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What are the Determinants of the Capital Structure? Evidence from Switzerland

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  • Wolfgang Drobetz
  • Roger Fix
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    Abstract

    We test leverage predictions of the trade-off and pecking order models using Swiss data. At an aggregate level, leverage of Swiss firms is comparatively low, but the results depend crucially on the exact definition of leverage. Confirming the pecking order model but contradicting the trade-off model, more profitable firms use less leverage. Firms with more investment opportunities apply less leverage, which supports both the trade-off model and a complex version of the pecking or-der model. Leverage is also closely related to tangibility of assets and the volatility of a firm's earnings. Estimating a dynamic panel model with adjustment costs, we find that Swiss firms tend to maintain target leverage ratios, but the results with respect to the speed of adjustment again depend on the definition of leverage. Our results are robust to several alternative estimation techniques.

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    Bibliographic Info

    Article provided by Swiss Society of Economics and Statistics (SSES) in its journal Swiss Journal of Economics and Statistics.

    Volume (Year): 141 (2005)
    Issue (Month): I (March)
    Pages: 71-113

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    Handle: RePEc:ses:arsjes:2005-i-3

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    Related research

    Keywords: optimal capital structure; trade-off theory; pecking order theory; dynamic panel estimation;

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    References

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    Cited by:
    1. Wolfgang Drobetz & Gabrielle Wanzenried, 2006. "What determines the speed of adjustment to the target capital structure?," Applied Financial Economics, Taylor & Francis Journals, vol. 16(13), pages 941-958.
    2. Wolfgang Drobetz & Matthias Grüninger, 2007. "Corporate cash holdings: Evidence from Switzerland," Financial Markets and Portfolio Management, Springer, vol. 21(3), pages 293-324, September.
    3. Wolfgang Drobetz & Pascal Pensa & Claudia B. Wöhle, 2004. "Kapitalstrukturtheorie in Theorie und Praxis: Ergebnisse einer Fragebogenuntersuchung," Working papers 2004/09, Faculty of Business and Economics - University of Basel.

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