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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.
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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

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