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

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:

• capital structure
• firm-specific factors
• trade-off theory
• pecking order theory
• market timing theory

JEL Classification::

• G1
• G311
• G32
• G33

Notes

¹ Some of these firm-specific factors are profitability, liquidity, nondebt tax shields, uniqueness of the product etc.

² This relationship may stem from the tendency for firms to issue equity when the share price is high; see, Baker and Wurgler (2002).

³ We did not winsorize market leverage and size because descriptive statistics indicate that they are normally distributed, although the results remain unaltered if we also winsorize these two variables.

⁴ Alternatively, we regress the change in book (market) leverage on the change in the four firm-specific variables. The results, not tabulated, remain unaltered.