The determinants of Capital Structure: a comparison between small-cap and large-cap US firms

Gembali, Ravi Raj (2018) The determinants of Capital Structure: a comparison between small-cap and large-cap US firms. [Dissertation (University of Nottingham only)]

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This paper empirically compares the determinants of Capital Structure choice between small-cap and large-cap US firms. Trade-Off and Pecking Order Theories formulate hypotheses which are tested to deduce whether theoretical predictions coincide with empirical analysis. Panel data focussing on US corporates from 1966 to 2017 is utilized in explaining the dynamic relationship associated with Leverage. Particularly, the speed of adjustment to an optimal Leverage ratio, Size, Profitability, Tangibility, Growth, Non-Debt Tax Shields, Liquidity, and Volatility are investigated.

A Two-Step System GMM approach which incorporates a lagged dependent variable and employs instruments to mitigate endogeneity is implemented. The downward bias in standard errors associated with Two-Step estimates is rectified using Windmeijer’s correction procedure. Pooled OLS and Fixed Effects models are also presented to provide a benchmark and comparative measure to GMM estimates. Dichotomous variables are incorporated to quantitatively confirm whether the effect of determinants on leverage are dissimilar depending on which index they belong to.

Profitability, Growth, Liquidity, and Volatility have significantly different effects on Leverage for small-cap and large-cap firms. However, the speed of adjustment to an optimal target Leverage is similarly slow at 16.9% and 14.3% per annum for the large and small firms, respectively. This indicates that the costs associated with adjustment outweigh the benefits accompanying an optimal Leverage ratio. Furthermore, regression results suggest that large-cap firms have greater access to debt-financing at more favorable rates than small-caps. Subsequently, small-caps are more frequently forced to facilitate investment opportunities by internal financing compared to their larger counterparts.

Item Type: Dissertation (University of Nottingham only)
Keywords: Determinants, Capital Structure, Leverage
Depositing User: Gembali, Ravi
Date Deposited: 25 Nov 2022 15:39
Last Modified: 25 Nov 2022 15:39

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