Capital structure decisions in a period of economic intervention

Abstract

Purpose This paper aims to analyse the Portuguese companies’ determinants of capital structure. To reach this objective, the authors used data from 37 non-financial Portuguese large enterprises and from 4,233 non-financial small and medium enterprises for the period 2010-2016. Additionally, the authors selected a sub-period from 2010 to 2014 for a deeper understanding of the impact of the sovereign debt crisis and the Economic Adjustment Programme of Troika on the capital structure of those companies. Design/methodology/approach Three dependent variables were tested according to debt maturity, and a dynamic panel data model, namely, the generalised method of moments system estimator, was used to test the formulated research hypotheses following Arellano and Bover (1995) and Blundell and Bond (1998) to capture the dynamic nature of the firm’s capital structure decisions. Findings In general, the results point out that the capital structure decisions depend on a set of firm-specific factors, and that the effects of the determinants of the debt maturity ratios differ according to the type of firm, i.e. large/small firms, and the economic cycle. Originality/value To the best of the authors’ knowledge, this is the first study that has been carried out in Portugal by using two samples of large and small companies for analysing the effects of the Economic Adjustment Programme of Troika on the capital structure of companies. The authors seek to understand which type of companies suffered more because of the effects of the Economic Adjustment Programme of Troika during this period, and which are the capital structure determinants that present greater change. Contrary to what might be expected, large companies are the firms that suffer most from the Economic Adjustment Programme. Probably, because these companies are the most immediate, most scrutinised and those that must show abroad that the bank did not fund them in the long term, because of the imposition and limits to grant credit faced by the banks themselves.

Size, Growth, Profitability and Capital Structure

“…The positive and insignificant relationship between firm size and capital structure is not in line with the results of the empirical studies of Sofat & Singh (2017) and Panda & Nanda (2020) which state that firm size has a negative relationship to capital structure. The direction of the positive influence between firm size and capital structure is supported by the results of research by Neves et al (2020) and Lemma & Negash (2014) which state that firm size has a positive influence on capital structure. According to Neves et al (2020) large companies tend to tolerate the use of a high proportion of debt ratio.…”

“…Large company size will increase the company's capacity to use debt (Moradi & Paulet, 2019). In this study, firm size is measured through the natural logarithm of total assets (Neves et al (2020); Panda & Nanda (2020)). Firm growth is an important aspect that must be considered in capital structure decisions (Sikveland & Zhang, 2020).…”

“…In explaining the determinants of capital structure, the theoretical approaches used include trade-off theory and pecking order theory (Le & Phan (2017); Mishra & Dasgupta (2019); Orlova et al (2020); Rani et al (2019); Stamou et al (2020)). Trade-off theory assumes that an optimal capital structure can maximize shareholder wealth, minimize bankruptcy risk, and increase firm value (Neves et al, 2020). Trade-off theory explains how companies determine the optimal proportion of debt to maximize the benefits of tax savings obtained by the company (Detthamrong et al, 2017).…”

“…These results are in line with the pecking order theory, which assumes that large companies have the advantage of being able to issue securities rather than using debt. Meanwhile, the results of research by Neves et al (2020) stated that there is a positive relationship between firm size and capital structure. Meanwhile, an empirical study conducted by Lemma & Negash (2014) states that firm size has a significant positive relationship to capital structure.…”

“…Another opinion expressed by Alipour et al (2015) stated that company growth has a negative and significant relationship to capital structure. Panda & Nanda (2020) and Neves et al (2020) state that company growth has a negative and significant effect on capital structure. Based on the trade-off theory, it shows a negative relationship between growth and debt.…”