Regression Analysis of Macroeconomic Conditions and Capital Structures of Publicly Listed British Firms
Metadata
Show full item recordEditorial
MDPI
Materia
Capital structure Macroeconomic conditions Firm-specific variables Pecking order theory Trade-off theory Market timing theory
Date
2022-03-31Referencia bibliográfica
Homapour, E... [et al.]. Regression Analysis of Macroeconomic Conditions and Capital Structures of Publicly Listed British Firms. Mathematics 2022, 10, 1119. [https://doi.org/10.3390/math10071119]
Abstract
Using an unbalanced panel of 922 non-financial companies publicly listed on the London
Stock Exchange during January 1995 and September 2014, this article tests the predictions of Pecking
Order Theory (POT), Trade-off Theory (TOT) and Market Timing Theory (MTT) of capital structure
through the lens of macroeconomic conditions. We find strong evidence that leverage is negatively
associated with the business cycle but positively related to stock market performance, which is
consistent with POT. In addition, leverage is negatively related to financial market risk, as predicted
by TOT. Furthermore, leverage is positively related to credit supply, which is in line with both the POT
and TOT. Finally, there is no evidence in support of MTT. The above results are robust with respect to
the measurement of macroeconomic variables, the choice of estimation methods and the inclusion of
a dummy variable to account for the effect of the 2008 financial crisis. An important implication is
that, because firms tend to be highly levered during business cycle downturns, expansionary fiscal
and monetary policies to encourage more business borrowings may not be effective after all.