The Objective of the Research

The objective of the research is to provide some features and determinants of the capital structure through the previous studies of capital structure and to examine these determinants of capital structure on a sample of 15 Egyptian companies, we will show what the most determinate is in common with other studies that done in middle east market and other international markets

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Contributions to the Research:

• It would provide empirical evidence to measure the determinants of capital structure in a growing market like Egypt.

• This study contributes to the literature by focusing only on three major sectors of the economy (Industry, Telecommunications, and Constructions )

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Limitations of the Research

• This paper studies examines the determinants of capital structure for only three years, due to the limited availability of data in Egypt stock exchange.

• Since the financial sectors have high leverage ratios like financial firms (Banks, and insurance companies) we exclude these companies from our research and we rely on non financial sectors (Industry, Telecommunications, and Constructions).

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Literature Review

Asadi & Ravari (2009) indicate a further empirical evidence of the theories of capital structure and try to examine the factors that affect Debt ratios in Islamic Republic of Iran. They used data from Tehran Stock Exchange (TSE) for five years from 2003 to 2007.They analysis 1000 observations to examine which capital structure theory can be strongly supported for private and public companies, there were nine hypotheses which had been developed to do the test of the relationship between debt ratios and explanatory variables such as growth opportunity, profitability, tangibility and size (measured by Sales). The results of OLS regression show that there is a significant negative relationship between profitability and Debt ratios. The relationship between growth opportunity and Debt ratios is significantly positive and there is a significant negative relation between tangibility and short-term debt and total debt ratios but for long-term debt ratio the relation is positive. The relationship between size and leverage ratios is different for private and public companies and it isn’t significant.

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Literature Review

Gaud, Jani, Hoesli & Bender (2003) showed that the determinants of the capital structure were analyzed for a panel data consisted of 106 Swiss companies listed in the Swiss stock exchange. The analysis was performed for ten years (1991-2000). They used multiple regression in the analysis, the variables: leverage as dependent variable (growth, size, profitability, tangibles, operating risk which means that when leverage increase lead to volatility of the net profit, firms that have high operating risk can lower the volatility of the net profit by reducing the level of debt) as independents variables. The results of the paper was : the size of companies, the importance of tangible assets and business or operating risk are positively correlated to leverage, while growth and profitability are negatively associated with financial leverage. Based on the analysis and results it suggested that both the pecking order theory and trade off hypothesis were confirmed in explaining the capital structure of Swiss companies.

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Literature Review

Modigliani and Miller (1958) was the first in to demonstrate algebraically the effect of capital structure on firm value. It forms the basis for modern thinking on capital structure, though it is generally viewed as a purely theoretical result since it disregards many important factors in the capital structure decision. The theorem states that, in a perfect market, how a firm is financed is irrelevant to its value. This result provides the base with which to examine real world reasons why capital structure is relevant, that is, a company's value is affected by the capital structure it uses. Some other reasons include bankruptcy cost, agency cost, and taxes This analysis can then be extended to look at whether there is in fact an optimal capital structure, the one which maximizes the value of the firm. For example, Modigliani and Miller (1963) took taxation system under consideration and they proposed that firms could achieve its optimal capital structure by using more debt in their balance sheet. According to Miller, the value of the firm depends on the relative height as a percentage of each tax rate.

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Hypotheses

First Hypothesis H0: There is a significant negative or no relationship between debt ratio of

the firms and percentage of fixed assets to total assets.H1: There is a significant positive relationship between debt ratio of the firms

and percentage of fixed to total asset.

Second HypothesisHo: There is a significant positive or no relationship between debt ratio of the

firms and their quick ratio.H1: There is a significant negative relationship between debt ratio of the

firms and their quick ratio.

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Hypotheses

Third Hypothesis

Ho: There is a significant negative or no relationship between debt ratio of the firms and the size of the firms.

H1: There is a significant positive relationship between debt ratio of the firms and the size of the firms.

Fourth Hypothesis H0: There is a significant positive or no relationship between the debt ratio

of the firms and their growth of earnings.H1: There is a significant negative relationship between the debt ratio of the

firms and their growth of earnings.

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Hypotheses

Fifth Hypothesis H0: There is a significant positive or no relation between debt

ratio of the firms and their profitability.

H1: There is a significant negative relationship between debt ratio of the firms and their profitability

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Research Methodology and Sampling

This study depends on descriptive and analytical methodology, it describes past studies that related to, and analyzes the results of field research.

We select our representative sample which consists of 15 publicly traded Egyptian companies over 3 years (2008-2010). We will use the regression analysis model to study the relationship between firm’s characteristics on Debt/Asset Ratio.

Applying multiple regression model, SPSS

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Dependent and Independent Variables

• Debt ratio, as measured by debt to total assets represents (dependent variable). For independent variables, however, only five independent variables are taken, and they are:

• Tangibility (Fixed assets / total assets)• Liquidity(quick ratio)• Profitability(Net Income / Total Asset) or ROA• Growth (Log Total Assets)• Size ( Log Sales)

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The general form of our model is

Where:LG = LeverageTG = Tangibility of assetsQR= Quick ratioSZ = SizeGT = GrowthPF= Profitabilityε = The error term

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Results & Analysis

Table (1)

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Model Summaryb

Model R R Square Adjusted R

Square Std. Error of the

Estimate

1 .748a .560 .504 .141230

a. Predictors: (Constant), Growth, Profitability, Tangibility, Quick Ratio, Sales

b. Dependent Variable: Debt Ratio

Results & Analysis

Table (2)

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Descriptive Statistics(2008-2010)

N Minimum Maximum Mean Std. Deviation

Debt Ratio 45 .029 .774 .33882 .200466

Tangibility 45 .264 .899 .59182 .184943

Profitability 45 .002 .335 .09669 .081486

Quick Ratio 45 .262 5.925 1.23438 .987667

Sales 45 1.531 4.465 3.48031 .656656

Growth 45 2.722 4.743 3.72669 .609438

Valid N (listwise) 45

Results & Analysis

Table(3)

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Coefficientsa

Model

Unstandardized Coefficients

Standardized Coefficients

t Sig. B Std. Error Beta

1 (Constant) .188 .153 1.230 .226

Tangibility -.050 .155 -.047 -.326 .747

Quick Ratio -.071 .026 -.352 -2.719 .010

Profitability -.727 .327 -.296 -2.222 .032

Sales .189 .086 .620 2.210 .033

Growth -.086 .097 -.261 -.885 .381

a. Dependent Variable: Debt Ratio

Conclusion

The findings show that there a negative relationship between financial leverage and tangibility of assets, liquidity, profitability, and growth. Size of the firm appears to have a positive relationship with the financial leverage. However, only the relationships with liquidity, profitability, and size of the firm are statistically significant

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Thanks

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