Determinants of capital structure of firms: an analysis on the Euro Zone and the U.K

The capital structure of firms has been a widely discussed subject in the world of corporate finance in the last decades. The aim of this paper is to analyse how some of its determinants previously studied by several authors, either firm characteristics and institutional settings, affect the financial structure of said firms. We perform a multivariate analysis with OLS using two equations, one for each of the dependent variables (market leverage and book leverage). We use a White estimator (diagonal) to avoid possible heteroscedasticity problems due to the use of panel data. Our sample includes firms from the UK, traditionally labeled as a market-oriented economy, and the Eurozone, considered a set of bank-oriented economies, totaling 4337 firms. The results suggest that there are no major differences in these two sets, concerning the behaviour of the determinants of capital structure. Furthermore, we interpret our results in light of the major theories on the subject, namely the trade-off, pecking order and market-timing theories. We also note that the 2008 financial crisis did not provoke any apparent change in the behaviour of structure determinants. With this work we hope to further understand the difference between bank and market oriented economies, as well as compare the main theories on the topic of determinants of capital structure of firms, on an empirical level, and finally to analyse the impact of the 2008 financial crisis on this topic.