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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. 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.
  2. Oliver Hart, 2001. "Financial Contracting," Harvard Institute of Economic Research Working Papers 1924, Harvard - Institute of Economic Research.
  3. 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.
  4. 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.
  5. Jeremy C. Stein, 1996. "Rational Capital Budgeting in an Irrational World," NBER Working Papers 5496, National Bureau of Economic Research, Inc.
  6. 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.
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  9. Nickell, S. & Nicolitsas, D., 1995. "How Does Financial Pressure Affect Firms," Economics Series Working Papers 99170, University of Oxford, Department of Economics.
  10. Stewart C. Myers, 2001. "Capital Structure," Journal of Economic Perspectives, American Economic Association, vol. 15(2), pages 81-102, Spring.
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  12. Andrew Benito & Garry Young, 2002. "Financial Pressure and Balance Sheet Adjustment by UK Firms," Working Papers 0209, Banco de España;Working Papers Homepage.
  13. Raghuram G. Rajan & Luigi Zingales, 1994. "What Do We Know About Capital Structure? Some Evidence from International Data," NBER Working Papers 4875, National Bureau of Economic Research, Inc.
  14. Alan J. Auerbach & Mervyn A. King, 1980. "Taxation, Portfolio Choice, and Debt-Equity Ratios: A General Equilibrium Model," NBER Working Papers 0546, National Bureau of Economic Research, Inc.
  15. 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.
  16. 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.
  17. 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.
  18. 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.
  19. 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.
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