Capital structure and its determinants in the United Kingdom – a decompositional analysis

Bevan, A.A. and Danbolt, J. (2002) Capital structure and its determinants in the United Kingdom – a decompositional analysis. Applied Financial Economics, 12(3), pp. 159-170. (doi: 10.1080/09603100110090073)

Abstract

Prior research on capital structure by Rajan and Zingales (1995) suggests that the level of gearing in UK companies is positively related to size and tangibility, and negatively correlated with profitability and the level of growth opportunities. However, as argued by Harris and Raviv (1991), 'The interpretation of results must be tempered by an awareness of the difficulties involved in measuring both leverage and the explanatory variables of interest'. In this study the focus is on the difficulties of measuring gearing, and the sensitivity of Rajan and Zingales' results to variations in gearing measures are tested. Based on an analysis of the capital structure of 822 UK companies, Rajan and Zingales' results are found to be highly definitional-dependent. The determinants of gearing appear to vary significantly, depending upon which component of debt is being analysed. In particular, significant differences are found in the determinants of long- and short-term forms of debt. Given that trade credit and equivalent, on average, accounts for more than 62% of total debt, the results are particularly sensitive to whether such debt is included in the gearing measure. It is argued, therefore, that analysis of capital structure is incomplete without a detailed examination of all forms of corporate debt.

• Item Type: Articles
• Status: Published
• Refereed: Yes
• Glasgow Author(s) Enlighten ID: Danbolt, Prof Jo
• Authors: Bevan, A.A., and Danbolt, J.
• Subjects: H Social Sciences > HB Economic Theory
• College/School: College of Social Sciences > Adam Smith Business School > Accounting and Finance
• Journal Name: Applied Financial Economics
• Publisher: Routledge
• ISSN: 0960-3107
• Copyright Holders: Copyright © 2002 Routledge
• First Published: First published in Applied Financial Economics 12(3):159-170
• Publisher Policy: Reproduced in accordance with the copyright policy of the publisher