Determinants of Capital Structure: Evidence from a Major Developing Economy

Determinants of Capital Structure: Evidence from a Major Developing Economy

Title:

Determinants of Capital Structure: Evidence from a Major Developing Economy

Number:

14/26

Author(s):

Bülent Köksal, Cüneyt Orman

Language:

English

Date:

July 2014

Abstract:

A major shortcoming of capital structure studies on developing economies is that they generally restrict their analyses to large publicly-traded manufacturing firms. Consequently, we know little about the applicability of various capital structure theories to firms that are private, small, and/or outside the manufacturing industry in these economies. In this paper, we conduct a comparative test of the trade-off and pecking order theories using a comprehensive firm-level dataset that covers manufacturing, non-manufacturing, small, large, publicly-traded, and private firms in a major developing economy, Turkey. The trade-off theory provides a better description of the capital structures of all firm types than the pecking order theory. Moreover, the trade-off theory appears to be particularly suitable for understanding the financing choices of large private firms in the non-manufacturing sector and when the economic environment is relatively stable. By contrast, pecking order theory is most useful when it comes to small publicly-traded manufacturing firms, especially when the economic environment is relatively unstable.

Keywords:

Capital Structure, Non-Financial Firms, Pecking Order Theory, Trade-off Theory, Turkey

JEL Codes:

G30; G32; F65

Determinants of Capital Structure: Evidence from a Major Developing Economy
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