The Global Financial Crisis (GFC), Equity Market Liquidity & Capital Structure: Evidence from Australia

Journal of Applied Research in Accounting and Finance (JARAF), Vol. 9, No. 1, 2014

23 Pages Posted: 24 Jul 2014

See all articles by Ahmad Mohamed

Ahmad Mohamed

University of Tobruk- Libya

Senarath Lalithanada Seelanatha

Victoria University - School of Accounting and Finance

Date Written: 2014

Abstract

This study investigates how the recent global financial crisis (GFC) has changed the relationship between equity market liquidity and the capital structure of firms listed on the Australian Securities Exchange (ASX). The study takes into account the recent GFC by splitting the sample period into pre-GFC, GFC and post-GFC periods. It has been suggested that firms whose stocks are liquid incur lower costs of issuing equity in comparison to those with less liquid stocks prefer equity to debt. This study employs least square panel regression analysis using a sample of 792 companies listed on the ASX during the period from 2003 to 2011. The study reveals that stock liquidity has a negative effect on leverage. However, this impact was negligible immediately after the crisis. The other important finding is the alteration of the roles of profitability and earning volatility. While profitability was negatively related to leverage before the GFC, it has become irrelevant in the post-GFC period. On the contrary, earnings volatility was not important during the pre-GFC period, but it has become negatively correlated with leverage in the post GFC period. Overall, the study has found that the relationship between leverage and the determinants of capital structure has been significantly changed by the GFC.

Keywords: Global Financial Crisis, Equity Market Liquidity, Capital Structure, Accounting, Finance

JEL Classification: M40, M41

Suggested Citation

Mohamed, Ahmad and Seelanatha, Senarath Lalithanada, The Global Financial Crisis (GFC), Equity Market Liquidity & Capital Structure: Evidence from Australia (2014). Journal of Applied Research in Accounting and Finance (JARAF), Vol. 9, No. 1, 2014, Available at SSRN: https://ssrn.com/abstract=2470927

Ahmad Mohamed (Contact Author)

University of Tobruk- Libya ( email )

50 OMAR AL MUKHTAR ST
TOBRUK
TOBRUK, Tobruk 00218
Libya

Senarath Lalithanada Seelanatha

Victoria University - School of Accounting and Finance ( email )

P.O. Box 14428
Melbourne, Victoria 8001
Australia

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