The determinants of capital structure across firms’ sizes: The U.K evidence

Subject Areas : International Journal of Finance, Accounting and Economics Studies

Received: 2010-11-03 Accepted : 2010-12-29 Published : 2011-01-20

Keywords: Capital Structure, Trade-off Theory, Pecking Order Theory, agency costs, bankruptcy costs, Panel data,

Abstract :

This paper explores the leverage determinants across firms’ sizesbased on the two main theories behind the capital structure, the trade-offand the pecking order theories. A panel data is sued to find therelationship between capital structure and the variables that proxy forbenefits and costs of debt during 1990 to 2006. Our findings show thatboth principles help to explain the capital structure of small, medium, andlarge firms. However, greater emphasised should be placed on the tradeofftheory. In addition, small firms differ from large companies in level ofgrowth opportunities, structure of assets, and probability of bankruptcyand agency costs. Therefore, different firms’ characteristics are importantto affect the power of leverage determinants and thus leveragedeterminants are likely to be size dependant. These results support theexisting differences between small and large firms considering theagency costs and the bankruptcy costs.