The Determinants of Capital Structure: Comparison between Before and After Financial Crisis

The financial crisis of 2008 provides an interesting opportunity to investigate the effect of the crisis on the capital structure decisions of firms. Over the years, capital structure choice has attracted considerable attention in the literature and is important to firms, investors and policy makers. We find that during the 2008 financial crisis, the coefficients of tangibility and market to book (MTB) ratio exert a stronger influence on capital structure choices than prior to 2008. We also find that the coefficient of profitability exerts less influence on capital structure choice than before the crisis. In addition, the sign of the coefficient of firm size is negative, which is exactly the opposite of the situation that existed before the crisis. Further analysis indicates that during the 2008 financial crisis, pecking order theory has more explanatory power than trade-off and market timing theory.