Determinants of Capital Structure and Testing of Theories: A Study on the Listed Manufacturing Companies in Bangladesh

Abstract

The objectives of this study are to identify the significant determinants of capital structure of the listed manufacturing companies in Bangladesh and to test the relevant capital structure theories. This study used a panel dataset including 74 manufacturing companies listed under 8 industries in Dhaka Stock Exchange (DSE) for the period of 2002-2011. The Unit Root tests suggested that all series were stationary. Using Panel Corrected Standard Error Regression Model and Random Effects Tobit Regression Model, all selected variables were found significant. Managerial ownership positively and Growth rate, Profitability, Debt service coverage ratio, Non-debt tax shield, Financial costs, Free cash flow to firm, Agency costs and Dividend payment negatively affect the capital structure. Tangibility and Liquidity ratio have positive relationship with Long term debt and negative relationship with Short term debt and Total debt. It was also found that Pecking-order theory and Static Trade-off theory are the most dominant capital structure theories in Bangladesh. The policy implication is that the financial managers should consider these determinants as yardsticks before taking the leverage decisions in order to choose the most favorable capital structure for the company so that it maximizes the shareholders' value.

Effects of Capital Structure and Managerial Ownership on Profitability: Experience from Bangladesh

“…These are well-acknowledged proxies used for capital structure in almost all studies i.e. Hossain and Hossain (2014) …”

“…In Bangladesh, Hossain and Hossain (2014), using Panel Corrected Standard Error Regression Model and Random Effects Tobit Regression Model on a large panel dataset including 74 manufacturing companies listed under 8 industries in DSE for the period of 2002-2011, found that there is an inverse relationship between profitability and capital structure. They also claimed that growth rate, debt service coverage ratio, non-debt tax shield, financial costs, free cash flow to firm, agency costs and dividend payout ratio have negative relationship with capital structure whereas managerial ownership, on the contrary, has positive relationship with capital structure.…”

“…To control the industry effects, industry dummy variable has also been used. Since 10 industries were covered in this study, 9 industry dummy variables have been used (Hossain & Hossain, 2014). (Kebewar, 2013).…”

How Does Board Structure Characteristics Affect Capital Structure Decisions? Evidence from East African Stock Markets

“…The PCSEs model will correct the problems automatically and models will present reliable best estimates for our variables. Kmeta (1997) argued that PCSEs as an alternative to the Feasible Generalized Least Square (FGLS) for fitting the panel data models when the errors are not independent and identically distributed; rather the errors are either heteroskedastic across panels or heteroskedastic and contemporaneously correlated across panels, with or without autocorrelation (Hossain. I andHossain.…”

“…The econometric regression model will produce spurious or non-sensible regression results relating to the relationship between dependent and independent variables when non-stationary data were employed in analysis. Non-stationary data this is when a data series does not have a constant mean variance and auto-covariance at various lags over time (Gujarati, 2007, Hossain. I and Hossain.…”