The Determinants of Capital Structure in Emerging Capital Markets: Evidence from Serbia

Abstract

This paper explores the determinants of the capital structure of Serbian firms listed on the regulated market using panel data. We model the leverage ratio as a function of firm-specific characteristics. The findings indicate the emerging character of Serbian corporate environment. We document that Serbian firms tend to have much lower debt ratio and that they rely more heavily on short-term than long-term debt compared to firms coming from other transitional economies. The study shows that there is a significant negative impact of liquidity, tangibility, profitability and cash gap on the two debt ratios. Leverage level is significantly positively affected by the income volatility and growth opportunities of Serbian firms. Our results are consistent with the findings of previous empirical studies realized in emerging and transition economies, indicating that Serbian companies follow the modified pecking order theory.

Testing trade-off theory and pecking order theory under managerial overconfidence

“…This is quite surprising as Titman and Wessels [1988], Rajan and Zingales [1995], Booth et al [2001], Baker and Martin [2011] found positive relation between tangibility and capital structure. Still, Bauer [2004] for Czech companies and Malinić et al [2013] for Serbian companies found a negative relation and concluded that a negative relation is present in empirical studies for developing countries (especially CEE), whereas developed countries exhibit a positive relation.…”

The Determinants of Capital Structure: Evidence from Russia

“…The study also indicated that there was a significant negative impact on liquidity, tangibility, profitability and cash gap on the debt ratios. The leverage level of Serbian firms was positively affected by income volatility and growth opportunities [Malinić, Denčić-Mihajlov, Ljubenović, 2013]. The study of Central and Eastern Europe firms tested the characteristics of the firms that affected the capital structure of micro, small, and medium-sized firms.…”

“…Business risk -(Trade-off theory) + (Pecking-order theory) Bauer, 2004;Dung, 2015;Frank, Goyal, 2009;Titman, Wessels, 1988 Profitability -(Pecking-order theory) + (Trade-off theory, Agency theory, Free Cash Flow theory) Ivashkovskaya, Solntseva, 2007;Jensen, 1986;Myers, Majluf, 1984;Rajan, Zingales, 1995;Sheluntcova, 2014 Firm size -(Pecking-order theory) + (Trade-off theory) Frank, Goyal, 2009;Ivashkovskaya, Solntseva, 2007;Nunkoo, Boateng, 2010;Sheluntcova, 2014;Titman, Wessels, 1988 Growth opportunities -(Trade-off theory, Agency theory, Free Cash Flow theory) + (Pecking-order theory) Dung, 2015;Malinić, Denčić-Mihajlov, Ljubenović, 2013;Myers, Majluf, 1984;Smith, Watts, 1992 Tangibility -/+ (Pecking-order theory) + (Trade-off theory, Agency theory)…”

“…Bradley, Jarrell, Kim, 1984;Cortez, Susanto, 2012;Frank, Goyal, 2009;Ivashkovskaya, Solntseva, 2007;Long, Malitz, 1985;Malinić, Denčić-Mihajlov, Ljubenović, 2013 Uniqueness -/+ (Pecking-order theory) -(Trade-off theory, Agency theory) Dung, 2015;Titman, 1984;Titman, Wessels, 1988 Average tax rate + (Trade-off theory) Bauer, 2004;Cortez, Susanto, 2012;DeAngelo, Masulis, 1980;Ivashkovskaya, Solntseva, 2007;Myers, 1984; Non-debt tax shields -(Trade-off theory) Industry mean leverage n/a Bradley, Jarrell, Kim, 1984;Frank, Goyal, 2009;Harris, Raviv, 1995;Long, Malitz, 1985 Stock market return -(Market Timing theory) Baker, Wurgler, 2002;Graham, Harvey, 2001;Welch, 2004 Average lending rate -(Pecking-order theory, Market Timing theory) + (Trade-off theory, Agency theory) Barry, 2008;Dung, 2015;Kaya, 2013;Taggart, 1977 Inflation rate -(Pecking-order theory) + (Trade-off theory, Market Timing theory) Dung, 2015;Frank, Goyal, 2009;Taggart, 1985…”

“…This theoretical framework proposed a number of determinants that were employed in empirical studies mainly for developed economies [Rajan, Zingales, 1995;Titman, Wessels, 1988]. Recent studies have provided results for the developing economies of Egypt [Eldomiaty, 2007], Jordania [Khrawish, Khraiwesh, 2010], Russia [Ivashkovskaya, Solntseva, 2007;Sheluntcova, 2014;Makeeva, Kozenkova, 2015], Serbia [Malinić, Denčić-Mihajlov, Ljubenović, 2013], Turkey [Acaravci, 2015] and Vietnam [Dung, 2015]. The sample of publicly traded Russian companies is particularly interesting because of the country's specific economy.…”