Determinants of Capital Structure: Evidence from a Major Developing Economy

Our paper uses a new and comprehensive dataset to investigate the capital structure of non-financial firms in a major emerging market economy, Turkey. We study both statistical and economic significance of four types of leverage factors: Firm-specific, tax-related, industry specific,and macroeconomic. We have included "capital flows" as a new determinant of non-financial firm capital structure in our analysis. We use fixed effects panel data analysis by adjusting the errors for heteroskedasticity and serial correlation. A summary of the issues analyzed in the paper that distinguishes it from the literature. 1. This paper is the first to provide evidence that tradeoff theory better accounts for the capital structure of Turkish firms than the pecking order theory. 2. In the Turkish context, this paper is also the first to show that firms adjust their leverage towards the industry median and that firms match the maturity of their assets and liabilities among several other findings. 3. On a more general level, our dataset is not just bigger and/or newer. It is different from the previous datasets in terms of its coverage of privately-owned firms. Although our dataset includes listed firms, most firms in the dataset are privately-owned, which means that the dataset is much more representative of the actual population of firms, thereby allowing us to take an unprecedentedly more accurate picture of the capital structure of the average (ie typical) non-financial firm. Most studies are silent on this as they focus on firms listed on the stock exchanges. We believe, this aspect of our paper is quite a distinguishing feature. 4. Another novel aspect is that we investigate not only the "statistical significance" of various determinants but also their "economic significance". This is very rare in the literature. Given this, we can rank the relative economic importance of various types of determinants (firm-specific, industry-specific, tax-related, macroeconomic) for Turkey. This can be fruitfully investigated in other countries as well. A statistically significant factor may not have to be very important if it is not economically all that important. This point is rarely made, if at all. 5. Our analysis also sheds light on the statistical as well as economic significance of leverage determinants for short-term, long-term, and total leverage definitions. For example, our findings suggest that if one is analyzing long-term leverage, the most economically important determinant is tangibility or collateral, even before size, profitabiliy, or tax-related factors. 6. Also novel is our finding that short-term debt ratios increase with firm size, but only for firms that are sufficiently large, indicating a “threshold effect” in size for short-term indebtedness. To our knowledge, no previous study has uncovered such a pattern in any country.