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Applied Financial Economics
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The determinants of capital structure choice: evidence
from Greek listed companies
A. Noulas
a
& G. Genimakis
a
a
Department of Accounting and Finance , University of Macedonia , 54006 Thessaloniki,
Greece
Published online: 17 Jan 2011.
To cite this article: A. Noulas & G. Genimakis (2011) The determinants of capital structure choice: evidence from Greek
listed companies, Applied Financial Economics, 21:6, 379-387, DOI: 10.1080/09603107.2010.532108
To link to this article: http://dx.doi.org/10.1080/09603107.2010.532108
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Applied Financial Economics, 2011, 21, 379387
The determinants of capital
structure choice: evidence
from Greek listed companies
A. Noulas and G. Genimakis*
Department of Accounting and Finance, University of Macedonia,
54006 Thessaloniki, Greece
This article investigates the capital structure determination of firms listed
on the Athens Stock Exchange, using both cross-sectional and nonpara-
metric statistics. The data set is mainly composed of balance sheet data for
259 firms over a 9-year period from 1998 to 2006, excluding firms from the
banking, finance, real estate and insurance sectors. The first part of the
study assesses the extent to which leverage depends upon a broader set of
capital structure determinants, while the latter provides evidence that
capital structure varies significantly across a series of firm classifications.
The results document empirical regularities with respect to alternative
measures of debt that are consistent with existing theories and, in
particular, reasonably support the pecking order hypothesis. Overall, this
study tries to shed more light on corporate financing behaviour in a way to
loosen the capital structure puzzle.
I. Introduction
The problem of optimal capital structure is one of the
central problems of corporate finance and has
attracted considerable attention by economists in
recent years. Since the 1960s, a number of studies
have revealed contradictory advice on gearing, ini-
tialized by the seminal papers of Modigliani and
Miller (1958, 1963). Other studies focus on alternative
cross-sectional implications deriving from firms
objective to choose value maximizing mixes of debt
and equity on account of bankruptcy costs and tax
deductibility of interest payments. Static trade-off
theory states that a target debtequity ratio is
approached at the point where the tax advantage of
debt is offset by the costs of financial distress and the
costs of prevailing market imperfections are mini-
mized (Kraus and Litzenberger, 1973). Optimal
capital structure is obtained where the firm value is
maximized and each firm sets a target debtequity
ratio in an industry class with a gradual attempt to
achieve it. However, in the presence of adjustment
costs, it might be cheaper for firms not to fully adjust
to their targets even if they recognize that their
existing leverage ratios are not optimal (Drobetz and
Wanzenried, 2006). On the other hand, conflicts of
interests and information asymmetry, first described
by Jensen and Meckling (1976) and Ross (1977), have
been identified as key factors and have resulted in the
development of the pecking order theory (Myers and
Majluf, 1984). The last is based on a financing
hierarchy of potential sources but does not indicate
an optimal capital structure. Retained earnings are
always preferred to external financing and debt is
preferred to equity if firms issue securities. Besides
these two prevailing financing theories, a number of
empirical studies explore comparable characteristics
and conditions to our study. In any case, managers
*Corresponding author. E-mail: genimakis@hotmail.com
Applied Financial Economics ISSN 09603107 print/ISSN 14664305 online 2011 Taylor & Francis 379
http://www.informaworld.com
DOI: 10.1080/09603107.2010.532108
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use capital structure to signal their private informa-
tion about the firms prospects.
The purpose of this article is to integrate the
insights of capital structure determination and
empirical evidence into a single framework and
reveal the way companies actually choose between
equity and debt. In Sections II and III, we present
three alternative measures of leverage and the incor-
porated determinants of capital structure choice. In
Section IV, we provide the data set description and
we apply the regression model to capture the effects
of these determinants. In Section V, we present a
systematic description of the empirical results and
perform some analysis. Conclusions are reported in
Section VI.
II. Measures of Capital Structure
Since the empirical evidence demonstrates different
implications with regard to different types of debt
instruments, we introduce separate measures of
Leverage (L). Three different ratios are used as
proxies of leverage in this study. These are the long-
term debt to equity (L
1
), the total bank debt to equity
(L
2
) and, finally, the ratio of total liabilities to equity
(L
3
). Data limitations forced us to measure both debt
and equity in terms of book values rather than
market values. Even though short-term bank debt is
considered as an inappropriate financing source, the
easy access of firms to this particular source and its
favourable terms, render its use a frequent phenom-
enon in long-term project financing. Moreover, since
total liabilities include items like accounts payable,
it may overstate the level of leverage. On the other
hand, short-term bank debt and current liabilities are
often used as a buffer for an alteration in a firms
capital structure and it is a common fact to observe
interaction between these sources. All gearing proxies
are calculated as the natural logarithm of the above-
mentioned average ratios in a way to capture
normality of residuals. Due to average calculations
of gearing proxies, no firms were found to be
unleveraged over the 9-year examined period.
Concluding, our study accounts for both financial
and capital structure. The first term stands for the
mix of total debt and equity funds of the
firm, indicating how assets are financed, whereas cap-
ital structure is the combination of long-term
debt and equity funds that indicates which long-
term sources of capital the firm uses to finance its
assets.
III. Determinants of Capital Structure
In this section, we present a brief discussion of the
determinants that, according to a variety of different
theories and empirical work, may affect the capital
structure choice. These determinants consist of the
age of the firm, size, profitability, profit volatility,
tangibility of assets, depreciation, growth rate,
credit rating, economic activity classification, sector
classification, ownership and stock market
categorization.
Age of the firm (A)
Different financing decisions have been linked with
business life cycle issues. Developing firms tend to
rely on equity finance, whereas mature firms are able
to increase their leverage in order to finance a new
investment opportunity. Due to restricted ability to
acquire debt in the early stages of operation, a
positive correlation is anticipated between the age of
the firm and its leverage (Kimki, 1997). We use the
average age of each firm over the examined period of
time as a proxy.
Size of the firm (S/W)
A positive correlation is expected between the size of
the firm and its leverage, as relatively large firms tend
to be more diversified and less prone to bankruptcy.
By combining diversified activities, the firm manages
to reduce the riskiness of its debt, which, in turn,
improves its investment opportunities. Larger firms
have easier access to low cost debt, whereas small
firms pay more to issue new equity and rely on bank
loans (Titman and Wessels, 1988). Consequently,
larger firms incur lower transaction costs associated
with debt and lower information costs because of
better quality of financial information. Moreover,
smaller firms solve the risk premium problem by
issuing short-term borrowing as it involves less risk
for creditors (Bhaduri, 2002). However, a number of
empirical studies on large firms find low levels of
leverage due to asymmetric information existence.
Gupta (1969) stated that small firms may be more
leveraged as they pay much more than large firms to
issue new equity. In this study, company size is
measured in two different ways; the natural logarithm
of (a) the average Sales (S) and (b) the number of
Workers (W) over the examined period of time. The
logarithmic transformation accounts for the conjec-
ture that small firms are particularly affected by a size
effect.
380 A. Noulas and G. Genimakis
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Profitability (P)
Profitability is considered as a fundamental determi-
nant of the capital structure choice since low profit-
ability may result in financial distress. There are
conflicting theoretical predictions on the effects of
profitability on equilibrium leverage. According to
Myers (1984) and the pecking order hypothesis, firms
prefer using internal financing as opposed to using
external financing; a negative association between the
profitability of a firm and its leverage is expected. On
the other hand, Jensen (1986) and the static trade-off
theory predict a positive relationship that derives from
the tax advantage of debt through interest payments
deductibility. Firms with high profits require greater
tax shelter and have more debt-taking capacity
(Nunkoo and Boateng, 2010). Profitability is mea-
sured by the average ratio of the operating earnings
before interest and depreciation over total assets.
Profit volatility (V)
A negative correlation is expected between profit
volatility and leverage, since firms with different cash
flows balance at different debt ratios. In more details,
firms that exhibit constant levels of profitability
depend more upon debt financing. The optimal debt
level is a decreasing function of the volatility of
profits for the reason that as long as this volatility
increases the probability of financial distress rises, as
well (Bradley et al. 1984). Profit volatility is calcu-
lated as the SD of the first difference in operating
earnings before interest and depreciation over total
assets employed that period.
Tangibility of assets (T)
Although Harris and Raviv (1991), under the pecking
order hypothesis, stated that firms with few tangible
assets face greater asymmetric information problems,
empirical evidence demonstrates an opposite associ-
ation. Tangible assets naturally serve as collateral in
bank debt, diminish the risk of the lender and allow
firms to have higher leverage. Undoubtedly, the
agency costs of secured debt are lower than those of
unsecured debt. Therefore, the greater the proportion
of tangible assets in a firms balance sheet, the higher
the leverage should be. Our proxy for tangibility is
the average of fixed assets of each firm scaled by total
assets.
Depreciation (D)
Tax deductions from depreciation and other nondebt
tax shields are substitutes for the tax benefits of debt
financing (DeAngelo and Masulis, 1980). As a result,
a negative association is expected with leverage since
firms with large nondebt tax shields include less debt
in their capital structure (substitution effect). It is
measured by the average ratio of depreciation over
total assets.
Growth rate (G)
Growth opportunities are capital assets that add
value to a firm but cannot be collateralized as the
tangible assets. Firms with growth opportunities are
associated with greater bankruptcy risk and, there-
fore, have low debt ratios (Stulz, 1990). This inverse
relationship due to higher costs of financial distress
(Rajan and Zingales, 1995) is consistent with the
static trade-off theory since firms that expect future
growth should be equity financed. Thereby, firms
with ample growth opportunities may face difficulties
in raising debt capital on favourable terms. On the
contrary, a positive sign is more consistent with the
pecking order hypothesis (Allen, 1993), which implies
that firms issue equity when their market perfor-
mance is high. One might expect that a firm with a
substantial growth rate could afford to have greater
financial leverage since it could generate enough
earnings to support the additional interest expenses.
The average annual growth rate of total assets is used
as a growth rate indicator.
Credit rating (R)
Last years assessment of both quantitative and
qualitative data describes the current credit worthi-
ness of a firm, which is reflected on its credit rating.
For the purposes of this study, we use a credit risk
model developed by ICAP SA and specifically we
introduce the average scoring of the examined period
up to 2005 for each firm of the working sample.
ICAP SA is involved in credit risk services and credit
rating evaluation of Greek companies. ICAP credit
rating expresses an estimation of a companys credit
quality with respect to the probability of default and
bankruptcy within a 1-year time horizon. This
estimation is based on an analysis of commercial,
financial and trading data derived from public
sources and interviews with the rated companies.
Credit ratings appear on a 10-grade scale (Table 1).
Classification of economic activities
Firms are classified into the following fundamental
categories according to their activity (NACE statisti-
cal classification of economic activities in the
European Community Nomenclature statistique des
Activites economiques des la Communaute Europeenne)
Capital structure determination in Greece 381
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and the Athens Stock Exchange standards (banking,
financial services, real estate and insurance activities
are excluded) in order to capture any industry
effects. Economic activity classification is expected
to be an important determinant of debt level since it is
viewed as a proxy of business risk (Table 2).
Sector classification
ICAP SA classifies firms into five main sectors, which
are introduced in our study and described in Table 3.
Specifically, enterprises are separated into five basic
sectors: industry, trade, services, tourism and other.
Harris and Raviv (1991) noted that firms within the
same sector reveal more similar capital structures than
those in different sectors. In addition, firms of the
same sector adjust their capital structure towards the
sector mean leverage or the leverage of benchmark
firm, showing that firms are not indifferent to whether
their gearing varies significantly as to the sector mean.
Ownership
The literature suggests that ownership structure
affects the manager shareholder conflict. We classify
firms into three groups as shown in Table 4: privately
Table 2. Economic activity classification of firms
Economic activity Frequency
Percentage
frequency
Cumulative
percentage frequency
Oil and gas 3 1.2 1.2
Chemical 10 3.9 5.0
Basic resources 17 6.6 11.6
Construction and materials 33 12.7 24.3
Telecommunications 3 1.2 25.5
Food and beverage 31 12.0 37.5
Industrial goods and services 28 10.8 48.3
Healthcare 8 3.1 51.4
Retail 15 5.8 57.1
Personal and household goods 47 18.1 75.3
Media 14 5.4 80.7
Travel and leisure 17 6.6 87.3
Utilities 5 1.9 89.2
Technology 28 10.8 100.0
Total 259 100.0
Table 1. ICAP credit rating 10-grade scale
Low credit risk Medium credit risk High credit risk Without rating
AA A BB B C D E F G H NR/NT
AA The AA rating indicates the lowest credit risk and is assigned to companies of exceptional credit quality
A The A rating indicates specifically low credit risk and is assigned to companies of particularly
good credit quality
BB The BB rating indicates very low credit risk and is assigned to companies of very good credit quality
B The B rating indicates low credit risk and is assigned to companies of good credit quality
C The C rating indicates average credit risk and is assigned to companies of moderate credit quality
D The D rating indicates relatively increased credit risk and is assigned to companies of associated
low credit quality
E The E rating indicates increased credit risk and is assigned to companies of low credit quality
F The F rating indicates significantly increased credit risk and is assigned to companies of considerably
low credit quality
G The G rating indicates very high credit risk and is assigned to companies of very low credit quality
H The H rating indicates the highest credit risk and is assigned to companies of extremely low credit quality
NR Not Rated. The NR class does not constitute a rating grade and includes companies that cannot be rated
NT Not Trading. The NT class does not constitute a rating grade and includes companies that
have ceased to operate
Source: ICAP SA.
382 A. Noulas and G. Genimakis
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owned, state owned and multinational enterprises.
Both state owned and multinational corporations are
considered of low credit risk and they constitute
preferable choices for bank financing. State owned
firms are often large firms with substantial ability to
compete internationally. They may have easier access
to credit but private firms are the ones that take on
more debt (Colombo, 2001). Even though multina-
tional firms represent the best possible investment
opportunity from banks perspective, they are often
financed through the parent company or foreign
bank channels.
Stock market categorization (Table 5)
According to the Athens Stock Exchange, firms are
classified into the following five categories at the time
of our study: big capitalization, medium and small
capitalization, low dispersion and specific features,
under supervision and under suspension. Undeniably,
this classification influences the psychology and the
attitude of investors towards new equity or bond
issues.
IV. Data Description and the Model
Specification
The Greek sample is made of companies listed on the
Athens Stock Exchange after excluding firms from
the banking, finance, real estate and insurance sectors
because their leverage is strongly influenced by
explicit investor insurance schemes such as deposit
insurance. The sources of the data are the informa-
tion databases of ICAP SA, Hellastat SA and Athens
Stock Exchange and the annual reports of the
examined firms. Using these criteria, we gathered
accounting and discriminant data for 259 firms over a
9-year period from 1998 to 2006. Our sample consists
of a significant proportion of the listed firms on the
Athens Stock Exchange during the examined period.
A selection bias arises from the fact that only listed
companies are reported that do not represent the
average Greek firm.
To measure the relationships between these vari-
ables and evaluate the impact of the above-mentioned
determinants on capital structure, we use the
Ordinary Least Squares (OLS) estimation based on
the following regression model:
L
jit

1
A
it

2
W
it

3
S
it

4
P
it

5
V
it

6
T
it

7
D
it

8
G
it

9
R
it
e
it
1
where L
j
is the leverage proxy (L
1
, L
2
or L
3
) of each
firm, i denotes each individual Greek listed firm, t the
examined time period from 1998 to 2006, the
constant term, the regression coefficients on capital
structure determinants and e
it
the random error term.
All regressions, including the separate gearing
measures, were estimated by the OLS and the results
are analysed in the following section. Due to severe
deviations from normality in the dependent variables,
the nonparametric KruskalWallis test and the
Monte Carlo simulation were performed to determine
whether economic activity classification, sector clas-
sification, ownership and stock market categorization
have a significant impact on the capital structure
determination. Monte Carlo simulation is a class of
computational algorithms that relies on repeated
random sampling (10 000 samples).
Table 5. Stock market categorization of firms
Stock market
categorization Frequency
Percentage
frequency
Cumulative
percentage
frequency
Big capitalization 66 25.5 25.5
Medium and small
capitalization
144 55.6 81.1
Low dispersion and
specific features
23 8.9 90.0
Under supervision 17 6.6 96.5
Under suspension 9 3.5 100.0
Total 259 100.0
Table 3. Sector classification of firms
Sector Frequency
Percentage
frequency
Cumulative
percentage
frequency
Industry 118 45.6 45.6
Trade 54 20.8 66.4
Services 80 30.9 97.3
Tourism 7 2.7 100.0
Total 259 100.0
Table 4. Categorization of firms based on ownership
Ownership Frequency
Percentage
frequency
Cumulative
percentage
frequency
Privately
owned firms
239 92.3 92.3
State owned firms 10 3.9 96.1
Multinational
corporations
10 3.9 100.0
Total 259 100.0
Capital structure determination in Greece 383
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V. Results
Regression results
Due to multicollinearity problems among the explan-
atory variables, the magnitude of the coefficient of
each determinant cannot be compared within the
same standards. Condition indices, computed as the
square roots of the ratios of the largest eigenvalue to
each successive eigenvalue, are much less than 10.
The above regression was estimated using both
Econometric Views (EViews) and Statistical
Package for the Social Sciences (SPSS) and the
significance of each variable was examined with
the stepwise regression model. All variables passed
the tolerance criterion to be entered in the equations
and all coefficients are significant at the 5% level of
significance. The equation system displayed a com-
paratively high degree of explanatory power for
cross-sectional regressions, as the coefficients of
determination lie between 0.1993 and 0.6012.
Contrary to what we expected, the explanatory
power increases if we use the ratio of total liabilities
to equity as a leverage proxy. The F-statistics
(Analysis of Variance, ANOVA) are significant at
the 1% level, demonstrating that all models are a
significant fit of the data overall. The Breusch
PaganGodfrey test showed that the null hypothesis
for no heteroscedasticity in all equations could not
be rejected. It is a Langrance Multiplier (LM) test of
regression misspecification that involves an alterna-
tive hypothesis in which the regression errors vari-
ance is proportional to a linear combination of the
regressors. The test is performed by completing an
auxiliary regression of the squared residuals from the
original equations and it determined that the error
terms are not heteroscedastic as all probabilities for
the F-statistics are greater than 5%. Finally, the
Hausman specification test was implemented in order
to check whether endogeneity is present and the OLS
estimates are biased. The suspect variables were
initially regressed on all exogenous variables and
then, the leverage functions were re-estimated includ-
ing the residuals from the first regressions as addi-
tional regressors. The null hypothesis of consistent
OLS estimates at conventional levels could not be
rejected and the coefficients on the first stage resid-
uals were not significantly different from zero. Hence,
the OLS is an appropriate estimation technique.
Table 6 contains the regression results and illus-
trates the association of the capital structure deter-
minants with each leverage measure for the whole
sample and per firm sector over the examined period
1998 to 2006. However, a regression model was not
built for the tourist sector since it consists of the
limited number of seven firms.
As shown in Table 6, the three measures of leverage
are significantly negatively related to the age of the
Table 6. Association of capital structure determinants with the gearing measures, as extracted from the multiple
regressions (OLS)
A W S P V T D G R R
2
Sig. F CI
Sig.
F BPG
Total sample
L
1
Negative None Positive None None Positive None Positive Positive 0.3509 0.0000 1.9647 0.0852
L
2
Negative None Positive Negative None None None None Positive 0.1993 0.0000 1.8618 0.0647
L
3
Negative None Positive None None Negative None None Positive 0.3093 0.0000 1.9507 0.2009
Sector classification: industry
L
1
Negative None None None None Positive None Positive None 0.2504 0.0000 8.2185 0.3344
L
2
Negative None Positive None None None None None Positive 0.2526 0.0000 2.2392 0.3588
L
3
Negative None Positive None None Negative None None Positive 0.3074 0.0000 2.2928 0.1702
Sector classification: trade
L
1
None None Positive Negative None None Positive None None 0.2796 0.0035 1.5335 0.4400
L
2
None None None Negative None None Positive None None 0.3069 0.0004 5.5624 0.2712
L
3
Negative None Positive None None None None Positive Positive 0.6012 0.0000 1.5705 0.4531
Sector classification: services
L
1
None None Positive None Positive Positive None None None 0.4629 0.0000 2.1207 0.7627
L
2
Positive None Positive None None None None Positive Positive 0.3958 0.0000 1.9806 0.8756
L
3
None None Positive None Positive None None Positive Positive 0.4241 0.0000 1.7449 0.5730
Note: L
1
long-term debt to equity; L
2
total bank debt to equity; L
3
total liabilities to equity; Aage of the firm;
Ssales; Wnumber of workers; Pprofitability; Vprofit volatility; Ttangibility of assets; Ddepreciation;
Ggrowth rate; Rcredit rating; R
2
coefficient of determination; Sig. Fsignificance of the F-statistic (ANOVA);
CI condition index; Sig. F BPGsignificance of the F-statistic for BreuschPaganGodfrey test.
384 A. Noulas and G. Genimakis
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firm and significantly positively related to sales and
credit rating for the entire sample. These two positive
correlations provide evidence that smaller firms pay
more for debt financing than larger firms and low
credit quality increases both probability of default
and creditors unwillingness to finance a firms
project. The unexpected negative association of the
firms age with leverage is consistent with Myers
(1984) pecking order theory and the existence of
asymmetrically distributed information to the
market, especially in the case of Greece because of
the lack of financial disclosure. Most importantly, the
negative relationship between the total bank debt to
equity and profitability implies once again the dom-
inance of the pecking order hypothesis as profitable
firms seem to use less debt. The positive sign on
growth rate implies that firms issue equity when their
market performance is high, whereas the negative
correlation among tangibility and debtequity ratio is
justified by potential close relationships with credi-
tors (Berger and Udell, 1994). This finding is in line
with the study of Ferri and Jones (1979) who argued
that the use of fixed assets can magnify the variability
in the firms future income. Number of workers,
volatility of profits and depreciation are not signif-
icant determinants of capital structure choice for the
whole sample.
A positive correlation between growth rate and
debtequity ratio occurs for the trade sector, which
verifies once more the pecking order hypothesis
(Baskin, 1989; Allen, 1993). Moreover, the antici-
pated positive sign on the age of the firm is noticed
only in the services sector and for the total bank debt
to equity. The analysis provides conflicting evidence
on the relationship between leverage and tangibility,
depending on the measure of gearing applied. A
negative association with leverage takes place for
the industrial firms only when debtequity ratio is the
dependant variable and this is consistent with the
pecking order theory. Otherwise, a positive correla-
tion exists between tangibility and leverage, indicat-
ing that assets serve as collateral in debt. The
estimated coefficients on profit volatility and depre-
ciation have abnormal positive signs for the trade and
services sector. A possible explanation for this direct
relation with depreciation is that nondebt tax shields
are an instrumental variable for the assets secur-
ability, with more securable assets leading to higher
debt ratios (Trezevant, 1992). Additionally, the pos-
itive relationship between profit volatility and gearing
is not inconsistent with theory, which suggests that
the relative strengths of agency and bankruptcy costs
determine the sign of this association (Bennett and
Donnelly, 1993). Finally, the number of workers as a
proxy of firm size does not affect the capital structure
determination in all three examined sectors.
Other determinants of capital structure choice
Table 7 indicates that firms within an economic
activity classification, facing similar conditions and
risk characteristics, have similar leverage ratios. The
nonparametric KruskalWallis test is performed,
which is based on a one-way ANOVA using only
ranks of the data. Both KruskalWallis test and
Monte Carlo simulation give p-values less than 5%
for all gearing measures, revealing that economic
Table 7. Mean leverage and p-values according to KruskalWallis test based on the economic activity classification
of firms
Economic activity classification Leverage L
1
Leverage L
2
Leverage L
3
Means Total 0.3162 0.8037 1.7353
Oil and gas 0.3437 1.4300 2.3673
Chemical 0.2841 0.9099 1.4729
Basic resources 0.4264 0.8312 1.2281
Construction and materials 0.2039 0.4762 0.9432
Telecommunications 0.5563 0.7037 1.2873
Food and beverage 0.2930 0.7481 1.2122
Industrial goods and services 0.1845 0.4401 0.8913
Health care 0.2143 0.6510 1.1125
Retail 0.2032 0.9784 5.4353
Personal and household goods 0.3006 0.9281 1.8541
Media 0.1826 0.7221 1.6898
Travel and leisure 1.1115 1.5692 3.0048
Utilities 0.8696 1.0016 1.4940
Technology 0.1218 0.7853 1.7655
p-values 0.0003* 0.0361* 0.0101*
Note: * Denotes significance at the 5% level.
Capital structure determination in Greece 385
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activity classification determines capital structure.
The p-values of the tests represent the probability of
incorrectly inferring difference in capital structure
according to the firm classification.
On the other hand, as illustrated in Table 8,
sector classification has an impact on the capital
structure determination only for the deptequity
ratio. For the other two gearing measures, we
cannot reject the null hypothesis that capital
structure is not affected by sector classification.
Furthermore, the tables in this section present the
average leverage by each firm category for all three
gearing measures.
Finally, it can be argued that firms ownership
(Al-Fayoumi and Abuzayed, 2009) and stock market
categorization do not determine capital structure.
The KruskalWallis statistic is applied to the working
sample and rejects the hypothesis that leverage is
different across these two firm classifications.
Tables 9 and 10 demonstrate that the attempt to
link firms ownership and stock market categoriza-
tion to capital structure determination is without
merit, which is also verified by the high p-values of
the Monte Carlo simulation.
VI. Conclusions
In this article, we analyse the determinants of capital
structure decision of Greek listed companies with a
view to fill the existing gap between influential
theories of corporate leverage and empirical evidence.
To summarize this articles results, the first part
extends empirical work on corporate financing
behaviour and focuses on the relationship of nine
quantitative factors with three different proxies of
leverage, measured in terms of book values rather
than market values. The regression results vary
substantially with each leverage measure applied
Table 10. Mean leverage and p-values according to KruskalWallis test based on the stock market categorization of
firms
Stock market categorization Leverage L
1
Leverage L
2
Leverage L
3
Means Total 0.4341 1.2941 2.2073
Big capitalization 0.5164 0.7444 1.2489
Medium and small capitalization 0.3642 0.8720 1.6050
Low dispersion and specific features 0.5435 0.9443 1.5830
Under supervision 0.5982 7.7959 11.8906
Under suspension 0.3600 0.6911 2.1756
p-values 0.8532 0.4731 0.1312
Table 8. Mean leverage and p-values according to KruskalWallis test based on the sector classification of firms
Means
Leverage Total Industry Trade Services Tourism p-values
Leverage L
1
0.3162 0.2776 0.1942 0.4368 0.5313 0.1577
Leverage L
2
0.8037 0.7382 0.9920 0.7833 0.6861 0.0574
Leverage L
3
1.7353 1.3564 2.8671 1.5990 0.9493 0.0002*
Note: * Denotes significance at the 5% level.
Table 9. Mean leverage and p-values according to KruskalWallis test based on firms ownership
Means
Leverage Total
Privately
owned firms
State
owned firms
Multinational
corporations p-values
Leverage L
1
0.3162 0.3033 0.6585 0.2827 0.5378
Leverage L
2
0.8037 0.8169 0.8108 0.4793 0.5295
Leverage L
3
1.7353 1.7701 1.5293 1.1102 0.5533
386 A. Noulas and G. Genimakis
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and with each business sector examined. It provides
evidence of significant positive correlations among
firms leverage and sales, growth rate, tangibility of
assets, depreciation, profit volatility and credit rating.
Respectively, profitability and firms age are signif-
icantly inversely associated with leverage, whereas the
number of workers as a measure of firm size does not
have an effect on leverage. The second part is a
deeper examination of the financing decision, pro-
viding tentative support that capital structure varies
significantly across economic activity classification.
In contrast to the previous empirical studies, the
implementation of nonparametric tests suggests that
both ownership and stock market categorization do
not affect the capital structure choice. In particular,
the framework presented here supports the pecking
order hypothesis in the context of growth and
profitability, whereas the static trade-off theory is
solely supported in size context.
However, our work has clear limitations. Given
that a dynamic setup implies that the target debt
equity ratio varies both across firms and over time, it
leaves considerable scope for further research by
applying panel methodology. A dynamic model
approach could better explain temporary deviations
from the target due to shocks and other random
changes. In concluding, it should be kept in mind that
the data set used here captures only listed companies
and future research may well collaborate that there is
room for other factors that affect the capital structure
decision, especially for smaller firms.
Acknowledgements
The authors would like to thank the editor, Mark
Taylor, and the anonymous referees for their valuable
comments, all of which have improved the article.
Any remaining errors are the authors responsibility.
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