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Determinants of capital Structure: comparison of empirical evidence for the use of different estimators

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  • tiwari, aviral kumar
  • krishnankutty, Raveesh

Abstract

The capital structure of a company consists of a particular combination of debt and equity issues to relieve potential pressures on its long-term financing. To examine such issues, many theories have been developed in the literature and they generally focus upon what determinants are likely to influence the so-called leverage decisions of the firms. Among these, the MM theory, trade-off theory and signaling theory have been said to mainly play a crucial role in identifying and testing the various properties of the leverage decisions. This paper briefly tries to define the fundamentals underlying these theories and evaluates whether some a priori assumed macroeconomic determinants can be related to the leverage parameters of interest examined in the paper. For this purpose, we conduct an empirical research that covers 90 selected firms traded at the BSE Stock Exchange. For the empirical analysis panel data methodology has been applied. The study period is 2002-2009. From this, it is hoped that we are able to highlight the issue of what properties the leverage ratios have and to satisfy our curiosity about how can the macroeconomic determinants affect the leverage ratios under various groupings such as tangibility, size, growth opportunities, profitability and non-debt tax shields. Our main results reveal that there is a negative and statistically significant relationship between non-debt tax shields and size and debt and there is a positive and statistically significant relationship between growth and ratio of fixed assets to total assets debt.

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Bibliographic Info

Paper provided by University Library of Munich, Germany in its series MPRA Paper with number 48612.

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Date of creation: 04 Aug 2010
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Handle: RePEc:pra:mprapa:48612

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Keywords: Debt; dynamic panel estimators; static panel models; capital structure; india;

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  1. Blundell, Richard & Bond, Stephen, 1998. "Initial conditions and moment restrictions in dynamic panel data models," Journal of Econometrics, Elsevier, vol. 87(1), pages 115-143, August.
  2. Arellano, Manuel & Bond, Stephen, 1991. "Some Tests of Specification for Panel Data: Monte Carlo Evidence and an Application to Employment Equations," Review of Economic Studies, Wiley Blackwell, Wiley Blackwell, vol. 58(2), pages 277-97, April.
  3. Booth, L. & Asli Demirgu-Kunt, V.A. & Maksimovic, V., 1999. "Capital Structure in Developing Countries," Rotman School of Management - Finance, Rotman School of Management, University of Toronto 00-001, Rotman School of Management, University of Toronto.
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  7. de Miguel, Alberto & Pindado, Julio, 2001. "Determinants of capital structure: new evidence from Spanish panel data," Journal of Corporate Finance, Elsevier, vol. 7(1), pages 77-99, March.
  8. Michael J. Barclay & Clifford W. Smith, 1996. "On Financial Architecture: Leverage, Maturity, And Priority," Journal of Applied Corporate Finance, Morgan Stanley, vol. 8(4), pages 4-17.
  9. Banerjee, Saugata & Heshmati, Almas & Wihlborg, Clas, 1999. "The Dynamics of Capital Structure," Working Paper Series in Economics and Finance 333, Stockholm School of Economics, revised 12 May 2000.
  10. Philippe Gaud & Elion Jani & Martin Hoesli & André Bender, 2005. "The Capital Structure of Swiss Companies: an Empirical Analysis Using Dynamic Panel Data," European Financial Management, European Financial Management Association, vol. 11(1), pages 51-69.
  11. Bradley, Michael & Jarrell, Gregg A & Kim, E Han, 1984. " On the Existence of an Optimal Capital Structure: Theory and Evidence," Journal of Finance, American Finance Association, vol. 39(3), pages 857-78, July.
  12. Frank, Murray Z. & Goyal, Vidhan K., 2003. "Testing the pecking order theory of capital structure," Journal of Financial Economics, Elsevier, vol. 67(2), pages 217-248, February.
  13. Jensen, Gerald R. & Solberg, Donald P. & Zorn, Thomas S., 1992. "Simultaneous Determination of Insider Ownership, Debt, and Dividend Policies," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 27(02), pages 247-263, June.
  14. Philip E. Berger & Eli Ofek & David Yermack, 1996. "Managerial Entrenchment and Capital Structure Decisions," New York University, Leonard N. Stern School Finance Department Working Paper Seires, New York University, Leonard N. Stern School of Business- 96-14, New York University, Leonard N. Stern School of Business-.
  15. Shyam-Sunder, Lakshmi & C. Myers, Stewart, 1999. "Testing static tradeoff against pecking order models of capital structure," Journal of Financial Economics, Elsevier, vol. 51(2), pages 219-244, February.
  16. Hovakimian, Armen & Opler, Tim & Titman, Sheridan, 2001. "The Debt-Equity Choice," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 36(01), pages 1-24, March.
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