Regression Analysis of Macroeconomic Conditions and Capital Structures of Publicly Listed British Firms

Elmina Homapour, Larry Su, Fabio Caraffini and Francisco Chiclana
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Elmina Homapour: Nottingham Business School, Nottingham Trent University, Nottingham NG1 4FQ, UK
Larry Su: School of Business, Universiti Teknologi Brunei, Seri Begawan BE1410, Brunei
Fabio Caraffini: Institute of Artificial Intelligence, School of Computer Science and Informatics, De Montfort University, Leicester LE1 9BH, UK
Francisco Chiclana: Institute of Artificial Intelligence, School of Computer Science and Informatics, De Montfort University, Leicester LE1 9BH, UK

Mathematics, 2022, vol. 10, issue 7, 1-28

Abstract: Using an unbalanced panel of 922 non-financial companies publicly listed on the London Stock Exchange during January 1995 and September 2014, this article tests the predictions of Pecking Order Theory (POT), Trade-off Theory (TOT) and Market Timing Theory (MTT) of capital structure through the lens of macroeconomic conditions. We find strong evidence that leverage is negatively associated with the business cycle but positively related to stock market performance, which is consistent with POT. In addition, leverage is negatively related to financial market risk, as predicted by TOT. Furthermore, leverage is positively related to credit supply, which is in line with both the POT and TOT. Finally, there is no evidence in support of MTT. The above results are robust with respect to the measurement of macroeconomic variables, the choice of estimation methods and the inclusion of a dummy variable to account for the effect of the 2008 financial crisis. An important implication is that, because firms tend to be highly levered during business cycle downturns, expansionary fiscal and monetary policies to encourage more business borrowings may not be effective after all.

Keywords: capital structure; macroeconomic conditions; firm-specific variables; pecking order theory; trade-off theory; market timing theory (search for similar items in EconPapers)
JEL-codes: C (search for similar items in EconPapers)
Date: 2022
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (4)

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