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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
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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
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-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
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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
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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
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WS - Dealing with excessive corporate indebtedness
Wednesday, 2nd of December 2015
European Commission, Brussels
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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
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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
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Detailed discussion
Kühnhausen & Stieber (2014) Determinants of Capital Structure
WS - Dealing with excessive corporate indebtedness
Wednesday, 2nd of December 2015
European Commission, Brussels
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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
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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
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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
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Descriptive / summary stats
Kühnhausen & Stieber (2014) Determinants of Capital Structure
WS - Dealing with excessive corporate indebtedness
Wednesday, 2nd of December 2015
European Commission, Brussels
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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
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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.
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European Commission, Brussels
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Heterogeneity
across
industries
Kühnhausen & Stieber (2014) Determinants of Capital Structure
WS - Dealing with excessive corporate indebtedness
Wednesday, 2nd of December 2015
European Commission, Brussels
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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
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Kühnhausen & Stieber (2014) Determinants of Capital Structure
WS - Dealing with excessive corporate indebtedness
Wednesday, 2nd of December 2015
European Commission, Brussels
Baseline regression results
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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
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Leverage –
industry dynamics
Kühnhausen & Stieber (2014) Determinants of Capital Structure
highest:
trade and
transportation
sectors
lowest:
utilities
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European Commission, Brussels
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Sub-sampling (1): industries
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WS - Dealing with excessive corporate indebtedness
Wednesday, 2nd of December 2015
European Commission, Brussels
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Sub-sampling (2): regions
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WS - Dealing with excessive corporate indebtedness
Wednesday, 2nd of December 2015
European Commission, Brussels
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Country dynamics
Kühnhausen & Stieber (2014) Determinants of Capital Structure
highest:
Germany, Italy,
Monaco, Norway
lowest:
Liechtenstein,
Macedonia,
Montenegro,
Turkey, Ukraine,
USA
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European Commission, Brussels
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Sub-sampling (3): countries
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WS - Dealing with excessive corporate indebtedness
Wednesday, 2nd of December 2015
European Commission, Brussels
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Firm characteristics
Kühnhausen & Stieber (2014) Determinants of Capital Structure
Public vs Private Small vs Large
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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
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Thank you for your attention!
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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