The Effect of the financial crisis on Firms Capital Structure: a cross Industry Study

Abstract

This study examines the effect of the last financial crisis on the capital structure of firms. A large sample of 1555 listed companies are analysed from 3 European countries: Germany, France and UK for the period 2008-2016. The focus is on the last financial crisis period 2008-2012, firm-level determinants and industry fixed effects. The results show that the determinants firm size, growth opportunity and tangibility have a positive relationship with leverage, measured as long-term debt divided by total assets. On the other hand, the study found that the determinants liquidity and profitability have a negative relation with capital structure. Based on the firm-level determinants in this study, the general finding is that the pecking order theory is the most influential capital structure theory. However, the results also show that the last financial crisis of 2008-2012 has a negative effect on leverage which is in accordance with the trade-off theory. Furthermore, the study found that the firm-specific determinants firm size and tangibility are more important during times of crisis. These characteristics could help firms to mitigate the negative relationship between crisis and leverage. Finally, this study found evidence that industry fixed effects have a significant influence on the capital structure decision.