financial managers should consider these determinants as yardsticks before taking the leverage decisions in order to choose the most favorable capital structure for the company so that it maximizes the shareholders’ value.

THE DETERMINANTS OF CAPITAL STRUCTURE FOR VIETNAM’S SEAFOOD PROCESSING ENTERPRISES

The goal in this paper is to assess the determinants of capital structure for Vietnam’s seafood processing enterprises (SEAs) in comparison with enterprises of other processing industries (DIFs). The result of this study was based on applying Shumi Akhtar’s model (2005) [22] and Shumi Akhtar, Barry Oliver’s (2005) [23] and using data of 302 enterprises, including 63 in fisheries industry, across 5 years from 2004 to 2008. Total observations were 772, including 284 and 488 for models applied to seafood processing enterprises and others respectively. The results show that capital structure differs between SEAs and DIFs. Accordingly, size and collateral value of assets were found to be significant determinants of capital structure for both SEAs and DIFs. For SEAs, profitability, growth, agency costs and interest expense affect the capital structure and play a crucial role. Meanwhile, bankruptcy risks and age of enterprises are essential determinants for DIFs. In relation to interaction effects, size and collateral value of assets are significant in explaining the differences in the capital structure of SEAs relative to that of DIFs. Finally, determinants of capital structure rarely varied over the sample period for both SEAs and DIFs. The findings suggest implications for Vietnam’s seafood processing enterprises (SEAs) on flexible usage of financial leverage. Specifically, to increase or decrease the level of financial leverage, SEAs need to take into account size, collateral assets, profitability and growth rate of enterprises as well as recommend measures to cope with shocks in variations of bank interest rates.

Taxes and Capital Structure

We use nearly 500 shifts in statutory corporate and personal income tax rates as natural experiments to assess the effect of corporate and personal taxes on capital structure. We find both corporate and personal income taxes to be significant determinants of capital structure. Based on ex-post observed summary statistics, across OECD countries, taxes appear to be as important as other traditional variables in explaining capital structure choices. The results are stronger among corporate tax payers, dividend payers, and companies that are more likely to have an individual as the marginal investor.

Multinationality as a Moderator of National Institutions: The Case of Culture and Capital Structure Decisions

Literature in international business and finance share the belief that country‐level institutions affect the decisions of corporations. In this study, we highlight the other side of the picture and propose that MNCs can moderate the impact of the national institutions of a country. Unlike previous studies, we treat culture not only as an explanatory variable but also as a moderator. We posit that multinationality moderates the influence of national culture on corporate financial leverage. Using a large panel data set of 50 countries, we show that the multinationality of a firm decreases the impact that national culture has on its capital structure. Additionally, our study makes another significant contribution by establishing existing cultural dimensions as economically and statistically significant determinants of capital structure.

Determinants of Capital Structure: A Case Study of Listed Companies of Nepal

In this paper, an attempt has been made to examine the determinants of capital structure -size, business risk, growth rate, earning rate, dividend payout, debt service capacity, and degree of operating leverage-of the companies listed to Nepal Stock Exchange Ltd. as of July 16, 2003. Eight variables multiple regression model has been used to assess the influence of defined explanatory variables on capital structure. In the preliminary analysis, manufacturing companies, commercial banks, insurance companies, and finance companies were included. However, due to the unusual sign problem in the constant term of the model, manufacturing companies were excluded in final analysis. This study shows that size, growth rate and earning rate are statistically significant determinants of capital structure of the listed companies.
 
 Journal of Nepalese Business Studies Vol.1(1) 2004 pp. 1-13

Capital Structure Among Latin American Companies

This paper reports the results of an empirical study of the determinants of capital structure of large Latin American companies. Variations with regard to the country, industry, and size of a company are examined for a sample of two hundred and thirty large companies located in twentytwo Latin American countries. This study is the first to examine the capital structures of this large set of Latin American companies. The results of this study indicate that while size does not seem to be significant, both country and industry are significant determinants of capital structure in Latin America not only in bivariate tests but also in multivariate statistical tests. Multinational and diversified companies, therefore, cannot assume uniformity of capital structure across countries and industries in Latin America and, they must take these differences into account in developing and setting capital structure, financing, evaluation, and management policies for their subsidiaries.