An Empirical Investigation of the Determinants of Capital Structure: Evidence from Istanbul Stock Exchange Firms

One of the most contentious issues in the theory of finance during the past decades has been the capital structure “puzzle.” The genesis of this controversy was the seminal work of Modigliani and Miller (1958) which pointed the direction of research on this issue by showing under what conditions capital structure is irrelevant. The theoretical and empirical studies following Modigliani and Miller (1958), concentrated on the issue of capital structure from the view point of such issues as taxes, bankruptcy costs and financial distress, agency costs and information asymmetry, and emphasised the existence of an optimum capital structure. This paper aims to investigate the relationships between a firm’s capital structure and its size, business risk, profitability, non-debt tax shield, tax rate and growth rate. The cross sectional data of 68 Istanbul Stock Exchange firms were analysed over the 1990 through 1995 period by the ordinary least squares method (OLS). Evidence obtained by this research confirmed strong relations between capital structure and profitability and non-debt tax shield. The decline in long-term debt opportunities for the Turkish firms due to the instability caused by inflation was also reflected in the results.