While in period of boons and inflation, the companys capital should consist of share capital generally equity shares. Debt tax shield and profitability simultaneously affect the capital structure, but other factors greater influence, among others. Some firms operate in volatile financial environments affecting their ability to meet financial obligations. Factors affecting capital structure decision of a firm are therefore critical. Factors affecting capital structure decisions wiley online library. A firms ability to pay expenses and loans determines debt capacity. The study examined the effect of contextual factors affecting nigerian companies capital structure. Capital structure with equity shares and debentures. Exploring the underlying factors affecting capital structure decision.
Capital structure with equity and preference shares. The most commonly identified determinants of capital structure include profitability, firm size, growth opportunities, tangibility of assets, uniqueness of assets, volatility. Factors that determine the capital structure among micro. Capital structure with equity, preference shares and debentures. In reality, it is difficult for companies to determine the best capital structure in an appropriate composition of spending. Capital structure capital structure means the proportion of dept and equity used for financing the operations of business. How capital structure affects business valuation santora. To formulate a theoretical perspective for examining the keys factors in influencing capital structures decisions and how do firms adjust their capital structure. Capital market conditionin the lifetime of the company, the market price of the shares has got an important influence. What%factors%affect%the%capital%structureof real%estate.
The aim of this study is to reveal the determinants of capital structure. First, it determines which part of companys assets is funded by shareholders and which is attributable to lenders. The objectives of the study were to identify the factors affecting capital structure among microenterprises, to establish the extent to which the factors affect capital structure among. The influence of capital structure on financial performance. Factors affecting capital structure decisions mba lectures. Factors affecting the capital structure the dependent variable are.
There are different factors that affect a firms capital structure, and a firm should attempt to determine what its optimal or best mix of financing. Key factors influencing capital structure decision and its. Determining a companys optimal capital structure capital structure capital structure refers to the amount of debt andor equity employed by a firm to fund its operations and finance its assets. Capital structure, as its name itself signifies, is the composition of the capital employed by the firm from various sources of finance. Key factors influencing capital structure decision and capital. These are companies features that influence a choice of financing mix and the level of leverage. Pdf contextual factors affecting capital structure. Chapter iii concepts and theories of capital structure and profitability.
The capital structure of the firm represents its investment and financing strategy. Although there is fair consensus about the factors affecting capital structure of firms, yet there isnt a single theory that can explain the motivations behind the capital structure decisions of corporations. That happens to be the need of the company because eps happens to be the maximum on it. A study on determinants of capital structure in india. Moreover, frank and goyal 2009 discovered that the reliable factors for explaining market leverage are median industry leverage, markettobook assets ratio, tangibility of assets. According to frank and goyal 12, the factors affecting the companys leverage include the median industrial leverage, imarket capital. Factors affecting capital structure decision semantic scholar.
In this paper we examine the factors that influence financial performance through panel data regression models using a sample of 16 pharmaceutical companies from 5 countries during 200120. In the study, the factors affecting capital structure are examined by testing 75 turkish manufacturing firms traded on. In addition, there are only a limited number of studies that examine factors which influence the capital structure of nigerian firms. Pdf the main objective of this paper is to analyze the factors determining the capital structure of indian companies. An empirical study on factors influencing capital structure of pharmaceutical listed corporations yin yuxuan and gu wenlin school of business, hohai university, nanjing, p. Key factors influencing capital structure decision and. Companies use a variety of methods to raise capital needed to finance operations and expansion.
The second area of the capital structure literature is the set of studies that speci. The proportion of debt funding is measured by gearing or leverages. Factors affecting capital structure decisions request pdf. Procedure and analysis of data is discussed in section three followed by empirical analysis in section four. Cost of capital is an important factor in determining the companys capital structure. Size doesnt affect capital structure of an organization. Some of the major factors influencing capital structure are as follows. To discover what determines capital structure, six firm level explanatory variables profitability, tangibility, size, growth, age and taxshield were selected and regressed against the appropriate capital structure measure debt to equity ratio. The firms size has been the critical point of capital. Under the capital structure, decision the proportion of longterm sources of capital is determined. To gain insight into the factors affecting capital structure choice, responses from a fortune 500 survey are analyzed using factor analysis and. What factors are influencing the determination of capital.
The decision related to composition of capital structure also depends upon the ability of business to generate enough cash. The independent variables have been considered keeping in view agency theory, pecking order hypothesis and other established capital structure models. Factors affecting the capital structure of a company. This thesis examines what factors that affect the capital structure of 84 listed real estate firms within the european union for ten years during 20032012.
Can macroeconomic factors explain the choice of capital. How capital structure affects business valuation a companys capital structure essentially, its blend of equity and debt financing is a significant factor in valuing the business. Some of the chief factors affecting the choice of the capital structure are the following. Most favourable proportion determines the optimum capital structure. Analysis on the factors affecting the capital structure of. Research on the factors that affecting capital structure in manufacturing companies has been done by many researchers. It is this literature to which this article contributes. J o u r n a l o f accouni international journal of a l n g. Factors affecting capital structure decisions norton. Capital budgeting usually involves calculation of each projects future accounting profit by period, the cash flow by period, the present value of cash flows after considering time value of money, the number of years it takes for a projects cash flow to pay back the initial cash investment, an assessment of risk, and various other factors. Factors affecting capital structure decisions your business.
They suggest that some of the insights from modern finance theory of capital structure are applicable in the fbih in that certain firmspecific factors that are relevant for explaining capital. Determining the factors affecting capital structure decisions of. It is seen that debentures at the time of profit earning of company prove to be a cheaper source of finance as compared to equity shares where equity shareholders demand an extra share in profits. To study the effect of factors like growth, liquidity, profitability, tangibility and size on leverage. Factor analysis uncovers nine factors explaining 66.
Commensurate with the objectives, following five null hypotheses have been formulated to be tested in the study. Abstract objective this study deploys an earnest effort to understand the factors that affect the managers involved in managing the portfolio of. Multiple regression has been used to find out the factors affecting capital structure. During the depression period, the companys capital structure generally consists of debentures and loans. In the paper, the factors affecting capital structure is examined by testing 77 turkish manufacturing firms traded on borsa istanbul, with 308 observations from 2010 to 20. Pdf corporate capital structure remains a controversial issue in modern corporate finance. Cbse notes class 12 business studies financial management. Determining the factors affecting capital structure decisions of real sector companies operating in ise. Cost of financing in a capital structure, the company has to look to the factor of cost when securities are raised. To gain insight into the factors affecting capital structure choice, responses from a fortune 500 survey are analyzed using factor analysis and cluster analysis. Purpose this study aims to investigate the dynamic aspects in the capital structure decisions of firms in indonesia, offering an extension to the existing literature on indonesia via a dynamic. This paper starts from the economic environment and characteristics of small and mediumsized enterprises, discusses the internal and external factors affecting the capital structure of small and mediumsized enterprises and puts forward the countermeasures and suggestions for optimizing capital structure of small and mediumsized enterprises.
Wessels 11 argue that the main factors affecting a companys capital structure include the asset collateral value of the company, the size of the company, and the nondebt tax rate. Myers 2001 attributes this outcome to the conditionality of capital structure theories. The capital structure puzzle is unravelled and a clear picture is presented in terms of why capital structure matters. Factors affecting capital structure of go public manufacturing. This paper investigates the significant factors influencing capital structure decision of the listed real estate companies and the speed of adjustment towards their target level. Factors affecting the capital structure in textile and garment listed in indonesia stock exchange doi. Financial leverage it refers to proportion of debt in the overall capital. It is therefore essential to study the emerging economies as individual countries rather than see them collectively as a group. Besides the development of several theories and empirical works in relation with capital structure, what factors affect firms. As salawu and agboola 2008 note that though the capital structure issue. Factors affecting capital structure of go public manufacturing companies in bei indonesia stock exchange abdillah an, ikhsan s and mutia i.
Bonds pay interest to investors until the maturity date. Also a conclusion can be given about the importance of the theories. On the maturity date, the company must pay the full redemption value back to the investor. Cost of capital learn how cost of capital affect capital. This paper analyzes the capital structure determinants of manufacturing, merchandising and service firms operating in istanbul stock exchange. The various factors which influence the decision of capital structure are. The factors affecting capital structure have been a popular topic of research, both theoretically and empirically, around the world. The results have shown that capital structure has an impact on. The key division in capital structure is between debt and equity. The study used homogeneous panel of 39 thai companies in real estate industry listed in the stock exchange of thailand set during the period 2002 to 2009.
The influence of macroeconomic factors on capital structure is examined in this paper. Most of the results are in line with what was expected, except for the variables tangibility, free cash flow and priority shares. Several researchers argue that the determinants of capital structure are significantly affected by factors such as the laws and regulations of the country, corporate and personal tax systems and corporate governance. Second, capital structure affects companys solvency key financial ratios like debt ebitda and debt equity are dependent on capital structure.
Pdf determining the factors affecting capital structure decisions. The patterns of corporate capital structures around the world are also discussed. Seeking all above thoughts in mind it can be said that the companies should maintain the financial flexibility or adequate reserve borrowing capacity because it depends on the factors which are necessary in making capital structure decisions. Factors affecting capital structure 1 cash flow position. Important factors in determining the capital structure of. Nonmanufacturing firms were not included in the study since their incentives are different compared to manufacturing firms.
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