Capital Structure and its Determinants in the UK - a Decompositional Analysis

University of Glasgow Working Paper No. 2000-2

36 Pages Posted: 6 Jul 2000

See all articles by Alan A. Bevan

Alan A. Bevan

European Bank for Reconstruction and Development (EBRD) - Office of the Chief Economist

Jo Danbolt

University of Edinburgh Business School

Multiple version iconThere are 2 versions of this paper

Date Written: May 2000

Abstract

Prior research on capital structure by Rajan and Zingales (1995) suggests that the level of gearing in UK companies is positively related to size and tangibility, and negatively correlated with profitability and the level of growth opportunities. However, as argued by Harris and Raviv (1991), "The interpretation of results must be tempered by an awareness of the difficulties involved in measuring both leverage and the explanatory variables of interest". In this paper we focus on the difficulties of measuring gearing, and test the sensitivity of Rajan and Zingales' results to variations in gearing measures. Based on an analysis of the capital structure of 822 UK companies, we find Rajan and Zingales' results to be highly definitional-dependent. The determinants of gearing appear to vary significantly, depending upon which component of debt is being analysed. In particular, we find significant differences in the determinants of long and short-term forms of debt. Given that trade credit and equivalent, on average, accounts for more than 62 percent of total debt, the results are particularly sensitive to whether such debt is included in the gearing measure. We argue, therefore, that analysis of capital structure is incomplete without a detailed examination of all forms of corporate debt.

Keywords: Capital Structure Determinants, Debt Elements, Gearing

JEL Classification: G32, G3

Suggested Citation

Bevan, Alan A. and Danbolt, Jo, Capital Structure and its Determinants in the UK - a Decompositional Analysis (May 2000). University of Glasgow Working Paper No. 2000-2, Available at SSRN: https://ssrn.com/abstract=233550 or http://dx.doi.org/10.2139/ssrn.233550

Alan A. Bevan

European Bank for Reconstruction and Development (EBRD) - Office of the Chief Economist ( email )

One Exchange Square
London EC2A 2JN
United Kingdom
+44 20 7338 7725 (Phone)
+44 20 7338 6111 (Fax)

Jo Danbolt (Contact Author)

University of Edinburgh Business School ( email )

University of Edinburgh
29 Buccleuch Place
Edinburgh, Scotland EH8 9JS
UNITED KINGDOM

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