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What do we know about capital structure? Revisiting the impact of debt ratios on some firm-specific factors

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Abstract:

We revisit the evidence on the effect of size, tangibility, profitability and growth opportunities on debt ratios using a large sample of the US and the UK firms and applying advanced estimation methods that are perfectly aligned with the panel data. We employ a double-censored Tobit estimator, a Fixed-Effect (FE) estimator, a model that accounts for cross-sectional and time-series dependence and a Fama–Macbeth regression, we find that the signs of size, tangibility, profitability and growth opportunities for the US firms are consistent with previous studies. As with the US evidence we show that size and tangibility are positively associated with leverage whereas profitability and growth opportunities are negatively associated with leverage for the UK firms. However, the impact of growth opportunities on leverage for UK firms is inconclusive. We conclude that size, tangibility, profitability and growth opportunities cannot explain the theoretical aspects of capital structure.

Keywords: G1; G311; G32; G33; capital structure; firm-specific factors; market timing theory; pecking order theory; trade-off theory

Document Type: Research Article

DOI: http://dx.doi.org/10.1080/09603107.2012.676733

Affiliations: Manchester Business School, University of Manchester, Manchester, UK

Publication date: October 1, 2012

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