The Determinants of Capital Structure Across Firms’ Sizes: The U.K Main and AIM Markets Evidence

Abstract:     
We test the determinants of leverage within the trade-off and pecking order framework, and the speed of adjustment to the target leverage of large and small firms quoted on a regulated (Main) and relatively unregulated market (AIM) in the UK. We find that both firm size and market of quotation affect the level of leverage. Consistent with trade-off theory, leverage is affected by measures of taxes, bankruptcy costs and agency costs. In contrast, the leverage of small firms on AIM is more affected by firms’ asset tangibility, positively related to market-to-book reflecting the difficulties of these firms to raise equity capital to finance their growth, and is not affected by taxes or profitability. These differences are strongly reflected in the level of leverage of small firms which is significantly lower than that of large companies.

Keywords: Capital Structure, Trade-Off Theory, Pecking Order Theory, Partial Adjustment Model, Dynamic Panel Data

JEL Classification: G32, G33

working papers series