Capital Structures in German Small and Mid Caps: Does Trade-Off or Pecking Order Theory Explain Current Reality Better?

Abstract

This paper analyzes the determinants of the capital structure of German companies. The data are based on the year-end values of 44 companies included in the SDAX for the 2017 financial year. The data are examined in a multiple regression analysis according to the ordinary least squares (OLS) method. The result basically shows a strong correlation for the market leverage ratio with the factors of company size and growth opportunities. Profitability plays only a subordinate role. No significant correlation with the capital structure of German companies in the SDAX has been found for the tangibility factor of the assets. Basically, the results of this work support trade-off theory more than pecking order theory and thus point to the existence of an optimal debt ratio.

Dynamic modelling of the relationship between financial leverage and firm value of selected firms quoted on the Nigerian Stock Exchange

“…In the course of studying the Capital Structures in Small and Mid-Capitalized firms, Dommes, Schmitt and Steurer (2019) compared the Trade-Off and Pecking Order Theories. Dommes et. al.…”

¿Deuda o recursos propios? Decisiones de Financiamiento Empresarial (Estudio de Casos)

“…Como lo explicaron Cornejo (2016) y Neves et al (2019), los gerentes prefieren financiarse a través de fuentes internas para mantener el control de la empresa y evitar que ingresen nuevos accionistas. Dommes, et al (2019) sostuvieron que esto se debe a que, principalmente, el costo es menor, pero también porque si los inversionistas podían considerar que la empresa está sobrevalorada, entonces, limitarán la emisión de más deuda. Pero desde el punto de vista de la teoría del orden jerárquico resulta ser más conveniente para incrementar el valor de la firma.…”

An analysis of the interaction between leverage and market value: Evidence from the Ho Chi Minh City Stock Exchange in Vietnam

“…With a similar viewpoint to the net income approach, the trade-off theory adds some new notions in explaining the effect of the level of debt employed in a firm on its WACC and market value. Companies can take advantage of tax shields to reduce their cost to finance assets by gearing up and using more debt to finance their assets (Dommes et al, 2019). However, the use of tax shield advantage should be considered with the threat of bankruptcy and financial distress as the company takes on more debt, the risk of bankruptcy increases.…”