Determinants of Capital Structure
in Non-Financial Companies
Fabian Kühnhausen (MPI & LMU Munich)
Harald W. Stieber (EC, DG FISMA)
Workshop
Dealing with excessive corporate indebtedness
Wednesday, 2nd of December 2015
European Commission, Brussels
Copyright rests with the author. All rights reserved
Motivation & questions
Economic Activity
Recent financial crisis reversed trend of financial market integration, does this
show up in firm-level data?
Kühnhausen & Stieber (2014) Determinants of Capital Structure
WS - Dealing with excessive corporate indebtedness
Wednesday, 2nd of December 2015
European Commission, Brussels
2
-600
-400
-200
0
200
400
600
800
2000 2002 2004 2006 2008 2010 2012 2014
Loans
-300
-200
-100
0
100
200
300
400
500
600
700
800
2000 2002 2004 2006 2008 2010 2012 2014
Loans
Bonds
Quoted
shares
Evolution of the funding structure of non-financial
corporations in the euro area (12-month cumulative monthly flows)
Kühnhausen & Stieber (2014) Determinants of Capital Structure
WS - Dealing with excessive corporate indebtedness
Wednesday, 2nd of December 2015
European Commission, Brussels
3 (Source: ECB)
Motivation & questions
Economic Activity
Recent financial crisis reversed trend of financial market integration, does this
show up in firm-level data?
Potential link between access to finance, firms’ decisions on leverage, and
financial stability?
Cross-country variation in firm-level leverage or industry-level dynamics:
which drivers are more relevant?
Theoretical Shortfalls
Capital structure theories can only partially explain data
empirical validity of theories is ambiguous
Kühnhausen & Stieber (2014) Determinants of Capital Structure
WS - Dealing with excessive corporate indebtedness
Wednesday, 2nd of December 2015
European Commission, Brussels
4
Research questions
What are the main drivers of leverage in NFCs?
Do we find industry or country patterns in capital structures?
We evaluate firm-, industry- and country-specific factors determining a firm’s
capital structure
Kühnhausen & Stieber (2014) Determinants of Capital Structure
WS - Dealing with excessive corporate indebtedness
Wednesday, 2nd of December 2015
European Commission, Brussels
5
Method
Panel regression analyses to determine leverage drivers
firm-level data with very large cross-section
firm-, industry- & country-specific parameters
Data limitations reflect the dominance of private firms in the sample:
Annual data
Lack of granular view on funding instruments
Kühnhausen & Stieber (2014) Determinants of Capital Structure
WS - Dealing with excessive corporate indebtedness
Wednesday, 2nd of December 2015
European Commission, Brussels
6
Results
Leverage increases with increasing
- tangible assets (long-term),
- debt tax shield,
- firm size,
- firm growth, and
- industry leverage
Leverage decreases with increasing
- firm profitability,
- firm liquidity
12% improvement over Rajan-Zingales (1995) four-factor model: important
macro-variables such as capital inflow
Results robust against different panel estimators, decomposition, over time
Kühnhausen & Stieber (2014) Determinants of Capital Structure
WS - Dealing with excessive corporate indebtedness
Wednesday, 2nd of December 2015
European Commission, Brussels
7
Detailed discussion
Kühnhausen & Stieber (2014) Determinants of Capital Structure
WS - Dealing with excessive corporate indebtedness
Wednesday, 2nd of December 2015
European Commission, Brussels
8
Literature review
Capital structure theories
Trade-off theory: optimal leverage in tax vs risk
Pecking order theory: info asymmetries vs capital costs
Not discussed: free cash flow theory, market timing theory, other
Empirical studies
Firm-level drivers: Rajan/Zingales (1995)
Industry-level drivers: Faulkender/Petersen (2006), Brav (2009), Frank/Goyal
(2009), Degryse et al. (2012)
Macroeconomic drivers: Antoniou et al. (2008), Fan et. al (2012), Köksal et
al. (2013)
Kühnhausen & Stieber (2014) Determinants of Capital Structure
WS - Dealing with excessive corporate indebtedness
Wednesday, 2nd of December 2015
European Commission, Brussels
9
Our contribution is two-fold
Panel data set with very large cross-section to tackle problems with selection
bias
More variation explained compared to previous studies with firm-, industry-
and country-specific factors
Kühnhausen & Stieber (2014) Determinants of Capital Structure
WS - Dealing with excessive corporate indebtedness
Wednesday, 2nd of December 2015
European Commission, Brussels
10
Data
Structure of our data sample
Annual data 2003-2012
1,189,708 firms 6,365,842 firm-year observations
5-8 observations per firm (few data points in 2012)
Geography: Europe (EU, non-EU), U.S., Japan
Data sources
ORBIS (BvD): 2003-2012, Europe, USA, Japan
WDI, World Bank: macroeconomic data
Variables
LHS: total, long-term, short-term leverage ratios (D/A)
Firm-level: size, growth, profitability, tangibility, liquidity, Nickell
Industry-level: median leverage, median growth
Macro-level: business cycle, capital flows, debt tax shield
Kühnhausen & Stieber (2014) Determinants of Capital Structure
WS - Dealing with excessive corporate indebtedness
Wednesday, 2nd of December 2015
European Commission, Brussels
11
Descriptive / summary stats
Kühnhausen & Stieber (2014) Determinants of Capital Structure
WS - Dealing with excessive corporate indebtedness
Wednesday, 2nd of December 2015
European Commission, Brussels
12
Heterogeneity across Countries (1)
Kühnhausen & Stieber (2014) Determinants of Capital Structure
WS - Dealing with excessive corporate indebtedness
Wednesday, 2nd of December 2015
European Commission, Brussels
13
Heterogeneity across Countries (2)
Kühnhausen & Stieber (2014) Determinants of Capital Structure
0.0
05.0
1.0
15T
ax S
hiel
d pe
r C
ount
ry
AT BA BEBG CH CY CZ
DE DK EE ES FIFR G
BG
R HR HU IE IS IT JP LILT LU LV
MC
ME
MK NL
NO PL PTRO RS
RU SE SISK TR UA US
Data for Malta is excluded.
WS - Dealing with excessive corporate indebtedness
Wednesday, 2nd of December 2015
European Commission, Brussels
14
Heterogeneity
across
industries
Kühnhausen & Stieber (2014) Determinants of Capital Structure
WS - Dealing with excessive corporate indebtedness
Wednesday, 2nd of December 2015
European Commission, Brussels
15
Empirical strategy
Fixed effects panel regressions of the form
i, s, k indicate the levels of firm, industry, country
t is the time period (year)
L is the leverage ratio for firm i in period t
X is the vector of firm characteristics
Y is the vector of industry-specific factors
Z is the vector of country factors
Kühnhausen & Stieber (2014) Determinants of Capital Structure
WS - Dealing with excessive corporate indebtedness
Wednesday, 2nd of December 2015
European Commission, Brussels
16
Kühnhausen & Stieber (2014) Determinants of Capital Structure
WS - Dealing with excessive corporate indebtedness
Wednesday, 2nd of December 2015
European Commission, Brussels
Baseline regression results
17
Results compared to main theories' expected impacts
and results obtained in the literature
Kühnhausen & Stieber (2014) Determinants of Capital Structure
WS - Dealing with excessive corporate indebtedness
Wednesday, 2nd of December 2015
European Commission, Brussels
18
Leverage –
industry dynamics
Kühnhausen & Stieber (2014) Determinants of Capital Structure
highest:
trade and
transportation
sectors
lowest:
utilities
WS - Dealing with excessive corporate indebtedness
Wednesday, 2nd of December 2015
European Commission, Brussels
19
Sub-sampling (1): industries
Kühnhausen & Stieber (2014) Determinants of Capital Structure
WS - Dealing with excessive corporate indebtedness
Wednesday, 2nd of December 2015
European Commission, Brussels
20
Sub-sampling (2): regions
Kühnhausen & Stieber (2014) Determinants of Capital Structure
WS - Dealing with excessive corporate indebtedness
Wednesday, 2nd of December 2015
European Commission, Brussels
21
Country dynamics
Kühnhausen & Stieber (2014) Determinants of Capital Structure
highest:
Germany, Italy,
Monaco, Norway
lowest:
Liechtenstein,
Macedonia,
Montenegro,
Turkey, Ukraine,
USA
WS - Dealing with excessive corporate indebtedness
Wednesday, 2nd of December 2015
European Commission, Brussels
22
Sub-sampling (3): countries
Kühnhausen & Stieber (2014) Determinants of Capital Structure
WS - Dealing with excessive corporate indebtedness
Wednesday, 2nd of December 2015
European Commission, Brussels
23
Firm characteristics
Kühnhausen & Stieber (2014) Determinants of Capital Structure
Public vs Private Small vs Large
WS - Dealing with excessive corporate indebtedness
Wednesday, 2nd of December 2015
European Commission, Brussels
24
Conclusions
Capital structure choice theory could be highly relevant for economic activity
and policies (but different findings in literature)
Present paper: panel regression analyses to determine leverage drivers
draw on data with very large cross-section
firm-, industry- & country-specific parameters
LR (+): tangible assets (long-term), debt tax shield, firm size, firm growth,
and industry leverage
LR (-): firm profitability, firm liquidity
12% improvement over RZ (1995) four-factor model: important macro-
variables such as capital inflow
robust against different panel estimators, decomposition, over time
Kühnhausen & Stieber (2014) Determinants of Capital Structure
WS - Dealing with excessive corporate indebtedness
Wednesday, 2nd of December 2015
European Commission, Brussels
25
Thank you for your attention!
Background slide: LHS variable evolution over time 0
.2.4
.6.8
Mea
n of
Lev
erag
e R
atio
s pe
r Yea
r
2003 2004 2005 2006 2007 2008 2009 2010 2011 2012
Total Leverage Long-term Leverage Short-term Leverage
Kühnhausen & Stieber (2014) Determinants of Capital Structure
WS - Dealing with excessive corporate indebtedness
Wednesday, 2nd of December 2015
European Commission, Brussels