Purpose – The aim of this empirical study is to explore the factors that affect the capital structure of manufacturing firms and to investigate whether the capital structure models derived from Western settings provide convincing explanations for capital structure decisions of the Pakistani firms.Design/methodology/approach – Different conditional theories of capital structure are reviewed (the trade‐off theory, pecking order theory, agency theory, and theory of free cash flow) in order to formulate testable propositions concerning the determinants of capital structure of the manufacturing firms. The investigation is performed using panel data procedures for a sample of 160 firms listed on the Karachi Stock Exchange during 2003‐2007.Findings – The results suggest that profitability, liquidity, earnings volatility, and tangibility (asset structure) are related negatively to the debt ratio, whereas firm size is positively linked to the debt ratio. Non‐debt tax shields and growth opportunities do not appear ...

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Determinants of capital structure

The influences of profitability and leverage on firm value have long been critical with regard to financial decision making. The greater the profitability of a firm, the more assignable profit there is, and the higher is the value of the company. Profitability thus has a significantly positive influence on firm value. The pecking order theory holds that highly profitable corporations are not over-dependent on external funds, and thus profitability has a significantly negative influence on leverage. However, when the leverage increases, both agency and bankruptcy costs increase rapidly as a result. Since leverage generally has a markedly negative influence on firm value, leverage becomes the mediator variable in the influence of profitability on firm value. In addition, two moderator variables exist in the research industry type and firm size. It is noted that when industry type the acts as a moderator variable, it interferes with the relationship between profitability and leverage. When firm size is the moderator variable, it also interfere the relationship between profitability and leverage. The moderating effect happens in the first stage.

The influence of profitability on firm value with capital structure as the mediator and firm size and industry as moderators

Purpose




The purpose of this paper is to study the status of studies on capital structure determinants in the past 40 years. This paper highlights the major gaps in the literature on determinants of capital structure and also aims to raise specific questions for future research.




Design/methodology/approach




The prominence of research is assessed by studying the year of publication and region, level of economic development, firm size, data collection methods, data analysis techniques and theoretical models of capital structure from the selected papers. The review is based on 167 papers published from 1972 to 2013 in various peer-reviewed journals. The relationship of determinants of capital structure is analyzed with the help of meta-analysis.




Findings




Major findings show an increase of interest in research on determinants of capital structure of the firms located in emerging markets. However, it is observed that these regions are still under-examined which provides more scope for research both empirical and survey-based studies. Majority of research studies are conducted on large-sized firms by using secondary data and regression-based models for the analysis, whereas studies on small-sized firms are very meager. As majority of the research papers are written only at the organizational level, the impact of leverage on various industries is yet to be examined. The review highlights the major determinants of capital structure and their relationship with leverage. It also reveals the dominance of pecking order theory in explaining capital structure of firms theoretically as well as statistically.




Originality/value




The paper covers a considerable period of time (1972-2013). Among very few review papers on capital structure research, to the best of authors’ knowledge; this is the first review to identify what is missing in the literature on the determinants of capital structure while offering recommendations for future studies. It also synthesize the findings of empirical studies on determinants of capital structure statistically.

Research on capital structure determinants: a review and future directions

This paperwork investigates the relative importance of five factors upon the capital structure decisions of Romanian firms listed at the Bucharest Stock Exchange and operating in the construction sector of the industry. The analysis is based on panel data estimations on a sample of 20 companies, observed during three years (2009-2011). Traditional explanatory variables are adopted in the study, including profitability, company size, tangibility of assets, liquidity and asset turnover. By employing the ordinary least squares method and the fixed effects model, simple and multiple linear regressions are obtained. These are further selected and interpreted in order to determine the influence of the independent variables upon the leverage of a company. The results show that profitability and liquidity ratios are negatively affecting the total debt ratio of Romanian companies. The tangibility of assets is also having a negative impact on leverage, strengthening the findings of previous empirical studies which claim that this indicator moves in opposite direction with the debt ratio of companies located in developing countries. On the other hand, the size of a company and its asset turnover have a positive correlation with leverage. The explanatory variable which has the highest impact on the capital structure choices is profitability.

Determinant Factors of the Capital Structure of a Firm- an Empirical Analysis☆

The debates regarding determinants of corporate capital structure have been progressing for a few decades since the first capital structure theory was found by Modigliani and Miller in 1958. Their theory evolved into two main theories; static trade off theory by Krauz & Litzebnerger (1973), and pecking order theory by Myers & Majluf (1984). The studies related to corporate capital structure often use firms in developed countries as their sample data. Japan, which is one of the largest economies in the world, regularly becomes a part of these studies. In this study, we aim to determine the relations between the firm specific experience and debt level in Japanese firms. We choose manufacturing companies as the subject of study because the sector is vital to the Japanese economy. Moreover, Japanese manufacturing companies are also very influential in the global economy. With this study, we intend to contribute to the literature by examining the determinants of corporate capital structure in Japan, one of the major developed markets. We use panel data and multiple regression to analyze the relationships between the dependent variable, namely leverage, and the independent variables, tangibility, profitability, non-debt tax shield, size, growth in fixed assets, and growth in total assets. We find that size, growth in fixed assets, and growth in total assets are not significant. However, we also reveal that the variable tangibility, profitability, non-debt tax shield are statistically significant. Tangibility has a positive relation with debt level while profitability and non-debt tax shield have negative relation with debt level. These relationships are predicted in either static trade off theory and pecking order theory but none of the theories show a more dominant predictive capability over the other. Therefore, we propose the Trade-off adjusted Order Theory, which combines the elements of the latter theories, as a possible explanation for this behavior.

The Determinants of Corporate Capital Structure: Evidence from Japanese Manufacturing 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.

Kinga Mazur

Papers

The Determinants of Capital Structure Choice: Evidence from Polish Companies