Corporate Capital Structure in the United Kingdom: Determinants and Adjustment

Bank of England Working Paper No. 226

43 Pages Posted: 4 Jan 2005

See all articles by Philip Bunn

Philip Bunn

Bank of England

Garry Young

National Institute of Economic and Social Research

Date Written: August 2004

Abstract

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

Bunn, Philip and Young, Garry, Corporate Capital Structure in the United Kingdom: Determinants and Adjustment (August 2004). Bank of England Working Paper No. 226, Available at SSRN: https://ssrn.com/abstract=641281 or http://dx.doi.org/10.2139/ssrn.641281

Philip Bunn (Contact Author)

Bank of England ( email )

Threadneedle Street
London, EC2R 8AH
United Kingdom

Garry Young

National Institute of Economic and Social Research ( email )

2 Dean Trench Street
Smith Square
London, SW1P 3HE
United Kingdom

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