1 Introduction
1.1 Why modeling capital structure in transition market?
Due to transitional markets less efficiency, information asymmetry and global convergence, capital structure decisions in transition markets are relatively influenced by the three theories of capital structure.
2 Determinants of capital structure: review of the relevant literature
Factors (determinants of capital structure) | Variables (ratio/proxy) | Theoretical/Empirical underpinnings |
---|---|---|
Target debt ratioa
| DEt+1
| |
ΔDR* | ||
Average industry leverage | ΔDR
AVG
| |
Structure of tangible assets | FATA
t
(ratio of fixed assets/total assets) | |
Relative tax effects | ΔNDTAX [The ratio of depreciation to total assets (DEP/A)
t
] | |
ECTR
t
(The effective corporate tax rate)b
| ||
Δ(NDT/A) | A direct estimate of non-debt tax shields over total assets (Titman and Wessels 1988)c
| |
Growth | CETA
t
(capital expenditures over total assets) | |
GTA
t
(growth of total assets = percentage change in total assets) | ||
SG
t
(sales growth) | ||
ASTURN
t
(assets turnover) | ||
Investment growth opportunities | Market-Book Ratio MB
t
(dummy variables) | |
Bankruptcy risk | ||
DCR
t
(Debt Coverage Ratio) | ||
Agency costs | ER
t
(Expense Ratio = Operating expenses scaled by annual sales)e
| |
AUR
t
(Assets Utilization Ratio = Annual sales/Total assets) | ||
Uniqueness | SES
t
[Selling Expenses over Sales (Titman and Wessels 1988)] | |
Industry classification | IC
t
(Dummy variables 11 different types of non-financial industries) | |
Size | LnAssets
t
, the natural logarithm of total assets (Dummy variable) | |
LnSales
t
, the natural logarithm of net sales (Dummy variable) | ||
Profitability | ΔEBITDA (Earnings Before Interest, Taxes, and Depreciation over Total Assets) | Firm’s profitability ratios, which indicate the relationship between firm’s profitability and leverage (Toy et al. 1974; Martin and Scott 1974; Schmidt 1976; Carleton and Silberman 1977; Marsh 1982; Long and Maltiz 1985; Titman and Wessels 1988; Harris and Raviv 1991; Whited 1992; Rajan and Zingales 1995; Ghosh 2000; Ozkan 2001). |
ΔOIS (Operating Income over Sales) | ||
ΔOIA (Operating Income over Total Assets) | ||
ΔPM (Profit Margin) | ||
ΔROI (Return on Investment) | ||
Financial flexibility | REAt+1 [The expected effect of ‘Retained Earnings Ratio’ as a proxy for the retention rate.] | |
ΔREA (A measure of the cumulative effect retained earnings, thus the extent of firm’s financial flexibility). | ||
Liquidity position | ΔQR (Quick Ratio) | The relationship between assets’ liquidity and the use of debt (Ozkan 2001). |
ΔWCR (Working Capital Ratio) | ||
ΔCashR (Cash Ratio) | ||
ΔCR (Current Ratio) | ||
Interest rate | IR
t
(Interest Rate on bank loans) | |
Timing effect | ΔPE (Price/Earnings Ratio) | |
Transaction costs | DPR
t
(Dividend Payout Ratio) | |
Free cash flow | FCT
t
| Jensen (1986) |
3 Variables and research proxies
3.1 Dependent variables
3.2 Independent variables
Variables | Ratio/Proxy | Mean | SD | Min | Median | Max |
---|---|---|---|---|---|---|
Long-term debt ratio | ΔLTDR
t
| −0.01 | 0.154 | −2 | 0 | 1.358 |
Short-term debt ratio | ΔSTDR
t
| −0.02 | 0.427 | −5.54 | −0.1 | 3.165 |
Target debt ratio | DEt+1
| −0.01 | 0.38 | −6.13 | 0.001 | 4.5 |
Average industry leverage | ΔADR
AVG
| −0.01 | 0.14 | −0.54 | −0.01 | 0.48 |
Structure of tangible assets | FATA
t
| 0.24 | 0.3 | 0.002 | 0.18 | 5.33 |
Relative tax effects | ΔNDTAX
t
| −0.02 | 0.23 | −4.3 | 0 | 0.24 |
Growth | GTA
t
| 0.22 | 1.13 | −0.9 | 0.05 | 15.05 |
Investment growth opportunities (MB ratio) | High MB | 0.05 | 0.22 | 0 | 0 | 1 |
Average MB | 0.29 | 0.45 | 0 | 0 | 1 | |
Low MB | 0.65 | 0.47 | 0 | 1 | 1 | |
Bankruptcy risk | DCR
t
| 76.9 | 11.4 | −8.8 | 3.01 | 25.3 |
Agency costs | ER
t
| 0.15 | 0.17 | −0.01 | 0.11 | 1.8 |
Industry classification (IC)a
| IC1 | 0.03 | 0.17 | 0 | 0 | 1 |
IC2 | 0.01 | 0.10 | 0 | 0 | 1 | |
IC3 | 0.09 | 0.29 | 0 | 0 | 1 | |
IC4 | 0.08 | 0.28 | 0 | 0 | 1 | |
IC5 | 0.06 | 0.24 | 0 | 0 | 1 | |
IC6 | 0.06 | 0.24 | 0 | 0 | 1 | |
IC7 | 0.07 | 0.26 | 0 | 0 | 1 | |
IC8 | 0.13 | 0.33 | 0 | 0 | 1 | |
IC9 | 0.22 | 0.41 | 0 | 0 | 1 | |
IC10 | 0.07 | 0.26 | 0 | 0 | 1 | |
IC11 | 0.10 | 0.31 | 0 | 0 | 1 | |
Size (LnAssets
t
) | Large size | 0.3 | 0.46 | 0 | 0 | 1 |
Medium size | 0.35 | 0.48 | 0 | 0 | 1 | |
Small size | 0.34 | 0.47 | 0 | 0 | 1 | |
Profitability | ΔEBITDA
t
| −0.03 | 0.8 | −12.2 | −0.01 | 12.3 |
Financial flexibility | REAt+1
| 0.21 | 0.24 | 0 | 0.16 | 4.1 |
Liquidity position | ΔCashR
t
| −0.31 | 6.2 | −13.8 | −0.001 | 1.9 |
Interest rate | IR
t
| 0.14 | 0.01 | 0.13 | 0.14 | 0.16 |
Timing effect | ΔPE
t
| 6.86 | 10.8 | −41.5 | 0.02 | 20.6 |
Transaction costs | DPR
t
| 0.94 | 11.3 | 0 | 0.35 | 25.1 |
4 Data and methodology
4.1 Data
4.2 Methodology
5 The statistical modeling approach: the subset selection criteria
5.1 The adjusted coefficient of determination (R a 2 )
5.2 Mallows’ criterion (C p )
5.3 Akaike’s information criterion (AIC)
5.4 Bayes information criterion (BIC)
5.5 Final prediction error (FPE)
5.6 Hannan and Quinn criterion (HQ)
5.7 Smith and Spiegelhalter criterion (SSC)
5.8 Shibata criterion (SC)
5.9 Risk inflation criterion (RIC)
5.10 Bias-variance criterion (BIVAR)
6 Results
6.1 How does the subset selection work?
Variables | Model selection criteria |
n
i
| |||||||||
---|---|---|---|---|---|---|---|---|---|---|---|
R
a
2
| CP | AIC | BIC | FPE | HQ | SSC | SC | BIVAR | RIC | ||
DEt+1
| √ | √ | √ | √ | √ | √ | √ | √ | √ | 9 | |
ΔADR
AVG
| √ | √ | √ | √ | √ | √ | 6 | ||||
FATA
t
| √ | √ | √ | √ | √ | √ | √ | √ | √ | √ | 10 |
ΔNDTAX
t
| √ | √ | √ | √ | √ | √ | √ | √ | √ | 9 | |
GTA
t
| √ | √ | √ | √ | √ | √ | √ | √ | √ | √ | 10 |
MB1 | √ | √ | √ | √ | √ | √ | √ | √ | √ | 9 | |
MB2 | √ | √ | 2 | ||||||||
DCR
t
| √ | √ | 2 | ||||||||
ER
t
| √ | √ | 2 | ||||||||
IC1 | √ | √ | 2 | ||||||||
IC2 | √ | √ | 2 | ||||||||
IC3 | √ | √ | 2 | ||||||||
IC4 | √ | √ | 2 | ||||||||
IC5 | √ | √ | 2 | ||||||||
IC6 | √ | √ | 2 | ||||||||
IC7 | √ | √ | 2 | ||||||||
IC8 | √ | √ | 2 | ||||||||
IC9 | √ | √ | 2 | ||||||||
IC10 | √ | √ | 2 | ||||||||
IC11 | √ | √ | 2 | ||||||||
Large-size firms | √ | √ | 2 | ||||||||
Medium-size firms | √ | √ | 2 | ||||||||
ΔEBITDA
t
| √ | √ | √ | 3 | |||||||
REAt+1
| √ | √ | √ | √ | √ | √ | √ | √ | √ | 9 | |
ΔCashR
t
| √ | √ | 2 | ||||||||
IR
t
| √ | √ | √ | √ | √ | √ | √ | √ | √ | 9 | |
ΔPE
t
| √ | √ | 2 | ||||||||
DPR
t
| √ | √ | 2 |
Variables | Model selection criteria |
n
i
| |||||||||
---|---|---|---|---|---|---|---|---|---|---|---|
R
a
2
| CP | AIC | BIC | FPE | HQ | SSC | SC | BIVAR | RIC | ||
DEt+1
| √ | √ | √ | √ | √ | √ | √ | √ | √ | 9 | |
ΔADR
AVG
| √ | √ | 2 | ||||||||
FATA
t
| √ | √ | √ | √ | √ | √ | √ | √ | √ | √ | 10 |
ΔNDTAX
t
| √ | √ | √ | √ | √ | √ | √ | √ | √ | 9 | |
GTA
t
| √ | √ | √ | √ | √ | √ | √ | √ | √ | √ | 10 |
MB1 | √ | √ | √ | 3 | |||||||
MB2 | √ | √ | 2 | ||||||||
DCR
t
| √ | √ | 2 | ||||||||
ER
t
| √ | √ | 2 | ||||||||
IC1 | √ | √ | 2 | ||||||||
IC2 | √ | √ | 2 | ||||||||
IC3 | √ | √ | 2 | ||||||||
IC4 | √ | √ | 2 | ||||||||
IC5 | √ | √ | 2 | ||||||||
IC6 | √ | √ | 2 | ||||||||
IC7 | √ | √ | √ | √ | √ | √ | √ | √ | 8 | ||
IC8 | √ | √ | 2 | ||||||||
IC9 | √ | √ | 2 | ||||||||
IC10 | √ | √ | 2 | ||||||||
IC11 | √ | √ | √ | √ | √ | 5 | |||||
Large-size firms | √ | √ | 2 | ||||||||
Medium-size firms | √ | √ | 2 | ||||||||
ΔEBITDA
t
| √ | √ | √ | √ | √ | √ | √ | √ | √ | 9 | |
REAt+1
| √ | √ | 2 | ||||||||
ΔCashR
t
| √ | √ | 2 | ||||||||
IR
t
| √ | √ | √ | √ | √ | √ | √ | √ | 8 | ||
ΔPE
t
| √ | √ | 2 | ||||||||
DPR
t
| √ | √ | 2 |
Variables | Model selection criteria |
n
i
| |||||||||
---|---|---|---|---|---|---|---|---|---|---|---|
R
a
2
| CP | AIC | BIC | FPE | HQ | SSC | SC | BIVAR | RIC | ||
DEt+1
| √ | √ | 2 | ||||||||
ΔADR
AVG
| √ | √ | 2 | ||||||||
FATA
t
| √ | √ | √ | √ | √ | √ | √ | √ | √ | √ | 10 |
ΔNDTAX
t
| √ | √ | 2 | ||||||||
GTA
t
| √ | √ | 2 | ||||||||
MB1 | √ | √ | √ | √ | √ | √ | √ | √ | √ | 9 | |
MB2 | √ | √ | √ | 3 | |||||||
MB3 | √ | √ | √ | √ | √ | √ | √ | √ | √ | 9 | |
DCR
t
| √ | √ | √ | 3 | |||||||
ER
t
| √ | √ | √ | √ | √ | √ | √ | √ | √ | √ | 10 |
IC1 | √ | √ | √ | √ | √ | √ | √ | 7 | |||
IC2 | √ | √ | √ | √ | √ | √ | √ | 7 | |||
IC3 | √ | √ | 2 | ||||||||
IC4 | √ | √ | 2 | ||||||||
IC5 | √ | √ | √ | √ | √ | √ | √ | √ | √ | 9 | |
IC6 | √ | √ | 2 | ||||||||
IC7 | √ | √ | √ | 3 | |||||||
IC8 | √ | √ | 2 | ||||||||
IC9 | √ | √ | √ | √ | √ | √ | √ | √ | √ | √ | 10 |
IC10 | √ | √ | √ | √ | √ | √ | √ | √ | √ | 9 | |
IC11 | √ | √ | √ | √ | √ | √ | √ | √ | √ | √ | 10 |
Large-size firms | √ | √ | √ | √ | √ | √ | √ | √ | √ | √ | 10 |
Medium-size firms | √ | √ | 2 | ||||||||
ΔEBITDA
t
| √ | √ | 2 | ||||||||
REAt+1
| √ | √ | √ | √ | √ | √ | √ | 7 | |||
ΔCashR
t
| √ | √ | √ | 3 | |||||||
IR
t
| √ | √ | 2 | ||||||||
ΔPE
t
| √ | √ | 2 | ||||||||
DPR
t
| √ | √ | √ | 3 |
Variables | Model selection criteria |
n
i
| |||||||||
---|---|---|---|---|---|---|---|---|---|---|---|
R
a
2
| CP | AIC | BIC | FPE | HQ | SSC | SC | BIVAR | RIC | ||
DEt+1
| √ | √ | √ | √ | √ | √ | √ | √ | √ | 9 | |
ΔADR
AVG
| √ | √ | 2 | ||||||||
FATA
t
| √ | √ | √ | √ | √ | √ | √ | √ | √ | √ | 10 |
ΔNDTAX
t
| √ | √ | √ | 3 | |||||||
GTA
t
| √ | √ | √ | √ | √ | √ | √ | √ | √ | √ | 10 |
MB1 | √ | √ | √ | √ | √ | √ | √ | √ | √ | 9 | |
MB2 | √ | √ | 2 | ||||||||
MB3 | √ | √ | 2 | ||||||||
DCR
t
| √ | √ | 2 | ||||||||
ER
t
| √ | √ | 2 | ||||||||
IC1 | √ | √ | 2 | ||||||||
IC2 | √ | √ | 2 | ||||||||
IC3 | √ | √ | 2 | ||||||||
IC4 | √ | √ | 2 | ||||||||
IC5 | √ | √ | 2 | ||||||||
IC6 | √ | √ | 2 | ||||||||
IC7 | √ | √ | √ | √ | √ | √ | √ | 7 | |||
IC8 | √ | √ | 2 | ||||||||
IC9 | √ | √ | 2 | ||||||||
IC10 | √ | √ | 3 | ||||||||
IC11 | √ | √ | 3 | ||||||||
Large-size firms | √ | √ | 2 | ||||||||
Medium-size firms | √ | √ | 2 | ||||||||
ΔEBITDA
t
| √ | √ | √ | √ | √ | √ | √ | √ | √ | 9 | |
REAt+1
| √ | √ | 2 | ||||||||
ΔCashR
t
| √ | √ | 2 | ||||||||
IR
t
| √ | √ | √ | 3 | |||||||
ΔPE
t
| √ | √ | 2 | ||||||||
DPR
t
| √ | √ | 2 |
7 Discussion
Dimension of capital structure | Long-term debt ratio | Short-term debt ratio | Short-term debt/total debt | Changes in total debt ratio | Common determinants of debt financing (Agreed upon by 3 or 4 dependents) |
---|---|---|---|---|---|
Ratio and/or Proxy (Agreed upon by at least 9 model-selection criteria) | Ratio and/or Proxy (Agreed upon by at least 8 model-selection criteria) | Ratio and/or Proxy (Agreed upon by at least 9 model-selection criteria) | Ratio and/or Proxy (Agreed upon by at least 9 model-selection criteria) | ||
Target debt ratio | Equity-debt ratio | Equity-debt ratio | Equity-debt ratio | √ | |
Assets’ tangibility | Fixed assets/total assets | Fixed assets/total assets | Fixed assets/total assets | Fixed assets/total assets | √ |
Relative tax effect | Non-debt tax shields | Non-debt tax shields | |||
Firm’s growth | Growth of total assets | Growth of total assets | Growth of total assets | √ | |
Timing borrowing decisions | Interest rate | Interest rate | |||
Investment opportunities | Market-book ratio (high MB ratio is selected by the nine criteria) | Market-book ratio (high MB ratio is selected by the nine criteria) | Market-book ratio (high MB ratio is selected by the nine criteria) | √ | |
Market-book ratio (low MB ratio is selected by the nine criteria) | |||||
Financial flexibility | Retained earnings/total assets | ||||
Type of industry | Industry classification (Chemicals & Fertilizers Industry is selected by the eight criteria) | Industry classification (Textile & Garments, Building, Cement & Contracting, Engineering & Electrical, Housing & Real Estate Industries are selected by the eight criteria) | |||
Profitability | Earnings before interest, tax, and depreciation/total assets | Earnings before interest, tax, and depreciation/total assets | |||
Agency costs | Expense ratio | ||||
Size | Large-size firms |