The determinants of capital structure across firms’ sizes: The U.K evidence

Abstract

This paper explores the leverage determinants across firms' sizes<br />based on the two main theories behind the capital structure, the trade-off<br />and the pecking order theories. A panel data is sued to find the<br />relationship between capital structure and the variables that proxy for<br />benefits and costs of debt during 1990 to 2006. Our findings show that<br />both principles help to explain the capital structure of small, medium, and<br />large firms. However, greater emphasised should be placed on the tradeoff<br />theory. In addition, small firms differ from large companies in level of<br />growth opportunities, structure of assets, and probability of bankruptcy<br />and agency costs. Therefore, different firms' characteristics are important<br />to affect the power of leverage determinants and thus leverage<br />determinants are likely to be size dependant. These results support the<br />existing differences between small and large firms considering the<br />agency costs and the bankruptcy costs.