Working Paper Series, April 28, 2004.
AUTHOR:
Stein Frydenberg
ABSTRACT:
Under rational expectations, one may interpret a normal capital structure, contingent on variables that differ among firms, as an optimal capital structure. The firms are rational if they adjust to this common normalized capital structure since this norm minimizes the cost of financing. Estimating parameters in this normal capital structure I find that the determinants of capital structure are fixed assets, size, growth, taxes, return on assets and industry category.
This study contributes by analyzing the maturity structure in Norwegian non-listed firms. Using a large sample panel data facilitates use of panel data techniques to wipe out unobserved firm heterogeneity that may bias the estimates of the parameters of interest. Robust estimates of standard deviation are also provided. The new findings of this study compared to previous studies are that only the fixed assets seem to have any economic significance as measured by the elasticity between debt and fixed assets. The other variables are statistically significant, however, they do not have a non-trivial magnitude of the elasticities.
This study confirms the common belief that the asymmetric information about returns and expected bankruptcy costs have negative effects on the debt-ratio while agency cost of management, asymmetric information about risk and the tax shelter effects of debt financing are increasing the leverage of the firms. The tax effect is controversial since the Norwegian tax systems have been known to treat debt and equity neutrally. The inefficiency of debt financing of growth firms is not supported in the sample, except for the finding that growth firms have more short term debt.
Keywords: Determinants, Corporate, Capital, Structure, Norwegian, Manufacturing, Firms
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