Determinants of capital structure for turkish firms: A panel data analysis

Abstract

The capital structure of a company consists of a particular combination of debt and equity issues to relieve potential pressures on its long-term financing. To examine such issues, many theories have been developed in the literature and they generally focus upon what determinants are likely to influence the so-called leverage decisions of the firms. Among these, the MM theory, trade-off theory and signalling theory have been said to mainly play a crucial role in identifying and testing the various properties of the leverage decisions. This paper briefly tries to define the fundamentals underlying these theories and evaluates whether some a priori assumed macroeconomic determinants can be related to the leverage parameters of interest examined in the paper. For this purpose, we conduct an empirical research that covers 42 selected firms traded at the Istanbul Stock Exchange ISE- 100 index. Following the developments in the contemporaneous estimation techniques that allow us to use time series and cross section data concurrently, the panel data methodology has been applied to the actual data to compute the leverage ratios for each firm within the time period 2000-2007. From this, it is hoped that we are able to highlight the issue of what properties the leverage ratios have and to satisfy our curiosity about how can the macroeconomic determinants affect the leverage ratios under various groupings such as tangibility, size, growth opportunities, profitability and nondebt tax shields. Our main results reveal that return on assets and tangibility of assets have a positive and statistically significant impact on the firm's leverage ratio, while the ratio of total depreciation to total assets and profit margin on sales seem to have some negative and significant impacts on firms' leverage degree. © EuroJournals Publishing, Inc. 2009.