Skip to main content
SpringerLink
Log in

Determinants of capital structure of australian trading banks

  • Articles
  • Published:
Asia Pacific Journal of Management Aims and scope Submit manuscript

Abstract

Using pooled time series/cross section data of Australian trading banks over the 1967–1988 period, this study examines the determinants of bank capital ratios. Little evidence is found to support the tax benefit/bankruptcy cost trade-off, whereas evidence is broadly consistent with the predictions of Myers' pecking order theory in the presence of transactions costs and asymmetric information. Institutional factors, including bank deregulation and type of bank, are also significant determinants of capital management of Australian trading banks.

This is a preview of subscription content, log in via an institution to check access.

Access this article

Log in via an institution

Price excludes VAT (USA)
Tax calculation will be finalised during checkout.

Instant access to the full article PDF.

Similar content being viewed by others

References

  1. Akella, S.R. and Greenbaum, S.I., 1988, Savings and Loan Ownership Structure and Expense Preference,Journal of Banking and Finance 12: 419–437.

    Google Scholar 

  2. Alchian, A.A., 1965, Some Economics of Property Rights,Il Politico 30: 816–829.

    Google Scholar 

  3. Alchian, A.A., 1977,Economic Forces at Work, The Liberty Fund, Indianapolis.

    Google Scholar 

  4. Altman, E.I., 1984, A further empirical investigation of the bankruptcy cost question,Journal of Finance 39: 1067–1089.

    Google Scholar 

  5. Auerbach, A. and King, M., 1983, Taxation, portfolio choice, and debt-equity ratios: a general equilibrium,Quarterly Journal of Economies 98: 587–609.

    Google Scholar 

  6. Bewley, R. and Fiebig, D.G., 1990, Why are Long-run Parameter Estimates so Disparate?Review of Economics and Statistics 72: 345–349.

    Google Scholar 

  7. Buser, S.A., Chen, A.H. and Kane, E.J., 1981, Federal Deposit Insurance, Regulatory Policy and Optimal Bank Capital,Journal of Finance 36: 51–60.

    Google Scholar 

  8. Chow, D., 1985,Bankruptcy costs and optimal capital structure: The Australian evidence, BCom (Hons) thesis, University of New South Wales.

  9. Copeland, T.E. and Weston, J.F., 1988,Financial theory and corporate policy, (Addison-Wesley, Reading Ma.), 3rd ed.

    Google Scholar 

  10. Davies, D.G., 1981, Property Rights and Economic Behaviour in Private and Government Enterprises: The case of Australia's Banking System,Research in Law and Economics 3: 111–142.

    Google Scholar 

  11. Davis, K., 1989,Bank Capital Adequacy, Paper presented at Second Annual Australasian Finance and Banking Conference, University of New South Wales, November.

  12. De Angelo, H. and Masulis, R.W., 1980, Optimal capital structure under corporate and personal taxation,Journal of Financial Economics 8: 3–29.

    Google Scholar 

  13. Fama, E.F. and Jensen, M.C., 1983, Separation of Ownership and Control,Journal of Law and Economics 26: 301–326.

    Google Scholar 

  14. Fischer, E.O., Heinkel, R. and Zechner, J., 1989, Dynamic capital structure choice: theory and tests,Journal of Finance 44: 19–40.

    Google Scholar 

  15. Flath, D. and Knoeber, C.R., 1980, Taxes, failure costs, and optimal industry capital structure: an empirical test,Journal of Finance 35: 99–117.

    Google Scholar 

  16. Gavish, B. and Kalay, A., 1983, On the asset substitution problem,Journal of Financial and Quantitative Analysis 18: 21–30.

    Google Scholar 

  17. Green, R.C. and Talmor, E., 1986, Asset substitution and the agency costs of debt financing,Journal of Banking and Finance 10: 391–399.

    Google Scholar 

  18. Hempel, G.H., Coleman, A.B. and Simonson, D.G., 1986,Bank Management: Text and Cases John Wiley & Sons, New York, 2nd ed.

    Google Scholar 

  19. Hogan, W.P. and Sharpe, I.G., 1989, Prudential Regulation of Bank Ownership and Control,Economic Analysis and Policy 19: 73–90.

    Google Scholar 

  20. Hogan, W.P. and Sharpe, I.G., 1990a, Bank Capital Adequacy in Australia,Australian Journal of Management 15: 177–201.

    Google Scholar 

  21. Hogan, W.P. and Sharpe, I.G., 1990b, Prudential Supervision of Australian Banks,Economic Record 66: 127–145.

    Google Scholar 

  22. Howard, P.F. and Brown, R.L., 1992, Dividend Policy and Capital Structure under the Imputation Tax System: Some Clarifying Comments,Accounting and Finance 32: 51–62.

    Google Scholar 

  23. Jalilvand, A. and Harris, R.S., 1984, Corporate Behaviour in Adjusting to Capital Structure and Dividend Targets: An Econometric Study,Journal of Finance 39: 127–145.

    Google Scholar 

  24. Jensen, M.C. and Meckling, W.H., 1976, Theory of the firm: managerial behaviour, agency costs and ownership structure,Journal of Financial Economics 3: 305–360.

    Google Scholar 

  25. Judge, G., Griffiths, W., Hill, R., Lutkepohl, H. and Lee, T., 1985,The Theory and Practice of Econometrics, Wiley, New York, 2nd ed.

    Google Scholar 

  26. Kim, H., 1978, A mean-variance theory of optimal structure and corporate debt capacity,Journal of Finance 33: 45–63.

    Google Scholar 

  27. Kim, E.H., 1982, Miller's equilibrium, shareholder leverage clienteles and optimal capital structure,Journal of Finance 37: 301–319.

    Google Scholar 

  28. Kraus, A. and Litzenberger, R., 1973, A state preference model of optimal financial leverage,Journal of Finance 28: 911–922.

    Google Scholar 

  29. Lim, G.S. and Valentine, T.J., 1985, Trading Banks, in Lewis, M.K. and R.H. Wallace (eds),Australia's Financial Institutions and Markets, Longman Cheshire, Melbourne.

    Google Scholar 

  30. Marcus, A.J., 1983, The bank capital decision: a time series — cross section analysis,Journal of Finance 38: 1217–1232.

    Google Scholar 

  31. Miller, M., 1977, Debt and taxes,Journal of Finance 32: 261–276.

    Google Scholar 

  32. Modigliani, F. and Miller, M., 1958, The cost of capital, corporation finance and the theory of investment,American Economic Review 48: 261–297.

    Google Scholar 

  33. Modigliani, F. and Miller, M., 1963, Corporate income taxes and the cost of capital: a correction,American Economic Review 53: 433–443.

    Google Scholar 

  34. Myers, S.C., 1984, The capital structure puzzle,Journal of Finance 39: 575–592.

    Google Scholar 

  35. Myers, S.C. and Majluf, N.S., 1984, Corporate financing and investment decisions when firms have information that investors do not have,Journal of Financial Economics 13: 187–221.

    Google Scholar 

  36. Park, S.Y. and Williams, J., 1985, Taxes, capital structure, and bondholder clienteles,Journal of Business 58: 203–224.

    Google Scholar 

  37. Peltzman, S., 1970, Capital investment in commercial banking and its relation to portfolio regulation,Journal of Political Economy 78: 1–26.

    Google Scholar 

  38. Ross, S.A., 1977, The determination of financial structure: the incentive-signalling approach,Bell Journal of Economics 8: 23–40.

    Google Scholar 

  39. Senbet, L.W. and Taggart R.A. Jr., 1984, Capital structure equilibrium under market imperfections and incompleteness,Journal of Finance 39: 93–103.

    Google Scholar 

  40. Sharpe, I.G., 1991, Deregulation, Ownership Structure, and Capital Management of Australian Savings Banks: 1967–1988, in M. Johnson et al. (eds.),Contemporary Issues in Australian Economics, Macmillan Company of Australia: 24–48.

  41. Sharpe, I.G. and Pooley, G., 1991, Asymmetric Information, Adjustment Costs and Capital Structure of Australian Finance Companies vol. 1,Pacific Accounting Review: 93–125.

  42. Talmor, E., R. Haugen and Barnea, A., 1985, The value of the tax subsidy on risky debt,Journal of Business 58: 181–202.

    Google Scholar 

  43. Titman, S. and Wessels, R., 1988, The determinants of capital structure choice,Journal of Finance 43: 1–19.

    Google Scholar 

  44. Warner, J.B., 1977, Bankruptcy costs: some evidence,Journal of Finance 32: 337–347.

    Google Scholar 

  45. White, H., 1980, A heteroscedasticity-consistent covariance matrix estimator and direct test for heteroscedasticity,Econometrica 48: 817–838.

    Google Scholar 

  46. Williamson, O.E., 1983, Organisation Form, Residual Claimants, and Corporate Control,Journal of Law and Economics 26: 351–366.

    Google Scholar 

  47. Zechner, J. and P. Swoboda, 1986, The critical implicit tax rate and capital structure,Journal of Banking and Finance 10: 327–341.

    Google Scholar 

Download references

Authors
  1. Ian G. Sharpe
    View author publications

    You can also search for this author in PubMed Google Scholar

Additional information

The author is from the University of New South Wales, Kensington, N.S.W. Thanks are due to Neil Esho, Paul Gatward, Warren Hogan, Michael Skully and two anonymous referees for helpful comments on earlier drafts of this paper.

Rights and permissions

Reprints and permissions

About this article

Cite this article

Sharpe, I.G. Determinants of capital structure of australian trading banks. Asia Pacific J Manage 12, 97–121 (1995). https://doi.org/10.1007/BF01734388

Download citation

  • Issue Date:

  • DOI: https://doi.org/10.1007/BF01734388

Keywords

Search

Navigation