Capital structure determinants of financially constrained and unconstrained firms

This paper discusses the determinants of capital structure with a focus on both publicly-owned and privately-owned firms. We use annual financial statement data for over 1,000 publicly-owned and privately-owned Brazilian firms covering the 2012-2015 period. This enables us to use financial statements under the prevailing IFRS regime. The methodology takes into account the interdependency between debt and dividend policies, recognized in the literature on determinants of both capital structure and dividend policies. We also take into account that both debt and dividend policies can be used to mitigate agency problems, and that the presence of agency problems may in turn affect the choice of capital structure and dividend policy in a firm. As a proxy for the agency cost of equity, the firm’s inverted asset turnover ratio is used. Our empirical strategy treats debt and dividend policies and agency cost as dependent variables and leads to the use of a system of three equations, which are estimated with the generalized method of moments (GMM). In particular, we find that both payout and previous debt levels are positive and significant determinants of debt levels, but that there are differences in how important they are for privately-owned firms, on one hand, and publicly-owned firms, on the other. Also, some usual determinants of capital structure are significant for one group: for privately-owned firms (cash flow), for publicly-owned firms (intangibility), but not for the other, pointing out the importance of analyzing such firms separately.