Evidence for Financial Hierarchy Theory in Capital Structure Decisions: Data from BIST Companies

Abstract

The aim of this study is to test and expound the firm-level factors that determine financial leverage via testing a panel data of non-financial companies listed in the BIST throughout 1994-2015. We aim to build on our previous study of the same data set (Vural & Acar, 2018), which tested the basic model of Financial Hierarchy theory via a simple regression analysis of financial leverage on financial deficit and yielded positive results at 1% significance level. In this study, using reliably significant factors of leverage, we further analyze the effects of firm characteristics on changes in leverage by using the system version of the Generalized Method of Moments (System GMM). Operational profitability and firm size are found to negatively affect debt levels, while market-to-book value ratio has a positive effect, as predicted by the Financial Hierarchy theory. The median industrial leverage ratio has a positive coefficient, more in line with Trade-off theory's predictions.