How Do Firm Characteristics Affect Capital Structure Finance Essay

During the past 40 old ages one of the most controversial issues in finance theory has been the theory of capital construction. The modern theory of capital construction have been developed and expanded on the footing of seminal work by Modogliani & A ; Miller ( 1958 ) , which suggests that house ‘s market value is independent with its capital construction built on premise of perfect capital market, and therefore equity and debt can be replacements for each other. Furthermore, the cardinal premise under the M & A ; M proposition is to presume exists perfect capital construction, which includes no asymmetrical information, no revenue enhancement, no interlingual rendition cost and so on. So far, most of research workers have been focus on trial the cogency of modern theory of capital construction every bit good as in different concern sectors. For case, Modigliani & A ; Miller ( 1996 ) focal point on analysis electric-utility companies and Titman & A ; Wessels ( 1998 ) used fabrication houses as a sample. However, even after long clip intensive research, there is still no individual theory have been found to work out the capital construction mystifier ( Bhaduri, 2002 ) . Furthermore, the empirical research workers have failed to find the house specific determiners of capital construction when the theories of capital construction are quite abstract and non straight discernible ( Titman and Wesswls, 1988 ) .

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Once the premise is invalid in the existent concern universe, the pick of capital can impact house ‘s value as of import factor. The different combination of debt and equity will impact steadfast value instantly. Therefore the house director is really necessary to happen best combination of debt and equity in order to maximum steadfast value. It becomes progressively cognizant that the development of alternate theories of capital construction determination and their empirical analysis is highly of import. Now, research workers have already realized that the pick of capital construction between debt and equity which besides depend on house features.

Since different states have different economic systems, so formation of a different capital construction. In the long clip, UK has been development under the traditional and laissez faire capitalist economic system. It has extremely developed securities market and has a power to against the traditional assemblage of fiscal factor. Furthermore, such traditional economic system is formatted by a company ‘s funding features.

The UK can be characterized as holding a loosely similar fiscal and legal environment to the US. It has a common jurisprudence legal system with good investor protection, well-developed fiscal markets and an active market for corporate control. Bank finance and inter-company ownership relationships play comparatively smaller functions than in some states. The most obvious differences between the UK and US relate to revenue enhancement and bankruptcy codifications and the size of the corporate bond market ( Rajan and Zingales, 1995 ) .

There are three major grounds to take UK as a sample state. So far, a figure of research workers have documented the house specific determiners of capital construction which based on houses in the US. Recently, research workers have shown an increased involvement in to document international consequences. Furthermore, the turning Numberss of empirical groundss of Chinese houses have been added to back up old surveies. However, merely few surveies have used UK informations, which includes Bennett & A ; Donnelly ( 1993 ) , Ozkan ( 2001 ) and Bevan & A ; Danbolt ( 2002, 2004 ) . There is no more available grounds for UK houses after last publish paper in 2004. On the other manus, there are some struggles in the empirical consequences. Therefore, this survey attempts to cut down the clip spread from 2007 to 2011 and add more grounds for UK houses. Second, the mark houses listed in London Stock Exchange and represents about 81 % of UK market capitalisation. Compared with other unlisted houses, these houses should hold a comparatively stable capital construction and have their ain capital construction. Based on the old surveies, we found that uniqueness and liquidness is deficiency of empirical grounds in the context UK. Therefore, this survey will include uniqueness and liquidness as explanatory variables to supply new grounds of house specific determiners of capital construction. Finally, UK as developed states which have a complete fiscal system, it will much easy to make research in this background. Furthermore, the bing theories of capital construction and theoretical theoretical accounts have more explanatory power and suited in developed states.

1.2 Research aims

The aim of this research is to look into whether there is a important relationship between house features and capital construction. We selected seven house characterizes Based on empirical grounds on capital construction, and use selected the mark houses listed in FTSE 100 over the period from 2005 to 2011. The undermentioned research inquiry will be aid to accomplish our aim.

1. Which house features can impact UK house ‘s capital construction?

2. How do steadfast features affect capital construction?

1.3 Outline of Structure

This thesis is organized into six chapters as follow. Chapter 2 reviews the relevant theories of capital construction and paperss the empirical groundss based on the United States, United Kingdom and China informations and brief discourse the house specific determiners of capital construction in last subdivision. Chapter 3 so proposes the research methodological analysis in this survey and develops testable hypothesis harmonizing to the theories and literature nowadayss in chapter 2. Chapter 4 represents the consequence of analytical treatment. The concluding chapter 5 concludes that summary the chief findings, restriction of the survey and recommendations for future research.

1.4 Summary of Chapter

This chapter brief discusses the background of theories of capital construction. And it explained the necessary of extent the research in UK listed houses. Besides, this chapter presents the three major grounds to take UK as a sample state. Furthermore, the capital construction of UK houses has been analyzed. This aim of this survey is investigated whether there is a important relationship between house features and capital construction. In order to accomplish the aims, there were two research inquiries have been added. Therefore, in the following chapter, we will reexamine the relevant theories of capital construction and empirical groundss on capital construction which based on the houses in USA, UK and China.

Chapter 2: Literature Reappraisal: Theoretical background and Empirical research

2.1 Introduction

This chapter is divided into two subdivisions. The first subdivision is theories background that reviews the primary theories of capital construction. It includes M & A ; M theory, trade-off theory, picking order theory, bureau theory and market timing theory. The 2nd subdivision is empirical research on house determinates of capital construction in developing states and developed states.

2.2 Theories of Capital Structure

The early capital construction theory is really preliminary. The start of the modern theory of capital construction could be regarded as the seminal work which was done by Modigliani and Miller in 1958. In this paper, they supported the net operating income attack and rejected the traditional theory of capital construction. Furthermore, they proposed the first capital construction theory, which is referred to as M & A ; M Proposition. This proposition I states that the market value of the house is independent of its capital construction which based on the premise of a perfect capital market ( Modigliani & A ; Miller, 1958 ) . It assumes there is no asymmetrical information, no revenue enhancement and dealing costs, cipher can separately act upon market monetary values, there is s individual involvement rate for adoption and loaning, and there are homogenous merchandises ( Modigliani & A ; Miller, 1958 ) . Furthermore, M & A ; M Proposition I suggests the value of geared house is equal to ungeared house, which means a house ‘s capital construction do non impact the house ‘s entire value. ( Brealey, Myers, & A ; Allen, 2008 ) . Furthermore, the MM Proposition II states that the capital construction does impact the expected rate of return on the common stock, which is built under perfect capital market premise, expect no revenue enhancement.

In this theory, the premise of a perfect capital market is really of import. The premises should non be relaxed, otherwise the consequence might be alteration: a house ‘s capital construction would go relevant to its overall value. Consequently, as MM theory has discussed the capital construction could be irrelevant from the house ‘s value under what conditions, so that others could happen out the capital construction would be relevant to the house ‘s value under what conditions. Since the market in the existent universe is far from perfect, many researches have contributed to depicting the relationship between a house ‘s capital construction and its value by knocking MM theory ‘s premises.

2.3 Trade-off Theory

Trade off theory is fundamentally derived from the M & A ; M theory, which ab initio developed by Modigliani and Miller ( 1963 ) . They suggest debt can excite houses to assume revenue enhancement shield. Theoretically, in order to derive maximization of revenue enhancement advantages, houses intent to borrow as much of debts to beef up their profitableness. However, the higher degree of debt the higher possibility that houses may fiscal hurt concerns houses failed to run into its duties. Modigliani and Miller ( 1963 ) argue one of the advantages of utilizing maximising degree of debt concerns cut downing involvement payment from corporate revenue enhancement. While Kim ( 1987 ) point out the possible cost of fiscal hurt is closely related with high degree of purchase. Warner ( 1997 ) province fiscal hurt plays a important function in theories of capital construction, and increasing costs of fiscal hurt have important effects on houses operations and determination devisings, while fiscal hurt costs are normally refers to bankruptcy costs. Megginson, et Al ( 2007 ) argues bankruptcy costs can be categorized as direct cost and indirect costs. Direct costs related to the disbursement which straight associates with bankruptcy disposal, such as attorney fees, or fee paid to investing banker and comptroller. On the other manus indirect costs are incurred from the effects of bankruptcy, the costs like losing of of import employees and gross revenues during bankruptcy are all belonged to indirect costs. Therefore, on the footing of above statements, bankruptcy costs can hold great impact on house ‘s capital construction, and this has provide intensifiers for many houses to seek the optimum degree of houses leverage, meanwhile it besides lead to the cardinal construct of trade off theory that is the trade-off of between revenue enhancement benefits and fiscal hurt.

A figure of empirical researches are conducted which challenge the trade- off theory. For illustrations, Myers ( 1993 ) discovers some groundss associates with trade off theory, he have found the correlativity between fiscal purchase and house ‘s profitableness are reciprocally related. Harmonizing to Bradley et Al ( 1984 ) , the findings of their empirical research indicates fiscal hurt costs are reciprocally correlated with house ‘s purchase, besides they besides find out the non-debts revenue enhancement nest eggs are reciprocally associated with house ‘s purchase. To the contrary, there are several groundss which supports the tradeoff theory. Byoun ( 2008 ) have found some groundss which conformity with the trade-off theoretical account, shows houses can set mark purchase degree under asymmetric method. Graham and Harvey ( 2001 ) look into the rule of trade off theory through study house ‘s capital construction, the determination of their research suggests bulk of houses have their mark debt ratios which consistent with trade off theory.

2.4 Pecking Order Theory

The picking order theory is besides an of import theory on capital construction. Donaldson ( 1961 ) has foremost stated this theory. After that, it was developed by Myers and Majluf ( 1984 ) that a house follows a funding hierarchy, which means the house should prefer maintained net incomes as internal funding instead than external funding on the footing of the their surveies. Furthermore, if the house must utilize external funding, they will publish the safest security foremost, so possibly equity as a last resort when the company runs out of debt capacity ( Myers, 1984 ) .

The picking order theory is normally on the footing of the thought of asymmetric information, which suggests that to compare with outsider investors, the troughs know more about their companies ‘ future potency, hazards and value ( Brealey et al 2006 ) . Furthermore, asymmetric information can be cardinal determination in the pick between internal and external funding, and publish new debt or equity securities of house ( Brealey et al, 2003 ) .

Harmonizing to Baker & A ; Martin ( 2011 ) , the empirical grounds associate with the picking order theory is assorted. Shyam-Sunder and Myers ( 1999 ) uses a simple empirical manner to analysis the sample of 157 US houses, they find that all of these steadfast act to fund their funding shortages with debt and the pecking order theory provides a really good usher for their funding behaviour. Consistent with this position, Harmonizing to Fama and French ( 2002 ) , in little and high growing house, the picking order theory could execute better than others. On the other manus, some of writers still have found this theory is besides regarded as a sensible descriptive empirical manner of corporate capital construction. Bunn and Yong ( 2004 ) taking a similar attack to Frank & A ; Goyal, but utilizing UK day of the month, found clear grounds to back up the tradeoff theory.

2.5 Agency Theory

Gram molecules et Al ( 2011 ) concluded that both the tradeoff theory and the pecking order theory offer some penetrations into how directors choose the capital constructions for their house. However, other factors such as bureau must be taken into history to consideration. Therefore, in order to accomplish optimum capital construction of houses, Jensen & A ; Meckling ( 1976 ) presented bureau theory, which was a important part to the theory of capital construction.

Agency cost is defined as ‘the cost to the principal ( stockholders ) caused by agents ( directors ) prosecuting their ain involvements alternatively of the principal ‘s involvement ( Stickney et al, 2009 ) . Because of the different involvement between chief and agents and separation of control and ownership in a house, all of these cause struggles. Jensen & A ; Meckling ( 1976 ) place two types of struggles. The first 1 is the struggles between stockholders and directors. This struggle occurs due to the directors and stockholders have different personal involvements pursued ( Baker & A ; Martin, 2011 ) . In peculiar, directors might be more interested in maximising their ain wealth instead than increasing the wealth of stockholders and the house value ( Schroeder et al, 2010 ) . Under this scenario, the directors may be given to taking negative NPV undertakings which might merely spread out the house but damage the wealth of stockholders. Furthermore, there besides would be a struggle between debitors and stockholders. ( Jensen & A ; Meckling, 1976 ) . This struggle arises because the debt contract gives equity-holders an inducement to put ‘sub-optimally ‘ ( Harris & A ; Raviv, 1991 ) . It means that debt holders can reassign hazard to equity holders by puting in hazardous undertakings ( Jensen, 1986 ) . For case, if the undertaking successful and with big return, the equity holders would take most of the addition. However, if the undertaking fails, equity-holders merely holds limited liabilities, but debt-holders would hold to bear the effects ( Harris & A ; Raviv, 1991 ) .

Harris & A ; Raviv ( 1991 ) noted that bureau costs are of import determiner of houses ‘ capital construction, because it analysis types of bureau costs which can assist explicate the relevancy of capital construction. The first type pf bureau cost is the ‘underinvestment or debt overhang job ‘ ( Myers, 1977 ) . Brigham & A ; Ehrhardt ( 2010 ) defined underinvestment job as ‘ a type pf bureau job in which high debt can do directors to waive positive NPV undertakings unless they are highly safe ‘ . Harmonizing to Brealey and Myers ( 2000 ) , about all houses ‘ capital construction could be affected by the underinvestment job, and it is besides important in high debt ratio houses since fiscal hurt. Another bureau cost arises when directors select undertaking merely depend on their personal benefits. The troughs may set about negative NPV undertaking or put excessively many undertaking they company can offer, and most of the undertaking may non profit for the stockholders. It is called overinvestment of free hard currency flow since dividends are non paid in that hard currency flow.

Overall, there are two manner can cut down bureau costs. First, bend directors to stockholders by give their big proportion of portions ( Hawawini & A ; Viallet, 2010 ) . This will be increase the director ‘s motive to running the house twenty-four hours to twenty-four hours concern and besides extenuate the loss from the struggle between the directors and stockholders. Deft funding can be one manner of cut down bureau cost and it can avoid the troughs use available free hard currency to run into their personal chases ( Jensen,1986 ) .

2.6 Market timing theory

For a long period of clip and under the efficient market hypothesis, there are two viing theories that explain the funding determination: tradeoff theory and picking order theory. However, many surveies have challenged these two theories, one of more late and proposed by Baker & A ; Wurgler ( 2002 ) is market clocking theory. Harmonizing to the theory, directors make funding determinations in the visible radiation of capital construction conditions ( Graham & A ; Harvey, 2001 ) . In other words, directors will publish portions when the stocks are overvalues and tend to publish debt when the stock monetary values and diminutions ( Baker & A ; Wurgler, 2002 ) . Furthermore, Loughran and Ritter ( 1995 ) pointed out that ‘ the long-term comparative underperformance of stocks after initial public offering or secondary equity offerings ‘ , which is consistent with the market clocking theory.

Market clocking theory is another theory on capital construction which has been analyzed in recent old ages. Baker & A ; Wurgler ( 2002 ) consequences that market timing has big and relentless consequence on the capital construction of the house. In this theory, they measure market timing by the external finance-weighted norm of historical market-to-book ratios. They find the US purchase of house is negatively related to this market timing step. Furthermore, a high value could be occurred by this step when a house increases its external funding. Indeed, they besides find that there could be a significantly positive relationship between capital construction alterations and the market timing step. As a consequence, they province that “ capital construction is the cumulative result of past efforts to clip the equity market ” ( Baker & A ; Wurgler, 2002: page ) . The empirical literatures based on this theory is turning harmonizing to the positive grounds made by Baker and Wurgler ( 2002 ) for the US. For illustration, Hovakimian ( 2006 ) and Kayhan and Titman ( 2007 ) confirm the negative consequence of historical market-to-book ratios on US house ‘s purchase. On the other manus, Mahajan and Tartaroglu ( 2008 ) study that a negative relationship between purchase of firma and market-to-book ratio in the G-7 states, but the equity market timing can non be a ground to explicate this negative relationship. In add-on, they besides result that the impact of equity market clocking efforts on purchase is short lived. This is more consider with dynamic trade-off manner alternatively of the anticipation of the equity market clocking hypothesis.

2.7 Empirical Surveies on Capital Structure

As has been mentioned above, this research aims to happen out groundss to analyse the factors within houses, which can be the determiners of houses ‘ capital construction. As a effect, to sum up empirical groundss of the major surveies will be really helpful to accomplish our aim. In this subdivision, we will show 8 empirical surveies done in the past old ages, which chief include three states: United States, United Kingdom and China. As these three states have been analyzed and studied in recent old ages, to show these surveies could be helpful to understand the country of research.

There are three surveies selected in the UK, which includes Bennett and Donnelly ( 1993 ) , Ozkan ( 2001 ) and Bevan and Danbolt ( 2004 ) . Bennett and Donnelly ( 1993 ) used 12 old ages informations which from 1977 to 1988 to analysis the determiners of capital construction. They found house size, plus construction, non-debt revenue enhancement shields and house ‘s past profitableness are correlated with capital construction as stated by the theory. However, they reported that a positive relationship between volatility and purchase. Ozkan ( 2001 ) use a dynamic theoretical account to exam the relationship between liquidness and purchase, and utilizing panel day of the month that constructed for 390 non-financial houses for the period from 1984 to 1996. The consequences of the survey show that profitableness, liquidness and growing chances affect a house ‘s debt ratio negatively and non-debt revenue enhancement shields affect house ‘s purchase reciprocally. Furthermore, he merely found litter grounds that the relationship between house size and debt ratio is positive. Bevan and Danbolt ( 2004 ) used OLS method and fixed affects method to analysis the determiners of capital construction of 1054 UK companies over the period from 1991 to 1997. The consequences under the OLS method are consistent with anterior literature, but the consequences under fixed affects method concluded that compared with little houses, larger houses have higher degree of long-run debt and short-run debt. They besides suggested that there is a negatively relationship between profitableness and degree pf geartrain, and degree of growing chances merely has affect debt ratio small.

In recent old ages, many empirical researches about capital construction of Chinese houses have been carried out, which support the capital construction theories. A recent survey by Chen ( 2003 ) that information of 88 Chinese listed companies from 1995 to 2000 has been analyzed by utilizing arrested development theoretical account. It suggests that house size could impact long-run debt negatively and besides a negative relationship between profitableness and debt ratio. In add-on, they argued that growing chances and tangibleness are positive related with debt. In another major survey, Huang & A ; Song ( 2005 ) applied arrested development theoretical account, which contained over 1200 houses ‘ accounting and market informations from 1994 to 2003, to analyse the determinates of capital construction of Chinese listed companies. Their empirical consequences showed that the addition of Chinese house ‘s purchase will consequences in the addition of steadfast size and fixed assets, but will take to the lessening of profitableness, non-debt revenue enhancement shields and growing chances. They besides showed that there is undistinguished relationship exists between province ownership and house ‘s capital construction.

Two empirical research has been selected for United States: Ferri and Jones ( 1979 ) and Titman and Wessels ( 1988 ) . On the footing of the informations gathered for tow five old ages period which is steadfast 1969-1974 and 1971-1976, Ferri and Jones ( 1979 ) concluded that industry category straight consequence house ‘s purchase, size and operating purchase are negatively associated with purchase, but a undistinguished relationship between fluctuation in income and fiscal construction. Titman and Wessels ( 1988 ) employed factor analytic technique to gauge the determiners of capital construction over a period from 1974 to 1982. The consequences showed that house size and singularity are negatively related with short-run debt. However, there were non clear relationship between fiscal purchase and non-debt revenue enhancement shields, volatility, indirect value of assets, every bit good as future growing.

This survey selects variables as what have been tested in the empirical researches above, to add to the empirical groundss. Therefore seven steadfast features of capital construction are selected in the thesis. They are steadfast size, growing chances, non-debt revenue enhancement shields, profitableness, liquidness, uniqueness and tangibleness.

Firm Size ( SIZE )

Firm size plays an of import function in finding the capital construction ( Booth et al 2001 ) . The bulk of surveies suggest a positive relationship between size and purchase. Marsh ( 1982 ) found that big houses prefer to utilize long-run debt and little houses prefer short-run debt. Larger houses might take benefits from economic systems of graduated table to publish long-run debt, and might even acquire dickering power to creditors. Therefore, the relationship between cost of issue debt and house size is negative. However, steadfast size can besides be understood a placeholder of the information received by outside investors. Fama & A ; Jensen ( 1983 ) points out that compared with little houses, debitors of big companies could ever have more information. Rajan & A ; Zingales ( 1995 ) besides back up this point. Overall, houses with less job of asymmetric information will hold more equity than debt, and have lower degree of purchase. On the other manus, the concerns of larger houses are frequently more diversified and have more stable hard currency flow. Under the same fortunes, the chance of bankruptcy for larger houses is lower than little 1s. Both statements suggest that size should be positively related with purchase.

Empirical surveies such as Rajan & A ; Zingales ( 1985 ) analyzed the determiners of capital construction pick by look intoing the funding determinations of public houses in the major industrialised states. They used non-financial houses day of the month for the period 1987-1991. They find important positive correlativity between house size and purchase except for Germany. A recent survey by Antoniou et Al ( 2007 ) analysed the day of the month from five major states ( United Sates, United Kingdom, France, Germany and Japan ) and concluded that the purchase is positively affected the size of the house.

Growth Opportunities ( GROWTH )

Myers ( 1977 ) argues that to compare with low-growth houses, high-growth houses may keep more existent choices for future investing. If high-growth houses need add-on equity funding to implementation such options in the hereafter, a house has hazardous debt outstanding may waive this chance, because this sort of investing will do the benefit of following the undertaking semen to bondholders, which would cut down the wealth of stockholders ( Myers, 1977 ) . Therefore, in this state of affairs the investing undertaking with a positive net present value can non be accepted. Since the job of underinvestment will be greater for houses with greater investing options, Myers predicts that growing chances to be negatively related with purchase. Furthermore, other writers such as Kim & A ; Sorensen ( 1986 ) , Smith & A ; Watts ( 1992 ) , Wald ( 1999 ) , Rajan & A ; Zingales ( 1995 ) and Booth et Al. ( 2001 ) besides support the anticipation of negative relationship.

However, as discussed by Myers ( 1977 ) , Barneal et Al ( 1981 ) , Stohs & A ; Mauer ( 1996 ) , Barclay & A ; Smith ( 1996,1999 ) , Michaelas et Al ( 1999 ) and Ozkan ( 2000 ) , the growing chances affect long-run and short-run debt otherwise. Michaelas et Al ( 1999 ) noted this bureau job could be mitigated if the house issues short term instead than long term debt. Nevertheless, they find the growing chances affect short-run debt positively. On the other manus, Bevan & A ; Danbolt ( 2002 ) found the growing chances affect the sum and short term pitching would be positively.

Non-Debt Tax Shields ( NDTS )

The non-debt revenue enhancement shields ( NDTS ) could be defined as the revenue enhancement tax write-off for depreciation and investing revenue enhancement credits. The non-debt revenue enhancement shields could be considered as options of the revenue enhancement shields of debt funding, and a house has a big sum non-debt revenue enhancement shields is expected to utilize less debt ( DeAngelo & A ; Masulis, 1980 ) . Therefore, the relation between non-debt revenue enhancement shields and purchase should be negative.

Both Wald ( 1999 ) and Chaplinsly & A ; Niehaus ( 1993 ) province the NDTS affect the debt ratio negatively, even they used different ratio to mensurate NDTS. More recent old ages, Huang & A ; Song ( 2005 ) besides found grounds to back up this correlativity. Some of people such as Bradley et Al ( 1984 ) argued that a positive relationship between non-debt revenue enhancement shield and purchase, but most of past surveies support for negative relationship.

2.7.4 Profitability ( PROFIT )

The theoretical anticipations on how the profitableness affects the debt ratio could be conflict. On the footing of the picking order theory, house prefer internal funding instead so external funding, and retained net incomes take first topographic point, follows by debt funding and eventually equity funding ( Myers, 1984 ) . A much profitable house could follow debt funding more, alternatively of internal funding ( Myers & A ; Majluf, 1984 ) . As a consequence, the picking order predicts a negative relationship between purchase and profitableness. Friends & A ; Lang ( 1988 ) used econometric method to prove 984 New York Stock Exchange houses from the period 1979 to 1983, and they found apparent to back up the pecking order hypothesis from US houses. Kester ( 1986 ) states profitableness affect debt ratio negatively in both the US and Japan industries. Furthermore, in recent old ages, Bevan & A ; Danbolt ( 2002 ) analyzed the determinates of capital construction of 822 UK houses. The consequences under arrested development analysis support the anterior literature.

However, in the tradeoff theory, the profitableness affect debt ratio positively since much profitable houses would prefer debt due to the benefit from tax-shield. Long and Maltiz ( 1985 ) happen there is a positive relationship between purchase and profitableness of houses, but the relationship is non statistically important. Booth et Al ( 2001 ) utilize cross-section and time-series analysis on a sample of 10 developing states, and suggest that there is ever a positive relationship in most states in their sample.

Liquidity ( LIQD )

Mayo ( 2007: page ) points out that liquidness is “ the easiness with which assets may be rapidly converted into hard currency without the house ‘s a loss ” . The liquidness of a house ‘s plus could normally be measured by the current ratio. Harmonizing to Ozkan ( 2001 ) , the liquidness ratios may hold more than one consequence on the capital construction determination. Firms with higher liquidness ratios may hold sufficient capablenesss to refund its short-run debt duties. That is the ground why these houses usually with higher debt ratio. In means that a house ‘s liquidness is positive related with purchase ( Ozkan, 2001 ) . Besides, the liquidness might impact debt ratio negatively, since their investing could be financed by the liquid plus of the company with high liquidness ratio ( Ozkan, 2001 ) .

Ozkan ( 2001 ) found that liquidness is a negative consequence on purchase. Furthermore, the possible struggles between debtholders and stockholders of houses might be the major ground caused this negative consequence ( Ozkan, 2001 ) . After three old ages, Deesomsak et Al ( 2004 ) do the same research with Ozkan, but the day of the month was collected from houses runing in the Asian Pacific part, viz. Thailand, Malaysia, Singapore and Australia. They used OLS method to analysis day of the month for the period from 1993 to 2001. Overall they found liquidness to be negatively related to leverage. All of these findings are consistent with the picking order theory predict which negative relation between liquidness and purchase.

Uniqueness ( UNIQ )

In 1984, Titman proposed a theoretical account in which the settlement of house ‘s determination is causally associated with its bankruptcy position. Consequently, the costs could be transferred to their clients, providers and workers by houses through liquidating. It is relevant to their capital construction determinations. ‘Customers, workers and providers of houses which produce alone or specialised merchandises may endure comparatively high cost in the even that they liquidate ‘ . Furthermore, workers may acquire occupation specific techniques, providers may endure the bonding capital, and their client may hard to happen other replacements for their comparatively alone merchandises ( Titman & A ; Wessels, 1988: page ) . Therefore, the uniqueness affect purchase negatively.

However, some other writers as Ross ( 1977 ) suggest that the correlativity between uniqueness and purchase should be positive. This consequence is precisely different with Titman & A ; Wessels ‘s findings. Titman & A ; Wessels ( 1988 ) support it by supplying groundss. They use the merchandising disbursal over gross revenues ( SE/S ) to mensurate the relationship between singularity and purchase. “ This proxy implies that houses with comparatively alone merchandises are expected to publicize more and incur costs in advancing and selling their merchandises ” ( Titman & A ; Wessels ( 1988: page ) .

Tangibility ( TANG )

It is shown in the empirical researches that there is a negative correlativity between tangibleness and debt ratio ( Jensen & A ; Meckling ( 1976 ) , Titman & A ; Wessels ( 1988 ) and Rajan & A ; Zingales ( 1995 ) . A recent survey by Gaud et Al ( 2005 ) , they analyze the determinates of the capital construction for a panel of 104 Swiss companies listed in the Swiss stock exchange. Dynamic trials are performed for the period 1991 to 2000. It is found that tangibleness can impact debt ratio positively. Bevan & A ; Danbolt ( 2002 ) besides find grounds to back up the relationship between them in the UK. One twelvemonth subsequently, the survey of Chen ( 2003 ) found tangibleness is positively related to leverage. The present survey confirms old findings and contributes extra grounds that suggests tangibleness is positively correlated with purchase.

However, some other empirical surveies in developing states found a negative relationship between tangibleness and purchase. The first empirical research on the explanatory power of capital construction theoretical accounts in developing states is conducted by Booth et Al ( 2001 ) . This survey has found that tangibleness affects debt ratio negatively and this relationship is confirmed by Huang & A ; Song ( 2005 ) in China.

2.8 Decision

There are three major theories of capital construction have been developed on the footing of the pioneered work of Modigliani and Miller ( 1958 ) . Trade-off theory is the first theory ( Kraus & A ; Lizenberger, 1973 ) , which assumes that houses trade off the debt and equity, and should hold optional construction since the market in the existent universe is far from perfect. In add-on, the picking order theory is the 2nd one ( Myers & A ; Majluf, 1984 ) . It concludes that the asymmetrical information should be minimized by following fiscal hierarchy. The 3rd is bureau theory ( Jensen & A ; Meckling, 1976 ) , it arises when directors and stockholders have involvement struggle, and it may take to many jobs such as underinvestment and overinvestment job. Furthermore, the market clocking theory as a new theory of capital construction suggested by Baker & A ; Wurgler ( 2002: page ) , which states that “ the current capital construction is the cumulative result of past efforts to clip the equity market ” . The empirical surveies covered UK, the US and China three states documented the empirical grounds about explanatory variables. Therefore, the variables of this survey involved steadfast size, growing chances, non-debt revenue enhancement shied, profitableness, liquidness, uniqueness and plus tangibleness which reflect the trade off theory, picking order theory, bureau theory and market timing theory.

Chapter 3: Research Methodology

3.1 Introduction

This chapter foremost introduces the method adopted in this survey and explains the grounds why we selected this method. Section 2 provides the inside informations on preparation of explanatory variables, and do certain each of variable more suited in this thesis. Section 3 and 4 high spots the procedure of sample subdivision and informations aggregation. The information analysis method nowadayss in Section 5. The last subdivision reports the theoretical accounts used to analysis sample informations in this thesis.

3.2 Quantitative or Qualitative research method

The aim of this survey is to find the relationship between house features and fiscal purchase, so it is necessary to take appropriate research method to accomplish the aim. Research methods can be placed into two types: quantitative and qualitative methods. Denzin & A ; Lincoln ( 2011 ) pointed out that qualitative research is a multi method in focal point on natural scene. This means that this method is more understand the people human behaviours, the most common manner to collected day of the month is interviews, inquiries and studies.

We are traveling to follow quantitative research in the thesis and the grounds will be provided in the followers. First, compared with qualitative research, quantitative research is based on big, representative samples, which are analyzed with statistical tools such STATA and Excel ( Spitzlinger, 2010 ) . Second, Creswell ( 2002 ) argued that one of the advantages of quantitative research is to let the research workers to prove the relationship between independent and dependent variable more objectively than qualitative method. Finally, quantitative research can be applied to prove hypotheses, which is more is suited for this survey ( Greswell, 2002 ) .

Therefore, overall these three grounds, quantitative research in this instance is more appropriate to be applied instead than qualitative method.

3.3 Measurement of Variables

3.3.1 Dependent Variables

There are exists many assorted steps of capital construction after the seminal paper done by Modigliani & A ; Miller ( 1958 ) . By and large, there are two chief classs of purchase steps: book value of equity and market value of equity. Compared with market values, the book values is more suited utilizing in this survey as dependent variables. And it forces many research workers to mensurate debt in footings book values instead than market values ( Titman & A ; Wessels, 1988 ) . Indeed, the market day of the month is non available for this survey. However, Bowman ( 1980 ) pointed out that the cross-sectional correlativity between market value and book value of debt is immense plenty, so the misspecification due to utilizing book value step can be ignored. Furthermore, most of the researches available in the literature have use book values for their surveies, such as Titman & A ; Wessels. Therefore, it is sensible to utilize the book values for calculating dependent variables.

Benett & A ; Donnelly ( 1993 ) and Bevan & A ; Danbolt ( 2004 ) suggested that purchase costs of short-run debt possibly non same with the purchase costs of long-run debt. The short-run debt is ever used in some exigency state of affairs. For illustration, when the long-run capital can non run into the required of steadfast capital construction, the short-run debt will be used to carry through the demand ( Bennett & A ; Donnelly, 1993 ) . Therefore, utilize short-run debt and long-run debt is more powerful to analysis the relationship between short-run debt and long-run debt ratio.

Following the survey of Bennett & A ; Donnelly ( 1993 ) , we use entire purchase, long-run purchase and short-run purchase as the dependent variables.

Dependent variables which defined as the book value of entire debt that contains both long-run and shore-term liabilities divided by entire assets of the houses. Long-run purchase is the book value of long-run debt such as long-run bank loans which can repayable beyond one twelvemonth divided by the entire assets of houses. Short-run purchase is the book value of short-run debt such as bank overdraft can repayable within one twelvemonth divided by the entire assets of the houses.

3.3.2 Independent Variables

In this survey seven house features are suggested as independent variables. They are steadfast size, growing chances, non-debt revenue enhancement shield, profitableness, liquidness, uniqueness and plus tangibleness. It is really of import to take appropriate variables, which is closely related to the credibleness of the research. Due to this ground, the choice of explanatory variables should be considered the empirical surveies from the UK and other states.

Firm Size ( SIZE )

Firm size is measured by taking the natural logarithm of the entire assets. The trade-off theory expects a positive relation between purchase and house size. Large houses is more likely diversified and have more stable hard currency flow, therefore they have low hazard for fiscal hurt and less prone to raise bankruptcy cost. Therefore, house size is become really of import mark for a house when they decided to use debt and equity. In add-on, Marsh ( 1982 ) argued that compared with little houses employ short-run loan, big houses are more tend to utilize long-run loan. The chief ground is big house have benefits of economic systems of graduated table to publishing long-run debt and even have dickering power to creditors. In position of theoretical consideration and empirical groundss, we make the hypotheses as followers:

H1. There is a positive relationship between size and purchase.

H2. There is a positive relationship between size and long-run purchase.

H3. There is negative relationship between size and short-run purchase.

Growth Opportunities ( GROWTH )

In this survey, we follow Rajan & A ; Zingales ( 1995 ) used Tobin ‘s Q to mensurate growing chances. Tobin ‘s Q is defined as the ratio of book value of entire plus divided by the amount of entire liability and the market value of equity. Growth chances are viewed as intangible assets of house. Firms with important future growing chances are likely to confront troubles in raising finance from debt market because intangible assets are non to the full collateralisable. Therefore, houses with high intangible growing chances will utilize more of equity instead than debt in their capital construction. Therefore, we hypotheses:

H4: There is a negative relationship between growing chances and purchase.

Non-Debt Tax Shields ( NDTS )

Non-debt revenue enhancement shield ( NDTS ) is measured as entire one-year depreciation divided entire assets. Non-debt revenue enhancement shields such as revenue enhancement tax write-off for depreciation and investing revenue enhancement credits are considered to be the replacements for revenue enhancement benefits of debt funding ( DeAngelo & A ; Masulis, 1980 ) . Therefore, non-debt revenue enhancement shields are expected to hold negative impact on purchase. This relationship have been supported by many research workers includes Kim & A ; Sorensen ( 1986 ) , Wald ( 1999 ) and Huang & A ; Song ( 2002 ) . Based on the bulk of empirical grounds, we hypotheses:

H6: There is a negative relationship between NDTS and purchase.

Profitability ( PROFIT )

Profitableness is measured as net incomes before involvement and revenue enhancements scaled divided by book value of assets. The pecking-order theory posits that houses with higher net incomes ( high internally generated financess ) prefer to borrow less because it is easier and more cost effectual to finance from internal fund beginnings. So, as per this theory, there will be a negative relation between purchase and profitableness. In contrast, trade-off theory suggests that this relationship would be positive. Since profitable houses are less likely to travel belly-up, and therefore can avail more debt at cheaper rates of involvement. But most empirical surveies find a negative relationship between purchase and profitableness in line with the pecking-order theory. We hypothesis:

H7: There is negative relationship between profitableness and purchase.

Liquidity ( LIQD )

Liquid is measured as the ratio of current assets by current liabilities. Normally, the old survey showed that two different positions about the relationship between liquidness and purchase. However, in this instance, we consistent with the picking order theory, which suggested a negative relationship between liquidness and purchase. It argued that high liquidness houses are more rely on their internal funding and diminish the utilizing of external funding. Based on the old surveies, most of research workers affirm the negative relationship ( Friend and Lang, 1988 ) . Consequently, we hypotheses:

H8: There is a negative between liquidness and purchase.

Uniqueness ( UNIQ )

Singularity is defined as the merchandising expense dividend by over gross revenues. It suggests that houses will pass more costs on advertisement to advance their alone merchandises ( Titman & A ; Wessels,1988 ) . Furthermore, as suggested by the trade off theory, houses with comparatively alone merchandises will ensue in lower debt in house ‘s capital construction ( Titman, 1988 ) . We hypothesis:

H9: There is a negative relationship between singularity and purchase.

Tangibility ( TANG )

Tangibility is measured as a ratio of net fixed assets divided by entire assets. Since touchable assets are used as collateral, houses with big sum of fixed assets can borrow on favourable footings by supplying the security of these assets to the loaners. Therefore, a high ratio of fixed assets-to-total assets should hold a positive impact on house purchase. Empirical every bit good as theoretical surveies by and large predict a positive relation between purchase and plus tangibleness. The positive relation between tangibleness and purchase is found in Titman & A ; Wessels ( 1988 ) , Rajan & A ; Zingales ( 1995 ) , Wald ( 1999 ) , Chen ( 2003 ) , Supanvanij ( 2006 ) , and Akhtar & A ; Oliver ( 2009 ) . We hypothesis:

H9: There is a positive relationship between tangibleness and purchase.

3.4 Sample Selection

The sample includes the Financial Time Stock Exchange 100 index ( FTSE 100 ) at 15th June 2012. Harmonizing to FTSE web site ( 2012 ) , the FTSE 100 index represents about 81 % of the UK market capitalisation. In other words, houses listed in FTSE that accounts for about 81 % of the UK market, and it covers broad scope of companies from different industries. Therefore, the combination of FTSE 100 could be a represent of most of houses in the UK.

However, non all of 100 houses are selected as a sample in this survey. There are two of import standards followed in the procedure of sample selected. First, the houses in the fiscal sectors such as Bankss, common fund and insurance companies have different construction of balance sheet from non-financial companies, hence merely non-financial houses will be include from the sample for this survey. Second, in order to maintain the consistency and dependability of day of the month for future research, those houses that have losing observations for any of the variable in the theoretical account during the sample period will non included in the day of the month set. Furthermore, the clip period is chosen from 2005 to 2011 within a 5 old ages clip span. As a consequence, the 69 non-financial houses over a period of 5 old ages from 2005 to 2011 will be the concluding sample.

3.5 Data Collection

The informations used in the survey are secondary informations that collected from Financial Analysis Made Easy ( FAME ) , which provides fiscal and accounting informations for over 3.4 million companies in the UK and Ireland ( FAME, 2012 ) . Three types of informations are usually used for theoretical account appraisal. Cross sectional informations is informations collected by detecting many topics at the same points of the clip ( Anderson et al, 2008 ) . Time series informations is informations observed over different clip period ( Verbeek, 2008 ) . Panel information combine both clip series and cross-sectional constituents. There are many benefits to utilize panel informations in the research even with some jobs such as informations aggregation job, but it is still considers a sensible method ( Baltagi, 2001 ) . Therefore, we employed a panel information in this survey. We consider that cross-section informations set is wholly accounted for 69 in one twelvemonth. Furthermore, the clip period is cover 5 old ages from 2005 to 2011. Finally, the panel information contains 345 observations as a concluding information.

3.6 Analytic Methods

The pooled ordinary least squares ( OLS ) are employed as a tool to analysis the information. OLS is defined as statistical technique that uses sample informations to gauge the true population relationship between two variables. Pooled OLS method is used panel informations to run OLS. It is simple and speedy benchmark to which more sophisticated arrested developments can be compared, even it is capable to many restrictions.

3.7 Research Models

In order to look into the relationship between dependent variables and independent variables, three multiple arrested development theoretical accounts are employed in this survey. The theoretical accounts are as follows.

Model 1

Entire Leverage = a +I?1SIZE+I?2 GROWTH +I?3 NTDS +I?4 PROFIT + I?5 LIQD + I?6 UNIQ+I?7 TANG+ Iµ

Model 2

Long-run Leverage = a +I?1SIZE+I?2 GROWTH +I?3 NTDS +I?4 PROFIT + I?5 LIQD + I?6 UNIQ+I?7 TANG+ Iµ

Model 3

Short-run Leverage = a +I?1SIZE+I?2 GROWTH +I?3 NTDS +I?4 PROFIT + I?5 LIQD + I?6 UNIQ+I?7 TANG+ Iµ

Where a is changeless, I? refers to coefficient figure of explanatory variables and vitamin E is the mistake term which is the portion of the dependant variable that changes indiscriminately in consequence of other possible factors non included in this survey.

3.8 Decision

This chapter taken in consideration the adopted research attack and concluded that quantitative methods are more suited in this survey. After formation of explanatory variables, the procedures of sample choice and informations aggregation have been highlight in the chapter. The pooled OLS method was defined as chief analysis method to turn to the research inquiry. The undermentioned chapter will show arrested development consequences and give elaborate account of those consequences.

Chapter 4: Findingss and Analysis

4.1 Introduction

The purpose of this chapter is to show the analysis and findings of the influence of assorted houses ‘ features on capital construction in UK over the period from 2002 to 2011. Therefore, this chapter has been organized in the undermentioned ways. The first subdivision will show a descriptive analysis and the arrested development trial consequences of each explanatory variables. After that, return to the hypothesis posed in the last chapter, we will province prove the hypothesis and explicate the grounds behind. In the last subdivision, we will acquire the decision for all findings and analysis.

4.2.1 Descriptive Analysis

The survey focal point on the influence of assorted steadfast features on capital construction, and using a panel informations consist of 69 companies which listed in the FTSE 100 over the period from 2008 to 2011. The descriptive statistics for the purchase and explanatory variables of sample houses are reported in Table 1. As can be seen from the tabular array, the overall observation for each dependant and explanatory variable is 345. Besides, the following table exhibits the mean, standard divergence, lower limit and upper limit values for the dependant and independent variables.


Ob river


Std. Dev







































Net income
























Table 1: Descriptive statistics of Leverage and Independent Variables.

In the above tabular array the dependant variables are TLEV ( entire purchase ) , LTLEV ( long-run purchase ) and STLEV ( short-run purchase ) . The explanatory variables include size ( Size ) , growing chances ( GROWTH ) , non-debt revenue enhancement shield ( NDTS ) , profitableness ( PROFIT ) , liquidness ( LIQD ) , uniqueness ( UNIQ ) and tangibleness ( TANG ) .

As Table 1 shows, the house size is much higher than other explanatory variables. It may be we had applied the natural logarithm signifier of gross revenues to proxy of size, while other explanatory variables are present in per centum.

4.2.2 Testing for Multicollinearity

There are 7 independent variables in our survey, so it is necessary to look into that there is no multicollinearity between the variables. Mulicollinearity occurs when two or more independent variables are correlated with each other ( DeFusco et al, 2011 ) . There are two major attacks for proving multicollinearity, which involves correlativity matrix and discrepancy rising prices factor ( VIF ) trial.

The correlativity matrix ( Table 2 ) shows that the each of explanatory variable is independent with others when all variables correlated less than 0.8 ( Katz, 2006 ) . However, there is comparatively higher correlativity among some of the variables, for illustration, a positive correlativity between LIQD and PROFIT, but it still lower than the recommended value, therefore, the job of multicollinearity does non be in this survey.

Table 2: Correlation Matrix.

The following trial for cheque multicollinearity is tolerance values and VIF trial. Walker & A ; Maddan ( 2008 ) pointed out that ‘tolerance tells how much of the discrepancy of an independent variables does non depend on other independent variables ‘ . If the value of tolerance is greater than 0.20, which indicate that there are no job with multicollinearity ( Tuffery, 2011 ) . On the other manus, the VIF indicates whether a forecaster has a strong additive relationship with other forecasters. Belsley et Al ( 1980 ) suggests if VIF values below 10, it appears that multicollinearuty is non a job. As it is shown in Table 3, all of tolerance values are good above 0.2, and VIF values below 10, hence, there are both no multicollinearity issues in the theoretical account.













Net income












Table 3: Tolerance Valuess and VIF trial.

Through look intoing from the correlativity matrix, tolerance values and VIF trial, we find that there is no job of multicollinearity. Furthermore, harmonizing to

Ratner ( 2011 ) , multicilinearity is a information jobs, we can presume that there is no information job in this survey. Therefore, we continue to utilize these informations in the undermentioned trial.

4.2.3 Testing for Heteroscedasticity

In this subdivision, we will prove other of import premise of OLS, which is called heteroscedasticity. The ground for Heteroscedasticity happens is due to inconstant term for vaiance of the mistake in the arrested development theoretical account ( Moy & A ; Lee, 2000 ) . In the presence of heteroscedasticity, the OLS estimations remains indifferent, but it becomes inefficient ( Verbeek, 2008 ) . Besides, heteroscedasticity may give deceptive consequences for T and F statistics ( Katos, 2001 ) . Therefore, it is necessary to prove whether heteroscedasticity is present.

The Breusch Pagan ( BP ) trial is normally used trial for heteroscedasticity in a line drive arrested development theoretical account ( Breusch & A ; Pagan, 1979 ) . In BP trial, p-value can be used as a measuring to indicates of heteroscedasticity. The p-values in TLEV and LTLEV are zero which less than 0.05. It presents that we have to reject the void hypothesis, and hence, the job of heteroscedasticity exist. In order to work out the job of heteroscedasticity and acquire the valid consequences, we run the OLS arrested development with robust criterions mistakes, and the consequences are demoing in the following subdivision.

Dependent Variables


Prob & gt ; Chi2










Tables 4. : Consequences of Breusch and Pagan Tests.

4.3 Arrested development consequences

Since our trial does non hold lagged variables, it does non incorporate the jobs of autocorrelation. Based on our trial, the consequence had met the premises of ordinary least square. Therefore, we can utilize OLS to prove the significance of these explanatory variables in our survey. The overall arrested development consequences with robust standard mistakes are reported in Table 5-7. The r-square for entire debt is about 61.48 % under the pooled OLS theoretical account, which means that the theoretical account can explicate 61.48 % of the purchase ratio. The consequence had listed in Table 5, where size, growing chances and uniqueness are important and positively related to entire purchase. Furthermore, profitableness and and tangibleness are positively related to entire purchase and non-debt revenue enhancement shield and liquidness shows a negative relationship.

Table 5: Overall arrested development consequences for Entire Leverage. Note: P & gt ; |t|-this column shows the 2-tailed p-value used in proving the void hypothesis that the coefficient is 0. In this instance, we utilizing important at 5 % degree.

The r-square for long-run debt is about 48 % under pooled OLS theoretical account. It implies that the theoretical account fittingness is 48.76 % . The consequence shows except than non-debt revenue enhancement shields, all of the explanatory variables are extremely important. Furthermore, size, growing chances, liquidness, uniqueness and tangibleness are positively related to long-run purchase among those variables. In add-on, non-debt revenue enhancement shields and profitableness negatively related to short-run purchase.

Table 6: Overall arrested development consequences for Long-run Leverage.

The r-square for short-run purchase in pooled OLS theoretical account is about 42 % and the consequence show that the coefficients of growing chances and profitableness are important and positively related to short-run purchase. Besides, there was a positive correlativity between uniqueness and shore-term purchase. Furthermore, size, non-debt revenue enhancement shield, liquidness and tangibleness are negatively related with long-run purchase, and among these four variables liquidness and tangibleness are important and negatively related to short-run purchase.

Table 7: Overall arrested development consequences for Short-run Leverage.

4.4 Discuss

After discoursing the overall arrested development consequences applied a pooled OLS theoretical account, to discourse the consequence of each explanatory variable to analyse how they determine the short-run, long-run and entire debt ratio. Therefore, in the followers we will prove hypothesis in the old chapter to see whether or non hypothesis is accepted, and we will explicate the ground behind this. Furthermore, the consequences of this survey will compare with the empirical surveies in the UK.

4.4.1 Size ( SIZE )

The arrested development consequences show that size is positively and significantly related to entire purchase and long-run purchase, hence Hypothesis 1 and Hypothesis 2 is accepted. Furthermore, we found a negative relationship between size and shore-term purchase, but undistinguished, hence there could non be important relationship between them, so Hypothesis 3 is rejected. In this research, a 1 % addition in steadfast size will ensue in an addition in entire purchase by 0.0040567 % , long-run purchase will increase by 0.0056803 % and short-run purchase will diminish by 0.0016237 % ceteris paribus.

Dependent Variables

Pooled OLS










Table 8: Arrested development Consequences for Size.

The positive relationship between house size and entire purchase and long-run purchase shows that the larger the house gross revenues, the more debt in its capital construction. This determination is consistent with the tradeoff theory. Harmonizing to the trade off theory, houses with larger size have more intensifiers to be diversified, therefore these houses should hold lower bankruptcy hazard compare with little houses. They may besides be able to take advantage of economic systems of graduated table in issue long-run debt or borrow more debt as their beginning of funding ( Graham et al, 1998 ) . Therefore, for those of houses listed in the FTSE 100, it is much easy for them borrowing the money from bank and in accessing recognition market. The overall consequences support the trade off theory. Another possible account is that single manages have more control when larger houses have a more dilute ownership, therefore they may publish debt to cut down the hazard of personal loss ensuing from bankruptcy ( Friend & A ; Lang, 1988 ) . The consequence is consistent with the old research done by Rajan & A ; Zingales ( 1995 ) and Wald ( 1998 ) , which suggested that size was positive related to debt based on the information from developed states expect Germany.

As shown in the Table 4.6.1, that we had discovered a negative mark between house size and short-run purchase which is opposite to the measurings of old two dependent variables. See together with the comparatively higher long-run debt, we concluded that the houses listed in FTSE 100 prefer usage long-run debt instead than short-run debt.

Our consequences are consistent with the bulk empirical surveies in UK. Bennet & A ; Donnely ( 1993 ) found a positive relationship between size and entire purchase as suggested by the trade off theory. On the other manus, the survey proposed by Ozkan ( 2001 ) which supported the pecking order hypotheses. The survey merely had shown litter grounds to turn out the positive relationship and concluded that houses more rely on debt funding more than equity which implies a negative relationship between purchase and size. The survey from Bevan and Danbolt ( 2004 ) , showed that house size is positive associated with entire debt and long-run debt, but they failed to happen apparent the relationship between size and short-run debt.

4.4.2 Growth chances

We will prove another of import factor of growing chances. Since Hypothesis 4 suggested a negative relationship between growing chances and entire purchase. However, the association between


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