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Determinants of Corporate Capital Structure: Australian Evidence

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Abstract

This study seeks to provide evidence on the importnace and significance of capital structure determinants in the Australian context. The analysis was implemented on a sample of 226 Australian companies from 1977 to 1985. The following results are obtained. Company non-debt tax shields display a negative relationship with respect to each of the debt ratios. This evidence is consistent with the theory proposed by DeAngelo and Masulis (1980) that firms with non-debt tax shields at their disposal can use these as substitutes for interest tax shields. The evidence canvassed also lends some support to the pecking order hypothesis of Myers and Majluf (1984). Specifically, significant negative relationships between profitability and all debt ratios are found. The implication is that the sample of firms studied prefer to finance investments with internally retained funds before issuing debt. Some evidence of a size effect is present and this indicates that the larger firms in the sample tended to employ more debt in their capital structures. The positive relationship between cash holdings and debt ratios indicates some support for the free cash flow hypothesis of Jensen (1986), although these estimates are not significant. No support for the growth opportunity and collateral value attributes as determinants of deb ratios can be discerned, consistent with Titman and Wessels (1988).

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File URL: http://www.finance.uts.edu.au/research/wpapers/wp3.pdf
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Bibliographic Info

Paper provided by Finance Discipline Group, UTS Business School, University of Technology, Sydney in its series Working Paper Series with number 3.

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Length: 39 pages
Date of creation: 01 Jun 1991
Date of revision:
Publication status: Published as: Chiarella, C., Pham, T., Sim, A. B. and Tan, M. 1992, "Determinants of Corporate Capital Structure: Australian Evidence", in G.S. Rhee and R. P. Chan, Pacific Basin Capital Markets Research, Vol. III, North Holland, Amsterdam, pp. 139-158.
Handle: RePEc:uts:wpaper:3

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  1. Myers, Stewart C. & Majluf, Nicholas S., 1984. "Corporate financing and investment decisions when firms have information that investors do not have," Journal of Financial Economics, Elsevier, vol. 13(2), pages 187-221, June.
  2. Marcus, Alan J, 1983. " The Bank Capital Decision: A Time Series-Cross Section Analysis," Journal of Finance, American Finance Association, vol. 38(4), pages 1217-32, September.
  3. Dammon, Robert M & Senbet, Lemma W, 1988. " The Effect of Taxes and Depreciation on Corporate Investment and Financial Leverage," Journal of Finance, American Finance Association, vol. 43(2), pages 357-73, June.
  4. Myers, Stewart C. & Majluf, Nicolás S., 1945-, 1984. "Corporate financing and investment decisions when firms have information that investors do not have," Working papers 1523-84., Massachusetts Institute of Technology (MIT), Sloan School of Management.
  5. DeAngelo, Harry & Masulis, Ronald W., 1980. "Optimal capital structure under corporate and personal taxation," Journal of Financial Economics, Elsevier, vol. 8(1), pages 3-29, March.
  6. Jensen, Michael C, 1986. "Agency Costs of Free Cash Flow, Corporate Finance, and Takeovers," American Economic Review, American Economic Association, vol. 76(2), pages 323-29, May.
  7. Myers, Stewart C., 1977. "Determinants of corporate borrowing," Journal of Financial Economics, Elsevier, vol. 5(2), pages 147-175, November.
  8. Hamada, Robert S, 1972. "The Effect of the Firm's Capital Structure on the Systematic Risk of Common Stocks," Journal of Finance, American Finance Association, vol. 27(2), pages 435-52, May.
  9. Titman, Sheridan & Wessels, Roberto, 1988. " The Determinants of Capital Structure Choice," Journal of Finance, American Finance Association, vol. 43(1), pages 1-19, March.
  10. Masulis, Ronald W, 1983. " The Impact of Capital Structure Change on Firm Value: Some Estimates," Journal of Finance, American Finance Association, vol. 38(1), pages 107-26, March.
  11. Galai, Dan & Masulis, Ronald W., 1976. "The option pricing model and the risk factor of stock," Journal of Financial Economics, Elsevier, vol. 3(1-2), pages 53-81.
  12. Stewart C. Myers & Nicholas S. Majluf, 1984. "Corporate Financing and Investment Decisions When Firms Have InformationThat Investors Do Not Have," NBER Working Papers 1396, National Bureau of Economic Research, Inc.
  13. Altman, Edward I, 1984. " A Further Empirical Investigation of the Bankruptcy Cost Question," Journal of Finance, American Finance Association, vol. 39(4), pages 1067-89, September.
  14. Kraus, Alan & Litzenberger, Robert H, 1973. "A State-Preference Model of Optimal Financial Leverage," Journal of Finance, American Finance Association, vol. 28(4), pages 911-22, September.
  15. Miller, Merton H, 1977. "Debt and Taxes," Journal of Finance, American Finance Association, vol. 32(2), pages 261-75, May.
  16. Demsetz, Harold & Lehn, Kenneth, 1985. "The Structure of Corporate Ownership: Causes and Consequences," Journal of Political Economy, University of Chicago Press, vol. 93(6), pages 1155-77, December.
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Cited by:
  1. Suchard, Jo-Ann & Singh, Manohar, 2006. "The determinants of the hybrid security issuance decision for Australian firms," Pacific-Basin Finance Journal, Elsevier, vol. 14(3), pages 269-290, June.
  2. Hoa Nguyen & Robert Faff, 2010. "Are firms hedging or speculating? The relationship between financial derivatives and firm risk," Applied Financial Economics, Taylor & Francis Journals, vol. 20(10), pages 827-843.
  3. Ang, James S. & Fatemi, Ali & Tourani-Rad, Alireza, 1997. "Capital structure and dividend policies of Indonesian firms," Pacific-Basin Finance Journal, Elsevier, vol. 5(1), pages 87-103, February.
  4. Selim Aren & Lutfihak Alpkan & Bulent Sezen & Ziya Alper Guncu, 2011. "Drivers of firms’ debt ratios: evidence from Taiwanese and Turkish firms," Journal of Business Economics and Management, Taylor & Francis Journals, vol. 13(1), pages 53-70, May.
  5. Koh, SzeKee & Durand, Robert B. & Watson, Iain, 2011. "Seize the moment: Opportunism in Australian capital markets," Pacific-Basin Finance Journal, Elsevier, vol. 19(4), pages 374-389, September.
  6. Batten, Jonathan & Hogan, Warren & In, Francis, 2002. "Valuing Credit Spreads on Quality Australian Dollar Eurobonds in a Multivariate EGARCH Framework," Australian Economic Papers, Wiley Blackwell, vol. 41(1), pages 115-28, March.
  7. Alves, Paulo F. Pereira & Ferreira, Miguel A., 2011. "Capital structure and law around the world," Journal of Multinational Financial Management, Elsevier, vol. 21(3), pages 119-150, July.
  8. Timothy J. Brailsford & Barry R. Oliver & Sandra L. H. Pua, 2002. "On the relation between ownership structure and capital structure," Accounting and Finance, Accounting and Finance Association of Australia and New Zealand, vol. 42(1), pages 1-26.

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