No abstract

No abstract

Prior research on capital structure by Rajan and Zingales (1995) suggests that the level of gearing in UK companies is positively related to size and tangibility, and negatively correlated with profitability and the level of growth opportunities. However, as argued by Harris and Raviv (1991), "The interpretation of results must be tempered by an awareness of the difficulties involved in measuring both leverage and the explanatory variables of interest". In this paper we focus on the difficulties of measuring gearing, and the sensitivity of Rajan and Zingales' results to variations in gearing measures.Based on an analysis of the capital structure of 822 UK companies, we find Rajan and Zingales' results to be highly definitional-dependent. The determinants of gearing appear to vary significantly, depending upon which component of debt is being analysed. In particular, we find significant differences in the determinants of long and short-term forms of debt. Given that trade credit and equivalent, on average, accounts for more than 62 percent of total debt, the results are particularly sensitive to whether such debt is included in the gearing measure. We argue, therefore, that analysis of capital structure is incomplete without a detailed examination of all forms of corporate debt.Running Title:Capital Structure and its Determinants in the UK

No abstract

We analyse the determinants of the capital structure of 1,054 UK companies from 1991 to 1997, and the extent to which the influence of these determinants are affected by time-invariant firm-specific heterogeneity. Comparing the results of pooled OLS and fixed effects panel estimation, we find significant differences in the results. While our OLS results are generally consistent with prior literature, the results of our fixed effects panel estimation contradict many of the traditional theories of the determinants of corporate financial structure. This suggests that results of traditional studies may be biased owing to a failure to control for firm-specific, time-invariant heterogeneity. The results of our fixed effects panel estimation find larger companies to have higher levels of both long-term and short-term debt than do smaller firms; profitability to be negatively correlated with the level of gearing, although profitable firms tend to have more short-term bank borrowing than less profitable firms, and tangibility to positively influence the level of short-term bank borrowing, as well as all long-term debt elements. However, the level of growth opportunities appears to have little influence on the level of gearing, other than short-term bank borrowing, where a significant negative relationship is observed. Running title:Estimation of UK Capital Structure Determinants JEL classification: G32, G3