Capital structure policies in Europe: Survey evidence

Abstract

In this paper we present the results of an international survey among 313 CFOs on capital structure choice. We document several interesting insights on how theoretical concepts are being applied by professionals in the U.K., the Netherlands, Germany, and France and we directly compare our results with previous findings from the U.S. Our results emphasize the presence of pecking-order behavior. At the same time this behavior is not driven by asymmetric information considerations. The static trade-off theory is confirmed by the importance of a target debt ratio in general, but also specifically by tax effects and bankruptcy costs. Overall, we find remarkably low disparities across countries, despite the presence of significant institutional differences. We find that private firms differ in many respects from publicly listed firms, e.g. listed firms use their stock price for the timing of new issues. Finally, we do not find substantial evidence that agency problems are important in capital structure choice. CAPITAL STRUCTURE POLICIES IN EUROPE: SURVEY EVIDENCE AbstractIn this paper we present the results of an international survey among 313 CFOs on capital structure choice. We document several interesting insights on how theoretical concepts are being applied by professionals in the U.K., the Netherlands, Germany, and France and we directly compare our results with previous findings from the U.S. Our results emphasize the presence of peckingorder behavior. At the same time this behavior is not driven by asymmetric information considerations. The static trade-off theory is confirmed by the importance of a target debt ratio in general, but also specifically by tax effects and bankruptcy costs. Overall, we find remarkably low disparities across countries, despite the presence of significant institutional differences. We find that private firms differ in many respects from publicly listed firms, e.g. listed firms use their stock price for the timing of new issues. Finally, we do not find substantial evidence that agency problems are important in capital structure choice.2

Determinants of Capital Structure: The Evidence from European Energy Companies

“…According to this theory, companies should consider a trade-off between the costs (financial distress and bankruptcy) and benefits (interest tax shield value) of debt finance which would cause an optimum (target) capital structure and estimate advantages and disadvantages of additional debt (Brounen et al, 2005). As emphasized by the Trade-off Theory, the optimal capital structure would be determined whenever the net tax advantages of debt financing can balance leverage-relevant costs of bankruptcy and financial distress (Buferna et al, 2005).…”

“…Again, the marginal cost of financial distress inevitably has greater significance than the interest tax shield while leverage rises. The optimal debt ratio strikes a balance between the rise in the present value of tax savings from extra debt and the rise in the present value of the financial distress costs (Brounen et al, 2005).…”

Pecking-Order or Static Trade-off Theory in Family Firms? Evidence from Belgium

“…Brounen, De Jong and Koedijk (2006) revealed that in the United Kingdom, in the Netherlands and in Germany, more than two thirds of firms would turn to an indebtedness target ratio. The results were more moderate in France where only a third of the firms would gravitate towards such a ratio.…”

The Determinants of the Choice of Alternative Financing Methods of SMEs in Bank Credit Rationing: Evidence from Cameroon

“…Thus, Modigliani and Miller (1963) bring to the foreground the tax savings related to debt, and the fear of bankruptcy costs. Extensive surveys of executives and financial directors of American (Graham and Harvey 2001) and European groups (Brounen et al 2006) have shown that the tax savings related to debt as well as the fear of the bankruptcy costs are not the main criteria for choosing a financial structure. The financial flexibility and the impact of funding choices on credit ratings come out on top.…”