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Essays on the determinants of capital structure

Posted on:1996-04-03Degree:Ph.DType:Dissertation
University:University of New OrleansCandidate:Chehab, Adham FrancoFull Text:PDF
GTID:1469390014486979Subject:Economics
Abstract/Summary:
The focus of this dissertation is the firm's capital structure. The research is empirical in nature and divided into three essays. The results of the first essay of this dissertation indicate that debt levels tend to increase with growth, dividends, fixed assets intensity and insider ownership. Debt levels tend to decrease with profitability and business risk. However, the effect of profitability on the debt level dominates all the other variables. The results indicate that the pecking order theory best explains the firm's capital structure.; The second essay focuses on the determinants of the firm's financing decision. The sequential and the habit persistence versions of the probit model were used to evaluate the determinants of the financing decision. Although the sample firms exhibit a small degree of habit persistence when choosing between debt and external equity, such an effect is overshadowed by other determinants. The results indicate that firms with high profitability and high business risk employ internal funds while firms with high leverage compared to their respective industry, high growth and high dividend payout ratios utilize external sources of funds. When choosing between debt and external equity, firms with high growth rates and high dividend payout ratios utilize debt financing and firms with high leverage compared to their respective industry and high business risk issue external equity. The results of the second essay complement those obtained in the first.; For the third and final essay, probit analysis was used to determine the relationship between certain firm characteristics and the strictness of the covenants in the loan agreements. The firms in the study were divided into two groups. Group 1 consisted of firms with less restrictive covenants, while Group 2 contained firms with much stricter bond covenants. The results of the empirical investigation indicate that insider ownership significantly contributes to the strictness of bond covenants.
Keywords/Search Tags:Capital, Firms with high, Determinants, Essay, Results, Covenants, Indicate
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