Debt by Design: Exploring Market Forces Behind Leverage in Two Economies

PurposeThe purpose of this paper is to investigate the factors affecting capital structure decisions of Istanbul Stock Exchange (ISE) lodging companies.Design/methodology/approachA model based on the trade‐off and pecking order theories is specified and implications of both theories are empirically tested. The model is estimated using a dynamic panel data approach for five ISE companies for the period of 1994‐2006.FindingsThe findings suggest that effective tax rates, tangibility of assets, and return on assets are related negatively to the debt ratio, while free cash flow, non‐debt tax shields, growth opportunities, net commercial credit position, and firm size do not appear to be related to the debt ratio. Although the findings partially support the pecking order theory, neither the trade‐off nor the pecking order theory exactly seem to explain the capital structure of Turkish lodging companies.Research limitations/implicationsThe data used in this paper are limited to five companies traded in the ISE, since the data on other companies are not available. A more detailed analysis would use data for other companies in the industry.Practical implicationsThe findings of the study clearly demonstrate the importance of capital structure decisions for financial sources.Originality/valueAlthough the capital structure theory is extensively examined in the finance literature, there are fewer studies covering the tourism industry, particularly Turkey. The paper establishes the determinants of the capital structure of Turkish lodging companies. The research findings should help managers to make optimal capital structure decisions.

PurposeMotivated by the agency theory, this study aims to empirically examine the nexus between board attributes and a firm’s financing decisions of non-financial listed firms in Palestine and how the previous relationship is moderated and shaped by the level of gender diversity.Design/methodology/approachMultiple regression analysis on a panel data was used. Further, we applied three different approaches of static panel data “pooled OLS, fixed effect and random effect.” Fixed-effects estimator was selected as the optimal and most appropriate model. In addition, to control for the potential endogeneity problem and to profoundly analyze the study data, the authors perform the one-step system generalized method of moments (GMM) estimator. Dynamic panel GMM specification was superior in generating robust findings.FindingsThe findings clearly unveil that all explanatory variables in the study model have a significant influence on the firm’s financing decisions. Moreover, the results report that the impact of board size and board independence are more positive under conditions of a high level of gender diversity, whereas the influence of CEO duality on the firm’s leverage level turned from negative to positive. In a nutshell, gender diversity moderates the effect of board structure on a firm’s financing decisions.Research limitations/implicationsThis study was restricted to one institutional context (Palestine); therefore, the results reflect the attributes of the Palestinian business environment. In this vein, it is possible to generate different findings in other countries, particularly in developed markets.Practical implicationsThe findings of this study can draw responsible parties and policymakers’ attention in developing countries to introduce and contextualize new mechanisms that can lead to better monitoring process and help firms in attracting better resources and establishing an optimal capital structure. For instance, entities should mandate a minimum quota for the proportion of women incorporation in boardrooms.Originality/valueThis study provides empirical evidence on the moderating role of gender diversity on the effect of board structure on firm’s financing decisions, something that was predominantly neglected by the earlier studies and has not yet examined by ancestors. Thereby, to protrude nuanced understanding of this novel and unprecedented idea, this study thoroughly bridges this research gap and contributes practically and theoretically to the existing corporate governance–capital structure literature.

A large body of theoretical literature suggests that capital structure plays an important role as a managerial incentive mechanism. What of the evidence for the agency approach? Cross‐sectional empirical studies have identified a positive effect of leverage on expected performance (measured by Q) for firms with low growth opportunities. However, this evidence does not take into account the endogeneity of capital structure decisions. Our paper investigates the determinants of capital structure and performance, allowing for endogeneity and dynamics. Our results suggest that conclusions reached by previous studies which did not take into account the endogeneity issue should be treated with caution.

The paper aims to investigate the factors affecting firm capital structure in the context of Vietnam. The research sample includes 290 non-financial listed companies on Vietnamese stock market. This study applied Generalized Method of Moments (GMM) to explain the research results. The paper investigates six factors influencing on firm capital structure including return on assets (ROA), return on equity (ROE), firm size, tangible assets, risks, and growth. The empirical results show that return on assets, tangible assets, risks, and growth have a statistically significant positive effect on the firm capital structure while return on equity has a statistically significant negative effect on the firm capital structure. In addition, when dividing companies into sectors, the study realized that determinants of capital structure in some sectors are consistent with results for entire sample. Finally, firm size has the same impact on capital structure in oil & gas companies and material companies whereas it is not statistically significant for other companies. These evidences provide a new insight to managers on how to determine the reasonable capital structure.

This paper identifies factors determining capital structure and estimates the speed at which firms adjust to optimal debt in Malaysian and Indonesian manufacturing firms. It uses the difference Generalized Method of Moments (GMM) estimator and the partial adjustment model in a sample of 141 Malaysian and 96 Indonesian firms, which include many of the major manufacture companies in these economies. The results suggest the existence of dynamic capital structure in both countries, but differences in adjustment speed towards optimal debt and factors affecting the optimal debt levels are evident between these countries. Firm-specific factors such as tangibility of assets, non-debt tax shield, and profitability significantly affect optimal debt in both countries. However, most countryspecific factors are insignificant determinants, GDP in Malaysia being the sole exception. The findings of this study are helpful for corporate managers, policymakers, and regulatory authorities in monitoring the amount of debt used by the firms and their adjustment speed towards target debt to avoid the bankruptcies. Financial reforms can be worked out in these economies to better support the firms in use of optimal debt.

Firm-specific considerations impact decisions about capital structure. A few investigations have been done in Pakistan's oil and gas sector. Most studies have examined the effect on non-financial firms and the textile industry. As this sector is very attractive for investors, The influences on capital structure decisions must be considered. In this study, only firm-specific factors are considered for analysis. The effect of asset structure, financial distress (earning volatility), non-debt tax shield, liquidity, firm size, profitability, and firm growth on capital structure decisions are examined. For this, data ranging from 2007 – 2021 of the firms working in Oil and Gas sector of Pakistan was used. The pool regression approach was applied. As per the results, tangibility and liquidity have an inverse relationship; non-debt tax shields and firm size directly affect profitability, and growth does not impact the capital structure.

Capital structure plays a critical role which enables manufacturing firms address the dilemma of whether or not an optimal capital structure can be achieved. The total capital of a firm is composed of both debt and equity which makes up firm’s capital structure. The capital structure of manufacturing firms is made up of a combination of internal financing and external financing of the firm. Internal financing composed of equity, preference share capital and shareholder's funds and external financing composed of long term debt and short term debt of the firm. Internal financing using profits as a source of capital for new investment rather than obtaining capital elsewhere distributed as dividends to firm's owners or other investors. External financing is the phrase used to describe funds that firms obtain from outside of the firm. The decade since the onset of the global financial crisis has brought about significant structural changes in the manufacturing sector in USA. This study thus sought to assess the first-order determinants of capital structure among listed manufacturing companies in the United States of America through literature based study methodology. The study found that the manufacturing industry in USA is an industry that dominates companies listed on the New York Stock Exchange, it can be seen from the number of companies listed on NYSE increasing every period. The companies not only required to produce products, but also must be able to manage their capital structure. The study established that the first order determinants of capital structure for listed manufacturing firms in USA consist of financial situation, growth opportunities, size of the firm, product uniqueness, business risk, tax shields, dividend Policy. Furthermore, the first order determinants of capital structure consist of firm size, tangibility, growth opportunities, the non-debt tax shield, the bankruptcy risk, profitability and risk. The study concludes that listed manufacturing firms with the highest asset liquidity may increase debt capacity only when the bond covenants impose restrictions on the disposition of assets. The fact that a company possesses fixed assets to a large extent can be considered by its creditors as a guarantee that will allow them to recover their funds in the case of financial distress experienced by the borrower corporation. If a high-risk company is experiencing a decline in sales, the resulting profit will decrease due to the amount of the fixed costs. Because there is a decrease in profits, the company is not available enough funds to pay off the debt and interest so that it threatens the occurrence of bankruptcy. Keywords: First order determinants, capital structure, listed manufacturing companies, USA.

While there is sufficient evidence that a crisis impacts lending behaviour and corporate leverage, the literature on the effects of the global financial crisis on small and medium-sized enterprises (SMEs') capital structure is limited if not absent. This paper aims to analyse how and to what extent various macroeconomic states impact the capital structure determinants of SMEs. Based on a comprehensive dataset of Italian SMEs during the 2006-2016 period, we use a fixed effects panel approach to examine SMEs' capital structure decisions before, during and after the 2008 financial crisis. Our results show that the financial crisis negatively affected SMEs' financial leverage, as the total debt ratio significantly declines in our sample period. However, we also find that the financial crisis negatively impacted trade credit, given that it does not substitute for the reduction of credit from financial institutions. Finally, the impact of capital structure determinants significantly changed during and after the crisis compared to the pre-crisis levels. Our results indicate that compared to the pre-crisis period, profitability, profit volatility and liquidity are the main determinants of the total debt ratio during and after the crisis. These results have implications for firms and policy makers.

Life cycle of the firm has an important role in the dynamics of firm’s capital structure. A firm will take different funding decision along the life cycle because the firm’s characteristics that affect the capital structure will adjust itself as the tranformation of the life cycle occuring. The research objectives were to analize the dynamic of firm’s capital structure across three-life cycle stages of Indonesian manufacturing companies listed with a total sample of 121 companies observed during the period from 2011 to 2016. By using dynamic panel data analysis with Generalized Method of Moments (GMM) model, we find that profitability and liquidity affect the firm’s life cycle for a growing stage, meanwhile the fixed asset, growth opportunities, profitability, and liquidity affect the capital structure for a mature stage, whereas only liquidity that affects capital structure for a decline stage. The coefficient of lag dependent variable of GMM model representing the previous year capital structure showed an adjustment rate of capital structure. The lowest speed of adjustment occurred on the decline stage which was orderly followed by the growth and mature stage. Keywords: capital structure, life cycle of firm, firm’s characteristics, dynamic panel data analysis

<div>The purpose of this research is to examine firm-specific determinants of capital structure in Canadian non-financial firms. The research uses a sample of 208 firms listed on Toronto Stock Exchange from 1999 to 2016. Panel data analysis has been performed using a fixed effects model estimation. The study also investigates the impact of firm-specific factors on capital structure in three different phases: pre-crisis (1999-2006), during crisis (2007-2009), and post-crisis (2010-2016). </div><div><br></div><div>The analysis suggests that age, liquidity, asset tangibility, size, growth opportunities, and profitability are the determinants of capital structure in Canadian non-financial firms. The findings suggest that Pecking Order Theory better explains capital structure choices across Canadian non-financial firms. However, some hypotheses of Trade-off Theory are also applicable in certain contexts. This study adds to the existing literature on factors influencing capital structure of Canadian non-financial firms. Both practitioners and academicians may benefit from the findings of this study.</div>

This study investigates the impact of profitability, liquidity, growth opportunity, and asset tangibility on the capital structure of manufacturing firms in Indonesia. This study employs the pecking order theory to examine data from 140 manufacturing companies listed on the Indonesia Stock Exchange from 2017 to 2024. The companies were chosen based on criteria such as having full financial statements, being listed before 2017, and not having negative equity. A total of 1,120 firm-year observations were analyzed using panel data regression with STATA. The findings indicate that profitability and liquidity have a significant negative impact on capital structure, while asset tangibility has a significant positive effect. However, growth opportunity does not have a significant effect, suggesting that expansion potential is not a primary factor in determining debt utilization among manufacturing firms. These findings support the pecking order theory and emphasize the importance of internal financial strength and asset structure in financing decisions. Companies are encouraged to maintain strong internal funding capabilities and manage debt prudently to ensure financial sustainability. Keywords: Capital Structure; Profitability; Liquidity; Growth Opportunity ; Asset Tangibility ; Manufacturing Sector

This study examines the relationship between capital structure decisions and corporate profitability across diverse industries, focusing on the strategic implications of debt-equity configurations. Using secondary financial data from 50 listed firms in manufacturing, pharmaceuticals, IT, infrastructure, and consumer goods sectors (2019–2023), the research employs descriptive statistics, correlation, and regression analyses. Findings reveal a moderate negative correlation between high leverage and profitability (ROE, ROA), particularly in asset-light sectors, while capital-intensive industries benefit from moderate debt due to tax shields. Firm size, asset tangibility, and sector-specific norms significantly influence optimal capital structuring. The study highlights the absence of a universal optimal capital structure, emphasizing context-specific strategies. Practical recommendations include dynamic debt monitoring, diversified financing, and alignment with operational risk profiles. The research contributes to capital structure theory by bridging empirical gaps in emerging markets and offers actionable insights for financial managers and policymakers. Keywords: Capital structure, profitability, leverage, debt-equity ratio, ROE, corporate finance, emerging markets.

This study mainly aimed at examining the determinants of capital structure in Nepalese trading and manufacturing firms. The study has covered eleven major on-financial enterprises of trading and manufacturing firm’s specific variables. Firm’s size, growth opportunity, asset tangibility, profitability, firm’s age, liquidity and interest coverage ratio have selected as variables to examine their effect on corporate capital structure. The study used both descriptive and causal comparative research design to examine the determinants of capital structure. Data required for undertaking the study were collected from secondary sources. For each enterprise, financial data for 10 fiscal years covering the period of F/Y 2005/2006 to F/Y 2015/2016.The study concluded that asset tangibility, profitability, liquidity and interest coverage ratio are the major determinants of corporate capital structure in Nepalese trading and manufacturing firms.

The study examines the significant factors affecting the capital structure decisions for banks’ in MENA region. An unbalanced panel data comprising of 132 banks operating in fifteen different countries of the MENA region from 2012 to 2017, data was extracted from Bank Scope resulting in 891 bank year observations. Macroeconomic indicators and institutional characteristics data has been taken from World Bank and World Bank governance indicators database and financial freedom data has been collected from heritage foundation. We use the two-step system Generalized Method of Moments (GMM) to explore the relationship between dependent and explanatory variables. The regression outcome between profitability and leverage shows a negative and significant relationship. No significant association between tangibility and leverage is found. Earnings volatility is negatively and significantly related to leverage. The relationship between growth and leverage is negative and significant. Macroeconomic indicators GDP growth and inflation show a positive relationship with leverage. Finally, the institutional factors, that is, government effectiveness, political stability, and rule of law have positive association with leverage. The study results will lend a hand to bank managers to make value-maximizing financing decisions to achieve an optimal capital structure. It will also help the policymakers to articulate an effective regulatory framework in the region. As per our knowledge, this is the first study to explore the determining factors of capital structure for banks operating in the MENA region. Moreover, the findings from MENA region banks could also support the comparative study with other regional blocks.

The purpose of this study is to empirically test the determination of the existing capital structure in manufacturing companies in Indonesia. Various capital structure theories (trade-off theory, pecking order theory, agency theory, and free cash flow theory) are reviewed in order to formulate testable hypotheses about the determinants of capital structure in manufacturing firms. The research was carried out on a sample of 896 financial statements using panel data procedures. The results show that Tangibility and liquidity have a significant negative effect on leverage. Profitability and company age have no effect on leverage, while company size has a significant negative effect. This study has laid some groundwork for further investigation into the determinants of capital structure in Indonesian firms, which could be the basis for a more detailed evaluation. Furthermore, empirical findings should assist corporate executives in making the best capital structure decisions. To the best of the authors' knowledge, this is the first study that uses the most recent data to investigate the determinants of capital structure of manufacturing firms in Indonesia. Furthermore, this study appears to confirm that the same factors influence capital structure decisions in developing countries as they do in developed economies.