CHAPTER V

RESULTS AND DISCUSSION

Descriptive Analysis

Table 4.1 Descriptive Statistics

  Observation Mean Standard Minimum Maximum

s Deviation
Leverage 73 0.70 0.58 0.00 2.36
Profitability 73 0.09 0.07 -0.05 0.36
Non-debt tax
shield 73 0.04 0.03 0.00 0.17
Growth 73 0.23 0.41 -0.11 2.64
Liquidity 73 2.39 2.53 0.52 17.31
Firm Size 73 23.81 1.76 20.21 27.89
Tangibility 73 0.47 0.20 0.03 0.90

Tables 4.1 show the descriptive statistics of the seven variables used in
the study. There were a total of 73 observations derived for every variable from
the two-year financial data of 73 listed non-financial companies in the Philippine
Stock Exchange (PSE).

The variables have been tested for fitness to use multiple regression and
is presented in the Appendices. The residuals are a little bit skewed. However,
the expectation was that these errors have no major impact on the statistical
results, but must be kept in mind as asserted also in the studies of Huizingh
(2006) and Nijenhuis (2013).

It can be inferred from the table that the 73 listed companies used in the
study utilize an average leverage of 70% in financing their assets. The studies of
Nijenhuis (2013) and Pratheepan and Banda (2016), although performed on
different economic environments, time frame and measure, observed that most
non-financial listed companies had an average leverage employed of 45% on
total assets. This suggests that normally, firms use less of debt and more of
equity financing. It can also be noted from the table that the minimum value of
leverage employed by these firms was around 0.00% implying that there were
companies that used almost no leverage during the research time frame.

Average value of profitability (PROF) in this study is 9% which is far from

its maximum gathered data of 36%. This may be attributed from the presence of
negative values as proved by the existence of minimum gathered value of -5%.
This result though was in range with the study of Pratheepan & Banda (2016)
that had a mean of 11.35% for profitability variable for listed firms in Sri Lanka.

The average tangibility of 47% indicated that the sample firms have
relatively big proportion of fixed assets and inventory which is normal in the
industrial sector. In contrast, companies in highly industrialized countries in
Southeast Asia employ a big proportion of assets (Nagano, 2003). Given the
average proportion of fixed assets to total assets, it explains the mean value of
non-debt tax shield of 4% over total assets.

Multiple Regression Analysis

Model 1: Determinants of Capital Structure

For the estimation of the panel regression model, the Ordinary Least
Squares (OLS) Method was used to determine the relationship of the
determinants of capital structure to leverage. The following are the results after
we employ multiple linear regression.

Table 4.2 Model Summary

R-
Adjusted R- Std. Error of the
Model R square
squared Est.
d

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 1 0.682 0.465 0.407 0.44790

Table 4.2 provides the values of r and r-squared which are used to
determine how well the regression model fits the data. A value of R =0.682,
indicates a good level of prediction. The R-squared value is the proportion of
variance in the dependent variable that can be explained by the independent
variables (technically, it is the proportion of variation accounted for by the
regression model above and beyond the mean model). Hence, our independent
variables explain 68.2% of the variability of our dependent variable, leverage.

Table 4.3 ANOVA

Mod Sum of Mean P

el   Squares Df Square F value
On
Regressio 8.06
the
1 n 11.322 7 1.617 2 0.000

  Residual 13.040 65 0.201    

  Total 24.362 72      

other hand, Table 4.3 provides the F-ratio which is also used to test whether the
overall regression model is a good fit for the data. The table shows that the
independent variables statistically significantly predict the dependent
variable, F(7,65) = 8.062, p < .0005 (i.e., the regression model is a good fit of the
data).

Moreover, table 4.4 below shows the results for the coefficients of the
independent variables. Unstandardized coefficients indicate how much the
dependent variable varies with an independent variable when all other
independent variables are held constant.

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Table 4.4 Coefficients (Dependent Var: Leverage)

Dependent Variable: Leverage    

  Unstandardized
T Sig.
Coefficients
Independent
B Std.Error
Variables

1 (Constant) -2.462 .819 -3.008 .004

  PROF -2.954 .812 -3.638 .001
  NONDEBT .360 1.957 .184 .854
  GROWTH .315 .145 2.174 .033
  LIQUIDITY .009 .024 .364 .717
  IndustryDummy .427 .134 3.200 .002
  TANGIBILITY .013 .305 .041 .967
  SIZE .135 .032 4.180 .000
 

From table 4.4, profitability, growth, industrydummy, and firm size proved
to be significant with 5% level of significance. The OLS regression has high
adjusted R-squared and seems to be capable to describe differences in leverage.

The table reveals that profitability and leverage have a negative

relationship and is statistically highly significant. When other independent
variables are constant, for each percentage increase in profitability, there is a
decrease in leverage of 2.954. Therefore, the null hypotheses of this study can
be rejected. Nijenhuis (2013) obtained the same negative coefficient on his
study, having a value of -.124. However, the effect of profitability on leverage
based on his study was insignificant. According to Nijenhuis (2013), De Jong &
van Dijk (2007) and De Miguel & Pindado (2001) that profitability is inversely

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related to leverage based on their analysis on pecking order theory. According to
them, the pecking order theory postulates that firms initially resort to internal
financing before considering external funding from equity and then considering
lastly, financing using debt; these are all in consideration of information
asymmetry. High profitability indicates wide availability of internal funds; hence,
companies will not consider anymore looking funds from external sources when
they have enough amounts of idle cash to finance their projects.

On the other hand, there is a statistically significant positive relationship

between firm size and leverage. The coefficient value of firm size indicates that,
increase of one percent of the latter will lead to a .135 increase in leverage.
Pratheepan & Banda (2016), as well as Nijenhuis (2013) De Jong, Kabir &
Nguyen (2008) and Deesomak et al. (2004) had found the same relation between
firm size and leverage just as this study. Given these repetitive conclusions made
by previous related studies, it is not surprising that in this paper, firm size has a
high significant relation to leverage. Also, the direction of its relation is in line with
the trade-off theory. According to the researchers already mentioned above,
firms with bigger size are seen by investors and creditors sustainable and thus
capable to pay their obligations to them. Rajan & Zingales (1995) asserted in
their study that bigger firms have well-diversified portfolio, less risks and thus
larger borrowing capacity. Hence, as mentioned by Titman & Wessels (1988) in
their study, the risk of default which is part of distress cost that worries creditors
are less likely perceived from bigger firms. Thus, these firms have greater and
easier access to debt financing since its cost is cheaper and has tax benefits.

The three variables non-debt tax shield, liquidity, and tangibility show
statistically insignificant relationships with leverage.

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