An empirical investigation on the determinants of capital structure: the UK and Italian experience
This article investigates the empirical determinants of capital structure choice by analysing security issues made by companies in the UK and Italy between 1992 and 1996, and examines how companies actually select between financing instruments at a given point in time and in different financial contexts. A descriptive model of choice is developed and then estimated using Logit and Probit estimation procedures, and using data of two samples, which are assumed to be representative of a particular financial environment. The results provide evidence of interesting differences between the two financial markets, generally supporting the idea of the UK market being more testable and in principle more consistent with the main prescriptions of the more recent developments of capital structure theory; on the whole, the results provide support for positive effects of size and profitability, and negative impact of liquidity conditions and bankruptcy risk on the financial leverage of companies. This, together with the negative effect displayed by the available reserves which are taken as a proxy of internally generated funds, lends support to the pecking order theory of capital structure. It is also suggested that firms in well developed financial systems (UK) may have long-term target leverage ratios, while in less efficient markets (Italy) an optimal debt level does not seem to be a major concern. Finally, for both markets, the results are consistent with the notion that the tax advantage of debt financing plays a relevant role in capital structure decisions.
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Volume (Year): 13 (2003)
Issue (Month): 2 ()
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