Determinants of Capital Structure
Empirical Evidence from the Czech Republic
The modern theory of capital structure was established by Modigliani and Miller (1958). Thirty-seven years later, Rajan and Zingales (1995, p. 1421) stated: “Theory has clearly made some progress on the subject. We now understand the most important departures from the Modigliani and Miller assumptions that make capital structure relevant to a firm’s value. However, very little is known about the empirical relevance of the different theories.” Similarly, Harris and Raviv (1991, p. 299) in their survey of capital structure theories claimed: “The models surveyed have identified a large number of potential determinants of capital structure. The empirical work so far has not, however, sorted out which of these are important in various contexts.” Thus, several conditional theories of capital structure exist (none is universal), but very little is known about their empirical relevance. Moreover, the existing empirical evidence is based mainly on data from developed countries (G7 countries). Findings based on data from developing countries have not appeared until recently – for example Booth et al. (2001)1 or Huang and Song (2002)2. So far, no study has been published based on data from transition countries of Central and Eastern Europe, at least to the extent of this author’s knowledge. The main goal of this paper is to fill this gap, exploring the case of the Czech Republic. The structure of this paper is as follows. In Section 1 the most prominent theoretical and empirical findings are surveyed. In Section 2 the potential determinants of capital structure are summarized and theoretical and empirical evidence concerning these determinants is provided. Section 3 is the empirical part of the paper. Here the data is described, measures of
* Institute of Economic Studies, Charles University, Prague and IDET, Department of Economics, Ludwig-Maximilians-Universität, Munich (Patrik.Bauer@seznam.cz) This research was supported by the Grant Agency of the Czech Republic, Grant No. 402/01/0033, ‘Risk management and financial engineering: applicability of modern technology on capital market in the Czech Republic’. The author is grateful to the European Commission for supporting his Marie Curie Fellowship at LMU, Munich. Moreover, he would like to thank Zdenek Sid Blaha, Vít Bubák, Jana Fajtová, Irena Jindﬁichovská and the participants in the research seminar at the Seminar for Comparative Economics, Munich (especially Monika Schnitzer) for their selfless help and helpful comments. 1
the cases of Brazil, Mexico, India, South Korea, Jordan, Malaysia, Pakistan, Thailand, Turkey and Zimbabwe the case of China
Finance a úvûr – Czech Journal of Economics and Finance, 54, 2004, ã. 1-2
leverage are defined, the extent of leverage is characterized and the impact of potential determinants of capital structure on leverage is tested. Section 4 provides conclusions of the study. 1. Theoretical and Empirical Findings According to Myers (2001, p. 81), “there is no universal theory of the debt-equity choice, and no reason to expect one”. However, there are several useful conditional theories3, each of which helps to understand the debt-to-equity structure that firms choose. These theories can be divided into two groups – either they predict the existence of the optimal debt-equity ratio for each firm (so-called static trade-off models) or they declare that there is no well-defined target capital structure (pecking-order hypothesis). Static trade-off models understand the optimal capital structure as an optimal solution of a trade-off, for example the trade-off between a tax shield and the costs of financial distress in the case of trade-off theory. According to this theory the optimal capital structure is achieved when...