Determinants of capital structure an empirical study of american companies

2.2 Tradeoff theory The Static tradeoff theory The basic idea of trade-off theory is that that firms follow an optimal capital structure to maximize value by offsetting the cost of the

DETERMINANTS OF CAPITAL STRUCTURE

AN EMPIRICAL STUDY OF AMERICAN COMPANIES

Supervisor: Dr Cormac Mac Fhionnlaoich Author: Nguyen Thi Dieu Hong

August 31st 2016

Abstract

This study investigates the factors that potentially have impact on capital structure decisions of American firms, and identify the key determinants of the capital structures of these firms The paper also explores the capital structure theories and how they explain capital structure decisions of firms worldwide and in the U.S The sample of includes 1.500 U.S firms, which covers 90% publicly-traded companies in the U.S during post-financial crisis time, from

2010 to 2016 Using panel data techniques with fixed-effects model and random-effects model, firms ‘characteristics are tested if they explain for leverage ratios The explanatory variables represent the factors that potentially determine capital structure: business risk, profitability, firm size, growth opportunities, tangibility of assets, non-debt tax shields

This study finds that the most reliable and important factors that determine the use of debt by American listed firms are firm size (+), tangibility

of assets (+), profitability (–) Besides, the moderately influential factors of leverage includes: business risk (+/–), non-debt tax shield (+/–) and growth opportunities (+/–) The study finds evidences which are consistent with pecking-order theory’ prediction of a positive relationship between asset tangibility and financial leverage and a negative relationship between profitability and financial leverage The finding moderately supports trade-off theory’s prediction of negative relationship between non-debt tax shield and leverage, business risk and leverage The trade-off suggestion of a positive relationship between asset tangibility and financial leverage are also confirmed

by this study Finally, agency’s prediction of a negative relationship between growth opportunities and leverage is moderately supported by a negative and insignificant relationship found in this study

Furthermore, I would like to send my appreciation to Irish Aid, The UCD Michael Smurfit Graduate Business School staff and lectures, and ICOS for giving the scholarship and support me during my academic year in Ireland

I also would like to place on the record my sincere gratitude to my IDEAS Fellows, in particular, Pham Khanh Linh, for his guide on data solving and Nguyen Thi Phuong Thao for her company and encouragement

Last but not least, I would like to show my great appreciation family and friends for their support and constant care for me on the way to my completion

of the master program

Contents

o

1 INTRODUCTION 1

2 LITERATURE REVIEWS 3

2.1 Modigliani-Miller theorem 3

2.2 Tradeoff theory 3

2.3 Pecking order theory 7

2.5 Determinants of capital structure 8

2.5.1 Size 8

2.5.2 Tangible assets 9

2.5.3 Profitability 10

2.5.4 Growth 10

2.5.5 Non-debt taxed shield 11

2.5.6 Risk 12

3 DATA AND METHOLOGY 15

3.1 Data Description 15

3.2 Panel data regression model 15

3.2.1 Panel data 15

3.2.2 Definition of variables 17

3.2.3 Model 20

4 RESULT 21

4.1 Data descriptive 21

4.2 Correlation Test 22

4.3 Test of determinants of capital structure 24

5 CONCLUSION, LIMITATION AND SUGGESTED FUTURE WORKS 34

5.1 Conclusion 34

5.2 Limitation 35

5.3 Suggestions for future research 37

REFERENCES 38

List of tables

Table 1: Predicted effects on leverage based on capital structure theories 13

Table 2: Determinants of capital structure in previous researches 14

Table 3: Measures of leverage 17

Table 4: Measures of capital structures determinants 19

Table 5: Descriptive statistics of the sample 21

Table 6: Correlation of variables 22

Table 7: Fixed-effects regression results 24

Table 8: Random effects regression results 25

Table 9: Hausman test results 25

Table 10: Regression with selected factors 27

Table 11: Modified Wald test results for heteroskedasticity 27

Table 12: Wooldridge test results for autocorrelation 28

Table 13: Fixed-effects regression with Driscoll-Kraay standard errors 29

1 INTRODUCTION

Capital structure is one of the most important decisions of every company A false decision in capital structure can lead a firm to severe difficulties Managers always want to find a suitable capital structure policy to meet their goals Researchers, from another aspect, are curious to know how firms choose of sources of financing, do they have target structure and what factors affect firms’ decisions That is the reason makes the capital structure to become one of the most important fields of corporate finance Modern corporate capital structure theory originated by Modigliani and Miller’s (1985) with irrelevance theorem The idea of the theory is that in an efficient market with the absence of taxes, agency costs, bankruptcy, and asymmetric information, how a firm is financed does not affect its value Since the value of the company depends neither on its dividend policy nor its source of capital, the Modigliani, and Miller theorem is often called capital irrelevance principle This theory is considered to lay stones for many followers to study capital structure

However, it is clear that Modigliani and Miller’s assumptions are unrealistic and hard to happen in the real market Following Modigliani and Miller (1958), several other theories have been developed on the topic of capital structure The trade-off theory states that companies choose an amount

of debt finance and equity finance base on the balance of benefit and financial cost The pecking order theory focusses on asymmetric information with considering that the cost of finance increases with asymmetric Therefore, firms will choose to internal financing as the first priority, then debt and equity as a

‘’last resort’’ Another stream of research was initiated by Ross (1977) on how the choice of a firm’s capital structure can signal information to outside investors about the company, i.e issuing large debt levels is a signal of higher quality of the firm

With regards to empirical work, many studies were done to find an answer to the capital structure puzzle Concerning to U.S firms, one of the earliest attempts to extend empirical study on capital structure was conducted

by Titman and Wessels (1988) A large set of data of U.S companies between

1974 and 1982 was used to examine theoretical determinants of capital structure Following this, Rajan and Zingales (1995) investigated the determinants of capital structure decisions on a broader scope in G-7 countries with more focus on U.S firms

It can be clearly seen that both theoretical and empirical work has made progress in investigating which factors influence capital structure decisions Yet, Titman and Wessels (1988), Rajan and Zingales (1995), and Harris and Raviv (1991) agreed on the fact that, while progress has been made from the initial work of Modigliani and Miller in 1958, the empirical work was lagging behind and doing very little to identify empirical findings of capital structure in practice While theoretical work had identified a large number of potential determinants of capital structure, empirical studies have not frequently considered various contexts outside the G-7 countries

In recent years, empirical studies on capital structure determinants have been largely extended to different developed and developing countries including Malaisia, (Pandey, 2001), India (Joy Pathak, 2010), Portugal (Vergas, Cerqueira, Brandão 2015), Sweden (Han-Suck Song, 2005) They pointed out both similarities and discrepancies in what factors influence firm financing decisions across different contexts

By updating data, applying the methodology used for the panel data that has been improved upon and updated with a thorough analysis of different models and using four kinds of leverage ratios, the study wants to find out which factors are important in the capital structure decisions of U.S in recent time, especially after the financial crisis time

2 LITERATURE REVIEWS

2.1 Modigliani-Miller theorem

Fifty-eight years ago (1958), two economists Franco Modigliani and Merton Miller proposed Modigliani-Miller theorem on the capital structure which plays an essential role in modern corporate finance Before them, no widely-accepted theory of capital structure has existed The theorem states that in a perfect market without taxes, asymmetric information, bankruptcy cost, and agency costs, the way in which a firm raise its capital makes no influence on its value This suggests that the valuation of a firm is irrelevant to its capital structure, so the theorem is also called capital structure irrelevance principle

The assumptions of the theory are based on an efficient market First, there are no taxes Second, there is no transactions costs and bankruptcy costs Third, the information is symmetric, all investors are rational and have the same access to information Fourth, the costs of debt are the same for everyone and last, debt financing do not affect firms

The fact is that it is very hard to find a perfect market In reality, corporations do business in a market containing transaction costs, borrowings costs, taxes, asymmetric information and agency costs By relaxing some assumption in Modigliani-Miller theory, some alternative theories were proposed to address these imperfections

2.2 Tradeoff theory

The Static tradeoff theory

The basic idea of trade-off theory is that that firms follow an optimal capital structure to maximize value by offsetting the cost of the additional unit

of debt by its benefit Baxter (1967) and Kraus and Litzenberger (1973) stated that a taxable corporation should consider an increase in its debt level until there is a balance between the marginal value of tax shield and the present value of any financial distress costs occurred

Trade-off model with bankruptcy costs

When firms borrow, they get a tax advantage as interest is deductible for income tax Besides, firms have to incur bankruptcy cost of debt Companies using leverage need to pay interest on their borrowings This changes companies’ earnings and cash flow The more firms borrow, the higher probability of bankruptcy increases The trade-off theory predicts that firms choose an optimal capital structure to balance tax benefits and cost of debt Companies substitute debt with equity or versus while maximizing the company’s value

Trade-off model with agency costs

Jensen and Meckling (1976) notice that debt had been used widely before the appearance of subsidies tax on interest payment, given that there must be other important factors of capital structure that have not been recognized Two kinds of agency costs were suggested that is the gap between shareholders and managers and conflict between shareholders and creditors

Agency cost between shareholders and managers: This type of agency costs appear when there is a separation between ownership and management When shareholders lose control, sometimes managers have opportunities to put their benefits above shareholders Instead of always making decisions to maximize the market value of the firms, managers may make the inefficient

the expense of profitability and value by investing in unprofitable projects Some managers prefer managing a bigger, and more influential firms have less incentive to act for benefits of shareholders If increasing using debt, firms have

to pay interest payment and by that reduce free cash flow within the firms As a result, there is a deterioration of liquidity that allows managers to take part in projects that the profit maximization (Jensen, 1986)

Agency cost between shareholders and creditors: The shareholder's attempt to engage in new projects that generate more benefits for shareholder while posing higher risks to the firm’s creditors If the risky capital investment project is successful, shareholders will gain more rate of return Lender’s benefit does not change because the interest rate is fixed If the project fails, the creditors are forced to share in the loss The reduction in value of debt due

to risky projects is called agency cost of debt financing

Jensen and Meckling (1976) suggested that firms can find optimal capital structure point where the total cost of agency is minimized

Dynamic Trade-off theory

There are abundant studies supports this static trade-off theory such as Myers (1993); Andrade and Kaplan (1998); Graham (2000); Hovakimian, Kayhan, and Titman (2012) Graham and Harvey (2001) find that 81% of CFOs

claims that they apply target debt-equity or something like that on debt decisions However, the evidence of this theory is still widely debatable

In respond to this debate, especially static trade-off theory, academics have turned to dynamic versions of the trade-off theory

Studies on dynamic adjustment share a similar view that the optimal and real capital structure are not able to be the same all the time The imperfection

of market such as transaction costs can prevent the instantaneous adjustment

of the real debts to the desired level Heinkel and Zechner (1989) propose that small recapitalization costs have the ability to give significant changes in debt ratio of a firm while the role of agency costs of debt is emphasized by Leland (1998) through the determination of the optimal debts

From a dynamic model perspective, a suitable capital decision often depends on the financing margin that the firm anticipates in the next period Some companies expect to pay our funds in next period, while others want to raise funds in the form of debt or equity Firms will consider all these factors while making decisions

Kane (1984), Brenman and Schwartz (1984) propose first dynamic models which take the tax savings and bankruptcy cost into consideration Both examined continuous time models with uncertainty, taxes, and bankruptcy costs without transaction costs Firms react to adverse shocks immediately by rebalancing; firms maintain high levels of debt to get benefits of tax

Heider (2003), suggests that companies specify a target capital structure By estimating a partial adjustment model, companies quickly adjust

to that target when they are spread further to changes in share prices or changes in firm characteristics

Many studies of dynamic trade-off models are done rather recently however they bring us new look of profits, retained earnings, taxes, mean reversion Further studies in line with trade-off theories appear to be very promising in the future

2.3 Pecking order theory

This theory is often set up as a competitor theory to trade-off theory The first seed of pecking order theory was from Donaldson’s book in 1961 when he analyzed a large sample of corporations He found that: “Management strongly favored internal generation as a source of new funds even to the exclusion of external funds except for occasional unavoidable ‘bulges’ in the need for funds” When external finance is needed, managers are reluctant to issue share “Several financial officers showed that they were well aware that this had been a good time to sell common, but the reluctance still persisted.” The primary focus of this theory is not optimal capital structure but more about the way managers make use of various sources of funds to finance their operations This is really meaningful to any firm

The theory is then modified and popularized by Stewart C.Mayers and Nicolas Majluf (1984) and Mayer (1984) In “Corporate financing and investment decisions when firms have information that investors do not have”, the authors assumed that the financial market is perfect except there are information asymmetries The investors do not have all information of operation and prospect of the firms as well as the managers When managers believe that their shares are overvalued by the market, they have more incentive to issue new common shares rather than debt Investors are rational when interpreting this signal; they compensate for their own informational disadvantage by decreasing issuer’s share price, especially when they see no clearly valuable opportunities The equilibrium model of the issue-invest decision shows that firms tend to refuse to issue stock in this circumstance The managers act in the interesting of existing shareholders refuse to issue new share when their equity is on the verge of being undervalued even though they may miss opportunities for projects with positive NPV

Mayer (2001) summation of Pecking Order is that:

“1 Internal finance is preferable to external finance for which firms must take information asymmetries into account while making decision) 2 Dividend

is “sticky,” Dividend cuts, therefore, are not spent for financing capital

expenditure In addition, changes in cash requirements are not attributable to short-run dividend changes That being said, changes in net cash display changes in external financing

3 If firms require external funds for capital investment, they will first issue debt, which is the safest security, followed by the equity If cash flow that

is internally generated is greater than capital investment, the excess is used to repay debt rather than repurchasing and retiring equity As additional external financing is necessary, the pecking order is utilized; the firm moves from safe

to riskier debt such as convertible securities or preferred stock, and finally to equity as last alternative

4 Each firm’s debt ratio therefore reflects its cumulative requirement for external financing.”

There have been numerous empirical studies are in line with Pecking Order theory Many studies show that price of stock goes down after the announcement of new issues According to Asquith and Mullins (1986), the price of stocks falls averagely 3 percent after new issue

2.5 Determinants of capital structure

firms size are positively correlated with leverage except for Germany In Germany, larger firms tend to borrow less

Firm size is also function as a proxy of information that outside investors can have Fama and Jensen (1983) said that large firms disclose more information to our side investors than small firms Large firms are more able to issue equity than small firms Small firms are managed by a small group of managers Those managers tend to avoid the intrusion from outside entities They often use retained earnings as the first priority of financing When internal funds are not enough for new projects, they prefer to use debt than issuing As

a result, pecking order theory are more often used by small firms Data from Hussan and Matlay (2007) asserts that small firms only look for outside resources when internal funds are exhausted Daskalakis and Psillaki (2008) shows that the motivation of small firms to buy is to meet financial needs rather

than achieve an optimal capital structure

2.5.2 Tangible assets

Assets structure is an important factor of capital structure A larger portion of tangible assets increases the liquidation value of firms While intangible assets are difficult to identify, value, separate and utilize, tangible assets are easy to identify and measure Therefore, tangible assets can easily

be collateral to obtain debt Companies are more able to approach creditors when they have large tangible assets as a guarantee in case of bankruptcy Therefore, trade-off theory indicates that firms will be more leveraged when they have more tangible assets

Firms having more tangible assets have less impact of asymmetric information and agency costs Thus, pecking order theory and agency theory predict that firms with more tangible assets have more capability to borrow debt Previous studies provided different results Some studies prove that this

is true by revealing that the capital structure is positive with firms’ assets structure such as Allen (1995), Michealas (1999), Amidu (2007) Daskalakis and Thanou (2010) by studying Greek small and medium companies from

2003 to 2007 found an inverse impact of tangibility on debt ratio They

explained that firms owning a larger portion of tangible assets already have a stable source of returns, which provides internally stable funds and discourage

it to use external financing Thus, pecking order theory also predicts a negative relationship between leverage and tangibility

Degryse et al (2010) found a positive relationship between debt and tangibility, however, positive effect on total debt came entirely from long-term debt, as short-term debt is negatively affected by the collateral It is possible that banks charge relatively higher interest rates on short-term debt than long-term debt This finding follows the maturity matching principle that long-term assets are financed with long-term financing and short-term assets are financed with short-term funds

2.5.3 Profitability

Many researchers have conducted the investigation on the determinants

of capital structure, but the result of the relationship between profitability and capital structure is still a conflict According to Pecking Order theory, a firm just uses external finance when internal finance exhausted When firms make profits, they tend to use retained earnings more than borrowings There is abundance evidence of this Many studies such as Al-Sakran (2001), Fama and French (2002), Frank and Goyal (2003), Daskalakis and Psillaki (2008), Kayo and Kimura (2010), etc are consistent with Pecking Order theory by showing that there is a negative relationship between profitability and leverage Although firms cannot enjoy the tax shield benefits which could be availed because of increased leverage, firms with high profitability incorporate less debt while forming their capital structure decisions

2.5.4 Growth

The relationship between growth and capital structure is still ambiguous Major previous studies generally favor a negative relationship between the growth opportunities and leverage of firms Rajian and Zingles (1988) while using market-to-book as a proxy of growth found a negative relationship between growth opportunities and leverage One reason for the

market-to-book ratio to be negatively correlated with leverage is that firms often issue stocks when their market value is high in comparison with book value

In contrast, another school of thought supports a positive relationship between growth and leverage Modigliani and Miller (1958) explained that managers have to pay costs for debt In the begin, a firm may use debt as a source of capital but when the firm realize that projects will become profitable they reduce debt Modigliani and Miller found a positive relationship between leverage and growth Myers (1977) said that companies with highly potential growth opportunities do like risky debt and the firms using risky debt, in some circumstances, will pass up valuable investment opportunities Pandey (2001) proved that firms whose sales grow rapidly are often in need of expanding their fixed assets Thus firms with high growth are in more demand of funds and also retain more earnings When examining the determinants of capital structure of Malaysian during 1994 to 1999, Pandey found a significant relation between growth and all types of book and market value debt ratios Because short-term debt ratios are higher than long-term debt ratios, Malaysian firms tend to employ short-term debt to finance their growth

Titman and Wessels (1988) using data of U.S firms from 1974 to 1982 reported no relationship between leverage and growth

2.5.5 Non-debt taxed shield

DeAngelo and Massulis (1980) proposed a model of optimal capital structure that combines the impact of corporate taxes, personal taxes, and non-debt tax shields They said that tax deduction for depreciation and investment tax credits are tax benefits of debt financing Firms with a large amount of non-debt tax shield will enjoy more benefit, as a result, borrow more

According to trade-off theory, when a firm is forced to pay higher taxes

on its earnings it has higher leverage The more firms borrow, the more value

of debt tax shields they can gain, as suggested by Myers (1984) Besides, debt tax shields such as accounting depreciation, depletion allowances, and investment tax credits have been found to have a negative influence on

non-leverage because they act as substitutes for the benefit of debt financing coming from interest tax shields (DeAngelo & Masulis, 1980)

Empirical research has shown support for the above predictions regarding the relationship between taxes and leverage, although it is not one of the most popular factors Bauer (2004) and Chi (2013) found that taxes have a positive influence on the use of debt, yet, the impact of taxes does not always hold

Non-debt tax shields, often relating to depreciation and other operating expenses, are observed in the empirical work of Bauer (2004), Huang and Song (2002), and Cortez and Susanto (2012) to have a negative relationship with leverage This is consistent with what trade-off theory suggest

2.5.6 Risk

Firms risk can be defined as financial risk and business risk Here, business risk is, as volatility in earnings, is tested to see if it determinate capital structure The more risk firms have, the higher the cost of the financial distress firm face Trade-off theory predicts that riskier firms reduce leverage to avoid high bankruptcy cost Titman and Wessels (1988) confirmed that optimal debt level to be a decreasing function of earnings volatility A similar argument is introduced by Frank and Goyal (2009) More risky cash flows resulting from cyclicality or seasonality of business lines will make firms not able to gain full benefit of tax advantage of debt; thus, trade-off theory would support a negative relation between volatility and leverage Moreover, firms with volatile cash flows will also want to avoid making large fixed commitments for debt holders

On the other hand, Schoubben and Hulle (2004) explained that when risk increases, the cost of debt increase simultaneously Creditors set higher fee of debt to protect themselves from a bankruptcy of firms Therefore, according to pecking order theory, to deal with higher cost of debt, firms will use internal funds as a priority Frank and Goyal (2009) argued that firms with high volatility in earnings can be regarded in the financial markets as having

prices Because the impact of information asymmetry is higher in riskier firms, the pecking order theory would also suggest that these firms have higher leverage

Table 1 presented predicted effects on leverage based on capital structure theories and table 2 presented the results of some previous rehearses on capital structure

Table 1: Predicted effects on leverage based on capital structure theories

Factors

Predicted effects on leverage

Trade-off theory

Pecking -order theory

Agency Theory

Free cash flow theory

Market timing theory

Table 2: Determinants of capital structure in previous researches

3 DATA AND METHOLOGY

3.1 Data Description

This study analyzes a sample of 1500 U.S companies of S&P Composite 1500 index which cover 90% of the market capitalization of U.S public stock In order to ensure the generality, the sample includes three groups of firms The first group is S&P 500 with 500 large companies having common stock listed on the NYSE or NASDAQ The second group is S&P 400 (mid-cap firm) which includes investors with a benchmark for mid-sized companies to reflect the distinctive risk and return characteristics of this market segment The third gruop is S&P 600 which includes small-cap segment of the U.S equity market However, among those 1.500 companies, only companies meeting all requirements are included For example, the model specifications include lagged variables so companies do not have data of at least two consecutive years will not be used

The data sample includes data of those U.S companies in post-financial crisis time, Q1/2010 to Q2/2016, to exclude the effect of financial crisis on capital structure The final sample is a panel data comprising 39.000 observations

3.2 Panel data regression model

complexity of capital structure puzzle Panel data provides information on both inter-temporal dynamics and the individuality of the entities which will help explain determinants of capital structure

Last but not least, panel data can control unobservable individual heterogeneity by allowing for entity-specific variables and avoid other problems

in time series data such as multicollinearity

First, descriptive statistics were used to demonstrate characteristics of U.S firms, as presented previous part Following this, correlation analysis was conducted to derive an overview of the relationship between each pair of variables Subsequently, linear regression was performed as the main analysis

to identify the best factors to explain the capital structure

Since there are many companies lacking data in several years, the data set is constructed as an unbalanced panel There are several potential estimating techniques to deal with panel data In this paper, the most two popular estimators, the random effects estimators, and fixed effects estimators will be used

The fixed-effects model explores the relationship between explanatory variables and dependent variables within an entity (i.e a company in this case) and removes the effect of time-invariant characteristics pertaining to the entity

in order to assess the net effect of the explanatory variables on the dependent variable Unlike the fixed-effects model, the random-effects model assumes that the variation across entities is random and not correlated to explanatory variables in the model, allowing for time-invariant variables to have an effect on the dependent variable

Hence, the regressions were run with both the fixed-effects model (FEM) and random-effects model (REM) on only independent variables without dummies variables, the Hausman test will be used to examine whether the estimated coefficients from the fixed effects estimation and the random effects estimation is statistically significant, as suggested by both Wooldridge (2010) and Baltagi (2005)

In this study, panel data regressions using both the fixed-effects model and random-effects model were conducted using Stata 13 software

3.2.2 Definition of variables

Measures of capital structure

There are many types of securities a firm can issue to raise funds such

as short-term debt, long-term debt, convertible debt, preferred stock, and common stock The term “leverage” considered in capital structure research refers to financial leverage, not operating leverage or total leverage After reviewing various leverage measures used in previous research, Rajan and Zingales (1995, p 1429) concluded that “the effects of past financing decisions

is probably best represented by the ratio of total debt to capital.” Hence, the most relevant definitions of leverage to use in this study include the ratios of total debt to capital – either in book value or market value, the ratios of long-term debt and short-term debt to book value of capital These measures are identified below

Table 3: Measures of leverage Den

otation Dependent Variable Calculation

Measures of capital structure determinants

Profitability

There exist many different measures of profitability Different studies use different measurements Titman and Wessels (1988) used the ratios of

operating income over sales and operating income over total assets Frank and Goyal (2009) used operating income before depreciation Michaelas, Chittenden and Poutziouris (1998), Han-Suck Song (2005) and Sogorb-Mira (2005) used the ratio of earnings before interest and taxes (EBIT) to total assets as indicators of profitability Hall, Hutchinson and Michaelas (2000) used ratio of EBT over sales Klapper, Sarria-Allende and Zaidi (2006) and Degryse, Goeji and Kappert (2009) used returns on assets as proxy of profitability In this study, returns on assets is used as indicator of profitability

Size

There have many different measurement of size, for example sales, number of employee, total assets This study follows Frank and Goyal (2009), Flannery and Rangan (2006) to use the log of total assets is used as proxy for firm size

Growth

Growth can be seen as change business operation Business growth has been considered an influential determinants to capital structure in many empirical studies The most commonly used proxy for growth is market-to-book asset ratio Capital expenditure and a change in log assets are also popular proxies for growth opportunities In a study by Han-Suck Song (2005), percentage change in total assets is the measurement of growth Michaelas, Chittenden and Poutziouris (1998), Hall, Hutchinson and Michaelas (2000) used percentage change of sales over previous 3 years Degryse, Goeij and Kappert (2009) used change of total assets from previous year

This study aims to investigate the realized values as proxy for growth when the capital structure decision was made not the potential opportunities of growth Therefore, growth is not measured by market-to-book asset ratio but the percentage change of sales from previous year

Tangibility

Tangibility assets affect firm’s ability to borrow Therefore, it influences