CHAPTER III

CONCEPTUAL FRAMEWORK

A. Framework of the Study

The following conceptual model was formulated to illustrate the

determinants of capital structure.

Figure 1.1 Conceptual Framework of the Determinants of Capital Structure

Asset Tangibility

Firm Size

Industry dummy

Growth Opportunity

Capital Structure

Liquidity

Profitability

Non-debt Tax Shield

 Figure 1.1 showed the determinants of capital structure as the
independent variables and capital structure as the dependent variable. The
researchers believed that the above mentioned factors namely asset tangibility,
firm size, growth opportunity, liquidity, profitability, industry dummy, and non-debt
tax shield determines the capital structure of the firm. These determinants are
associated with the capital structure theories namely the trade-off theory (i.e.
non-debt tax shield, asset tangibility, firm size), pecking order theory (i.e. liquidity,
profitability), and the agency theory (i.e. growth opportunity).

These seven determinants of capital structure are being used in this study
due to their popularity of use across other similar studies found in Google
Scholar. Also, these are the only determinants that can be clearly deduced from
the firm’s historical financial reports and widely used by the researchers.
Researchers like Chen, Lensink & Sterken (1999), Degryse, De Goeji & Kappert
(2009), Nijenhuis (2013) used these variables.

B. Hypotheses

The following null hypotheses are tested at 95% level of significance.

1. There is no significant relationship between leverage of listed non-financial

firms in the PSE and the following independent variables:

A. Asset Tangibility

B. Firm Size

C. Growth Opportunities

D. Liquidity

E. Non debt Tax Shield

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F. Profitability

G. Industry dummy

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