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Corporate capital structure in the United Kingdom: determinants and adjustment

  • Philip Bunn
  • Garry Young

In this paper three contributions are made. First, empirical support is provided for the 'trade-off' model of corporate capital structure where companies borrow to take advantage of the tax benefits of debt, which they set against possible costs of overindebtedness. Second, it is shown empirically how companies adjust their balance sheets when borrowing is out of equilibrium, through adjustments to dividend payments, new equity issues and to a lesser extent capital investment. Third, these factors are incorporated within an aggregate model that quantifies the process and speed of balance sheet adjustment in the economy as a whole.

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File URL: http://www.bankofengland.co.uk/research/Documents/workingpapers/2004/WP226.pdf
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Paper provided by Bank of England in its series Bank of England working papers with number 226.

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Date of creation: Aug 2004
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Handle: RePEc:boe:boeewp:226
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  1. Alan J. Auerbach, 2001. "Taxation and Corporate Financial Policy," NBER Working Papers 8203, National Bureau of Economic Research, Inc.
  2. repec:sae:niesru:v:144:y::i:1:p:74-84 is not listed on IDEAS
  3. Stein, Jeremy C., 1996. "Rational Capital Budgeting in an Irrational World," Scholarly Articles 3708373, Harvard University Department of Economics.
  4. 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.
  5. Rajan, Raghuram G & Zingales, Luigi, 1995. " What Do We Know about Capital Structure? Some Evidence from International Data," Journal of Finance, American Finance Association, vol. 50(5), pages 1421-60, December.
  6. Nickell, Stephen & Nicolitsas, Daphne, 1999. "How does financial pressure affect firms?," European Economic Review, Elsevier, vol. 43(8), pages 1435-1456, August.
  7. Oliver Hart, 2001. "Financial Contracting," NBER Working Papers 8285, National Bureau of Economic Research, Inc.
  8. 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.
  9. 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.
  10. Jensen, Michael C. & Meckling, William H., 1976. "Theory of the firm: Managerial behavior, agency costs and ownership structure," Journal of Financial Economics, Elsevier, vol. 3(4), pages 305-360, October.
  11. Alan J. Auerbach & Mervyn A. King, 1984. "Taxation, Portfolio Choice, and Debt-Equity Ratios: A General Equilibrium Model," NBER Working Papers 0546, National Bureau of Economic Research, Inc.
  12. Alan J. Auerbach, 1980. "Wealth Maximization and the Cost of Capital," NBER Working Papers 0254, National Bureau of Economic Research, Inc.
  13. Andrew Benito & Garry Young, 2003. "Hard Times or Great Expectations? Dividend Omissions and Dividend Cuts by UK Firms," Oxford Bulletin of Economics and Statistics, Department of Economics, University of Oxford, vol. 65(5), pages 531-555, December.
  14. repec:sae:niesru:v:139:y::i:1:p:88-94 is not listed on IDEAS
  15. Benito, Andrew & Garry Young, 2002. "Financial Pressure and Balance Sheet Adjustment by UK Firms," Royal Economic Society Annual Conference 2002 20, Royal Economic Society.
  16. repec:nsr:niesrd:27 is not listed on IDEAS
  17. Michael J. Barclay & Clifford W. Smith & Ross L. Watts, 1995. "The Determinants Of Corporate Leverage And Dividend Policies," Journal of Applied Corporate Finance, Morgan Stanley, vol. 7(4), pages 4-19.
  18. Randall Morck & Andrei Shleifer & Robert W. Vishny, 1990. "The Stock Market and Investment: Is the Market a Sideshow?," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 21(2), pages 157-216.
  19. Stewart C. Myers, 2001. "Capital Structure," Journal of Economic Perspectives, American Economic Association, vol. 15(2), pages 81-102, Spring.
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