Variation in firm-level predictors of capital structure: a cross industry study

Abstract

This study examines the variation in the effects of firm-level predictors on leverage across industries. Specifically, the variation is studied across nine industries. The sample consists of 48691 firms worldwide for the period 1990 -2017. To discover the existence of industry heterogeneity in firm-level predictors two panel data analyses are conducted: Random Effects Model and Multilevel Model. These analyses are used to compare the explanatory power of a general empirical model to several unrestricted models. Where the unrestricted models each added interaction terms between a firm-level predictor and industries. An increase in explanatory power indicates a variation in effect, this is also tested with the Wald test and likelihood-ratio test. Both analyses concluded that the effects of all firm-level predictors varied across industries. The most relevant variation is in non-debt tax shields and tangibility. Additionally, the robustness check pointed out that the level of industry aggregation influences the variation in effect. When industries are more accurately specified the variation in effects becomes larger. However, incorporating more industries also makes the research increasingly complex. Therefore, a trade-off is to be made between complexity and explanatory power.

Keywords: Capital structure, leverage, firm-level predictors, static trade-off theory, pecking order theory, industry heterogeneity.