University of Twente Student Theses


Capital structure determinants in Europe : the effect of profitability and the moderating role of firm size

Mirza, Daniel (2015) Capital structure determinants in Europe : the effect of profitability and the moderating role of firm size.

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Abstract:Background: A review of the literature indicates that the extant research generally focused on identifying which of the two main capital structure theories, the trade-off theory (TOT) or the pecking order theory (POT), performs best, with only few papers aiming to reconcile the two. Purpose: This study seeks to assess the impact of size and profitability on capital structure, and to analyse the moderating role of size on the profitability–leverage relationship, in order to provide a means for reconciling POT and TOT. Methodology: The impact of size and profitability on leverage was gauged through OLS regressions, on a sample of 10.688 firm-year observations from France, Germany and the United Kingdom during 2006–2013. The moderating role of size was analysed graphically, the coefficients being computed via the Johnson–Neyman technique. Findings: In small and medium German and British firms profitability follows the predictions of TOT and has a positive effect on the debt level. Conversely, the effect of profitability in large firms is significant only in the British sample, and is negative, as predicted by POT. In French companies profitability negatively impacts leverage, which is consistent with POT. The effect, however, is significant only in the year 2006 and in the full period subsample, and only in medium and large companies. As regards firm size, the variable positively affects leverage across the studied years and countries, which is consistent with TOT. Implications: The main implications of the findings are twofold. First, POT and TOT can and should be reconciled, rather than be viewed as competing capital structure models. Second, a new capital structure model should be developed, which would encompass existing theories and take into account firm size and country differences.
Item Type:Essay (Bachelor)
Faculty:BMS: Behavioural, Management and Social Sciences
Subject:85 business administration, organizational science
Programme:International Business Administration BSc (50952)
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