Pdf the financing decision is one of the most important imperative in corporate finance. Abstract this paper examines the risk and return of the socalled. Determinants of capital structure mba knowledge base. Analyse the main determinants of capital structure of startup firms in the south african economy. Capital structure of the firms is embedded on the mix of debt and equity in financing the company asset and it is therefore regarded as the most crucial decision to be made by the financial managers. It is shown that the more discretionary investment opportunities a firm faces,the lower its financial leverage. Capital structure theories both theoretical and empirical capital structure studies have generated many results that attempt to explain the determinants of capital structure. Determinants of bank capital structure the impact of basel iii may 2016 abstract this paper examines which determinants of bank capital structure are reliably decisive for 15 publicly traded european and american banks from 2006 to 2015. As a result of these studies, some broad categories of capital structure determinants have emerged. The effects of firm size and risk on capital structure decisions of insurance industry in kenya michael njogu wahome, dr. The capital structure of a company is made up of debt and equity securities that comprise a firms financing of its assets. Capital structure theories of capital structure finance essay.
Determinants of capital structure in the nigerian chemical. Most empirical studies that examine the determinants of capital structure have been done for developed or specific country and there is little evidence in subsahara africa. In the specialized literature, the factors that affect the capital structure of a firm are classified into two categories. Abstract capital structure has been one of the most controversial issues in. The empirical results show that h 0 is rejected because there is positive relationship in capital structure and financial performance. It is the permanent source of financing for a firm which is represented by longterm debt, preferred stock and net worth. The capital structure of financing pattern decision is a significant managerial decision. Its importance for financial managers lies in the conveyance of information to investors which will. The investigation is performed using generalized method of moment gmm approach for 146 listed firms in the tehran stock exchange over the period 2003 to 2008. Various theories, namely, the tradeoff, pecking order and agency theories, are deployed to explain and predict the signs and significance of each factor identified by ragan and zingales 1995 and booth et. Capital structure arbitrage has lately become popular among hedge funds and bank proprietary trading desks. Our results show that profitability, nondebt tax shield, size, tangibility, and liquidity are significant determinants of the capital structure, size being. The determinants of capital structure of jordanian mining and extraction industries. Capital structure is defined as the specific mix of debt and equity a firm uses to finance its operations.
Determinants of capital structure an empirical evidence, us. Issn 2348 7968 the determinants of capital structure of. Theory and practice of capital structure in their crosssectional study of the determinants of capital structure, rajan and zingales 1995 examine the extent to which, at the level of the individual firm, gearing may be explained by four key factors, namely, markettobook, size, profitability and tangibility. Some evidence from banks abstract this paper documents that standard crosssectional determinants of firm leverage also apply to the capital structure of large banks in the united states and europe. We find a remarkable consistency in sign, significance and economic magnitude. Capital structure, pecking order theory, static tradeoff theory, banking sector, gcc markets. Explore the relationship between the capital structure and the main factors of startup companies in south africa.
Financial flexibility, credit rating and tax advantage of debt are the most important factors influencing the debt policy while the earnings per share dilution is the most important. Our main objective is to explore the link between theory and practice of capital structure. Capital market conditionin the lifetime of the company, the market price of the shares has got an important influence. The paper contributes to the capital structure literature by investigating the determinants of capital structure of firms operating in the asia pacific region, in four countries with different legal, financial and institutional environments, namely thailand, malaysia, singapore and australia. This study intends to investigate the factors that affect the capital structure decision of the firm. Krauseova 1995 describes the capital structure of czech firms in the period from 1990 to 1993.
Purpose the aim of this study is to find out the factors that affect the capital structure of hotels and restaurant companies and to investigate whether the capital structure models derived from western settings provide convincing explanations for capital structure decisions of the sri lankan companies. Determinants of capital structure presentation capital. Inclusion of other possible determinants of capital structure, such as availability of internal funds, tax effects and risk, while significant, do not affect the importance of discretionary investment. The theory of trade off was developed by kraus and litzenberger 1973 arguing that the companies choose their optimal capital structure by by evaluating the revenue and costs, debt. Determinants of capital structure univerzita karlova. Capital structure is composed of a combination of debt short and long term and equity common and preferred stocks. Pdf determinants of capital structure in irish smes. The study assessed the determinants of capital structure in nigerian chemical and paints companies listed in nigeria, for a period of five years from 2005 to 2009. The main aims of this study are to determine the factors which affect capital structure of corporations operating in energy sector and to detect capital structure theories with which capital structure of energy sector companies would comply. The main purpose of this study is identifying the determinants of capital structure of banks in pakistan by using firm s level determinants of capital structure. Figure 1 distribution of book capital ratios the objective of this paper is to examine whether capital requirements are indeed a firstorder determinant of banks capital structure using the crosssection and timeseries variation. Determinants of capital structure for listed construction.
The determinants of the capital structure of listed on stock. Capital structure meaning and factors determining capital. An oftcited survey exemplifies the range of factors cfos consider when making capital structure decisions figure 3. Capital structure and financial performance have the negative relationship. The determinants of capital structure evidence from commercial banks in ethiopia by kibrom mehari fisseha reg. The study employed secondary data from the annual reports and the nigerian stock exchange nse fact books covering the study period ordinary least square ols was. The capital structure decision is a continuous process. The explanatory variable which has the highest impact on the capital structure choices is profitability. Purpose purpose of this study is to investigate the determinants of optimal capital structuring that affect growth and financing behavior of textile sector firms in pakistan keeping in view the important role capital structuring plays in any firms financial management decisions and the positive contribution it makes to the creation of firms value and profitability. Many studies including pandey 2001 have identified various determinants of capital structure, which generally include tangibility of assets, size, growth, profitability, and age of firms.
Pdf the determinants of capital structure choice scinapse. Capital structure decisions are among the most important and crucial decisions for any business because of their effect on value and cost of the company. These are the static tradeoff theory, agency theory, peckingorder theory and bankruptcy cost theory. Examples of factors that seem to influence capital structure in a certain way are the size of company, the profitability, the annual growth rate, liquidity and tangibility. Determinants of capital structure in nigerian banking sector. However in practical, taxes and bankruptcy costs do significantly affect a companys stock price. In section 1 the most prominent theoretical and empirical findings are surveyed. In particular, providing evidence for an economy like the uruguayan in which there is a total lack of access at the corporate level information, and the st ock market is not developed. Overview of methodology data and information used for this dissertation will be from the financial statements of. The effects of firm size and risk on capital structure. Determinants of capital structure semantic scholar. Cbepr002501 research project submitted to the department of accounting and finance, college of business and economics, mekelle university, for the partial fulfillment of the degree of master of finance and investment. Determinants of capital structure have received much attention among the researchers. Furthermore identifying the determinants of capital structure also can help investors and managers of firm as it will provide better understanding of the firm capital structures strategy by considering companies characteristics in order.
Thus, capital structure is irrelevant to a companys stock price. Bauer and bubak 2003 test for the existence of optimal capital structure and for relevance of signaling theory in the case of czech listed firms. In this paper we have discussed the determinants of capital structure of pakistani firms. This paper analyzes the determinants of the sources of funding for the firms of an economy without stock market. There is a significance impact of capital structure on. Introduction capital structure refers to the way a firm finances its assets through some combination of equity, debt, or securities. A theoretical and empirical study of how capital structure influences the performanceandenterprisevalue. The optimal capital structure issue has been debated by many scholars and researchers for several decades. The determinants of capital structure choice titman 1988 the. Preliminary analysis of the survey shows some interesting findings. The m odern theory of capital structure starts with the modigliani and miller 1958 theorem stating that under a number of specific assumptions capital structure is irrelevant for both the cost of capital and the firm value, which imply that there is no optimal leverage ratio.
The cost of capital curve is a useful concept to think about capital structure, but is just one of many inputs to the capital structure decisionmaking toolbox. Results derived from the study of public firms are generalized to the private firms. In section 2 the potential determinants of capital structure are summarized and theoretical and empirical evidence concerning these determinants is provided. Capital structure is the specific mix of debt and equity that a firm uses to finance its operations abor, 2005. Kleff and weber 2004 examined the determinants of capital structure of german banks during the period of 1992 and 2001. Once the available and relevant financial sources for a uruguayan firm are defined, their determinants are analyzed through cross section econometric models. According to the empirical results, although pecking order theory seems to better describe the capital structure of the firms, some of the determinants are suitable.
Contribution originality most empirical studies that examined the determinants of capital structure have been done for specific country and there is little evidence of gcc region. Determinants of capital structure presentation free download as powerpoint presentation. Hence this study will utilize panel data regression analysis to empirically examine the impact of different determinants on three leverage measures. This paper attempts to investigate the determinants of the capital structure of a sample of 972 listed companies on the shanghai stock exchange and shenzhen stock exchange in china in 2003. A comparative study of public and private firms 3 there are certain limitations to the existing literature on capital structure. Common factors of leverage such as pro t, size, growth, risk, asset structure. Due to data limitations, the study on private firms has largely been neglected. The determinants of the capital structure of listed on. Capital structure a reading prepared by pamela peterson drake outline 1. The modern theory of capital structure was established by. Evidence from tanzanian nonfinancial listed companies bundala, ntogwa nghabi p. The the major contending theories of capital structure as well as th eir predictions are considered. One of the objectives of capital structure is to ensure that firms are being finance by lower cost of capital mix in order to ensure that shareholders. Determinant factors of the capital structure of a firm an.
The capital structure, namely the way firms choose to finance its overall operation and growth with external sources, has remained an arcane puzzle to contemporary corporates finance for decades. Determinants of capital structure czech journal of economics and. Acta universitatis agriculturae et silviculturae mendelianae brunensis, 20, lxi, no. The capital market is generally a modest financial source for firms in developing economies. This study contributes in the existing literature by examining the determinants of capital structure of. During the depression period, the companys capital structure generally consists of debentures and loans. Evidence from libya fakher buferna a, kenbata bangassa a, lynn hodgkinson b a school of management, university of liverpool, chatham street, liverpool l 69 7 zh, uk b school of business and regional development, university of wales, hen goleg, college road, bangor, gwynedd, ll57 2dg, uk. This study contributes in the existing literature by examining the determinants of capital structure of banks in africa thereby closing the gap in the literature. Marques and santos provided evidence that the impact of taxation at the bank level, bankruptcy and financial distress are moderate influence on banks capital structure.
A case of listed energy sector companies in pakistan. The primary aim of this study is to identify the firmspecific determinants of the capital structure of nonfinancial firms in turkey and to test whether the. A theoretical and empirical study of how capital structure. The theories suggest that firms select capital structures depending on attributes that determine the various costs and benefits associated with debt and equity. A lot of research on this subject has been done on firms in the. Willy muturi jomo kenyatta university of agriculture and technology.
Determinants wednesday, 2of capital structure dealing with excessive corporate indebtedness nd of december 2015 european commission, brussels 25. Based on an analysis of the capital structure of 822 uk companies, rajan and zingales results are found to be highly definitionaldepen dent. Determinants of capital structure in nonfinancial companies. The theory of trade off was developed by kraus and litzenberger 1973 arguing that the companies choose their optimal. Four important theories are used to explain the capital structure decisions. Thus, it shows the capital arrangement which excludes shorterm borrowings. Diamond and rajan 2000 found that a banks capital structure affects its stability as well as ability to provide liquidity and credits effectively. While in period of boons and inflation, the companys capital should consist of share capital generally equity shares. This study investigates the determinants of capital structure of iranian firms listed in the tehran stock exchange. As a result, the market value of the share may be affected by the capital structure decision. To be more accurate, the term capital structure, or financial structure, or financial plan of a company refers to the composition of the longterm sources of funds. The results showed that out of seven variables three profitability, size.
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