Determinants of capital structure in the retailing sector in the UK

Abstract

This paper examines the capital structure decisions of firms in the retailing sector of the UK economy. A model is developed, in the context of agency theory, which focuses on the role of risk, tangible assets, reputational assets and growth potential as explanatory variables. An attempt is also made at assessing the success of retailing firms in adjusting their capital structures in the current recession.

While the results are generally in line with other empirical work and, in addition, suggest that capital structure adjustment has been reasonably rapid, risk had an unexpected positive effect on financial leverage. Finally, some policy implications are discussed; in particular the role that investment in reputional assess has in partly off-setting the negative effect on the debt capacity of the firm of investment if future growth potential.

Keywords:

• Financial leverage
• agency theory
• reputational assets