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Were modern capital structure theories valid before World War I?

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  • DELOOF, Marc
  • VAN OVERFELT, Wouter

Abstract

This study investigates whether capital structure theory can explain debt ratios in an historical environment which was characterized by poor investor protection, booming stock markets and strong banks, and in which corporate income tax did not affect capital structure. Our results, based on a unique, hand-collected sample of 556 firm-year observations for 129 listed companies in pre-World War I Belgium, are remarkably similar to findings for present-day samples. Leverage was positively related to asset tangibility, firm size and firm age, and it was negatively related to profitability and prior stock returns. Bank relationships were associated with lower leverage.

Suggested Citation

  • DELOOF, Marc & VAN OVERFELT, Wouter, 2007. "Were modern capital structure theories valid before World War I?," Working Papers 2007024, University of Antwerp, Faculty of Business and Economics.
    • Handle: RePEc:ant:wpaper:2007024
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    File URL: https://repository.uantwerpen.be/docman/irua/3aa832/be7e995e.pdf
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    Keywords

    Capital structure; Corporate income tax; Investor protection; Bank relationships; Universal banks;
    All these keywords.

    JEL classification:

    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill

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