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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.

Suggested Citation

  • Philip Bunn & Garry Young, 2004. "Corporate capital structure in the United Kingdom: determinants and adjustment," Bank of England working papers 226, Bank of England.
  • Handle: RePEc:boe:boeewp:226

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    References listed on IDEAS

    1. 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.
    2. 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 1421-1460, December.
    3. 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.
    4. Benito, Andrew & Garry Young, 2002. "Financial Pressure and Balance Sheet Adjustment by UK Firms," Royal Economic Society Annual Conference 2002 20, Royal Economic Society.
    5. Oliver Hart, 2001. "Financial Contracting," Journal of Economic Literature, American Economic Association, vol. 39(4), pages 1079-1100, December.
    6. 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.
    7. Nickell, Stephen & Nicolitsas, Daphne, 1999. "How does financial pressure affect firms?," European Economic Review, Elsevier, vol. 43(8), pages 1435-1456, August.
    8. repec:sae:niesru:v:144:y::i:1:p:74-84 is not listed on IDEAS
    9. 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.
    10. Stein, Jeremy C, 1996. "Rational Capital Budgeting in an Irrational World," The Journal of Business, University of Chicago Press, vol. 69(4), pages 429-455, October.
    11. 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.
    12. repec:sae:niesru:v:139:y::i:1:p:88-94 is not listed on IDEAS
    13. Auerbach, Alan J., 2002. "Taxation and corporate financial policy," Handbook of Public Economics,in: A. J. Auerbach & M. Feldstein (ed.), Handbook of Public Economics, edition 1, volume 3, chapter 19, pages 1251-1292 Elsevier.
    14. Alan J. Auerbach, 1979. "Wealth Maximization and the Cost of Capital," The Quarterly Journal of Economics, Oxford University Press, vol. 93(3), pages 433-446.
    15. 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.
    16. Alan J. Auerbach & Mervyn A. King, 1983. "Taxation, Portfolio Choice, and Debt-Equity Ratios: A General Equilibrium Model," The Quarterly Journal of Economics, Oxford University Press, vol. 98(4), pages 587-609.
    17. 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.
    18. repec:nsr:niesrd:27 is not listed on IDEAS
    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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    Cited by:

    1. Jon Tucker & John Pointon & Moji Olugbode, 2010. "Target gearing in the UK: a triangulated approach," International Journal of Managerial Finance, Emerald Group Publishing, vol. 6(1), pages 58-80, February.
    2. Haldane, Andrew & Hall, Simon & Pezzini, Silvia, 2007. "Financial Stability Paper No 2: A New Approach to Assessing Risks to Financial Stability," Bank of England Financial Stability Papers 2, Bank of England.
    3. Tucker, Jon & Stoja, Evarist, 2011. "Industry membership and capital structure dynamics in the UK," International Review of Financial Analysis, Elsevier, vol. 20(4), pages 207-214, August.
    4. Burgess, Stephen & Fernandez-Corugedo, Emilio & Groth, Charlotta & Harrison, Richard & Monti, Francesca & Theodoridis, Konstantinos & Waldron, Matt, 2013. "The Bank of England's forecasting platform: COMPASS, MAPS, EASE and the suite of models," Bank of England working papers 471, Bank of England.

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