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Debt Equity Choice in Europe

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  • Philippe Gaud

    ()

  • Martin HOesli

    ()

  • André Bender

    ()

Abstract

Using a sample of over 5,000 European firms, we document the driving factors of capital structure policies in Europe. Controlling for dynamic patterns and national environments, we show how these policies cannot be reduced to a simple trade-off or pecking order model. Both corporate governance and market timing impact upon capital structure. European firms limit themselves to an upper barrier to leverage, but not to a lower one. Debt constrains managers to payout cash, and equity may become cheap during windows of opportunity. Internal financing, when available, is preferred over external financing, but companies limit future excess of slack as it constitutes a potential source of conflict.

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Bibliographic Info

Paper provided by International Center for Financial Asset Management and Engineering in its series FAME Research Paper Series with number rp152.

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Date of creation: Jun 2005
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Handle: RePEc:fam:rpseri:rp152

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Keywords: dynamic capital structure; debt-equity choice; trade-off; agency; pecking order;

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Cited by:
  1. Curtiss, Jarmila, 2012. "Determinants of Financial Capital Use: Review of theories and implications for rural businesses," Factor Markets Working Papers 123, Centre for European Policy Studies.
  2. Guney, Yilmaz & Li, Ling & Fairchild, Richard, 2011. "The relationship between product market competition and capital structure in Chinese listed firms," International Review of Financial Analysis, Elsevier, vol. 20(1), pages 41-51, January.
  3. Mari Avarmaa & Aaro Hazak & Kadri Männasoo, 2011. "Capital structure formation in multinational and local companies in the Baltic States," Baltic Journal of Economics, Baltic International Centre for Economic Policy Studies, vol. 11(1), pages 125-146, July.
  4. Boyd, John H. & Jalal, Abu M., 2012. "A new measure of financial development: Theory leads measurement," Journal of Development Economics, Elsevier, vol. 99(2), pages 341-357.
  5. Curtiss, Jarmila, 2012. "Determinants of Financial Capital Use: Review of theories and implications for rural businesses," Working Papers 122846, Factor Markets, Centre for European Policy Studies.
  6. Bartholdy, Jan & Mateus, Cesário, 2011. "Debt and taxes for private firms," International Review of Financial Analysis, Elsevier, vol. 20(3), pages 177-189, June.
  7. Péter Hernádi & Mihály Ormos, 2012. "What managers think of capital structure and how they act: Evidence from Central and Eastern Europe," Baltic Journal of Economics, Baltic International Centre for Economic Policy Studies, vol. 12(2), pages 47-71, December.
  8. Hunjra, Ahmed Imran & Iqbal, Jamshed & Batool, Irem & Niazi, Ghulam Shabbir Khan, 2011. "Determinants of financial management practices: a conceptual study," MPRA Paper 40679, University Library of Munich, Germany.
  9. Seifert, Bruce & Gonenc, Halit, 2008. "The international evidence on the pecking order hypothesis," Journal of Multinational Financial Management, Elsevier, vol. 18(3), pages 244-260, July.

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