Hostname: page-component-78c5997874-fbnjt Total loading time: 0 Render date: 2024-11-15T06:03:58.508Z Has data issue: false hasContentIssue false
  • English
  • Français

The Determinants of Capital Structure: Capital Market-Oriented versus Bank-Oriented Institutions

Published online by Cambridge University Press:  06 April 2009

Antonios Antoniou ,
Yilmaz Guney  and
Krishna Paudyal
Antonios Antoniou
Affiliation:
antoniou@durham.ac.uk, Centre for Empirical Research in Finance, Durham Business School, Durham University, Mill Hill Lane, Durham, DH1 3LB, U.K.
Yilmaz Guney
Affiliation:
y.guney@hull.ac.uk, Business School, University of Hull, Hull, HU6 7RX, U.K.
Krishna Paudyal
Affiliation:
k.n.paudyal@durham.ac.uk, Centre for Empirical Research in Finance, Durham Business School, Durham University, Mill Hill Lane, Durham, DH1 3LB, U.K.
Get access Rights & Permissions [Opens in a new window]

Abstract

The paper investigates how firms operating in capital market-oriented economies (the U.K. and the U.S.) and bank-oriented economies (France, Germany, and Japan) determine their capital structure. Using panel data and a two-step system-GMM procedure, the paper finds that the leverage ratio is positively affected by the tangibility of assets and the size of the firm, but declines with an increase in firm profitability, growth opportunities, and share price performance in both types of economies. The leverage ratio is also affected by the market conditions in which the firm operates. The degree and effectiveness of these determinants are dependent on the country's legal and financial traditions. The results also confirm that firms have target leverage ratioswith French firms being the fastest in adjusting their capital structure toward their target level and Japanese firms the slowest. Overall, the capital structure of a firm is heavily influenced by the economic environment and its institutions, corporate governance practices, tax systems, the borrower-lender relation, exposure to capital markets, and the level of investor protection in the country in which the firm operates.

Type
Research Article
Information
Journal of Financial and Quantitative Analysis , Volume 43 , Issue 1 , March 2008 , pp. 59 - 92
Copyright
Copyright © School of Business Administration, University of Washington 2008

Access options

Get access to the full version of this content by using one of the access options below. (Log in options will check for institutional or personal access. Content may require purchase if you do not have access.)

References

Alderson, M. J., and Betker, B. L.. “Liquidation Costs and Capital Structure.” Journal of Financial Economics, 39 (1995), 45–69.CrossRefGoogle Scholar
Anderson, T. W., and Hsiao, C.. “Formulation and Estimation of Dynamic Models Using Panel Data.” Journal of Econometrics, 18 (1982), 47–82.CrossRefGoogle Scholar
Ang, J. S., and Peterson, D. R.. “Optimal Debt versus Debt Capacity: A Disequilibrium Model of Corporate Debt Behavior.” In Research in Finance, Chen, A. W., ed. Greenwich, CT: JAI Press (1986).Google Scholar
Antoniou, A.; Guney, Y.; and Paudyal, K.. “The Determinants of Debt Maturity Structure: Evidence from France, Germany and the UK.” European Financial Management, 12 (2006), 161–194.CrossRefGoogle Scholar
Arellano, M., and Bond, S.. “Some Tests of Specification for Panel Data.” Review of Economic Studies, 58 (1991), 277–297.CrossRefGoogle Scholar
Arellano, M., and Bover, O.. “Another Look at the Instrumental Variable Estimation of Error-Components Models.” Journal of Econometrics, 68 (1995), 29–51.CrossRefGoogle Scholar
Baker, M., and Wurgler, J.. “Market Timing and Capital Structure.” Journal of Finance, 57 (2002), 1–32.CrossRefGoogle Scholar
Ball, R.; Kothari, S. P.; and Robin, A.. “The Effect of International Institutional Factors on Properties of Accounting Earnings.” Journal of Accounting and Economics, 29 (2000), 1–51.CrossRefGoogle Scholar
Blazenko, G. W. “Managerial Preferences, Asymmetric Information, and Financial Structure.” Journal of Finance, 42 (1987), 839–862.CrossRefGoogle Scholar
Blundell, R.W., and Bond, S. R.. “Initial Conditions and Moment Restrictions in Dynamic Panel Data Models.” Journal of Econometrics, 87 (1998), 115–143.CrossRefGoogle Scholar
Blundell, R. W.; Bond, S. R.; Devereux, M.; and Schiantarelli, F.. ’Investment and Tobin's Q.” Journal of Econometrics, 51 (1992), 233–257.CrossRefGoogle Scholar
Bradley, M.; Jarrell, G. A.; and Kim, E. H.. ’On the Existence of an Optimal Capital Structure: Theory and Evidence.” Journal of Finance, 39 (1984), 857–877.CrossRefGoogle Scholar
Chang, R. P., and Rhee, S. G.. “The Impact of Personal Taxes on Corporate Dividend Policy and Capital Structure Decisions.” Financial Management, 19 (1990), 21–31.CrossRefGoogle Scholar
Chung, K. H. ‘Asset Characteristics and Corporate Debt Policy: An Empirical Test.“ Journal of Business Finance and Accounting, 20 (1993), 83–98.CrossRefGoogle Scholar
de Jong, A., and Veld, C.. ’An Empirical Analysis of Incremental Capital Structure Decisions under Managerial Entrenchment.” Journal of Banking and Finance, 25 (2001), 1857–1895.CrossRefGoogle Scholar
DeAngelo, H., and Masulis, R. W.. “Optimal Capital Structure under Corporate and Personal Taxation.” Journal of Financial Economics, 18 (1980), 3–29.CrossRefGoogle Scholar
Devereux, M., and Schiantarelli, F.. “Investment, Financial Factors and Cash Flow: Evidence from UK Panel Data.” In Asymmetric Information, Corporate Finance and Investment, Hubbard, R. G., ed. Chicago, IL: University of Chicago Press (1990), 279–306.Google Scholar
Edwards, J., and Fischer, K.. Banks, Finance and Investment in Germany, Centre for Economic Policy Research, Cambridge, UK: Cambridge University Press (1994).CrossRefGoogle Scholar
Edwards, J., and Nibler, M.. “Corporate Governance in Germany: The Role of Banks and Ownership Concentration.” Economic Policy, 31 (2000), 239–267.Google Scholar
Fama, E. F., and French, K. R.. “Testing Trade-off and Pecking Order Predictions about Dividends and Debt.” Review of Financial Studies, 15 (2002), 1–33.CrossRefGoogle Scholar
Ferri, M. G., and Jones, W. H.. “Determinants of Financial Structure: A New Methodological Approach.” Journal of Finance, 34 (1979), 631–644.CrossRefGoogle Scholar
Fischer, E. O.; Heinkel, R.; and Zechner, J.. “Dynamic Capital Structure Choice: Theory and Tests.” Journal of Finance, 44 (1989), 19–40.CrossRefGoogle Scholar
Flannery, M. J., and Rangan, K. P.. “Partial Adjustment toward Target Capital Structures.” Journal of Financial Economics, 79 (2006), 469–506.CrossRefGoogle Scholar
Frank, M. Z., and Goyal, V. K.. “The Effect of Market Conditions on Capital Structure Adjustment.” Finance Research Letters, 1 (2004), 47–55.CrossRefGoogle Scholar
Friend, I., and Lang, L.. “An Empirical Test of the Impact of Managerial Self-Interest on Corporate Capital Structure.” Journal of Finance, 43 (1988), 271–281.Google Scholar
Fukuda, A., and Hirota, S.. “Main Bank Relationships and Capital Structure in Japan.” Journal of the Japanese and International Economies, 10 (1996), 250–261.CrossRefGoogle Scholar
Graham, J. R., and Harvey, C. R.. “The Theory and Practice of Corporate Finance: Evidence from the Field.” Journal of Financial Economics, 60 (2001), 187–243.CrossRefGoogle Scholar
Hansen, L. P. “Large Sample Properties of Generalized Methods of Moments Estimators.” Econometrica, 50 (1982), 1029–1054.CrossRefGoogle Scholar
Harris, M., and Raviv, A.. “Capital Structure and the Informational Role of Debt.” Journal of Finance, 45 (1990), 321–349.CrossRefGoogle Scholar
Harris, M., and Raviv, A.. “The Theory of Capital Structure.” Journal of Finance, 46 (1991), 297–355.CrossRefGoogle Scholar
Haugen, R. A., and Senbet, L.W.. “Corporate Finance and Taxes: A Review.” Financial Management, 15 (1986), 5–22.CrossRefGoogle Scholar
Heaton, J. B. ’Managerial Optimism and Corporate Finance.” Financial Management, 31 (2002), 33–45.CrossRefGoogle Scholar
Hovakimian, A. ‘The Role of Target Leverage in Security Issues and Repurchases.” Journal of Business, 77 (2004), 1041–1071.CrossRefGoogle Scholar
Hovakimian, A. “Are Observed Capital Structures Determined by Equity Market Timing?” Journal of Financial and Quantitative Analysis, 41 (2006), 221–243.CrossRefGoogle Scholar
Hovakimian, A.; Hovakimian, G.; and Tehranian, H.. “Determinants of Target Capital Structure: The Case of Dual Debt and Equity Issues.” Journal of Financial Economics, 71 (2004), 517–540.CrossRefGoogle Scholar
Hovakimian, A.; Opler, T.; and Titman, S.. “The Debt-Equity Choice.” Journal of Financial and Quantitative Analysis, 36 (2001), 1–24.CrossRefGoogle Scholar
Hsiao, C. “Benefits and Limitations of Panel Data.” Econometric Reviews, 4 (1985), 121–174.CrossRefGoogle Scholar
Jensen, M. “Agency Costs of Free Cash Flows, Corporate Finance and Takeovers.” American Economic Review, 76 (1986), 323–339.Google Scholar
Jensen, M. C., and Meckling, W. H.. “Theory of the Firm: Managerial Behavior, Agency Costs and Ownership Structure.” Journal of Financial Economics, 3 (1976), 305–360.CrossRefGoogle Scholar
Johnson, A. S. “The Effect of Bank Debt on Optimal Capital Structure.” Financial Management, 27 (1998), 47–57.CrossRefGoogle Scholar
Ju, N.; Parrino, R.; Poteshman, A. M.; and Weisbach, M. S.. “Horses and Rabbits? Trade-Off Theory and Optimal Capital Structure.” Journal of Financial and Quantitative Analysis, 40 (2005), 259–281.CrossRefGoogle Scholar
Kester, C. W. “Capital and Ownership Structure: A Comparison of United States and Japanese Manufacturing Corporations.” Financial Management, 15 (1986), 5–16.CrossRefGoogle Scholar
Kim, W. S., and Sorensen, E. H.. “Evidence on the Impact of the Agency Costs of Debt in Corporate Debt Policy.” Journal of Financial and Quantitative Analysis, 21 (1986), 131–144.CrossRefGoogle Scholar
Korajczyk, R. A., and Levy, A.. “Capital Structure Choice: Macroeconomic Conditions and Financial Constraints. Journal of Financial Economics, 68 (2003), 75–109.CrossRefGoogle Scholar
Kraus, A., and Litzenberger, R. H.. “A State-Preference Model of Optimal Financial Leverage.” Journal of Finance, 28 (1973), 911–922.Google Scholar
Kremp, E.; Stöss;, E. and Gerdesmeier, D.. “Estimation of a Debt Function: Evidence from French and German Firm Panel Data.” In Corporate Finance in Germany and France, Sauvé, A., and Scheuer, M., eds. Joint research of the Deutsche Bundesbank and the Banque de France (1999), 139–194.Google Scholar
La Porta, R.; Lopez-de-Silanes, F.; Shleifer, A.; and Vishny, R. W.. “Legal Determinants of External Finance.” Journal of Finance, 52 (1997), 1131–1150.CrossRefGoogle Scholar
La Porta, R.; Lopez-de-Silanes, F.; Shleifer, A.; and Vishny, R. W.. “Law and Finance.” Journal of Political Economy, 106 (1998), 1113–1155.CrossRefGoogle Scholar
Leary, M. T., and Roberts, M. R.. “Do Firms Rebalance their Capital Structures?” Journal of Finance, 60 (2005), 2575–2619.CrossRefGoogle Scholar
MacKay, P., and Phillips, G. M.. “How Does Industry Affect Firm Financial Structure?” Review of Financial Studies, 18 (2005), 1433–1466.CrossRefGoogle Scholar
MacKie-Mason, J. K. “Do Taxes Affect Corporate Financing Decisions?” Journal of Finance, 45 (1990a), 1471–1493.CrossRefGoogle Scholar
MacKie-Mason, J. K. “Do Firms Care Who Provides their Financing?” In Asymmetric Information, Corporate Finance and Investment, Hubbard, R. G., ed. Chicago, IL: University of Chicago Press (1990b), 63–103.Google Scholar
Maksimovic, V.; Stomper, A.; and Zechner, J.. “Capital Structure, Information Acquisition and Investment Decisions in an Industry Framework.” European Finance Review, 2 (1999), 251–271.CrossRefGoogle Scholar
Mao, C. X. “Interaction of Debt Agency Problems and Optimal Capital Structure: Theory and Evidence.” Journal of Financial and Quantitative Analysis, 38 (2003), 399–423.CrossRefGoogle Scholar
Marsh, P. “The Choice between Equity and Debt: An Empirical Study.” Journal of Finance, 37 (1982), 121–144.CrossRefGoogle Scholar
Miao, J. “Optimal Capital Structure and Industry Dynamics.” Journal of Finance, 60 (2005), 2621–2659.CrossRefGoogle Scholar
Michaelas, N.; Chittenden, F.; and Poutziouris, P.. “Financial Policy and Capital Structure Choice in U.K. SMEs: Empirical Evidence from Company Panel Data.” Small Business Economics, 12 (1999), 113–130.CrossRefGoogle Scholar
Miguel, A., and Pindado, J.. “Determinants of Capital Structure: New Evidence from Spanish Panel Data.” Journal of Corporate Finance, 7 (2001), 77–99.CrossRefGoogle Scholar
Miller, M. H. “Debt and Taxes.” Journal of Finance, 32 (1977), 261–274.Google Scholar
Myers, S. C. “Determinants of Corporate Borrowing.” Journal of Financial Economics, 5 (1977), 147–175.CrossRefGoogle Scholar
Myers, S. C. “The Capital Structure Puzzle.” Journal of Finance, 39 (1984), 575–592.CrossRefGoogle Scholar
Nestor, S., and Thompson, J. K.. “Corporate Governance Patterns in OECD Economies: Is Convergence under Way?” OECD Publications (2000).Google Scholar
Ozkan, A. “Determinants of Capital Structure and Adjustment to Long Run Target: Evidence from UK Company Panel Data.” Journal of Business Finance and Accounting, 28 (2001), 175–198.CrossRefGoogle Scholar
Rajan, R. G., and Zingales, L.. “What Do We Know about Capital Structure? Some Evidence from International Data.” Journal of Finance, 50 (1995), 1421–1460.CrossRefGoogle Scholar
Rozeff, M. S. “Growth, beta and Agency Costs as Determinants of Dividend Payout Ratios.” Journal of Financial Research, 5 (1982), 249–259.CrossRefGoogle Scholar
Scott, D. “Bankruptcy, Secured Debt, and Optimal Capital Structure.” Journal of Finance, 32 (1977), 1–19.CrossRefGoogle Scholar
Stulz, R., and Johnson, H.. “An Analysis of Secured Debt.” Journal of Financial Economics, 14 (1985), 501–521.CrossRefGoogle Scholar
Swoboda, P., and Zechner, J.. “Financial Structure and the Tax System.” In Handbooks in Operations Research and Management Science, Jarrow, R. et al. , eds. (1995), 767–792.CrossRefGoogle Scholar
Taub, A. J. “Determinants of the Firms' Capital Structure.” Review of Economics and Statistics, 57 (1975), 410–416.CrossRefGoogle Scholar
Titman, S., and Wessels, R.. “The Determinants of Capital Structure Choice.” Journal of Finance, 43 (1988), 1–19.CrossRefGoogle Scholar
Trezevant, R. “Debt Financing and Tax Status: Tests of the Substitution Effect and the Tax Exhaustion Hypothesis Using Firms' Responses to the Economic Recovery Tax Act of 1981.” Journal of Finance, 47 (1992), 1557–1568.CrossRefGoogle Scholar
Warner, J. B. “Bankruptcy Costs: Some Evidence.” Journal of Finance, 32 (1977), 337–347.CrossRefGoogle Scholar
Welch, I. “Capital Structure and Stock Returns.” Journal of Political Economy, 112 (2004), 106–131.CrossRefGoogle Scholar
Zimmerman, J. “Taxes and Firm Size.” Journal of Accounting and Economics, 5 (1983), 119–149.CrossRefGoogle Scholar