Determinants of capital Structure: comparison of empirical evidence for the use of different estimators

Abstract

The capital structure of a company consists of a particular combination of debt and equity issues to relieve potential pressures on its long-term financing. To examine such issues, many theories have been developed in the literature and they generally focus upon what determinants are likely to influence the so-called leverage decisions of the firms. Among these, the MM theory, trade-off theory and signaling theory have been said to mainly play a crucial role in identifying and testing the various properties of the leverage decisions. This paper briefly tries to define the fundamentals underlying these theories and evaluates whether some a priori assumed macroeconomic determinants can be related to the leverage parameters of interest examined in the paper. For this purpose, we conduct an empirical research that covers 90 selected firms traded at the BSE Stock Exchange. For the empirical analysis panel data methodology has been applied. The study period is 2002-2009. From this, it is hoped that we are able to highlight the issue of what properties the leverage ratios have and to satisfy our curiosity about how can the macroeconomic determinants affect the leverage ratios under various groupings such as tangibility, size, growth opportunities, profitability and non-debt tax shields. Our main results reveal that there is a negative and statistically significant relationship between non-debt tax shields and size and debt and there is a positive and statistically significant relationship between growth and ratio of fixed assets to total assets debt.

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