Diversity and Determinants of Corporate Financing Decisions: Survey Evidence

28 Pages Posted: 15 Jul 2004

See all articles by Alan Goodacre

Alan Goodacre

University of Stirling - Department of Accounting and Finance

Vivien A. Beattie

Lancaster University - Management School

Sarah Jane Thomson

Heriot-Watt University - School of Management and Languages

Date Written: March 2004

Abstract

Despite theoretical developments in recent years, our understanding of corporate capital structure remains incomplete. Prior empirical research has been dominated by archival regression studies which are limited in their ability to fully reflect the diversity found in practice. The present paper reports on a comprehensive survey of corporate financing decision-making in 192 UK listed companies.

A key finding is that firms are heterogeneous in their capital structure policies. About half of the firms seek to maintain a target debt level, consistent with trade-off theory, but 60% claim to follow a financing hierarchy, consistent with pecking order theory. These two theories are not viewed by respondents as either mutually exclusive or exhaustive, since some firms adopt (at least partially) both strategies, while a significant number of firms do not appear to follow either of these strategies. Such observations raise concerns about the usefulness of large-scale regression modelling of capital structure determinants. In normal usage, these models can only describe whether a particular theory is consistent with the observed capital structure of the 'average firm' in the population. They are not typically used to model the diversity of capital structure practice.

As found in many regression-based determinant studies, there is clear evidence here that company size affects corporate financing decisions. For example, large companies are more likely to adopt a target debt level and to maintain financial slack (though not more likely to follow a hierarchy of finance). Similarly, current high levels of gearing encourage a greater focus on particular issues, such as projected cash flows, loan covenants and non-interest tax shields. This contingency on debt levels suggests that empirical studies of capital structure dynamics may be particularly fruitful.

Investigation of debt level determinants shows that many of the theoretical arguments are widely accepted by respondents, in particular the importance of interest tax shield, financial distress, agency costs and also, at least implicitly, information asymmetry.

Keywords: Capital structure, survey, trade-off theory, pecking order theory

JEL Classification: G32

Suggested Citation

Goodacre, Alan and Beattie, Vivien and Thomson, Sarah Jane, Diversity and Determinants of Corporate Financing Decisions: Survey Evidence (March 2004). Available at SSRN: https://ssrn.com/abstract=564602 or http://dx.doi.org/10.2139/ssrn.564602

Alan Goodacre (Contact Author)

University of Stirling - Department of Accounting and Finance ( email )

Stirling, FK9 4LA
United Kingdom
+44 1786 467291 (Phone)
+44 1786 467308 (Fax)

Vivien Beattie

Lancaster University - Management School ( email )

Bailrigg
Lancaster, LA1 4YX
United Kingdom

Sarah Jane Thomson

Heriot-Watt University - School of Management and Languages ( email )

Division of Accountancy & Finance
Edinburgh EH14 4AS, Scotland
United Kingdom

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