How the capital structure of firms is determined over business cycles: further evidence from the construction industry of Taiwan

Abstract

This paper uses the panel data regression model to study the Taiwanese construction industry during the period 1982–1995 because during this period, Taiwan’s gross domestic product shows a structural change in economic growth trends over three business cycles. This design allows us to examine whether the effects of firm characteristics and economic growth on capital structure vary with macroeconomic conditions and across periods with changing economic growth trends. First, the results show that the effect of macroeconomic conditions on capital structure is counter-cyclical. Second, the effects of firm characteristics on capital structure can vary with macroeconomic conditions, although firm characteristics do not have a direct effect on capital structure. Third, the effects of firm characteristics on capital structure can vary across periods with changing economic growth trends. Finally, economic growth does not have a direct effect on capital structure. However, the effect of economic growth on capital structure can vary with macroeconomic conditions and across periods with changing economic growth trends. The findings of this study can be a helpful reference for financial managers, creditors, investors and government policy-makers in emerging countries.

Keywords:

• Debt ratio
• economic growth
• firm characteristics
• macroeconomic conditions

Notes

1. More explanations and discussions of the structural changes in economic growth trends are presented in the “Sample and Estimation” subsection in the “Methodology” section.

2. More details about the selection of the sample period (i.e. 1982–1995) are discussed in the “Macroeconomic Conditions and Capital Structure” subsection in the “Literature Review and the Context of Taiwan” section.

3. More details about the economic development of Taiwan are described in the “The Context of Taiwan” subsection in the “Literature Review and the Context of Taiwan” section.

4. Yeh (2011) investigated the adjustments of capital structure during the four types of economic periods (the trough, the period between the trough and the peak, the peak, and the period between the peak and the next trough) over each business cycle. Yeh used three dummy variables to denote the macroeconomic conditions during these four economic periods.