Corporate Capital Structure in the United Kingdom: Determinants and Adjustment
Bank of England Working Paper No. 226
43 Pages Posted: 4 Jan 2005
Date Written: August 2004
In this paper three contributions are made. First, empirical support is provided for the 'trade-off' model of corporate capital structure where companies borrow to take advantage of the tax benefits of debt, which they set against possible costs of overindebtedness. Second, it is shown empirically how companies adjust their balance sheets when borrowing is out of equilibrium, through adjustments to dividend payments, new equity issues and to a lesser extent capital investment. Third, these factors are incorporated within an aggregate model that quantifies the process and speed of balance sheet adjustment in the economy as a whole.
Keywords: Capital structure, gearing, tax, balance sheet adjustment
JEL Classification: C51, D92, G32, H25, H32
Suggested Citation: Suggested Citation