Capital Structure Decisions: Evidence from Deregulated Industries
51 Pages Posted: 21 Sep 2008 Last revised: 14 Mar 2013
Date Written: September 18, 2008
Deregulation significantly affects the firms' operating environment and leverage decisions. Firms experience a significant decline in profitability, asset tangibility and a significant increase in growth opportunities following deregulation. Firms respond by reducing leverage. Deregulation also significantly affects the cross-sectional relationship between leverage and its determinants. Leverage is much less negatively correlated with profitability and market-to-book and much more positively correlated with firm size following deregulation. These results are consistent with the dynamic tradeoff theory of capital structure. Also consistent with the dynamic tradeoff theory, the speed of leverage adjustment to optimal leverage increases significantly following deregulation.
Keywords: Capital structure, financing policy, deregulation
JEL Classification: G32, G38
Suggested Citation: Suggested Citation