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1
Determinants of Capital Structure in
Developing Countries
Tugba Bas*, Gulnur Muradoglu** and Kate Phylaktis***
1
Second draft: October
28
, 2009
Abstract
This study examines the determinants of capital structure decisions of firms, specifically
for sm
all and private firms
in
developing countries
. We use survey data from World Bank
Enterprise survey which is not used before. We examine the differences in
the
determinants of capital structure decisions of private and listed
firms
and small and large
firm
s. In accordance with the capital structure theory, the importance of firm level
determinants of capital structure, tangibility, profitability and size are confirmed. Results
are robust to the different definitions of size. Large and listed companies can have eas
y
access to finance in developing countries, thus they have higher leverage and higher debt
maturities.
F
or small and private firms, access to finance is depend
ed
on the conditions of
economic environment. Leverage and debt maturities are sensitive to macroeconomic
factors.
JEL Classification: G32, F30
Keywords: Leverage, debt maturity, small firms, private firms
*
Corresponding Author: Tugba Bas, Cass Business
School, 106 Bunhill Row, London EC1Y 8TZ, U.K.,
tugba.bas.1@city.ac.uk
**Gulnur Muradoglu, Cass Business School, 106 Bunhill Row, London EC1Y 8TZ, U.K.,
g.muradogl
u@city.ac.uk
,
***Kate Phylaktis, Cass Business School, 106 Bunhill Row, London EC1Y 8TZ, U.K.,
k.phylaktis@city.ac.uk
2
The purpose of this paper is to investigate capital structure decision of firms in
developing
countries
. We use firm level survey data for 25 countries in different stages of financial
development from different regions. Our main focus is on small and private firms. Most
theoretical and empirical studies in capital structure have focused on large listed companies for
both developed and developing countries (see e.g, Rajan and Zingales, 1995; Booth et al., 2001;
Demirguc
-Kunt and Maksimovic, 1998, 1999).
Since
large listed firms can easily have access to
both national and international financial markets, it could be misleading to accept and generalize
the results of these studies for all types of firms, especially for small firms who might not have
the same access to financial markets.
Small firms are important because they are the engines of economic development. They boost
competition and entrepreneurship. They provide economy-wide efficiency, innovation and
aggregate productivity growth. Countries, which encourage entrepreneurship and SMEs, have
higher economic growth (Schmitz, 1989; Acs, 1992). Small firms enter the industry as agents o
f
change and they introduce innovation (
Acs,
1984;
Acs and Audrestsch, 1988). SMEs are more
productive and labour intensive. So the expansion of SMEs enhances employment more than
large firms2. There are a number of studies which examine the capital struct
ure decisions of small
and medium size enterprises3. They are either examining a small sample of countries or t
he
capital structure decisions of SMEs have been studied for a single country
4
and on cross country
5.
We investigate both private and public fir
ms.
We compare small firms to large companies.
The
countries we include are the
developing
countries from different regions at different level of
financial development.
We can differentiate between
the firm
-
specific or country
-
specific factors
impact.
We
us
e
the World Bank Enterprise survey
.
We investigate the determinants of capital
structure of firms for 25
developing
countries covering all regions, Africa, East Asia and Pacific,
Latin America and Caribbean, Middle East and North Africa and South Asia. We have
unbalanced panel data which include 27,826 firm year observations up to three years. We
examine the firm level determinants of financial leverage including asset tangibility, profitability,
size and controlling for country level factors, such as GDP per capita, growth rate of GDP,
2
The workforce employed in SMEs in our sample varies between 27.60
-
86.50 percent (Ayyag
ari et
al.,2005).
3
Ang, 1991; Holmes and Kent, 1991; Cosh and Hughes, 1994
; Acs and
Isberg, 1996;
Daskalakis and
Psillaki, 2008; Bartholdy and Mateus, 2008
4
see
Van der Wijst and Thurik 1993; Sogorb
-
Mira 2005; Bartholdy and Mateus 2005
for a single count
ry
studies.
5
See
Hall et al
.,
2004; Daskalakis and Psillaki
,
2008; Bartholdy and Mateus
,
2008
for cross country studies
3
inflation, interest and tax. We are looking for answers to the following questions: Is there a size
effect on the leverage decisions of firms? Are the determinants of capital structure different for
small, medium and large firms? Are the determinants same for the listed firms and private
companies?
Trade
-off theory (Scott, 1977) claims that a firm s optimal debt ratio is determined by a trade-
off
between the bankruptcy cost and tax advantage of borrowing. Higher profitability decreases the
expected costs of distress and let firms increase their tax benefits by raising leverage. F
irms
would prefer debt over equity until the point where the probability of financial distress starts to be
important.
The type of assets that a f
irm has determines the cost of financial distress. For instance,
if a firm invests largely in land, equipment and other tangible assets, it will have smaller costs of
financial distress than a firm relies on intangible assets.
So
for debt financing, both s
mall
and
large
firms must provide some kind of guarantees materialized
in
collateral.
But small firms are
seen as risky because they have higher probability of insolvency than large firms (Berryman,
1982). On the other hand, tax advantage of borrowing can be applied to large firms which are
more likely able to generate high profits. But for small firms,
since
they are less likely to have
high profits, the tax advantage may not be the option to choose debt financing for the tax shields
advantage (Pettit and Singer 1985). Therefore, we expect collateral (asset tangibility) to be
positively related to leverage for both small and large companies; whereas, tax has a positive
relation with leverage for large firms, while
no
relation with small firms.
Pecking Order Theory, Myers and Majluf (1984), states that capital structure is driven by firm's
desire to finance new investments, first internally, then with low-risk debt, and finally if all fails,
with equity. Therefore, the firms prefer internal financing to external financing. This theory is
applicable for large firms as well as small firms. Since small firms are opaque and have important
adverse selection problems that are explained by credit rationing; they bear high information costs
(Psillaki 1995). Also, Pettit and Singer (1985) discuss that since the quality of small firms
financial statements vary, small firms usually have higher levels of asymmetric information. Even
though investors may prefer audited financial statements, small firms may want to avoid these
costs. Therefore, when issuing new capital, those costs are very high, but for internal funds, costs
can be considered as none. For debt, the costs are in an intermediate position between equity and
internal funds. As a result, firms prefer first internal financing (retained earnings), then debt and
they choose equity as a last resort.
We expect negative relation between profitability and leverage
for both small and large firms.
4
Agency theory focuses on the costs which are created due to conflicts of interest between
sharehol
ders, managers and debt holders (Jensen et al., 1976). For small firms, agency conflicts
between shareholders and lenders may be particularly severe (Ang 1992). Small firms are likely
to have more concentrated ownership and gen
erally
, the shareholders
often
run the firm which
decrease the conflict of interest between shareholders and managers.
Therefore,
no
or few
agency
problem
will be exist. As a result of that the lower the agency problem, the less debt the small
firms have in their capital structure.
In the light of these theories, we use the following variables to explain the reasons for firms to
choose debt over equity finance considering different sizes of firms and listed and private
companies. Asset tangibility is
used as a proxy for agency costs or collateral. Since tangible assets
are used as collateral, the large amount of them decreases the risk of lender suffering the agency
costs of debt, like risk shifting. Therefore, firms with a high ratio of fixed assets should have
greater borrowing capacity. So the higher the tangible assets, the more willing should lenders be
to supply loans and leverage should be higher (Scott, 1977; Harris and Raviv, 1990).
M
ost studies
have found positive relationship, such as Titman and Wessels
(1988),
Rajan and Zingales (1995)
and Ozkan (2002). Therefore, we would expect the asset tangibility to be positively related with
leverage.
Since small firms are not as informationally transparent as large firms, collateral is vital
for them to borrow. So we would expect positive relation between leverage and asset tangibility
for both small6 firms as well as large firms. According to the maturity matching principle, the
length of loans should be matched to the length of life of assets used as collateral (Myers, 1977)
;
therefore, long term assets should be financed with long term debt (Booth et al., 2001). Van der
Wijst and Thurik (1993), Hall et al., 2004 and Sogorb-Mira (2005) have found a positive relation
between asset tangibility and long term debt and an inverse relation between asset tangibility and
short term debt.
Therefore,
we expect asset tangibility to be positively related to long term debt,
while negatively related to short term debt.
Profitability is another variable which affects leverage of the firms. According to the trade-
off
theory, higher profitability lowers the expected costs of distress; therefore, firms increase their
leverage to take advantage from tax benefits. Also, agency theory supports this positive relation
because of the free cash flow theory of Jensen (1986). Therefore, leverage and profitability
are
6
see Michealas et al. (1999) and Sogorb
-
Mira (2005) for positive effect of tangible assets on the leverage
for SMEs.
5
positively related. On the other hand, according to Pecking Order theory, Myers and Majluf (1984)
discussed that firms prefer to finance with internal funds rather than debt if internal equity is
sufficient due to the asymmetric information. Hence, profitability is expected to have negative
relation with leverage. Most studies using large listed companies have found this negative
relationship, including Titman and Wessels (1988), Rajan and Zingales (1995), Booth et al.
(2001).
The studies about SMEs also
confirm
the pecking order relationship (Van der Wijst and
Thurik, 1993; Sogorb-Mira, 2005).
Since
the managers of the small firms
are
also the owner of
the compa
ny,
they
do not prefer to lose the control over the
ir
firms (Holmes and Kent, 1991;
Hamilton and Fox, 19
98)
, so
they do not want
to accept new shareholders; that s why, they prefer
internal financing to external resources to finance firm activity. So we expect profitability to be
inversely related to leverage and debt maturities for small and large firms.
F
irm size could be an inverse proxy for the probability of the bankruptcy costs according to trade
-
off theory. Larger firms are likely to be more diversified and fail less often. They can lower costs
(relative to firm value) in the occasion of bankruptcy. Therefore, size has a positive effect on
leverage. Pecking order theory also expects this positive relation. Since large firms are diverse
and have less volatile earnings, asymmetric information problem can be mitigated. Hence, size is
expected to have positive impact on leverage. So we expect small firms and private firms to have
lower, large and listed firms have higher debt.
W
e control for five macroe
conomic variables: GDP per capita, growth rate of GDP, inflation rate,
interest rate and tax rate (see e.g., Demirguc-Kunt and Maksimovic, 1996, 1999; Bartholdy and
Mateus, 2008). GDP per capita is a broad indicator which describes the differences in wealth in
each country. As countries are getting richer, more financing become available; as a result, we
expect GDP per capita to be positively related with leverage and debt maturities for all types of
firms
.
The Growth rate of
the economy
is a measure of t
he growth opportunities available to firms in the
economy. On an individual firm level, the growth rate is a proxy for the investment opportunity
set faced by firms (Smith and Watts, 1992) and its effect on the optimal financing of projects
(Myers, 1977).
Therefore,
we expect economic growth to be positively related with leverage and
debt maturities for all types of firms
.
6
Inflation shows the government s management of the economy as well as it provides evidence on
the stability of the local currency. Countries with high inflation are associated with high
uncertainty
(Demirguc-Kunt and Maksimovic, 1996). Since debt contracts are generally nominal
contracts, the rate of inflation may influence the riskiness of debt financing so that the lenders are
more likely to avoid providing debt. So we expect i
nflation
to be negatively related with leverage
and debt maturities for all types of firms
.
As interest rate increases, firms are less willing to finance new investments due to increase in the
cost of borrowing (Bartholdy and Mateus, 2008). Therefore, we expect interest rate to be
inversely related with leverage
and debt maturities for all types of firms
.
Tax variable is taken as a country s highest marginal corporate tax rate (Bartholdy and Mateus,
2008)
.
Accor
ding to the trade-off theory, firms prefer debt financing because debt is tax
deductible. This tax benefit of debt makes firms borrow more in accordance with the increases in
tax rate.
So t
ax rate is positively related with the leverage and debt maturity f
or large
firms
, while
no relation for small firms
.
The remainder of paper is organized as follows. Section 2 discusses the data and methodology.
Section 3
discusses the empirical findings for the sample.
Section 4 concludes the paper.
2
. Data and Method
ology
Our main dataset is a firm-
level survey data
for 11,125 firms
from World Bank Enterprise Survey
conducted for 25 developing countries from 5 regions. The countries included in our sample are
different from the previous studies. Most of the countries are low income and lower middle
income countries from different regions. Since they are developing countries, their economic
environment is different than developed countries.
We use 2002 version of the survey that provides information about the balance sheet and income
statement
items such as fixed assets, current assets, total liabilities including short-term and long-
term debt and equity-share capital, sales and expenses up to three years. The data for
macroeconomic variables are collected from World D
evelopment Indicators (April 2008).
We have 27,826 observations of which 48.1 percent
are
small firms, 41 percent
are
medium size
firms and 10.9 percent
are
large firms. Firms are defined as small if they have less than 50
7
employees. Medium firms employ 51 to 500 employees; large firms are defined as those with
more than 500 employees.
Only
9.5 percent of the firms in the sample are publicly listed
while
90.5 percent are
private
companies.
27.5 percent of listed firms are large companies, 46.5 percent
are
medium and 26 percent are small firms. On the other hand, 50.7 percent of unlisted firms are
small, 39.7 percent are medium and 9.6 percent are large companies.
Distinguishing
feature of the database is its coverage for small and medium enterprises and
private firms. It has n
ot
been used before for the examination of the determinants of capital
structure. For instance, Rajan and Zingales (1995) use Global Vantage database which contains
accounting data and monthly stock prices for the largest listed companies, Booth et al (2001) use
International Financial Corporation (IFC) database which includes abbreviated balance sheets and
income statements for the largest companies. Beck et al. (2004) focus on the small firms by using
World Business Environment Survey (WBES) 1999. But they investigate external finance as a
proportion of investment. They use the total amount of internal and external resources used in a
particular year rather than the ratio of exte
rnal financing to total assets.
The functional form of
our
model is as follows;
Leverage
it
=
t
+
1
Tangibility
it
+
2
Profitability
it
+
3A
Small
i
+
3B
Large
i
+
4
GDP/Cap
t
+
5
Growth
t
+
6
Inflation
t
+
7
Interest
t
+
8
Tax
t
+
it
(1)
We estimate the equation (
1
) for
leverage
and debt maturities
(long term debt and short term debt)
.
We repeat each estimation
with
different
definitions of
size
: small, medium and large; and we
repeat each estimation for different legal status of the firms: publicly listed firms and
priva
te
companies
.
We define
Leverage
it
as total liabilities divided by total assets for firm i at time t (see Rajan and
Zingales, 1995; Demirguc-Kunt and Maksimovic, 1996; Booth et al., 2001). This ratio can be
seen as a proxy for what is left for shareholders in case of liquidation. Debt maturities include
long term debt and short term debt. Long term debt is defined as long term liabilities to total
assets while short term debt is short term liabilities to total assets (Demirguc-Kunt and
Maksimovic, 1999).
Tangibility
it
is defined as total assets minus current assets (fixed assets) divided by total assets
for
firm
i at time t (see Rajan and Zingales, 1995; Booth et al. 2001). We expect positive relation
8
between asset tangibility and leverage ( 1
>0)
for all firms. For long term debt, we expect a
positive relation, while for short term debt we expect negative relation.
Profitability
it
is calculated
as earnings before tax7 divided by total assets for firm i at time t
.
We would expect to find a
ne
gative relation between profitability and leverage and debt maturities for all firms ( 2 < 0).
Small
i
and
Large
i
are used as dummy variables to proxy size of the firm. A firm is classified as
small if it has less than 50 employees; medium size if it has between 51 and 500 employees and
large if it has more than 500 employees. So size is a dummy variable for small, medium and large
firms (see Beck et al., 2008). We expect small to be negatively related with leverage and debt
maturity
; while, large is positiv
ely related to leverage
and debt maturity
(
3A
< 0,
3B
> 0).
For country factors, we control for five macroeconomic variables: GDP per capita, growth rate of
GDP, inflation rate, interest rate and tax rate (see e.g., Demirguc-Kunt and Maksimovic, 1996,
1999).
GDP/Cap
t is GDP per capita of the country at time t
and
Growth
t is the GDP
growth
rate
of the country at time t. Both of the variables are expected to be positively related with leverage
and debt maturity for all firms ( 4>0, 5
>0).
Inflation
t is the inflation rate of the country at time t
.
Inflation is measured based on the GDP deflator which is the ratio of GDP in local currency to
GDP in constant local currency. We expect inflation to be negatively related with leverage and
debt maturity for all firms ( 6
<0).
Interest
t is the
lending
inter
est
rate of the country at time t
.
Interest
is
expected to be inversely related with leverage and debt maturity for all firms ( 7
<0).
Tax
t is the country s highest marginal corporate tax rate at time t. Tax
is expected to be positively
related with leverag
e
and debt maturity for large firms ( 8
>0).
For small firms, it is expected to
have no effect.
We have an unbalanced panel data. We estimate the model using OLS estimators with fixed
effects
8.
We estimate the following model:
y
it
=
t
+
X
ijt
+
Z
jt
+
it
i=1, 2, .....,N; j = 1, 2, , 4; t=1, 2,.., T
(2)
where
it
y
represents the K-dimensional vector of one of the three debt ratios for the ith firm at
time
t. t is the individual intercept at time t
.
X
ijt
is a vector of the jth firm level explanatory
variables
for the ith firm at time t
and
Z
jt
is a vector of the jth macro level explanatory variables
at time
t
. We have an unbalanced panel data
.
7
Earnings is calculated as total sales minus the sum of direct raw material costs, consumption of
energy, manpower costs, interest charges and financial fees, other costs.
8
Fixed effects model is statistically preferred based on the result of the Hausman test.
9
2.1.
Descriptive Statistics
Table 1 presents descriptive statistics. The mean of leverage is 39.10 percent while the median is
37.74 percent. Leverage is low in our sample. In the US, the mean of leverage is
around
58
percent
, while in the UK leverage is
around
54 percent (Rajan and Zingales, 1995). Firms in
developed
countries are highly levered compared to firms in emerging markets. The reason for
this might be the limited availability of funds in emerging markets to finance companies.
The
available funds are generally allocated to publicly listed companies or large firms. The leverage
of
listed firms is 44.23 percent, while the leverage of private
companies
is 36.81 percent.
The
leverage for small, medium and large firms is 30.65, 46 and 50.49 percent, respectively.
Small
firms have limited access to finance compared to medium and large size companies. On the other
hand, listed firms borrow more than private firms. The reason for this high leverage among listed
firms could be the lack of well developed stock markets. Also lenders may prefer to fund listed
companies bec
ause
the
quality of information provided by them is more
reliable
than private
firms.
Therefore, in developing countries, it is difficult to access to finance for small and private
companies.
Insert table 1 here
The average of leverage includes 14.01 percent of long term debt financing
and
24.95 percent of
short term debt financing. Listed companies have 20
.04
percent long term debt while they have
24.3
1 percent of short term debt. On the other hand, unlisted firms have
14.11
percent long term
debt and 22.54 percent short term debt. The long term debt for small, medium and large firms are
9.61, 17.18 and 21.39 percent; whereas, short term debt is 20.76, 28.69 and 29.21 percent,
respectively.
Large and listed firms have more long term debt than small and medium size
enterprises.
The short term debt is high for small firms because they do not have access to long
term debt financing. On the other hand, in developing countries, public companies have higher
long term debt than private firms due to the information
asymmetries.
On average 45.21 percent of the firms assets are fixed assets which can be used as collateral.
So
firms with high asset tangibility should have greater borrowing capacity. Listed firms have 44.44
percent tangible assets, while private comp
anies have 46.64 percent. The mean of asset tangibility
for small, medium and large companies is 48.16, 42.80 and 41.44 percent, respectively.
The mean
of asset tangibility for listed companies in the UK is 35.6 percent while tangibility in the US is
39.5
percent (Antoniou, 2008). Stock markets in developing countries are not as efficient and
10
liquid as in developed countries; therefore, equity financing may not be available. Hence listed
firms in developing countries rely on high asset tangibility for debt
financing.
The
mean of profitability in the sample is 33.96 percent. Listed firms have 30.87, while private
firms have 35.89 percent. The mean of profitability for small, medium and large firms is 30.48,
35.25 and 44.60 percent, respectively. The profitability in the UK is 11.6 percent; whereas, it is
16 percent in the US (Antoniou, 2008). The firms in developing countries have higher
profitability than firms in the UK and US. Since funding options are limited in developing
countries, firms prefer to keep
their profits in the company as an internal funding source.
We use size dummy variable for small and large firms which are based on the firms number of
employees. Firm is classified as small if it has less than 50 employees and large if more than 500
employees. So 48
.12
percent of the firms in our sample are small firms while only 10.87 percent
of them are large firms. The 41.1 percent is medium size firms. Within listed firms, 26 percent of
them are small while 28 percent of them are large. On the other hand, within unlisted firms, 51
percent of them are small while 10 percent of them are large.
Average GDP per capita for our sample is $1,69
3.60
. GDP per capita for the richest country in
the sample is $8,961.50; whereas, it is $120.80 for the poorest country. In the same period, the
GDP per capita in the UK is $25,359 while in the US, it is $34,852. As can be seen from the
figures, there is a great wealth difference between even for the richest country in the sample and
developed countries. On the other hand, growth rate of GDP is 3.26 percent on average for our
sample
, while the growth rate is 2.40 percent in the UK and 1.75 percent in the US. The countries
in our sample grow faster than developed markets. The fastest growing country
has
8.04 percent
growth rate, while the slowest growing country has 0.15 percent growth rate.
Average
inflation
rate
is
6.97 percent; whereas, the rate is 2.41 in the UK and 2.13 in the US. As inflation rate,
interest rate is higher for the countries in the sample. The ave
rage interest rate is 21
.27
percent, on
the other hand, for the UK and US the interest rate are 4.75 and 6.21 percent respectively.
The
highest interest rate in our sample is 62.88 percent while the lowest interest rate is 6.18 percent.
The higher inflation and interest causes borrowing to be costly in emerging markets. On the other
hand, the average corporate income tax rate is 29.64 in the sample while the tax rate is 30 percent
in the UK and 35 percent in the US. The maximum corporate tax rate is 45 percent, whereas the
minimum rate is 12 percent for our sample.
11
2.2.
Correlation
s:
Table 2 presents correlations between the dependent (Leverage) and
independent
variables. Asset
tangibility is negatively correlated with leverage in contrast to what we expected. According to
the theory, since fixed assets can be used as collateral, debt level should increase with higher
fixed assets. We find this positive relation, when we look at the correlations between asset
tangibility and long term debt. But asset tangibi
lity is negatively correlated with short term debt.
Profitability is inversely related to leverage, long term debt and short term debt. In accordance
with Pecking Order theory, profitable firms prefer to finance internally. Size is positively related
wit
h leverage and debt maturities. As firm gets larger, their debt increases. Large is positively,
while small is negatively related with leverage and debt maturities.
Insert table 2 here
The correlation between
leverage
, debt maturities and macro variables are not so high. GDP per
capita
is positively related with leverage and short term debt, while it is negatively related with
long term debt. Growth is positively correlated with leverage and long term debt, while it is
inversely related with short term debt. Inflation is negatively correlated with leverage and debt
maturities. Interest is not significantly correlated with leverage. However, it is positively related
with short term leverage, while, it is negatively related with long term debt. Tax is positiv
ely
correlated with leverage and short term debt; whereas, it is negatively related with long term
leverage.
3
. Empirical findings
Table
3
presents result
s of leverage and debt maturities for the overall sample.
Each column has a
number which symbolizes the model estimated. Column one reports the regression that leverage
is used as an independent variable. Column two presents the results for the long term debt, while
column three shows outcome for short term debt.
T
he top four variables in Table 3
are
coefficient estimates of our firm specific variables.
Based on
the results
,
the
coefficient estimate for tangibility is negative for
leverage
, indicating that as
collateral increases, firms borrow less
.
According to trade-off and pecking order theory, as
tangibility increases, collateral increases and firms should be able to find more debt (Rajan and
Zingales, 1995; Titman and Wessels, 2006) as opposed to what we find. But some studies have
found this inverse relation and explain it with maturity matching principle (Booth et al., 2001).
The coefficient estimate for profitability is negative, suggesting that as profitability increases,
12
leverage decreases.
Firms
follow pecking order (Myers and Majluf, 1984); they use retained
earnings first and then move to debt and equity. The size dummy for small firms has a negative
coefficient estimate and the dummy for large firms has a positive coefficient estimate,
implying
that leverage
is
higher for large firms and lower for small firms. As firms size increases, they
become more diversified and have more stable cash flows.
They
are less often bankrupt compared
to small firms so that they can af
ford higher levels of leverage.
Insert table 3 here
Table 3 presents also the effect of macroeconomic variables on leverage. The coefficient estimate
of
GDP per capita is positive for leverage indicating that as countries become richer, more funds
become available and firms can borrow more
.
GDP growth has a positive coefficient estimate.
In
countries with relatively higher rate of economic growth, firms are eager to take higher levels of
debt to finance new investment. The coefficient estimate for inflation is negative implying that
firms borrow less as inflation increases. The impact of interest on leverage is positive suggesting
that firms continue to borrow despite the increases in the cost of interest. The coefficient estimate
f
or tax is positive for leverage. A
s tax increases,
firms borrow less because of the high bankruptcy
and financial distress costs.
Table 3 Column 2 presents the coefficient estimates for the long term debt. The coefficient
estimate for asset tangibility is positive for long term debt. A firm with more tangible assets use
more long term debt in accordance with maturity matching principle. Profitability has positive
coefficient estimate. As profitability increases, long term debt decreases. Firms prefer to be
financed internally if they have enough internal sources. The coefficient estimate for small is
negative, while the coefficient estimate for large is positive. As firm gets larger, they use more
long term debt financing.
Macroeconomic coefficient estimates have also influenced the long term debt financing decisions.
The coefficient estimate for GDP per capita is positive for long term debt. As wealth of the
country increases, firms can borrow more long term debt. The coefficient estimate for GDP
growth is positive, implying that as countries grow, long term debt increases
.
The impact of
i
nflation
on long term debt is positive. As inflation increases, firms use more long term debt
financing. Interest has a negative coefficient estimate, indicating that as interest rate increases,
firms avoid financing themselves with long term debt. The coefficient estimate for tax is negative.
Firms use less long term de
bt financing, a
s tax increases.
13
Table 3 Column
3
shows the results for short term debt. The coefficient estimate for tangibility is
negative for short term debt. As tangibility increases, firms are financed less by short term debt.
Profitability has neg
ative
coefficient estimate implying that as profitability increases, short term
debt decreases. The coefficient estimate for small is negative, while the coefficient estimate for
large is positive. As size increases, firms can borrow more short term debt.
The impact of GDP per capita on short term leverage is positive. As GDP per capita increases,
short term debt increases. The effect of growth is positive indicating that the growth of the
economy causes short term debt to increase. The coefficient estimate for inflation is negative,
implying that as inflation increases, firms borrow less short term debt. The coefficient estimate
for interest is positive.
F
irms continue to finance themselves with short term debt
although cost of
interest rises. Tax has positive coefficient estimate suggesting that as tax increases, short term
debt increases.
Hence
, we confirm the importance of firm level factors in accordance with the capital structure
theory.
Based on the maturity matching principle, long term debt is financed by long term assets,
while short term debt is negatively related with asset tangibility. Leverage is negatively related
with asset tangibility because firms in our sample have more short term debt than long term debt.
Firms prefer internal financing as profitability is negatively related with leverage and debt
maturities. In accordance with increases in firms size, debt level of firms increases.
Macroeconomic conditions of countries have an impact on the capital struc
ture decisions of firms.
Levera
ge and debt maturities of firms increase with the rise in GDP per capita and growth of the
country. Increases in inflation rate causes leverage and short term debt decrease while long term
debt increases
.
Since in most developing countries, high inflation reduces the cost of borrowing;
therefore, decreasing the value of debt, firms may prefer to be financed by long term debt.
On the
other hand, as interest rate increases, firms continue to be financed by short term debt, but they
avoid long term debt financing. Increases in tax rate increase leverage and short term debt while
decrease long term debt. Even debt is tax deductible because of the bankruptcy risk and financial
distress, long term debt financing is not preferable.
3.1. Are results different for
different size proxies?
For robustness of our results, we estimate the model by using different size measures. We re-
estimate each equation by using logarithm of sales and logarithm of total assets as a size proxy.
Table 4 Panel A presents the
results
for
leverage and debt maturities
using
total sales as a proxy
14
for size and Panel B shows the estimations for leverage and debt maturities using total assets as a
size proxy.
Panel
A Column 1 shows the
results
of leverage regression. The coefficient estimate for asset
tangibility
is
negative for leverage. As asset tangibility increases, leverage decreases.
Profitability
has a negative coefficient estimate. As profitability increases, leverage decreases. The coefficient
estimate for size is positive,
indicatin
g that large firms borrow more.
Insert table 4
panel A
here
Most of the macroeconomic variables are significant. The coefficient estimate of GDP per capita
is
positive. The richer the country, the more debt firms can have. The coefficient estimate for
gro
wth is positive, suggesting that as the economy grows, the more debt firms can get. The
coefficient estimate for inflation is negative, indicating that increases in inflation causes firms to
borrow less. Interest has no impact on leverage. Tax has negative coefficient estimate, suggesting
that a
s
increases in
tax
causes
lower
leverage.
Panel A
Column 2 presents the
outcome of long term debt. The coefficient estimate for tangibility
is positive, indicating that more
the
collateral
, the more long term funds firms have. The
coefficient estimate for profitability is negative. More available internal sources induce long term
debt to decrease. The impact of size is positive indicating that size increases, firm borrow more
long term debt.
GDP per capita has no effect on long term debt. The coefficient estimate for growth is positive,
implying that as economy grows, long term debt increases. The coefficient estimate for inflation
is positive, suggesting that as inflation increases, firms continue to be financed by
long term debt.
The coefficient estimate for interest is negative. Increases in cost of capital makes firms borrow
less long term debt. The impact of tax is negative. As tax increases, long term debt decreases.
Panel A Column 3 reports the results for short term debt. The coefficient estimate for tangibility
is negative, indicating that as tangibility increases, short term debt decreases. The coefficient
estimate for profitability is negative, implying that more profitable firms have lower short term
de
bt. The coefficient estimate for size is positive. As larger the firm, the more short term debt
they have.
15
The impact of macroeconomic variables is statistically significant. The coefficient estimate for
GDP per capita is positive, indicating that as countries become richer, firms borrow more short
term debt. The coefficient estimate for growth is positive. As economy grows, short term debt
increases. The effect of inflation is negative, suggesting that increases in inflation cause short
term debt to decline. The coefficient estimate for interest is positive. Firms continue to be
financed by short term debt in spite of the increases in interest. The coefficient estimate for tax is
positive. As tax increases, short term debt increases.
Table
4 Panel B presents the re-estimation of the equation by using logarithm of total assets as a
proxy for size.
Column 1 shows the results for leverage.
In accordance with previous results, firm
level variables have the same impact on leverage. The coefficient estimate for asset tangibility
and profitability are negative. As asset tangibility and profitability increase, leverage decreases.
The impact of size is positive
indicating that
l
arge firms have
higher
leverage
.
Insert table
4 panel B
here
Most of the macroeconomic variables are statistically significant. The coefficient estimates for
GDP per capita and growth are positive, suggesting that as GDP per capita and growth increase,
leverage increases. The coefficient estimate for inflation is negative. The higher the inflation, the
less debt firms have. Interest and tax have no effect on leverage.
Panel B Column 2 shows the result for long term debt. The coefficient estimate for asset
tangibility is positive, implying that firms with more collateral have more long term debt. The
coefficient estimate for profitability is negative. More profitable firms have lower long term debt.
The coefficient estimate for size is positive, suggesting that larger firms have more long term debt.
The impact of macroeconomic variables on long term debt is statistically significant. The
coefficient estimate for GDP per capita, growth and inflation are positive. As GDP per capita,
growth and inflation increase, long term debt increases. The coefficient estimate for interest and
tax are nega
tive. As interest and tax increases, firms borrow less long term debt.
Panel B Column 3 reports the results for short term debt. The coefficient estimate for asset
tangibility and profitability are negative, indicating that as asset tangibility and profi
tability
increase, firms borrow less short term debt. The coefficient estimate for size is positive implying
that
l
arger firms have more short term debt.
16
The impact of macroeconomic variables
is
statistically
significant.
The coefficient estimate for
GDP
per capita and growth are positive, indicating that as GDP per capita and growth increase,
short term debt increases. The coefficient estimate for inflation is negative. As inflation increases,
short term debt decreases. The coefficient estimate for interest and tax are positive, implying that
as interest and tax increase, firms borrow more short term debt.
Most of the macroeconomic variables do not change when we use different size measures. But in
some regression, GDP per capita, interest rate and tax rate become insignificant as opposed to
what we found previously. As GDP per capita increases, leverage and short term debt increases.
Long term debt increases as well if we use total assets as a size proxy whereas GDP per capita
does not have any effect
when we use total sales. The impact of growth and inflation are the same
as what we find in the previous section. As economy grows, firms borrow more. On the other
hand, as inflation increases, leverage and short term debt decrease, but long term debt inc
rease.
The effect of interest and tax are the same for long term and short term debt. But interest and tax
do not have significant effect on leverage.
Hence,
we confirm that our results are robust for different size proxies. Larger firms have higher
leve
rage
and debt maturities
.
The firms in our sample follow the maturity matching principle
so
that they finance their long term assets with long term debt. As profitability increases, leverage,
long term debt and short term debt decrease. Firms follow the pecking order when they finance
their
new
investments.
3.2
.
Are capital structure and debt maturities different for Small, Medium and Large Firms?
Our
second
question is to analyze whether the determinants of capital structure are different for
different firm sizes. We divide the sample into three different firm sizes based on small, medium
and large. Table
5
present the results for the Small, Medium and Large firms.
Table 5 Column 1 shows the results for leverage of small firms. The coefficient estimates for
tangibility is negative. As asset tangibility increases, small firms borrow less. The coefficient
estimate for profitability is negative, indicating that more profitable small firms borrow less. The
macroeconomic factors have also affect on leverage decisions of small firms. The impact of GDP
per capita is positive, suggesting that as countries become richer, more funds become available
and small firms
borrow more. The coefficient estimate for growth is positive. As economy grows,
leverage increases. Inflation has negative coefficient estimate implying that as inflation increases,
17
leverage decreases. Interest has no
effect
on leverage decisions of small firms. The coefficient
estimate for tax is positive, implying that as tax increases, small firms borr
ow more.
Insert table 5
Table 5 Column 2 presents the results for long term debt. The coefficient estimate for asset
tangibility is positive, suggesting that small firms borrow more long term debt as their
tangible
assets
increase. The coefficient estimate for profitability is negative. As profitability increases,
small firms prefer to use internal sources. Macroeconomic variables have significant impact on
the long term debt of small firms. The coefficient estimate for GDP per capita, growth and
inflation
are positive. As GDP per capita, growth and inflation increase, long term debt increases.
The coefficient estimate for interest and tax are negative, indicating that increases in interest and
tax cause long term debt to decrease.
Table 5 Column 3 presents the outcome for short term debt of small firms. The coefficient
estimate for tangibility is negative, suggesting that small firms with more collateral borrow less
short term debt. The coefficient estimate for profitability is negative, indicating that the more
profitable small firms borrow less short term debt. The impact of macroeconomic variables is
statistically significant. The coefficient estimates for GDP per capita and growth are positive,
indicating that as GDP per capita and growth increase, small firms borrow more short term debt.
Inflation has negative coefficient estimate. As inflation increases, short term debt decreases. The
coefficient estimate for interest is positive, suggesting that small firms continue to borrow short
term debt even if the increases in the cost of
borrowing
. The coefficient estimate for tax is
positive. As tax increases, small firms borrow more short term debt.
Table 5 Column 4 shows the results for leverage of medium firms. As small firms, firm level
variables have an inverse impact on leverage of medium firms. The coefficient estimate for
tangibility is negative, indicating that medium firms with more collateral borrow less. The
coefficient estimate for profitability is negative, implying that medium firms with more
profits
prefer internal sources to debt financing. GDP per capita and tax have no impact on the leverage
decisions of medium size firms. The coefficient estimate for growth is positive, indicating that as
economy grows, medium firms borrow more. The coefficient estimate for inflation is negative.
As inflation increases, leverage decreases. The coefficient estimate for interest is positive,
suggesting that medium firms continue to borrow even if the increases in interest.
18
Table
5 Column 5 presents the results for long term
debt
of medium size firms. The coefficient
estimate for tangibility is positive implying that as asset tangibility increases, firms borrow more
long term debt. The coefficient estimate for profitability is negative, indicating that profit
able
medium firms have lower long term debt. Most of the macroeconomic variables are statistically
significant. The coefficient estimate for GDP per capita is negative, indicating that as GDP per
capita increases, long term debt decreases. The coefficient estimate for growth is positive. As
economy grows, medium firms borrow more long term debt. Inflation does not have an impact on
the long term debt decisions of medium firms.
The
coefficient estimate for interest is negative,
suggesting that increases in interest rate induce medium firms to borrow less long term debt. The
coefficient estimate for tax is negative. As tax increases, medium firms borrow more long term
debt.
Table 5 Column 6 shows the estimations for short term debt of medium size firms. Firm level
variables are inversely related to the short term debt. The coefficient estimate for tangibility is
negative, indicating that medium firms with more collateral borrow less short term debt. The
coefficient estimate for profitability is negative. As profitability increases, short term debt
decreases. The impact of macroeconomic variables is statistically significant. The coefficient
estimates for GDP per capita and growth are positive. As GDP per capita and growth increase,
medium firms borrow more short term debt. The coefficient estimate for inflation is negative,
indicating that increases in inflation cause to decrease in short term debt for medium firms. The
coefficient estimate for interest is positive, suggesting that medium firms continue to borr
ow
short term debt in spite of the increases in interest rate. The coefficient estimate for tax is positive,
implying that as tax increases, medium firms borrow more short term debt.
Table 5 Column 7 presents the coefficient estimates for leverage of large firms. The coefficient
estimate for asset tangibility is negative, indicating that large firms with more collateral have less
leverage. The coefficient estimate for profitability is negative, suggesting that more profitable
large firms have lower leverage. Most of the macroeconomic variables do not have an impact on
the leverage decisions of large firms. GDP per capita, growth and inflation do not affect the
leverage. The coefficient estimate for interest is positive, implying that as interest increases,
leverage increases. The coefficient estimate for tax is positive, indicating that as tax increases,
large firms borrow more.
19
Table 5 Column 8 shows the outcome for long term debt of large firms. The coefficient estimate
for asset tangibility is positive, suggesting that as tangible assets increase, large firms borrow
more long term debt. The coefficient estimate for profitability is negative. The more profitable
large firms have lower long term debt. The impact of the most macroeconomic variables is not
significant. Only the coefficient estimate for growth is positive, indicating that as economy grows,
large firms increase their long term debt financing. GDP per capita, inflation, interest and tax do
not have any impact on long term debt financing decisio
ns of large firms.
Table 5 Column 9 presents the results for short term debt of large firms. The coefficient estimate
for tangibility is negative, indicating that large firms with more collateral borrow less short term
debt. Profitability does not have any impact on short term debt financing decisions of large firms.
Also GDP per capita and inflation do not affect the short term debt financing decisions.
The
coefficient estimate for growth is negative, suggesting that large firms borrow less as economy
gro
ws. The coefficient estimate for interest is positive, indicating that large firms continue short
term debt financing even if the increases in interest rate. The coefficient estimate for tax is
positive, implying that as tax increases, large firms borrow m
ore short term debt.
Therefore, according to our sample the determinants of capital structure show some differences
among small and medium size enterprises and large firms. Collateral is important for all types of
firms to access debt financing and they follow the maturity matching principle. Also the firms
follow the pecking order; therefore, they choose to be financed internally first. However, for short
term debt financing, profitability does not have any impact for small and large firms. But overall,
firm level variables have the same affect on debt financing decisions of all sizes of firms. On the
other hand, the effect of macroeconomic variables shows differences among small, medium and
large firms. Large firms have access to both domestic and international financial markets;
therefore, the changes in economic environment of the country do not affect them as much as
small firms. GDP per capita and inflation do not affect their leverage
and debt maturity
decisions.
They do not consider the changes in interest rate and tax for their long term debt financing
decisions.
Only economic growth of the country has an impact on the long term debt financing
decisions of large firms. On the other hand, small firms decisions about debt financing are
also
depended
on the changes in economic environment of the country.
20
3.
3.
Are capital structure and debt maturities of listed and private firms different?
To answer our
third
question whether the
listed
and
private
firms have the same determinants of
capital structure, we split our sample into two sub-samples based on the firms which are listed
and privately held.
Table
6 shows the regressions for leverage and debt maturities of listed and
private
companies
.
Table
6 Column 1 presents the results for leverage of listed firms. The coefficient estimate for
asset tangibility is negative, indicating that listed firms with more collateral have lower debt. The
profitability do
es
not have an effect on leverage decisions of listed firms.
The coefficient estimate
for small is negative, suggesting that smaller listed firms have lower leverage. On the other hand,
being a larger firm does not affect the leverage decisions of listed firms. Some of the
macroeconomic variables are statistically significant. The coefficient estimates for GDP per
capita and growth are positive, indicating that as GDP per capita and growth increases, listed
firms borrow more. On the other hand, inflation, interest and tax do not have significant impact
on the leverage decisions of listed firms.
Insert t
a
ble
6
here
Table 6 Column 2 shows the outcome for long term debt of listed firms. Firm level variables do
not affect the long term debt financing decisions of listed firms. The coefficient estimates for
tangibility, profitability and large are not statist
ically significant. Only the coefficient estimate for
small is negative,
indicating
that being a smaller
listed
firm causes to have less long term debt.
The impact of macroeconomic variables, except interest, on long term debt financing of listed
firms is
statistically significant. The coefficient estimate for GDP per capita is positive, indicating
that
as country becomes richer, listed firms
are
financed by more long term debt. The coefficient
estimate for growth is positive, suggesting that as economy gro
ws, listed firms increase their long
term debt financing. The coefficient estimate for inflation is negative. As inflation increases, long
term debt decreases. Interest does not have an impact on the long term debt financing decisions of
listed firms. The
coefficient estimate for tax is positive, suggesting that listed firms use more long
term debt financing as tax rate increases.
Table 6 Column 3 presents the results for short term debt of listed firms. The coefficient estimate
for asset tangibility is n
egative. Listed firms with more tangible assets have lower short term debt.
Profitability does not affect the short term debt financing decisions of listed firms. The coefficient
estimate for small is negative, implying that as smaller the firm, the less s
hort term debt they have.
Large f
irms do not have an impact on short term debt of listed firms.
Also
not all macroeconomic
21
variables affect the short term debt of listed firms. The GDP per capita, growth and interest are
not statistically significant, indicating that they do not influence the short term debt financing
decisions
. The coefficient estimate for inflation is positive, suggesting that listed firms borrow
more in spite of increases in inflation. The coefficient estimate for tax is negative,
implyi
ng
that
as tax increases, listed firms borrow less short term debt.
Table 6
Column
4 shows the estimations for leverage of private firms. As opposed to listed firms,
all firm level variables are statistically significant. The coefficient estimates for asset tangibility
and profitability are negative, suggesting that as tangibility and profitability increase, private
firms borrow less.
The coefficient estimate for small is negative, while the coefficient estimate for
large is positive. As firms get larger, private firms borrow more. Macroeconomic variables have
also impact on leverage decisions of private firms. The coefficient estimate for GDP per capita
and growth are positive, suggesting that as GDP per capita and growth increase, leverage
increases. Inflation does not influence the leverage decisions of private firms. The coefficient
estimate for interest is positive, indicating that private firms borrow more even if the interest
increases. The coefficient estimate for tax is negative, suggesting that as tax increases, leverage
increases.
Table 6 Column 5
presents the results for long term debt of private firms. The coefficient estimate
for asset tangibility is positive, suggesting that private firms borrow more long term debt as they
have more collateral. The coefficient estimate for profitability is negative. As profitability
increases, long term debt decreases. The coefficient estimate for small is negative while the
coefficient estimate for large is positive. As firms get larger, private firms borrow more. Most
macroeconomic variables have impact on long term debt decisions of private firms.
The
coefficient estimates for GDP per capita and growth are positive, implying that GDP per capita
and growth increase, private firms borrow more long term debt. The coefficient estimates for
inflation and interest are negative, suggesting that as inflation and interest increase, private firms
borrow less long term debt. Tax does not have any impact on long term debt financing decisions
of
private
firms.
Table
6
Column
6
shows the results for short term debt financing of private firms. The coefficient
estimates for asset tangibility and profitability are negative. As asset tangibility and profitability
increase, short term debt decreases. The coefficient estimate for small is negative while the
coefficient estimate for large is positive. As firms get larger, private firms have more short term
22
debt financing. Macroeconomic variables, except tax, have an effect on the short term debt
financing decisions of private firms. The coefficient estimates for GDP per capita, growth,
inflation and interest are positive. As GDP per capita, growth, inflation and interest increase,
private firms borrow more short term debt. Tax does not have any effect on short term debt
financing
decisions of private firms.
Therefore, according to our sample the determinants of capital structure show some differences
for private and listed companies. Some of the firm level variables are not considered by listed
firms for the capital structure decision. Listed firms do not consider collateral for long term debt
financing, while private firms follow the maturity matching principle. Profitability of the firm
does not have any impact on debt financing for listed firms. But private firms follow pe
cking
order. As firm size increases, leverage and debt maturities increase for private firms; however, it
has no effect on listed firms. Being small firms affect leverage and debt maturities negatively for
both private and listed firms. GDP per capita and growth do not have any effect on short term
debt financing decisions for listed firms. However, for private firms, as GDP per capita and
growth rate increase, short term debt financing increases. Both types of firms react inflation same
way. On the other hand, listed firms do not consider interest rate for the debt financing decisions
as opposed to private firms. Tax has different impact on debt financing decisions of private and
listed companies. For private firms, as tax increases, leverage increases; whe
reas it does not affect
long term or short term borrowing. For listed firms, as tax increase, long term debt financing
increase, while short term decrease but it does not affect the leverage. So, listed firms increase
their long term borrowing to take adva
ntage of tax shields.
4
. Conclusion
This paper examines the determinants of capital structure decisions of firms in
developing
countries
. Previous research is mainly focus on the large listed firms covering small number of
countries. We discuss the capital structure decisions of firms in developing markets covering 25
countries from different regions. In contrast to early studies, our main focus is on the small
firms
because their contribution to the GDP is higher than large firms and they comprise the ma
jority of
firms in developing countries. We analyze whether the determinants of capital structure show
differences among small, medium and large firms and we examine whether the determinants of
capital structure are same for listed and private firms. We use database which has
not
been used
for the examination of the capital structure, before.
23
We draw the following major conclusions from the results. Regardless of how the
firm defines,
in
accordance with the capital structure theory, the importance of firm level variables, such as
tangibility and
profitability
is
confirmed. According to the results, private, small, medium and
large firms follow the maturity matching principle and pecking order on their debt financing
decisions. But listed firms prefer equity financing to long term debt financing. Moreover, internal
funds do not have an impact on the debt financing decisions.
Another major finding is the size effect. We see different responses from small and large firms
towards debt financing. As firms become larger, they become more diversified and risk of failure
is reduced as a result of that they can have higher leverage. Based on our results, small and large
companies have different debt policies. Due to the information asymmetries, small firms have
lim
ited access to finance; therefore, they face higher interest rate costs. Also, they are financially
more risky compared to large firms. As a result of that, small companies have restricted access to
debt financing which may influence their growth.
Econom
ic environment of the countries have influenced the debt decisions of firms differently.
Since large and listed firms can have easily access to both the domestic and the international
financial markets, their financing decisions are not influenced by the economic conditions of the
country as much as the small, medium and private firms. For instance, large firms do not consider
most of the macroeconomic factors for their long term debt financing decisions. The environment
is important for short term borrowin
g.
We find differences in the capital structure decisions of listed and
private
firms
and small and
large companies. Large and listed companies can have easily access to finance in developing
countries; whereas, for small and private firms, access to finance is more depended on the
conditions of economic environment of the country.
24
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29
Abbreviations
EBT
Earnin
gs before tax
EBT/TA
Profitability (earnings before tax to total assets)
GDP
/Cap
Gross domestic product per capita
Growth
Growth of GDP
Interest
Lending interest rate
Large
Large companies (more than 500 employees)
LTDEBT
Long Term Liabilities to
Total assets
NFA/TA
Tangibility (fixed assets to total assets)
Sale
Total Sales
Small
Small companies (less than 50 employees)
SMEs
Small and medium size enterprises
STDEBT
Short Term Liabilities to Total assets
TA
Total Assets
Tax
Corporate
tax rate
30
Appendices
Our sample contains 25 emerging market countries from 5 different regions, which are Eritrea,
Ethiopia, Malawi, South Africa, Tanzania, Zambia from Africa region; Cambodia, Indonesia,
Philippines from East Asia and Pacific; Brazil, Chile, Ecuador, El Salvador, Guatemala, Guyana,
Honduras, Nicaragua, Peru from Latin America and Caribbean; Morocco, Oman, Syrian Arab
Republic from Middle East and North Africa; Bangladesh, India, Pakistan and Sri Lanka from
South Asia. Tho
se countries are selected because the data for firm level variables are only
available for those countries.
The countries included in our sample are different from the previous studies. Most of the
countries are low income and lower middle income countries from different regions. Since they
are emerging market countries, their economic environment is different than developed countries.
31
Table 1
Descriptive Statistics
The tables show descriptive statistics for firm specific variables and macro variables. Panel A presents
descriptive statistics for all firms included in the sample. Panel B presents the comparative descriptive
statistics
for all firms,
private
, listed, small, medium and large
. Listed are the firms which are publicly held.
P
rivate
are the firms which are privately owned. Small is small firms which has less than 50 employees.
Medium is medium size firms which employs 50 to 500 people. Large is large firms which have more than
500 employees. The firm specific variables are as follows: Leverage is the ratio of total liabilities to total
asset. Ltdebt is the ratio of long term liabilities to total assets. Stdebt is the ratio of short term liabilities to
total assets. Tangibility is measured as net fixed assets to total assets. Profitability is calculated as the
earnings before tax divided by total assets. Small and Large are included as dummy variables to proxy for
size. If the firm employs less than 50 employees, small takes the value of 1, otherwise 0. Large takes the
value of 1 if the firm has more than 500 employees, otherwise 0. GDP/Cap is GDP per capita in U.S.
dollars. Growth is the annual growth rate of GDP. Inflation is measured based on GDP deflator. Interest is
the lending rate. Tax is the highest tax rate shown on the sc
hedule of tax rates applied to the taxable income
of corporations. ALL is abbreviation for the whole sample.
Panel A: Descriptive Statistics for all firms
Mean
Median
Maximum
Minimum
Std. Dev.
Observations
Leverage
0.3910
0.3774
1.0000
0.0000
0.
2974
27826
Ltdebt
0.1401
0.0254
0.9973
0.0000
0.1989
27297
Stdebt
0.2495
0.1826
0.9995
0.0000
0.2477
27297
Tangibility
0.4521
0.4409
1.0000
0.0000
0.2722
27153
Profitability
0.3396
0.1957
6.8096
-
4.0425
0.7031
27125
Small
0.4812
0.0000
1.0000
0.0000
0
.4997
27826
Large
0.1087
0.0000
1.0000
0.0000
0.3113
27826
GDP/Cap
1693.6
996.1
8961.5
120.8
1569.7
27826
Growth
0.0326
0.0307
0.0804
0.0015
0.0155
27826
Inflation
0.0697
0.0620
0.3082
-
0.0704
0.0634
27826
Interest
0.2127
0.1369
0.6288
0.0618
0.1707
2
7738
Tax
0.2964
0.3000
0.4500
0.1200
0.0919
27826
Panel B: Comparative means for different types and size of firms
All
Private
Listed
Small
Medium
Large
Leverage
0.3910
0.3681
0.4423
0.3065
0.4600
0.5049
Ltdebt
0.1401
0.1411
0.2004
0.0961
0.1718
0.2
139
Stdebt
0.2495
0.2254
0.2431
0.2076
0.2869
0.2921
Tangibility
0.4521
0.4664
0.4444
0.4816
0.4280
0.4144
Profitability
0.3396
0.3589
0.3087
0.3048
0.3525
0.4460
Small
0.4812
0.5073
0.2594
NA
NA
NA
Large
0.1087
0.0960
0.2753
NA
NA
NA
GDP
/Cap
1693.6
1758.7
1293.4
1775.5
1715.6
1248.3
Growth
0.0326
0.0323
0.0322
0.0309
0.0338
0.0356
Inflation
0.0697
0.0751
0.0685
0.0714
0.0681
0.0688
Interest
0.2127
0.2245
0.1682
0.2201
0.2148
0.1719
Tax
0.2964
0.2911
0.3031
0.2895
0.2983
0.3196
No. of Obs
27826
2
3365
2452
13389
11412
3025
32
Table 2
Correlations Matrix of Variables
This table presents the Pearson correlations of firm-specific and macro variables. Leverage is the ratio of total liabilities to total asset. Ltdebt is the ratio of long term
liabilities
to total assets. Stdebt is short term liabilities to total assets. Tangibility is measured as net fixed assets to total assets. Profitability is calculated as the earnings
before tax divided by total assets. Small and Large are included as dummy variables to proxy for size. If the firm employs less than 50 employees, small takes the value of 1,
otherwise 0. Large takes the value of 1 if the firm has more than 500 employees, otherwise 0. GDP/Cap is the GDP per capita in U.S. dollars. Growth is the annual gr
owth
rate of GDP. Inflation is measured based on GDP deflator. Interest is the lending rate. Tax is the highest tax rate shown on the schedule of tax rates applied to the taxable
income of corporations.
Correlation
Leverage
Ltdebt
Stdebt
Tangibility
Profi
tability
Small
Large
GDP per capita
Growth
Inflation
Interest
Tax
Leverage
1.0000
Ltdebt
0.5650***
1.0000
Stdebt
0.7482***
-
0.1212***
1.0000
Tangibility
-
0.2317***
0.0245***
-
0.3031
***
1.0000
Profitability
-
0.0521***
-0.0406***
-
0.0305
***
-
0.0141**
1.0000
Small
-
0.2736***
-0.2124***
-
0.1621
***
0.1034
***
-
0.0477
***
1.0000
Large
0.1337***
0.1301***
0.0603
***
-
0.0485
***
0.0526
***
-
0.3363
***
1.0000
GDP
/Cap
0.0601***
-
0.0585
***
0.1232
***
-
0.1316
***
-
0.0046
0.0502
***
-
0.0991
***
1.0000
Growth
0.0702***
0.1741
***
-
0.0522
***
-
0.0190
***
-
0.0109
* -
0.1066
***
0.0672
***
-
0.4360
***
1.0000
Inflation
-
0.0720***
-
0.0546
***
-
0.0456
***
0.0463**
*
0.0279
***
0.0247
***
-
0.0054
-
0.0039
-
0.3708
***
1.0000
Interest
0.0009
-
0.1102
***
0.0920
***
0.0162
***
0.0619
***
0.0418
***
-
0.0834
***
0.4207
***
-
0.4489
***
0.2385
***
1.0000
Tax
-
0.0245***
0.0700
***
-
0.0849
***
0.0470
***
-
0.0133**
-
0.0718
***
0.0882
***
-
0.8085
***
0.4607
***
0.0062
-
0.6104
***
1.0000
33
Table 3
Leverage
and Debt Maturities
The table shows regressions of leverage, long term debt and short term debt on firm specific and
macroeconomic variables. We estimate regressions by using OLS estimators with fixed effects
corrected with white standard errors. Column 1 shows the regression for leverage, Column 2 presents
the results for long term debt and Column 3 is for short term debt. Firm specific factors are as follows:
Tangibility is measured as net fixed assets to total assets. Profitability is the earnings before tax to total
assets. Small takes the value 1 if the firm employs less than 50 employees, otherwise 0. Large takes the
value of 1 if the firm has more than 500 employees, otherwise 0. Macroeconomic variables are as
follows: GDP
/Cap
is the natural logarithm of GDP per capita in U.S. dollars. Growth is the annual
growth rate of GDP. Inflation is measured based on GDP deflator. Interest is based on the annual
lending rate. Tax is the highest tax rate shown on the schedule of tax rates applied to the taxable
income of corporations. p-values are in parentheses. The reported R² is the adjusted R². Standard errors
are in parentheses. *** indicates level of significance at 1%, ** level of significance at %5, and * level
of significance at 10%.
Leverage
Ltdebt
Stdebt
Constant
0.1584***
0.0913***
-
0.0535
(0.045)
(0.031)
(0.039)
Tangibility
-
0.2031***
0.0427***
-
0.2492***
(0.010)
(0.007)
(0.008)
Profitability
-
0.0261***
-
0.0129***
-
0.01
27***
(0.004)
(0.003)
(0.003)
Small
-
0.1352***
-
0.0714***
-
0.0645***
(0.006)
(0.004)
(0.005)
Large
0.0597***
0.0443***
0.0193**
(0.009)
(0.007)
(0.008)
GDP
/Cap
0.0361***
0.0072**
0.0398***
(0.004)
(0.003)
(0.004)
Growth
2.6768***
2.4226***
0.4829**
(0.234)
(0.160)
(0.192)
Inflation
-
0.1567***
0.0796***
-
0.2065***
(0.033)
(0.021)
(0.030)
Interest
0.1164***
-
0.1012***
0.2397***
(0.020)
(0.014)
(0.017)
Tax
0.1413***
-
0.1626***
0.4011***
(0.045)
(0.029)
(0.038)
Observations
26415
25931
25931
R2
0.1484
0.0885
0.1528
34
Table 4
Leverage and Debt Maturities with different size proxies
The table shows regressions of leverage, long term debt and short term debt on firm specific and
macroeconomic variables by using different size proxy. Panel A presents the regression with the
logarithm of sales and Panel B includes logarithm of assets. We estimate regressions by using OLS
estimators with fixed effects corrected with white standard errors. Column 1 shows the regression for
leverage, Column 2 presents the results for long term debt and Column 3 is for short term debt. Firm
specific factors are as follows: Tangibility is measured as net fixed assets to total assets. Profitability is
the earnings before tax to total assets. Size is measured as the logarithm of total sales. Macroeconomic
variables are as follows: GDP/Cap is the natural logarithm of GDP per capita in U.S. dollars. Growth is
the annual growth rate of GDP. Inflation is measured based on GDP deflator. Interest is based on the
annual lending rate. Tax is the highest tax rate shown on the schedule of tax rates applied to the taxable
income of corporations. p-values are in parentheses. The reported R² is the adjusted R². Standard errors
are in parentheses. *** indicates level of significance at 1%, ** level of significance at %5, and * level
of significance at 10%.
Panel A: Leverage and Debt Maturity with size proxy: sale
Leverage
Ltdebt
Stdebt
Constant
-
0.1255
***
-
0.0239
-
0.1955
***
0.046
0.032
0.038
Tangibility
-
0.2032
***
0.0388
***
-
0.2456
***
0.010
0.007
0.008
Profitability
-
0.0281
***
-
0.0128
***
-
0.0149
***
0.004
0.003
0.003
Size
0.0243
***
0.0100
***
0.0143
***
Sale
0.001
0.001
0.001
GDP/Cap
0.0317
***
0.0045
0.0356
***
0.005
0.003
0.004
Growth
4.0565
***
3.0590
***
1.2040
***
0.238
0.162
0.189
Inflation
-
0.0594
*
0.1208
***
-
0.1533
***
0.034
0.022
0.030
Interest
-
0.0094
-
0.1567
***
0.1637
***
0.022
0.015
0.018
Tax
-
0.1181**
-
0.2734
***
0.2285
***
0.048
0.032
0.040
Observations
26388
25910
25910
R2
0.1248
0.0597
0.1536
35
Panel
B
: Leverage and Debt Maturity with size proxy:
as
se
t
Leverage
Ltdebt
Stdebt
Constant
-
0.1320
***
-
0.0401
-
0.1818
***
0.046
0.032
0.038
Tangibility
-
0.2126
***
0.0365
***
-
0.2531
***
0.010
0.007
0.008
Prof
itability
-
0.0131
***
-
0.0059**
-
0.0068**
0.004
0.003
0.003
Size
0.0208
***
0.0106
***
0.0100
***
Asset
0.001
0.001
0.001
GDP/Cap
0.0361
***
0.0056
*
0.0387
***
0.004
0.003
0.004
Growth
3.9991
***
3.0989
***
1.0986
***
0.241
0.162
0.191
Inflation
-
0.0672**
0.1238
***
-
0.1659
***
0.034
0.022
0.030
Interest
0.0228
-
0.1528
***
0.1934
***
0.022
0.014
0.018
Tax
-
0.0587
-
0.2767
***
0.2929
***
0.048
0.032
0.041
Observations
26415
25931
25931
R2
0.1146
0.0618
0.1436
36
Table 5
Leverage, Long term debt and Short term debt for small firms
The table shows regressions of leverage, long term debt and short term debt on firm specific and macroeconomic variables. We estimate regressions by using OLS estimators with fixed effects
corre
cted with white standard errors. Column 1 shows the regression for leverage, Column 2 presents the results for long term debt and Column 3 is for short term debt. Firm specific factors are
as follows: Tangibility is measured as net fixed assets to total assets. Profitability is the earnings before tax to total assets. Small takes the value 1 if the firm employs less than 50 employees,
otherwise 0. Large takes the value of 1 if the firm has more than 500 employees, otherwise 0. Macroeconomic variables are as follows: GDP/Cap is the natural logarithm of GDP per capita in
U.S. dollars. Growth is the annual growth rate of GDP. Inflation is measured based on GDP deflator. Interest is based on the annual lending rate. Tax is the highest tax rate shown on the
sched
ule of tax rates applied to the taxable income of corporations. p-values are in parentheses. The reported R² is the adjusted R². Standard errors are in parentheses. *** indicates level of
significance at 1%, ** level of significance at %5, and * level of s
ignificance at 10%.
SMALL FIRMS
MEDIUM FIRMS
LARGE FIRMS
Leverage
Ltdebt
Stdebt
Leverage
Ltdebt
Stdebt
Leverage
Ltdebt
Stdebt
Constant
-
0.1759***
-
0.0644*
-
0.3190***
0.5184***
0.4153***
0.1096
0.3843**
0.2354*
0.2581*
-
0.061
-
0.038
-
0.049
-
0.078
-
0.064
-
0.074
-
0.169
-
0.135
-
0.145
Tangibility
-
0.2190***
0.0192**
-
0.2456***
-
0.2071***
0.0597***
-
0.2684***
-
0.1047***
0.0924***
-
0.1988***
-
0.013
-
0.008
-
0.011
-
0.017
-
0.013
-
0.015
-
0.033
-
0.028
-
0.029
Profitability
-
0.0124***
-
0.0063**
-
0.0052
-
0.0478***
-
0.0237***
-
0.0243***
-
0.0273**
-
0.0187**
-
0.0097
-
0.005
-
0.003
-
0.004
-
0.006
-
0.005
-
0.005
-
0.012
-
0.008
-
0.01
GDP/Cap
0.0683***
0.0256***
0.0619***
-
0.0096
-
0.0304***
0.0198***
-
0.002
-
0.0168
0.0051
-
0.006
-
0.004
-
0.005
-
0.007
-
0.006
-
0.007
-
0.016
-
0.013
-
0.013
Growth
2.1861***
1.3215***
1.2973***
3.7980***
3.3478***
0.5237*
0.2465
1.4370***
-
1.1957**
-
0.373
-
0.249
-
0.283
-
0.36
-
0.237
-
0.309
-
0.671
-
0.512
-
0.601
Inflation
-
0.2137***
0.0896***
-
0.2535***
-
0.2063***
0.0509
-
0.2675***
0.1491
0.044
0.0826
-
0.047
-
0.027
-
0.043
-
0.055
-
0.04
-
0.051
-
0.121
-
0.104
-
0.099
Interest
0.0419
-
0.1585***
0.2319***
0.1625***
-
0.1077***
0.2761***
0.2493***
0.0457
0.1863***
-
0.03
-
0.019
-
0.025
-
0.031
-
0.022
-
0.027
-
0.071
-
0.053
-
0.057
Tax
0.1856***
-
0.1320***
0.4752***
-
0.1046
-
0.4623***
0.3520***
0.4333**
0.0192
0.3013*
-
0.058
-
0.034
-
0.05
-
0.084
-
0.064
-
0.077
-
0.209
-
0.155
-
0.169
Observations
12625
12329
12329
10925
10766
10766
2865 2836 2836
R2
0.1166
0.0311
0.1675
0.0818
0.0902
0.1225
0.020
6
0.0423
0.049
37
Table
6
Leverage and Debt Maturities
for listed
and private
firms
The table shows regressions of leverage, long term debt and short term debt on firm specific and
macroeconomic variables
for listed and private firms
. We estimate regression
s by using OLS estimators
with fixed effects corrected with white standard errors. Firm specific factors are as follows: Tangibility
is measured as net fixed assets to total assets. Profitability is the earnings before tax to total assets.
Small takes the value 1 if the firm employs less than 50 employees, otherwise 0. Large takes the value
of 1 if the firm has more than 500 employees, otherwise 0. Macroeconomic variables are as follows:
GDP/Cap is the natural logarithm of GDP per capita in U.S. dollars. Growth is the annual growth rate
of GDP. Inflation is measured based on GDP deflator. Interest is based on the annual lending rate. Tax
is the highest tax rate shown on the schedule of tax rates applied to the taxable income of corporations.
p-values are in parentheses. The reported R² is the adjusted R². Standard errors are in parentheses. ***
indicates level of significance at 1%, ** level of significance at %5, and * level of significance at 10%.
LISTED FIRMS
PRIVATE FIRMS
Leverage
Ltdebt
Stdebt
Leve
rage
Ltdebt
Stdebt
Constant
0.3644***
-
0.2498***
0.6080***
0.2643***
-
0.0365
0.1807***
-
0.115
-
0.089
-
0.11
-
0.052
-
0.035
-
0.042
Tangibility
-
0.1436***
0.0045
-
0.1549***
-
0.1839***
0.0246***
-
0.2122***
-
0.037
-
0.032
-
0.03
-
0.011
-
0.008
-
0.009
Prof
itability
-
0.0123
-
0.0037
-
0.0056
-
0.0220***
-
0.0163***
-
0.0056*
-
0.013
-
0.012
-
0.011
-
0.004
-
0.003
-
0.003
Small
-
0.1355***
-
0.0883***
-
0.0513***
-
0.1434***
-
0.0698***
-
0.0743***
-
0.022
-
0.019
-
0.019
-
0.006
-
0.004
-
0.005
Large
-
0.0193
-
0.0199
0.003
4
0.0910***
0.0449***
0.0492***
-
0.022
-
0.018
-
0.019
-
0.01
-
0.008
-
0.009
GDP/Cap
0.0278**
0.0432***
-
0.0152
0.0247***
0.0174***
0.0179***
-
0.012
-
0.009
-
0.012
-
0.005
-
0.003
-
0.004
Growth
1.9098***
2.4953***
-
0.5733
2.8812***
2.6832***
0.4645**
-
0.714
-
0.514
-
0.566
-
0.258
-
0.177
-
0.209
Inflation
0.0287
-
0.0889*
0.1165**
0.0553
-
0.0431*
0.1324***
-
0.057
-
0.05
-
0.058
-
0.037
-
0.025
-
0.03
Interest
0.0085
0.0147
0.0008
0.0997***
-
0.0526***
0.1757***
-
0.077
-
0.055
-
0.06
-
0.022
-
0.015
-
0.018
Tax
-
0.2013
0.3591***
-
0.5478***
-
0.0933*
0.0387
-
0.0338
-
0.133
-
0.094
-
0.108
-
0.051
-
0.034
-
0.038
Observations
2311
2148
2148
22100
21779
21779
R2
0.0961
0.0813
0.0718
0.1517
0.096
0.1463
