The determinants of capital structure choice: Evidence from Western Europe

• Authors: Ana Mugosa
• Languages of publication: EN

Abstracts

EN

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.

Keywords

EN

Capital structure; target debt ratio; Western Europe; trade-off theory; pecking order theory

Discipline

• ECONOMICS: ECONOMICS

• Publisher: Prague Development Center, Czech Republic
• Journal: Business and Economic Horizons
• Year: 2015
• Volume: 11
• Issue: 2
• Pages: 76-95

Dates

published

2015-07-10

Contributors

author

Ana Mugosa

References

• Baker H.K., Martin G.S., 2011. Capital structure and corporate financing decisions, The Rober W. Kolb series in Finance, John Wiley&Sons, Inc., Hoboken, New Jersey, http://dx.doi.org/10.1002/9781118266250
• Baker M., Wurgler J., 2002. "Market timing and capital structure", Journal of Finance, Vol.57, pp.1-32, http://dx.doi.org/10.1111/1540-6261.00414
• Baltagi B.H., 2013, Econometric analysis of panel data, John Wiley and Sons, West Sussex, 5th edition
• Bancel F., Mittoo U., 2004. "Cross-country determinants of capital structure choice: A survey of European firms", Financial Management, Vol.33, pp.103-132
• Bauer P., 2004. "Determinants of capital structure: Empirical evidence from the Czech Republic", Czech Journal of Economics and Finance, Vol.54, pp.2-21
• Berk A., 2006. "Drivers of leverage in Slovenian blue-chip firms and stock performance following substantial debt increases", Post-Communist Economies, Vol.18, pp.479-494, http://dx.doi.org/10.1080/14631370601008621
• Booth L., Aivazian V., Demirguc-Kunt A., Maksimovic A., 2001. "Capital structures in developing countries", Journal of Finance, Vol.56, pp.87-130, http://dx.doi.org/10.1111/0022-1082.00320
• Brounen D., Jong A., Koedijk K., 2006. "Capital structure policies in Europe: Survey evidence", Journal of Banking and Finance, Vol.30, pp.1409-1442, http://dx.doi.org/10.1016/j.jbankfin.2005.02.010
• Cassar G., Holmes S., 2003. "Capital structure and financing of SMEs: Australian evidence", Accounting and Finance, Vol.43, pp.123-147, http://dx.doi.org/10.1111/1467-629X.t01-1-00085
• Chang X., Dasgupta S., 2011. "Monte Carlo simulations and capital structure research", International Review of Finance, Vol.11, pp.19-55, http://dx.doi.org/10.1111/j.1468-2443.2011.01126.x
• Chen J., 2004. "Determinants of capital structure of Chinese-listed companies", Journal of Business Research, Vol.57, pp.1341-1351, http://dx.doi.org/10.1016/S0148-2963(03)00070-5
• Chen L. and Zhao X., 2006. "On the relation between the market-to-book ratio, growth opportunities, and leverage ratio", Finance Research Letters.Vol.3, pp.253-266, http://dx.doi.org/10.1016/j.frl.2006.06.003
• Cornelli F., Portes R., Shaffer M., 1996. "The capital structure of firms in Central and Eastern Europe", CEPR Discussion Paper No. 1392
• De Angelo H., Masulis R.W., 1980. "Optimal capital structure under corporate and personal taxation", Journal of Financial Economics, Vol.8, pp.3-29, http://dx.doi.org/10.1016/0304-405X(80)90019-7
• De Fiorey F., Uhligz H., 2012. "Corporate debt structure and the financial crisis", European Central Bank
• Deesomsak R. Paudyal K., Pescetto G., 2004. "The determinants of capital structure: Evidence from the Asia Pacific Region", Journal of Multinational Finance Management, Vol.14, pp.387-405, http://dx.doi.org/10.1016/j.mulfin.2004.03.001
• De Jong A., Kabir R., Nguyen T., 2008. "Capital structure around the world: The roles of firm- and country-specific determinants", Journal of Banking and Finance, Vol.32, p. 1954-1969, http://dx.doi.org/10.1016/j.jbankfin.2007.12.034
• Donaldson G., 1961. Corporate debt capacity: A study of corporate debt policy and the determination of corporate debt capacity, Boston, Division of Research, Harvard Graduate School of Business Administration
• Drobetz W., Pensa P., Wanzenried G., 2007. "Firm characteristics, economic conditions and capital structure adjustments", Centre of Business and Economics (WWZ), University of Basel, Working Paper 16/07
• Fama E., French K.R., 2002. "Testing trade-off and pecking order predictions about dividends and debt", Review of Financial Studies, Vol.15, pp.1-33, http://dx.doi.org/10.1093/rfs/15.1.1
• Flannery M., Rangan K., 2006. "Partial adjustment towards target capital structures", Journal of Financial Economics, Vol.79, pp.469-506, http://dx.doi.org/10.1016/j.jfineco.2005.03.004
• Frank M.Z., Goyal V.K., 2003. "Testing the pecking order theory of capital structure", Journal of Financial Economics, Vol.67, pp.217-248, http://dx.doi.org/10.1016/S0304-405X(02)00252-0
• Frank M., Goyal V.K., 2009. "Capital structure decisions: Which factors are reliably important", Financial Management, Vol.38, pp.1-37, http://dx.doi.org/10.1111/j.1755-053X.2009.01026.x
• Galai D., Masulis R., 1976. "The option pricing model and the risk pricing of stock», Journal of Financial Economics, Vol.3, pp.53-81, http://dx.doi.org/10.1016/0304-405X(76)90020-9
• Graham J.R., Harvey C.R., 2001. "The theory and practice of corporate finance: Evidence from the field", Journal of Financial Economics, Vol.60, pp.187-243, http://dx.doi.org/10.1016/S0304-405X(01)00044-7
• Grossman S. Hart O., 1982. "Corporate financial structure and managerial incentives", in J.J. McCall (Ed.), The economics of information and uncertainty, University of Chicago Press, Chicago, pp.123-155
• Hackbarth D., Miao J., Morrellec E., 2006. "Capital structure, credit risk and macroeconomic conditions", Journal of Financial Economics, Vol.82, pp.519-550, http://dx.doi.org/10.1016/j.jfineco.2005.10.003
• Harris M., Raviv A., 1991. "The theory of capital structure", Journal of Finance, Vol.46, pp.297-355, http://dx.doi.org/10.1111/j.1540-6261.1991.tb03753.x
• He Z., Milbradt K., 2015. "Dynamic debt maturity", Working paper
• Hovakiman A., Opler T., Titman S., 2001. "The debt-equity choice", Journal of Financial and Quantitative Analysis, Vol.36, pp.1-24, http://dx.doi.org/10.2307/2676195
• Huang R., Ritter J.R., 2009. "Testing theories of capital structure and estimating the speed of adjustment", Journal of Financial and Quantitative Analysis, Vol.44, pp.237-271, http://dx.doi.org/10.1017/S0022109009090152
• Jensen M., Meckeling W., 1976. "Theory of the firm: Managerial behaviour, agency costs and ownership structure", Journal of Financial Economics, Vol.3, pp.305-360, http://dx.doi.org/10.1016/0304-405X(76)90026-X
• Jensen M., 1986. "Agency cost of free cash flows, corporate finance and takeover", American Economic Review, Vol.76, pp.323-329
• Jõeveer K., 2006. "Sources of capital structure: Evidence from transition countries", Working paper, Prague: The Centre for Economic Research and Graduate Education-Economic Institute
• Kayhan A., Titman S., 2006. "Firms' histories and their capital structure", Journal of Financial Economics, Vol.83, pp.1-32, http://dx.doi.org/10.1016/j.jfineco.2005.10.007
• Kester C.W., 1986. "Capital and ownership structure: A comparison of United States and Japanese manufacturing corporations", Financial Management, Vol.15, pp.5-16, http://dx.doi.org/10.2307/3665273
• Kim W.S., Sorensen E.H., 1986. "Evidence on the impact of the agency costs of debt on corporate debt policy", Journal of financial and Quantitative Analysis, Vol.21, pp.131-144, http://dx.doi.org/10.2307/2330733
• Kraus A., Litzenberger R.H., 1973. "A state-preference model of optimal financial leverage", Journal of Finance, Vol.28, pp.911-922, http://dx.doi.org/10.1111/j.1540-6261.1973.tb01415.x
• Lauk C.T., 2014. "The triple crisis of Western capitalism: Democracy, banking, and currency", Palgrave Macmillan, http://dx.doi.org/10.1057/9781137432964
• Lemmon M.L., Roberts M.R., Zender J.F., 2008. "Back to the beginning: Persistence and the cross-section of corporate capital structure", Journal of Finance, Vol.63, pp.1575-1608, http://dx.doi.org/10.1111/j.1540-6261.2008.01369.x
• Lucas D., McDonald J.R., 1990. "Equity issues and stock price dynamics", Journal of Finance, Vol.45, pp.1019-1043, http://dx.doi.org/10.1111/j.1540-6261.1990.tb02425.x
• Malinić D., Denčić-Mihajlov K., Ljubenović E., 2013. "The determinants of capital structure in emerging capital markets: Evidence from Serbia", European Research Studies Journal, Vol.XVI, pp.98-119
• Matemilola B.T., Bany-Ariffin A.N., Azman-Saini W.N.W., 2013. "Impact of leverage and managerial skills on shareholders' return", Procedia Economics and Finance, Vol.7, pp.103-115, http://dx.doi.org/10.1016/S2212-5671(13)00224-4
• Modigliani F., Miller H.M., 1958. "The cost of capital, corporation finance and the theory of investment", American Economic Review, Vol.48, pp.261-297
• Myers S., Majluf N., 1984. "Corporate financing and investment decisions when firms have information investors do not have", Journal of Financial Economics, Vol.13, pp.187-221,
• http://dx.doi.org/10.1016/0304-405X(84)90023-0
• Myers S.C., 1984. "The capital structure puzzle", Journal of Finance, Vol.39, pp.575-592, http://dx.doi.org/10.2307/2327916
• Myers S., 1977. "Determinants of corporate borrowing", Journal of Financial Economics, Vol.5, pp.147-175, http://dx.doi.org/10.1016/0304-405X(77)90015-0
• Nivorozhkin E., 2002. "Capital structures in emerging stock markets: The case of Hungary", The Developing Economies, Vol.40, pp.166-187, http://dx.doi.org/10.1111/j.1746-1049.2002.tb01006.x
• Parsons C., Titman S., 2009. "Empirical capital structure: A review", Foundations and Trends in Finance, Vol.3, pp.1-93, http://dx.doi.org/10.1561/0500000018
• Rajan G.R., Zingales L., 1995. "What do we know about capital structure? Some evidence from international data", Journal of Finance, Vol.50, pp.1421-1460, http://dx.doi.org/10.1111/j.1540-6261.1995.tb05184.x
• Thalassinos E., Kiriazidis Th., 2003. "Degrees of integration in international portfolio diversification: Effective systemic risk", European Research Studies Journal Vol.VI, pp.111-122
• Thalassinos E., Kyriazidis Th., Thalassinos J., 2006. "The Greek capital market: Caught in between poor corporate governance and market inefficiency", European Research Studies Journal, Vol.IX, pp.3-24
• Thalassinos I.E., Deceanu L., Pintea M., Zampeta V., 2010. "New dimensions of country risk in the context of the current crisis: A case study for Romania and Greece", European Research Studies Journal, Vol.XIII, pp.225-236
• Titman S., Wessels R., 1988. "The determinants of capital structure choice", Journal of Finance, Vol.43, pp.1-19, http://dx.doi.org/10.1111/j.1540-6261.1988.tb02585.x
• Titman S., 2002. "The Modigliani and Miller theorem and the integration of financial markets", Financial Management, Vol.31, pp.5-19, http://dx.doi.org/10.2307/3666323
• Uysal V., 2007. "Deviation from target capital structure and acquisition choices", University of Oklahoma and AFA Meeting Conference paper
• Welch I., 2004. "Capital structure and stock returns", Journal of Political Economy, Vol.112, pp.106-131, http://dx.doi.org/10.1086/379933
• Wooldridge J.F., 2012. Introductory econometrics: A modern approach, Cengage Learning; 5th edition
• Zhu Y., 2010. "The spurious ratio problem and its correction: Empirical tests of capital structure theories", pp.1-28, electronic copy available at: http://ssrn.com/abstract=1724473
• Zhu Y., 2013. "Capital structure: The case of firms issuing debt", Australian Journal of Management, Vol.37, pp.283-295, http://dx.doi.org/10.1177/0312896211429159

Identifiers

DOI

http://dx.doi.org/10.15208/beh.2015.07