Capital Structure Policy and Determinants: Theory and Managerial Evidence

Abstract

The paper examines theoretically and explores empirically the problem of the banking firm's capital structure (voluntary) decisions using a unique dataset gathered through a survey conducted to a sample of 89.5 percent of the Chief Executive Officers (CEOs) of Portuguese banks in office during the 1989-1998 period. Findings support the notion that Portuguese banks' debt/equity choice do matter. They also indicate that surveyed CEOs show a relative preference for the trade-off capital structure policy model. Survey results are also congruent with a number of theoretical propositions typically associated with the determinants of debt-equity choice of non-financial firms. Specifically, evidence supports that factors associated with the role of debt and non-debt tax shields at the bank level, as well as agency and governance conflicts and asymmetric information considerations are relevant for capital structure managerial decision-making of Portuguese banks. Overall, findings provide support to the notion that the design and the adjustment of the firm's financial structure may be explained within the framework of both theoretical and empirically motivated determinants established in corporate capital structure literature.

Keywords: Capital structure policy, Portuguese banking industry, Survey

JEL Classification: C42, G21, G32