Research on Capital Structure Determinants Reviewed

International Journal of Managerial Finance
Research on capital structure determinants: a review and future directions

SATISH KUMAR Sisira Colombage Purnima Rao
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RESEARCH ON CAPITAL STRUCTURE DETERMINANTS: A
REVIEW AND FUTURE DIRECTIONS
ABSTRACT
Purpose - The purpose of this paper is to study the status of determinants of capital structure
research in past 40 years. The paper highlights the major gaps in the existing studies on
determinants of capital structure. It also aims to raise specific questions for future research.
Methodology/Design - The prominence of research is assessed by studying the year of
publication & region, level of economic development, firm size, data collection methods, data
analysis techniques and theoretical models of capital structure from the selected papers. The
review is based on 167 papers published from 1972 to 2013 in various peer-reviewed
journals. The status of the relationship of determinants of capital structure is analysed with the
help of Meta-Analysis.
Findings - Major findings show an increase of research interest on determinants of capital
structure of the firms located in emerging markets. However it is observed that these regions
are still under-examined which provides more scope for research, both empirical and survey
based studies. The majority of research studies are conducted on large size firms by using
secondary data and regression based models for the analysis, whereas studies on small size
firms are very meagre. As majority of the research papers are written only at the organizational
level, the impact of leverage on various industries is yet to be examined. The review
highlights the major determinants of capital structure and their relationship with leverage. It
also reveals that there is a dominance of pecking order theory in explaining capital structure of
firms theoretically as well as statistically.
Originality/Value -The paper covers a considerable period of time (1972-2013). Among the
very few review papers on capital structure research: to the best of authors’ knowledge, this is
the first review to identify what is missing in the literature on the determinants of capital
structure, thus offering recommendations for future studies. It also synthesise the findings of
empirical studies on determinants of capital structure statistically.
Key Words: Determinants, Capital Structure, Pecking Order, Leverage, Empirical,
Literature Review, Meta-Analysis
1
1. INTRODUCTION
The first decade of the 21st century witnessed enormous changes in terms of booms and
recessionary phases. It is believed that these different phases of business cycles have
impacted on the value of a firm. A firm is valued depending upon its past and future
investments. To finance these investments, the firm has to choose an appropriate
financial mix. Financing decisions also depend upon the business cycle dynamics (i.e. whether
there is an upsurge or slump in the economy). Because financial decisions relate to market
forces, they are vital for the economic welfare of the firm. Financial distress, potentially
leading to bankruptcy may well be a reality where management make wrong or incorrect
decisions with the balance of the capital structure (Eriotis, 2007). Optimal capital structure
helps in providing momentum to the development of an organization. It includes how a firm

decides its long term investment decisions and identifies suitable sources of finance. Therefore,
capital structure is one of the major areas of concern for a firm. Thus, the above decisions are
crucial as they significantly affect the financial performance of the firm. Financial resources
of a firm can be broadly classified into equity and debt. Capital structure is the explicit
fusion of debt and equity which an organization uses to back up its operating and
investment decisions.
Thus, it is essential to know about the factors affecting the financial decisions of an
organization. Capital structure determinants serve as strong pillars that lend competitive
advantage to an organization. The factors determining the financial mix of an organization
are dynamic in nature. They are firm specific and depend upon the industry to which the firm
belongs and on the micro & macroeconomic environment of the firm. Consequently, it can be
said that financial mix is an important strategic decision that is becoming increasingly more
crucial and challenging. Investment and financing decisions are mutually related to each other.
Investment in lucrative avenues requires money and thus it necessitates change in financial
structure by restructuring the proportion of alternative sources of funding. It thereby creates an
impact on existing capital structure, cost of capital, risk and earnings of the firm. So, an
optimal capital structure is required to maximize the value of the firm. A firm that plans to
venture into a new project or to upgrade its existing technology must make arrangements to
finance the project in such a way that it could minimize its cost of capital. By this, the firm
indirectly aims to increase returns to its shareholders. The basic goal of a firm is the
maximization of the shareholder’s wealth which will positively influence the firm’s value.
Because financing decisions have an impact on the firm’s value, capital structure decisions are
2
very vital for a firm’s progress. The literature examining the relevance or irrelevance of capital
structure proves the importance of capital structure.
1.1 Scope of the Study
The central idea of this study is to provide a comprehensive literature review on determinants
of capital structure. To the best of our knowledge, there is no literature review on
determinants of capital structure. This study is therefore the first to give a bird’s eye view on
the major work carried out on determinants of capital structure. More specifically, it intends to
study the major capital structure determinants w h i c h a r e consistent with various
theoretical models. This study reassesses the research investigating the repercussion of
determinants of financing decisions and categorises selected research articles as per their
approach and methodologies. It further explores research gaps in the related area and
recommends potential directions for future capital structure research.

The study attempts to synthesise the literature findings on determinants of capital structure. A
systematic approach is applied to explain major findings of the review and thereby highlighting
the gaps in the literature. Thus, it provides a pathway for future research in the area of capital
structure.
Research in the area of capital structure has revealed that financing decisions are inconclusive
and still a puzzle for the researchers. This study has tried to detangle this puzzle by combining
the results of different research papers through meta-analysis. It was found that the empirical
studies conducted on capital structure have mainly focused on the relationship of debt with
various explanatory variables. Usually review papers report the result and summarise the main
study conclusions. However this study tests the results of empirical studies which have been
statistically tested, revealing an overall relationship between criterion and predictor variables.
Therefore, the meta-analysis technique is applied to synthesise the findings of the previous
studies through a statistical evaluation to clarify the previous inconclusiveness in the capital
structure decisions.
This paper is divided into seven sections. Section 2 presents an overview of the various
theories of capital structure developed by eminent researchers. Section 3 offers a brief review
of the existing literature. Section 4 describes the methodology used in the paper followed by
an analysis of research articles selected for review in Section 5. Section 6 provides research
findings and research gaps identified in the existing literature. Section 7 presents the
conclusion and suggests areas of future research.
3
2. AN OVERVIEW OF CAPITAL STRUCTURE RESEARCH
Major research work on capital structure originates from the well known article of Modigliani
and Miller (1958) which has led to the emergence of various theories of capital structure over
the last five decades. Researchers, in general, tend to have different perspectives of capital
structure. Table 1 summarizes all the major views of renowned researchers on capital
structure.
Table 1. Emergence of New Concepts in Capital Structure

Serial Name of Year Researcher’s Outlook/Contribution
No. Researcher
1 Modigliani & Miller 1958 Laid the milestone in corporate finance by
propounding the “Theory of Irrelevancy”. As per

this theory capital structure has no impact on firm’s
value.
2 Modigliani & Miller 1963 Included taxes and considered the effect on tax
shield on interest payments.
3 Miller 1977 Included personal and corporate tax in the
consideration of financing decisions.
4 Kraus & 1973 Provided the classical version of “Trade-off theory
Litzenberger (TOT)”.This theory considers the trade-off
between cost of financial distress and benefits of
tax shield of debt.
5 Bradley et.al 1984 Presented “static trade-off theory”.
6 Kane et.al 1984 First to consider the effect of continuous time
model in trade- off theory with cost, taxes,
uncertainty and tax benefits. This is known as
“Dynamic Trade-off Theory”
7 Stiglitz 1973 Concluded that “Leverage ratio is the fortuitous
outcome of the profit and investment history of
a firm”. Initiated the concept of pecking order.
8 Fischer et al. 1989 Introduced the concept of transaction cost in the
capital structure and argued that variation in debt
ratio can also occur due to a small transaction cost.
9 Jensen & Meckling 1976 Put forward the concept of Agency cost and
presented the effect of manager–shareholder
conflict and debt holder–shareholder conflict on
financing decisions and introduced “Theory of
Agency Cost” in the literature of capital structure.
10 Myers & Majluf 1984 Pioneered the concept of “Information
asymmetry” that leads to “Adverse Selection”.
Based on this, they propounded “Pecking Order
Theory” (POT), which prefers internal funds to
debt and debt to equity.
11 Harris & Raviv 1991 Reviewed the literature of capital structure
theories and found that “capital structure decisions
are inconclusive”. They put forward the concept of
4
“control driven theory”.
12 Baker & Wurgler 2002 Introduced “Market Timing Theory” in the area
of capital structure. This theory states that firms
issue equity when the market is overvalued and
issue debt when the market is undervalued.
13 Ross 1977 Perceived debt issuance as an indicator of good
performance of a firm as opposed to equity
issuance. This led to the emergence of “Signaling
Theory” of Capital Structure.
14 Uckar 2012 Suggested the new concept of “Behavioral
Element in Capital Structure”.
From the above table, the following inferences can be drawn regarding the development in
the field of capital structure.
The idealistic assumptions of irrelevancy theory of capital structure compel researchers

to rethink the direction of importance of financing decisions with respect to firm’s value.
Emergence of new theoretical models of capital structure of a firm. For example,
( i ) t h e absence of taxes in irrelevancy theory give rise to the trade-off model, (ii)
information asymmetry in the market gives rise to the concept of pecking order, (iii) signalling
effect and (iv) behavioural aspects of capital structure.
3. EARLIER REVIEW OF LITERATURE ON CAPITAL STRUCTURE

Although capital structure is considered as an important area, research has sought to produce
evidence and new ideas on issues that affect the value of the firm, only a handful of papers
have reviewed literature on the topic. One of the major breakthroughs in the literature review
of capital structure is provided by Harris & Raviv (1991). The following is the list of review
papers on capital structure in chronological order.
1. “The Theory of Capital Structure”, Harris & Raviv, Journal of Finance, Vol.66,
No. 1.1991.
2. “A Review of the Capital Structure Theories”, Lugi & Sorin, Annals of Faculty
of Economics, Vol.3, No.1, pp. 315-320, 2009.
3. “The Pecking order, Trade off, Signalling and Market Timing Theories of Capital
Structure: A Review”, Miglo, A. Working Paper, University Library of Munich,
Germany, 2010.
4. “A Critical Review of Capital Structure Theories”, Iqbal.et.al, Information
Management and Business Review, Vol. 4, No. 11, pp. 553-557, 2012
5
One common observation about these reviews (except in Harris & Raviv, 1991) is that they are
based on theories of capital structure and no other chronological, methodological and thematic
approach is incorporated in analysing literature. Therefore, to the best of the authors’
knowledge, the present paper is the first attempt in providing a comprehensive and systematic
review of literature from the reputed journals. This highlights the major work done in the area
while aiming at providing potential directions for future research.
4. RESEARCH METHODOLOGY
The methodology used for reviewing the literature must be systematic; it must explicitly
describe the procedure for conducting the review, comprehensive in scope and include all
relevant material related to particular phenomena (Fink, 2005). In this paper, we have used
Systematic Literature Review (SLR) methodology to analyse the research work on capital
structure. A Systematic review is a tool used to summarise, appraise and communicate the
results and implications of a large quantity of research and information. It aims to provide an
exhaustive summary of current literature relevant to the research question. The systematic
review methodology is designed to reduce any unintended bias, which may occur in the use
of other review methodologies (Bimrose et al. 2005).
4.1 Time Horizon
In this review we have selected journal articles published during 1958-2013, but the majority
of the articles are those published during 1972-2013. We did this primarily to include the
seminal paper on capital structure by Modigliani & Miller (1958). Most of the work on capital
structure was reported after MM Theory of Irrelevancy. Therefore, we felt that a time span of
approximately 40 years was sufficient to review the literature comprehensively.
4.2 Literature Collection and boundary identification
We started our review with a keyword/phrase search and then delimited the literature using a
combination of deductive and inductive approaches. As input criteria, we initially used words
like Capital Structure. We assumed that Determinants of Capital Structure would be present
in the abstract or key words or title of the article. W e searched this term in all types of
documents including case study, research paper, technical paper, review paper, conceptual
paper and working paper documents. Our initial search database includes EBSCO, Emerald,
Social Science Research Network (SSRN), Google Scholar but we got most relevant results
from Emerald and EBSCO. In the preliminary phase of the review, we have searched
papers on capital structure and found 6,303 initial results on EBSCO. We then developed the
following delimiting conditions to get the most relevant results:-
6
Articles published only in peer-reviewed journals were considered;
Articles were collected for a period of 40 years (1972-2013);
Articles written only in the English language were included;
Articles addressing determinants of capital structure were considered;
Articles were collected with full text.
Using the above delimiting criteria, we found 180 research papers from reputed journals, of
which 13 articles provide theoretical framework for the study. These studies, (thirteen in all)
include all review articles on capital structure and articles based on theoretical models of
capital structure and thus were excluded for the purpose of this present study. Table 2
summarises our database search approach.
Table 2. Database and Search Criteria

Serial Database Search Criteria Period of Total Total No. Exclusion Final
No Keywords or Search No of of Papers Criteria Set
Abstract or Title Papers Excluded
1 EBSCO October- 161 75 Not 86

Capital Structure December relevant to
or 2013 our study
Determinants of
2 Emerald Capital Structure October- 146 93 Due to 53
in Key words or December duplicity ,
Abstract 2013 &
irrelevancy
for our
study
3 Others - December 28 - - 28
2013
(Source: Authors own calculation)
5. RESEARCH SEGMENTATION AND CATEGORIZATION

The research articles that finally met our delimitation criteria were analysed for the research
outlets. After selection, we classified relevant research articles based on various parameters to
better understand the research done so far regarding capital structure determinants. While
designing the categorization parameters, we ensured that there was synchronization and
relevance of classification so that a well-organized and systematic analysis of the extant
literature was performed. We then classified our studies under the following categories.
Year of Publication
Geographic Region
Level of Economic Development
Type of Industry
7
Research Methods
Firm Size
Data Analysis Techniques
Empirical Findings
Meta-Analysis
Citation Analysis
The synthesis of literature review involves itemisation of selected articles, and it unearths the
explicit and implicit relevant facts from the existing body of knowledge. In this section, we
provide a detailed analysis of research articles using the classification scheme we designed.
5.1 Year of Publication and Geographic Region

This sub-section, classifies studies based on the year and region of publication. Figure 1
presents the previous work on determinants of capital structure based on region and year of
publication.
Figure 1. Capital Structure Research by Region & Year of Publication
Although it shows an exponential growth in number of studies dealing with capital structure in
the recent past, there are very few publications in the 1980s and 1990s. Figure 1 clearly
identifies that major work on determinants of capital structure acquired momentum after 2001,
particularly more so between 2005 and 2013. This implies a growing interest in corporate
financial make-up research. The analysis by year confirms that selected articles were
8
published periodically from 2005 to 2013. This also evidences the significance of the field and
most capital structure studies originated in America and Europe. We can also observe that major
work was performed in Europe and America until 2002 and capital structure was studied only
in these two continents. More importantly, we see that in the first decade of the 21 s t century
there is a surge in the number of articles published on capital structure. This indicates that the
subject gained prominence in Asia-Pacific and African continents. The number of articles
published in 2013 clearly shows more researchers have been focusing their interest on capital
structure.
5.2. Level of Economic Development
According to Booth et al. (2001), capital structure is the function of economic development
that mainly includes the economy growth rate, capital market development, inflation rate, etc.
The concept of capital structure was first studied only in the context of advanced markets such
as the USA, the UK and other developed markets and was then gradually investigated across
the world. In this sub-section, research papers are classified on the basis of level of economic
development worldwide. Classification helps us to appreciate the fact that economic
development has initiated studies on capital structure. The selected research articles were
categorised based on their country of study. Undoubtedly, studies are still being more intensely
conducted in developed economies as compared to those in emerging economies. Table 3
shows that 90 studies have been carried out in developed countries, whereas only 73 were
performed in developing countries. This suggests that there is a shift in the work done on this
topic towards emerging economies, with a view to exploring the caveats between the financial
practices of developed and developing nations. Because some studies entail a comparison of
developed and developing economies, they have been included as a separate category.
Table 3. Classification by Level of Economic Development

Regions No. of Developing No. of Developed Both
Economies Economies
Africa 21 1
America 6 28
America & Europe 1
Asia- Pacific 37 9
Europe 2 48 1
Middle East 4 1
Multiple Regions 3 2 2
Grand Total 73 90 4
Table 3 shows that most studies conducted in developing countries pertain to Asia-Pacific and
9
Africa. It clearly indicates the growing interest of researchers towards developing countries.
Moreover the institutional settings of developing countries are different from the developed
countries. As such, there is more scope for studying the firms of emerging markets with
respect to other firms operating in different institutional and regulatory environments. This
clearly calls for a cross-country analysis.
5.3. Firm Size
Economic growth of any nation is the function of production, investment and savings.
Savings channelize investment which boost production and thus help accelerating the
economic growth of a country. Audretsch and Keilbach (2004) and Audretsch (2007)
document that young and small firms are important determinants of economic growth and that
they pave the way to investigate the financial mix of firms based on their size (Table 4).
Literature on capital structure reveals that majority of work is concentrated on large firms
and only a small fraction of studies are done on small size firms. It also shows that only 8
studies have been done on SMEs in Asia-Pacific region and 8 in Africa. The highest number
of studies report in Europe which is almost 50% (23 of 45) of the investigations on capital
structure on SMEs.
Table 4. Classification by Firm Size

Region No. of Large No. of Small Size Firms Both
Firms
Africa 13 8 1
America 29 5
America & Europe 1
Asia- Pacific 39 8
Europe 27 23 1
Middle East 5
Multiple Regions 7
Grand Total 120 45 2
Table 4 significantly reveals the dearth of research on financial practices of SMEs. According to
Lopez–Gracia & Sogorb-Mira (2008) financing decisions of SMEs are clearly different from
large ones and therefore it is essential to study financing preference of SMEs particularly in the
context of firms located and operated in emerging markets.
5.4. Industry-wise Classification
The financial structure of a company also depends on the industry in which it operates; the
type of industry is an influential factor in the determination of the capital structure of a firm.
10
The majority of articles (121) include all firms from all economy sectors making the work on
determinants of capital structure is least industry specific. The existing evidence is based
more on the whole of the economy rather than on the various industries operating in that
economy. It is evident from the table 5 that no single industry has a share of > 10 % in the total
sample of 167 papers. Seventy three percent studies include all types of firms from different
industries.
Table 5. Industry-Wise Classification of Articles

Industry Type No. of Papers Percentage
All 121 73
Mixed 12 7
Manufacturing 8 5
Banking 6 4
Real Estate 5 2
Hospitality 2 1
Micro-Finance 2 1
Retail 2 1
Cement 1 1
Cotton 1 1
Electric Appliance 1 1
Financial 1 1
Heavy Industries 1 1
Insurance 1 1
Lodging 1 1
Service & Manufacturing 1 1
Wine 1 1
Grand Total 167 100
Note: All: No specific industry is mentioned; mixed: Includes multiple industries,
5.5. Data Analysis Techniques

For data analysis one can use either simple descriptive statistics or more sophisticated
statistical inferences. We have divided our sample of 167 papers applying various statistical
procedures into 10 major categories, to ascertain the most popular and recent technique of
analysis. Table 6 shows that the majority of papers have used panel data and regression
analysis. In our regression statistical procedure, we adopted various estimation techniques such
as simple regression, Ordinary Least Square (OLS), Fixed & Random Effect, Logistic, Stepwise
regression, Tobit & Probit regression, generalized method of moments etc. Our findings show
that regression analysis is the most popular technique used by researchers to carry out empirical
11
studies on capital structure determinants. Apart from intensive use of regression based models
many scholars have also applied techniques like Structural Equation Modelling (SEM), Factor
Analysis etc. Researchers have also used self-developed models, Non parametric test,
Simulation, Jensen Alpha & Sharpe’s measure techniques that are included in the “others”
category in Table 6.
Table 6. Data Analysis Techniques

Conjoint Descriptive Factor Ratio Grand
Years Correlation EBA Regression SEM Mixed Others
Analysis Statistics Analysis Analysis Total
1984 1 1
1986 1 1
1988 1 1
1995 1 1
1998 1 1
1999 2 2
2000 2 2
2001 1 2 1 4
2002 1 2 3
2003 2 2
2004 1 2 3
2005 3 1 2 6
2006 1 1 4 1 1 8
2007 1 2 1 5 1 10
2008 1 1 9 1 12
2009 1 1 19 2 1 24
2010 1 13 2 16
2011 1 1 11 1 14
2012 1 2 2 23 1 1 30
2013 1 1 22 1 1 26
Grand
Total 1 4 11 3 3 4 120 4 4 13 167
Note: EBA: Extreme Bound Analysis; SEM: Structured Equation Modelling; Others: includes
Non parametric test, Simulation, Jensen Alpha & Sharpe’s measures
5.6. Type of Research

We classified articles into different types of research based on the following criteria.
Analytical Studies include those papers in which a technique or models developed earlier
by others has been used to check the concepts.
Empirical Studies comprise articles in which s econdary data is analysed by using
various statistical procedures.
Survey based studies mostly include primary data in their analysis.
12
Conceptual studies are those in which a model is developed to build a concept.
In our sample of 167 studies, literature is dominated by the presence of empirical articles. It
constitutes 83.83% (140) of total papers which clearly signifies the supremacy of empirical
research in this area. It shows that researchers are more inclined towards secondary data,
since primary data collection might be a difficult task due to lack of necessary responses
required by a researcher in this field. We have found only 19 survey-based studies using
questionnaire, structured or semi-structured interviews, focus group studies and mail surveys.
5.7. Empirical Findings
Empirical studies on capital structure that followed theoretical studies form a large body of the
literature. Empirical research on financing decisions was first published in the 1980s
(Bradley et al., 1984; Robert & Taggart , 1986; Titman & Wessels, 1988) and was mostly
carried out in developed countries (USA, UK, Germany, Spain, France and Italy). A few
examples of these studies are Titman & Wessels (1988); Harris and Raviv (1991); Rajan &
Zingales (1995); Sunder & Myers (1999); Bevan & Danbolt (2000); Graham and Harvey
(2001); Bancel & Mitto (2004) and Hall et al. (2004). Capital structure studies that are
performed on emerging economies (China, India, Brazil, Mexico, Malaysia, Africa etc) are
limited in number as compared to developed economies (Booth et al. 2001; Pandey 2001;
Chen 2004; Colombage, 2007). Financing decisions of firms vary among these economies, due
to the presence of institutional, regulatory and cultural differences in developed and emerging
markets. Cook (2001) pointed out that the United States and United Kingdom are the major
contributors to studies on finance and on SMEs. This implies that research on financing
decisions of SMEs has originated in developed countries. While reviewing, we also came to
find that the majority of research done on capital structure is focused on large firms (Titman &
Wessels, 1988; Rajan & Zingales, 1995; Booth et al. 2001; Chakraborty, 2010). A careful
examination of the literature highlights that very few studies on capital structure of SMEs have
been examined so far, compared to those on the financial make-up of larger firms. Because
financing decisions of SMEs are clearly different from larger ones, it is worth studying
financing preference of SMEs in a broader context.
By examining 167 empirical studies, we analysed the impact of leverage on various firm,
industry and country-specific variables, to understand the micro and macro views of variables
related to corporate capital structure. Table 7 presents a summary of reviews with respect to the
direction of the relationship between independent variables (firm, industry and country) and a
firm’s capital structure.
13
To start its operations, every firm requires funds which are obtained from various
financial sources. Capital structure involves the inclusion of all available financial resources.
How an organisation pools its funds depends on various factors, which can be firm-specific,
industry-specific or country-specific. Many studies have been conducted to determine the
factors affecting capital structure decisions and these have different impacts on leverage based
on the context in which they are studied. Corporate financing decisions are affected by the
same factors in developed and developing countries except for institutional and cultural
differences (Booth et al., 2001; Chen, 2004; Foster & Young, 2013). Therefore, the capital
structure of a firm is the outcome of the interaction of institutional differences and business
practices (Bancel & Mitto, 2004). As in the case of Baltic countries, Norvaisiene (2012) and
Colombage (2007) found different determinants of capital structures for the firms operating in
developing countries. Country-specific factors (e.g. gross domestic product [GDP] growth,
inflation, interest rates and financial development) have an indirect influence on firm-specific
factors, and they also help in explaining how a firm’s capital structure is designed. In the case
of European SMEs, firm-specific factors explain the nature of capital structure decisions, and
similarity in the capital structure of SMEs is attributed to the country, institutional factors and
common civil law system (Daskalakis & Psillaki, 2008). In India, SMEs rely more on internal
funds (Dogra & Gupta, 2009). Industry effects also play an important role in making capital
structure decisions in small and medium sized firms (Abor, 2007). Table 7 shows that industry-
specific variables are under-studied as compared to firm-specific variables. This therefore
indicates that researchers are more inclined towards investigating firm level factors and that
there is a call for studying industry-specific factors as well. Apart from all these factors, there
are some cognitive variables that affect the process of financing decision-making of the firm.
This indicates that behavioural aspects of financial decision makers are not studied in much
detail, for example, overconfidence & optimism. These non-considerations of behavioural
aspects of managers led them to issue excessive debt or to invest in risky projects with negative
NPV which finally led to financial distress.
Capital structure decisions are complex in nature and hard to study the effect of its
determinants independently due to frequent interaction among the determinant factors.
Therefore optimal capital structure of a firm requires the inclusion of the explicit and implicit
effects of these variables. Generally, an organization collects funds from two main sources i.e.
debt & equity. According to MM theory (revised 1963), firms should try to obtain 100%
debt to maximize the firm’s value. This is practically not possible because of many other costs
such as cost of financial distress, agency cost, and cost of uncertainty etc. that are associated
14
with debt. Financing with all equity funds is also not feasible due to the problem of adverse
selection by investors which in turn makes the cost of equity more expensive for the company.
Therefore firms maintain their capital structure based on the environment in which they
operate. The choice of having equity or debt or reliance on internal funds or mixture of all in
the composition of firm’s financial structure depends on various factors. In table 7, these
factors are classified on the basis of their operating environment i.e. firm, industry and country.
Firm and industry both constitute micro-level environment and country-specific factors
constitute macro environment for the organization. Table 7 shows the impact of these factors
on leverage based on empirical evidence of various studies performed on determinants of
capital structure. Empirical studies are generally supported by the predictions of various
capital structure theories. It is evident from table 7 that empirical evidences of firm specific
factors do not follow a particular direction of relationship with leverage. Many studies reveal
diverse results, thereby providing mixed and confusing evidence about capital structure
decisions.
15
Table 7. Empirical Evidence on Factor Affecting Capital Structure

Panel A- Impact of Firm Specific Factors on Leverage
Leverage Empirical Evidence Supportive Theory
Increases(+)/Decreases (-)
Profitability (+) Al- Ajmi et al. (2009); Kaur& Rao (2009); Nunkoo & Boateng (2010); Zhang (2010) TOT
Profitability (-) Titman & Wessels (1988); Rajan & Zingales (1995); Michleas et al. (1999); Fama & French POT
(2002); Cassar & Holmes (2003); Hall et al. (2004); Sogorb-Mira (2005); Mazur (2007);
Daskalakis & Psillaki (2008); Antoniou et al. (2008); Frank & Goyal (2009); Chakraborty
(2010); Arvantis (2012); Van Caneghum & Van Campenhout (2012)
Size (+) Michaleas et al. (1999); Sogorb-Mira (2005); Nguyen & Ramachandran (2006); Antoniou et TOT
al. (2008); Abor & Biekpe (2009); Al- Ajmi et al. (2009); Bevan & Danbolt (2000); Matzaz &
Dusan (2009); Pathak (2010); Zhang (2010); Sheikh & Wang (2010).
Size (-) Titman & Wessels (1988); Hall et al. (2004); Chakraborty (2010) POT
Tangibility (+) Michaleas et al. (1999); Antoniou et al. (2008); Sogorb-Mira (2005); Abor & Biekpe (2009); TOT,POT, ACT
Bevan & Danbolt (2000); Frank & Goyal (2009); Chakraborty (2010); Nunkoo & Boateng
(2010); Pathak (2010); Zhang (2010); Cortez & Susanto (2012); Arvantis (2012); Moosa et
al. (2011)
Tangibility (-) Nguyen & Ramachandran (2006); Al- Ajmi et al. (2009); Karadeniz et al. (2009); Matzaz N.A.
&Dusan (2009); Sheikh & Wang (2011)
Liquidity (+) Bradley et al. (1984); Kaur& Rao (2009) N.A.
Liquidity (-) Mazur (2007); Pathak (2010); Shiekh & Wang (2011); Alom (2013) POT
Age (+) Abor & Biekpe (2009) N.A.
Age (-) Michaleas et al. (1999); Hall et al. (2004); Viviani (2008); Matzaz &Dusan (2009) N.A.
Growth (+) Michaleas et al. (1999); Sogorb-Mira (2005); Nyugen & Ramachandran (2006); Al- Ajmi et al. POT
(2009); Bevan & Danbolt (2000); Matzaz & Dusan (2009); Pathak (2010); Odit & Gobardhan
(2011)
Growth (-) Kaur & Rao (2009); Nunkoo & Boateng (2010); Zhang (2010) TOT & ACT
Managerial Ownership (+) Bokpin (2009) N.A.

Managerial Ownership (-) Abor (2008); Floarckis (2008) ACT
Uniqueness (+) Kaur & Rao (2009) N.A.
Uniqueness (-) Titman & Wessels (1988); Chakraborty (2010) TOT
16
Operating Cash Flow (+) Upneja & Dalbor (2001) ; Honjo & Harada (2006) TOT
Operating Cash Flow (-) Mateeva et al.(2013) ACT
Non Debt Tax Shield (+) Kaur & Rao (2009); Chakraborty (2010) N.A.
Non Debt Tax Shield (-) Bradley et al. (1984); Sogorb-Mira (2005); Viviani (2005); Cortez & Susanto (2012) TOT
Business Risk (+) Nguyen & Ramachandran (2006); Kaur & Rao(2009) N.A.
Business Risk (-) Al- Ajmi et al. (2009); Chen (2009); Pathak (2010) TOT
Bankruptcy (+) Upneja & Dalbor (2001) N.A.
Bankruptcy (-) Bradley et al. (1984) TOT
Agency Cost (-) Morellec et al. (2012) N.A.
Dividend Payout (-) Al- Ajmi et al. (2009); Bokpin (2009) N.A.
Managerial Skills Grunert & Norden (2012) N.A.
Panel B-Impact of Leverage on Industry Specific Factors
Capex Robert &Taggart (1986) N.A.
Industry Leverage Abor (2007); Frank & Goyal (2009) N.A.
Creditors Fan et al. (2012) ; Serrasquerio (2011) N.A.
Panel C-Impact of Leverage on Economy/Time Specific Factors
Capital Markets Abor (2006) N.A.
Interest Rate (-) Colombage (2007); Kaya ( 2011) N.A.
Inflation (+) Frank & Goyal (2009) N.A.
Inflation (-) Bokpin (2007) N.A.
ROE (+) Abor, (2005); Madan (2007) N.A
GDP growth (-) Bokpin, (2009) N.A.
Tax System(+) Amidu (2007) N.A.
Institutional Ownership (+) (2007);
Al- AjmiColombage (2007); Arvantis (2009)
et al. (2009) TOT
Institutional Ownership (-) Casey et al. (2006) N.A.
Note: POT: Pecking Order theory; TOT: Trade off Theory; ACT: Agency Cost Theory; N.A.-Not Applicable (No empirical evidence found in support of any theory of capital structure)
17
The basic foundation of capital structure theory was provided by Modigliani & Miller in
1958 and then several theories have emerged from this. Because the assumptions of MM
theory were idealistic not realistic, the subsequent empirical evidence do not support the
theory. Due to the inclusion of tax, imperfect markets, information asymmetry, agency
conflicts, several prominent theories providing judicious explanation of financing decisions
were propounded. In this paper, we have made an attempt to analyse which type of
financing pattern are followed by firms and we found that out of 167 articles 52 articles
followed Peking Order Theory (POT). This indicates high emphasis on the risk aversion
criteria followed by firms. A hierarchical order is followed for usage of funds. POT is
redefined in the form of New Pecking order Theory (NPOT) & Modified Pecking Order
Theory (MPOT). In NPOT hierarchical order is changed in terms of outside funding,

making equity preferred over debt (Chen, 2004). MPOT includes both trade-off and
pecking order models and it is suitable in hybrid systems (Bontempi, 2002). Frank & Goyal
(2003) also concluded that equity financing is preferred over debt. Shyam-Sunder & Myers
(1999) argue that both TOT and POT do well when applied independently but jointly
pecking order performs better. As TOT suffers from type II error, it is rejected. It is also
argued that POT and TOT are not mutually exclusive to each other. Both theories provide
reasonable explanation to financing decisions and 20 studies support both TOT and POT.
We found that 15 articles support TOT and 12 articles support agency cost theory. Floaricks
(2008) argues that financial carrots motivate managers to enhance firm value. Therefore,
agency problem is being tackled by firms having low and high growth opportunities by
providing ownership control in the case of high growth firms and monitoring control in low
growth firms. This is also evident from the fact that POT has been exploited through
diminishing returns (Harris & Raviv, 1991). Therefore, new theories should be tested
extensively, for example, some studies have supported market timing theory (Baker &
Wurglar, 2002), and behavioural finance theory (Uckar, 2012); however, these theories are
still in their nascent stage. We confirm that the capital structure puzzle is still unresolved as
we found 39 articles in which there is no consensus with any other theoretical findings.
18
Table 8. Capital Structure Theories & No. of times their assumptions are used to
explain the Capital Structure
Multipl
Americ Asia- Europ Middl Grand
Theoretical Models Africa e
a Pacific e e East Total
Regions
ACT 7 2 2 1 12
Conventional Theory 1 1
Dynamic Trade-off
Theory 1 1
Market Timing Theory 1 2 2 1 6
MPOT 1 1 2
NPOT 1 1
Ownership Theory 1 1 1 3
POT & TOT 1 3 9 5 1 1 20

POT& ACT 3 1 4
POT 2 5 14 25 2 4 52
Signaling Theory 1 1
Signaling & Control Drive Theory 1 1
Theory of Irrelevancy 1 1
TOT 4 5 2 3 1 15
Mixed 1 2 4 1 8
Grand Total 17 22 36 42 5 6 128
Note: Mixed: denote multiple theories have been tested by the researcher(s)
5.8 Meta –Analysis
Empirical Studies on capital structure are mainly focused on firm specific variables.
Profitability, tangibility, size, growth, age, liquidity, risk and non-debt tax shield are the
primarily studied variables in the vast literature of capital structure. All these firm specific
variables are explanatory variables. Researchers have analysed the relationship between
firm-specific variables and leverage through various forms of regression and discussed their
statistical significance. Though the dependent and independent variables are same in most of
the empirical studies, their relationship with each other is not consistent in all studies.
Moreover, the definition of the dependent variable (leverage) and the independent variables
varies among the empirical studies undertaken by various researchers all over the globe. The
reasons behind the difference in the magnitude and direction of the relationship between
leverage and various firm specific variables is documented in the literature, these reasons
vary as per the relationship found between criterion and predictor variables. There are large
number of empirical studies conducted on determinants of capital structure and therefore in
19
order to study what literature overall says about the relationship of leverage with its
determinants, meta-analysis is highly essential. Meta-analysis means analysis of the
analysis. It is an important research strategy designed to enable the synthesis of results of
various studies for an issue to determine a generalized statement. In other words, it helps
researchers to explore the past and put forth the generalized facts for future research. This
technique allows researchers to compare or combine the results of various studies.
Therefore, individual studies are considered as units for meta-analysis. It is a more efficient
and effective way to summarize the results of a large number of studies (Burns & Burns,
2008). Thus meta-analysis helps in removing subjectivity and brings objectivity in the
review of literature.
In this study, determinants of capital structure are studied in detail and the findings are
summarised statistically employing the meta-analysis technique. If the results are
summarised by a counting method, say number of studies to determine a statistically
significant positive relationship between two variables or negative relationship or non-
statistically significant relationship, it would produce erroneous result as it does not take into
account the difference between studies in terms of statistical significances and sample size
(Copper ,1998). To mitigate the error of a counting method two quantitative procedures;
namely combined significance test and effect size index are developed. In combined
significance test, the statistically computed z values associated with the findings of earlier
studies are integrated to produce a generalize result. On the other hand, effect size method
involves the combination of coefficient of correlation across studies (Wolf, 1986; Cooper,
1998). According to Greenberg (1992) when previous studies document some significant
and some non-significant results, combined significance technique is more accurate.
Therefore, to analyse the determinants of capital structure, combined significance technique
is applied. Combined significance test also has some disadvantages like it gives equal
weight to all studies and ignores the effect of sample size. Basically, a study with a large
number of observations is more accurate and exact as compared to a study with fewer
observations (Al-Dohaiman, 2008). This problem can be circumvented with the help of
Weighted Stouffer Test (WST) (Cooper, 1998; Greenberg, 1992, Wolf, 1986). WST uses
degree of freedom associated with each statistical test. The formula for Weighted Stouffer
Test is;
Zc=∑df Z/√∑df2 (1)
20
Where Zc is standard normal deviate associated with one tailed p value and df is degree of
freedom. The procedure for calculating Zc is described below.
• Record the t test , p value or z value or standard error associated with the findings of the
study
• Convert the standard errors into t stats by dividing beta coefficient with standard error
• Transform t statistics into p value
• Transform p value into Z value
• Finally calculates Zc by using above formula
In this study, eight independent firm specific variables are tested to report the overall
relationship of the variables with leverage. The analysis is further extended to test the
statistical significance of variables among different regions of the world.
5.8.1 Profitability
Profitability is one of the prime explanatory variables studied in the literature of capital
structure. In most of the studies it is defined as earnings before interest and tax scaled by
total assets or total sales. According to the Weighted Stouffer Test, overall profitability is
negatively associated with the leverage and when the relationship is seen separately in
different regions of the world and it is found to be negatively related with the leverage. The
relationship is statistically significant at 99% confidence level. This explains the fact that
generally firms utilize their internal funds like retained earnings and owner’s equity. The
rationale behind choosing internal funds might be different in different regions. In
developing regions, firms do not have alternative resources and the cost of debt is also high.
Moreover, the capital markets are also not developed and there exists a problem of
asymmetry that makes equity costly. While in developed regions, these factors don’t work
out but it might be the case that profitability is very high in these regions and there is an easy
availability of alternative sources of finance which makes the conventional sources less
lucrative. Overall, the firms follow a balancing approach and this also supports the pecking
order theory of capital structure. However, some studies have shown a positive relationship
but while considering the overall effect including the region-wise effect of profitability; it is
found to be inversely related with the leverage.
21
Table 9. Meta- Analysis Results of Profitability
Region No. of Sum of Z Sum of Sum of Z * Sum of Square Zc p Direction
Observations Scores df df Square of df Root of value
df
Africa 4151 -29.7129 4042 -9445.8704 1674248 1293.927 -7.30016 0 Negative
America 162815 -59.2451 162666 -481264.27 5624990392 74999.94 -6.41686 0 Negative
Asia- 94391 -248.603 94193 -2373840.7 912369359 30205.45 -78.5898 0 Negative
Pacific
Europe 553778 -168.538 553515 -936143.89 34941053807 186925.3 -5.00812 0 Negative
Middle 1040 -10.1833 996 -2484.709 248196 498.1927 -4.98745 0 Negative
East
df= degree of freedom it is calculated as number of observations – number of explanatory
variables. p value is significant at 99% confidence level
5.8.2 Tangibility
Tangibility defines the asset structure of an organisation. In most of the studies it is defined
as fixed assets scaled by total assets. It is also one of the important determinants of the
capital structure of a firm. If a firm has assets that can be used as collateral, it will ease the
access of money from external sources. Therefore, it should be positively related to the
capital structure of firms. Overall WST shows positive relationship of tangibility with
leverage; however it differs when considering the region-wise effect of tangibility. In the
case of countries from Middle East, tangibility is negatively related with leverage. It is
possibly due to the structure of Islamic contracts which do not require collateral for long
term loans. However, most of the Arabian firms rely on short term loans and also these firms
are heavily capitalized and finance their long term requirements through equity (Al- Ajmi et
al. 2009). In case of Africa, though tangibility is positively related to leverage, it is not
statistically significant. It is due to the fact that almost 50 % of the studies show negative
impact of tangibility on leverage, because these studies are conducted on small firms and the
dependent variable is short term debt. Therefore, in Africa tangibility is inversely associated
with leverage for small firms but positively associated with leverage in case of large firms.
Hence, the overall result as per WST comes out to be insignificant.
22
Table 10. Meta- Analysis Results of Tangibility
Sum
No. of Sum Sum of Z * Sum of Square
Region of Z Zc p value Direction
Observations of df df Square of df Root of df
Scores
-
Africa 4151 19.134 4042 1102.174 1674248 1293.927 0.852 0.197a Positive
-
America 42371 24.102 42270 63626.381 1127752110 33582.021 1.895 0.0294* Positive
Asia-
Pacific 95107 79.639 94908 1272803.231 909377290 30155.883 42.207 0 Positive
Europe 528687 19.322 528441 4255012.753 34335862107 185299.385 22.963 0 Positive
Middle
East 1040 -7.399 996 -1859.683 248196 498.193 -3.733 0 Negative
variables. p value is significant at 99% confidence level; * p value is significant at 95% confidence
level ;a p value is not significant.
5.8.3 Size
Firm size has also a powerful impact on the capital structure decisions. As per WST, it is
positively related with leverage. It means that large firms have more debt as compared to
small firms. Firm size is calculated by taking log of sales or log of asset in most of the
studies. In all the regions of the world size is positively related with leverage except Asia-
Pacific. It is due to the fact that Asia being a developing continent where capital markets are
not well developed or in a transitory stage, firms face difficulty in issuing equity as it
becomes more expensive than debt. It forces firms for looking at debt as a source of finance.
In American continent, a study (Nunkoo & Boateng, 2010) considering determinants of
Canadian firms also shows negative relationship of firm size with leverage. It is being
discussed separately since the observations are too large in this study which changes the
overall effect of size for American firms. As shown in Table 11, for all the other empirical
studies on firm size considered in the sample show a positive association with leverage.
Table 11. Meta- Analysis Results of Size
Sum
No. of Sum Sum of Z * Sum of Square p
Region of Z Zc Direction
Observations of df df Square of df Root of df value
Scores
Africa 4151 15.647 4042 3498.942 1674248 1293.927 2.704 0 Positive
America 37799 16.026 37717 36785.964 481630045 21946.071 1.6761 0 Positive
Asia-
Pacific 98430 66.587 98234 -60150.122 922197152 30367.699 -1.981 0.023* Negative
Europe 554423 94.287 554155 2061828.914 34941463407 186926.358 11.030 0 Positive
Middle
East 795 52.911 759 13386.357 192027 438.209 30.548 0 Positive
23
variables. p value is significant at 99% confidence level; * p value is significant at 95% confidence
level
5.8.4 Age
According to the WST, the age of the firm is negatively related to leverage in developed
countries and positively related to leverage in developing countries. As per the findings
reported in Table 12, age is negatively associated with leverage in American and European
countries and statistically significant at 99% confidence level. The plausible explanation is
the availability of alternative sources of finance and moreover equity markets are highly
developed in these regions. Financial resources are easily approachable and accessible to
firms in American and European countries. On the other hand age it is positively related to
leverage in Asian and African continents. It is due to the fact that these are developing
regions and alternative sources of finance are limited. Therefore, firms rely more on formal
sources of finance mainly debt. But debt is only available to old and mature firms because of
their credit worthiness in the market.
Table 12. Meta- Analysis Results of Age

Sum Sum of Square
No. of Sum Sum of Z * p
Region of Z Square of Root of Zc Direction
Observations of df df value
Scores df df
Africa 1084 5.146 1024 791.939 152182 390.105 2.030 0 Positive
Asia-
- - -
Europe 84380 61.078 84251 816424.534 1327078327 36429.086 22.411 0 Negative
Middle
East 245 2.491 237 590.351 56169 237.000 2.491 0 Positive
5.8.5 Growth
Empirical studies on capital structure measure growth by taking the percentage change in
sales or assets or by market to book ratio of equity. Overall growth is positively related to
leverage. Growth leads to investment and investment require funds. As equity is more costly
than debt, debt is preferred. But in Asia Pacific region growth is negatively related to
leverage. According to pecking order theory a high premium is charged by the investors to
24
lend funds to high growth firms (Myers & Majluf, 1984). This will increase the costs and
therefore high growth firms are reluctant to seek this form of debt raising.
Table 13. Meta- Analysis Results of Growth

Sum
No. of Sum Sum of Z Sum of Square p
Region of Z Zc Direction
Observations of df * df Square of df Root of df value
Scores
Africa 3737 25.097 3664 5403.13 1626620 1275.390 4.236 0 Positive
America 71473 30.848 71336 132292.90 1592294124 39903.560 3.315 0 Positive
Asia- -
Pacific 89934 12.050 89736 -126232.98 902737316 30045.587 -4.201 0 Negative
Europe 522353 -2.995 522121 395873.07 34317503811 185249.842 2.137 0 Positive
Middle
East 1040 17.831 996 4370.04 248196 498.193 8.772 0 Positive

5.8.6 Liquidity
Liquidity is negatively related to capital structure. Liquidity is captured by the current ratio
in most of the studied. Higher liquidity ensures positive working capital and therefore funds
can be saved for long term investments. Moreover, in this case there is no need to borrow
from other external sources. WST also reveals a negative relationship of liquidity with
leverage in different regions of the world and it is statistically significant at 99% confidence
level.
Table 14. Meta- Analysis Results of Liquidity
Sum Sum of Square

Scores df df
- -
America 3988 50.952 3945 -26274.971 5490787 2343.243 11.213 0 Negative
Asia- -
Pacific 32451 -8.748 32387 104069.271 319058859 17862.219 -5.826 0 Negative
- -
Europe 9149 50.440 9088 -65575.271 20257888 4500.876 14.569 0 Negative
Middle -
East 775 10.493 743 -2625.350 184187 429.170 -6.117 0 Negative
5.8.7 Non Debt Tax Shield

Non debt tax shield (NDTS) includes items such as depreciation and amortization providing
a tax shield in addition to debt. The greater the number of items included, the lesser will be
the motivation for managers to include debt in the capital structure. Therefore, WST reports
a negative relationship of NDTS with debt. In Asia Pacific Region, NDTS is positively
25
associated with the debt because firms can take benefit from the tax shield provided due to a
deduction in interest payments (Chakraborty, 2010).
Table 15. Meta- Analysis Results of Non Debt Tax Shield

Sum Sum of Square
Scores df df
Africa 2994 5.128 2950 2665.526 5490787 2343.243 1.138 0.127a Positive
Asia-
- - -
Europe 486703 43.988 486582 1358302.807 184187 429.170 3164.952 0 Negative
variables. p value is significant at 99% confidence level; a not significant
5.8.8 Business Risk

Business Risk is measured by variability in earnings. In the literature, it is defined as a
standard deviation of EBIT or as a coefficient of variability in EBIT. Business Risk
increases the financial risk of a company, therefore capital structure theory (POT, TOT)
predicts a negative relationship of business risk with leverage and it is also confirmed
statistically by WST. For the studies conducted in the European region, the relationship is
found to be positively and significantly associated with leverage. It is seen that for a
negative relationship between debt and risk, bankruptcy cost should be very high (Bradley et
al., 1984). This is not the case with European firms. Furthermore it is a contrasting finding
which supports the fact that determinants of capital structure vary in the different regions of
the world.
Table 16. Meta- Analysis Results of Business Risk
Sum Sum of Square
Scores df df
Africa 1693 -6.677 1626 1095.895 514586 717.346 1.528 0.063a Positive
Asia-
Pacific 48975 -3.200 48838 -91560.272 352187712 18766.665 -4.879 0 Negative
Europe 119095 1.868 118964 109945.579 2032737882 45085.894 2.439 0 Positive
Middle
East 1040 -7.026 996 -1764.599 248196 498.193 -3.542 0 Negative
variables. p value is significant at 99% confidence level; a not significant
26
5.8.9 Summary of Meta-Analysis Results
Table No 17 provides a summary of the nature of relationship exists between capital
structure determinants and leverage. It is confirmed from the above table that overall firms
follows pecking order theory. The results are significant at 99% confidence level. Table 17
documents that most firms follow a financial hierarchy model, but the possibility of trade–
off theory is not completely ruled out. In addition to this, when the results of different
regions are compared, variables like age, growth, NDTS and risk differ; their direction of
relationship with leverage differs. This further documents the fact that the capital structure
decisions differ across the regions.
Table 17. Summary of Findings of Capital Structure through Meta-Analysis

Region Profitability Tangibility Size Age Growth Liquidity NDTS Risk
Africa -*** +*** +*** +*** +*** Nil +a +a

America -*** +** +*** -*** +*** -*** -*** -***
Asia- -*** +*** -** +*** -*** -*** +*** +***
Pacific
Europe -*** +*** +*** -*** +*** -*** -*** -***
Middle -*** -*** +*** +*** +*** -*** Nil -***
East
Overall -*** +*** +*** -*** +*** -*** -*** -***
*** Significant at 99% confidence level;** significant at 95% confidence level; a not significant
5.9 Citation Analysis

Citation is the list of references pointing to prior publications (Smith, 2012). According to
Ziman (1968), “a scientific paper does not stand alone; it is embedded in the literature of
the subject.” A citation represents relationship between cited entity and citing document.
Citation analysis acts as a tool for collection of relevant studies. It helps in identifying the
most important studies related to the work concerned. The citation count serves as a
quality indicator of the literature referred in the analysis. The quality of the study is
positively correlated with a higher number of citation counts. Citation analysis measure is
derived from citation count high face validity.
For our present study, citation data is collected from Google scholar citation index and
EBSCO host database. Table 18 provides the list of top 34 papers whose citation is more
27
than 100. Citation Analysis helps in proving the reliability of the sample, and it also
provides a list of the most important articles in a specific area. Out of top listed 34 articles,
23 articles are published after 2000, providing evidence of an increasing trend of capital
structure research performed in the 21st century. The remaining articles form the basis of
theoretical concepts of capital structure in the field of corporate finance.
28
Table 18. Citation Analysis of Important Studies on Capital Structure
Serial Title of the Paper Author Journal Year No. of Times Cited
No.
1 Theory of the Firm: Managerial Jensen & Meckling JFEa 1976 41943
Behaviour, Agency Costs and Ownership
Structure
2 The Cost of Capital, Corporation Finance Modigilani & AERb 1958 12920
and theory of Investment Miller
3 Corporate and Financing Decisions Myers and Majluf JFEa 1984 12063
When Firm have Information that
Investors do not have
4 The Capital Structure Puzzle Myers JFc 1984 5394
c
5 What do we know about Capital Rajan & Zingales JF 1995 4261
Structure: Some Evidence from
International Data
6 The Determinants of Capital Structure Titman & Wessels JFc 1988 3859
Choice
7 The theory of Capital Structure Harris & Raviv JFc 1991 3370
8 The Determination of Financial Structure Ross BJEd 1977 3256

:The Incentive & Signalling Approach
9 Testing Trade off and Pecking Order Fama & French RFSe 2002 3079
Predictions about Dividend and Debt
10 Debt and Taxes Miller JFc 1977 2952
29
11 Testing Trade-off against Pecking Order Shyam-Sunder & JFEa 1999 1889
theory Models of Capital Structure Myers
12 The Dynamic Specification of Pecking Bontempi EEf 2002 1535

Order Theory : Its Relevance in Italy
13 Capital Structure in Developing Booth et al. JFc 2001 1453

Countries
14 Testing the Pecking Order Theory of Frank & Goyal JFEa 2003 1261
Capital Structure
15 On the Existence of Optimal Capital Bradley et al. JFc 1984 1257
Structure: Theory & Evidence
16 Capital Structure Decisions: Which Frank & Goyal FMg 2009 750
Factors are Reliably Important?
17 Financial Policy and Capital Structure Michaelas et al. SBEh 1999 451
Choice in UK SMEs : Empirical
Evidence from Panel Data
18 An International Comparison of Capital Fan et al. JFQAi 2012 387

Structure and Debt Maturity Choice
19 The Theory & Practice of Corporate Hall et al. JFEa 2001 384
Finance: Evidence from the field
20 Trade-off and Pecking order theories of Frank & Goyal HECFj 2005 371
Debt
21 Cross Country Determinants of Capital Bancel &Mitto FMg 2004 337

Structure Choice : A survey of European
Firms
30
22 How Persistent is the Effect of Market Alti JFc 2006 305

Timing on Capital Structure
Testing static trade-off against pecking Chirinko & Singha JFEa 2000 297
23 order models of Capital Structure :A
critical approach
Capital Structure and Financing of Cassar &Holmes 2003 265

24 SMEs: Australian Evidence
AFk
Determinants of the Capital Structure of Hall et al. JBFl 2004 238

25 European SMEs
The Determinants of Capital Structure: Antoniou et al. JFQAi 2008 202
26 Capital Market-Oriented versus Bank-
Oriented Institutions
Industry Effects on the Determinants of Hall et al. IJEBm 2000 199
27 Unquoted SMEs’ Capital Structure
Does Asymmetric Information Drive Bharath et al. RFSe 2009 196
28 Capital Structure Decisions?
The Effect Of Capital Structure on Abor JRFn 2005 186
29 Profitability-An Empirical Evidence
from Listed Firms
Small & Medium Size Enterprise Watson & Wilson JBFAo 2002 173
30 Financing –A Note on some of Empirical
Implications of Pecking Order
How SME Uniqueness Affects Capital Sogorb-Mira SBEh 2005 150
31 Structure :Evidence from a 1994-1998
Spanish Data Panel
31
Specificity and Opacity as a Resource Vincente-Lorente SBJp 2001 136

Based Determinants of Capital Structure:
32 Evidence from Spanish Manufacturing
Firms
Capital Structure and Debt Structure Rauh & Sufi RFSe 2010 132
33
Potential Competitive Effects of Basel II Berger JFQAi 2006 110

34 on banks in SME credit market in the
United States
Note: Coding Pattern: a=Journal of Financial Economics, b=American Economic Review, c= Journal of Finance, d= The Bell Journal of
Economics, e=Review of Financial Studies, f=Empirical Economics, g=Financial Management, h=Small Business Economics, i=Journal of
Financial and Quantitative Analysis, j= Handbook of Empirical Corporate Finance, k=Accounting & Finance, l=Journal of Business Finance
, m=International Journal of the Economics of Business, n= Journal of Risk Finance, o =Journal of Business Finance & Accounting,
p=Strategic Business Management
32
6. RESEARCH GAPS
In this paper, we present our analysis sequentially, and we thereby make an attempt to
unearth the gaps in the existing literature on capital structure determinants. We sum up our
findings as follows.
1. Our empirical study shows the predominance of capital structure literature in developed
economies. The study also shows that there is only a limited knowledge available on
emerging markets. Recently, studies on emerging markets have gained in popularity,
because the capital and stock markets in emerging markets are relatively less efficient and
incomplete compared with those in the developed markets. This causes financing decisions
to be incomplete and subject to irregularities (Eldomiaty, 2007). This aspect makes
emerging markets interesting to study and thereby contribute to the literature.
2. Our review of literature indicates the relationship among managerial characteristics such as
age, education, experience and gender and financing preferences among firms. However,
these characteristics are not studied in detail for firms in both developed and developing
countries which highlight another gap in the existing work on capital structure.
3. Our meticulous literature review also indicates mixed evidence about the determinants of
capital structure. Their direction and significance of relationship changes when applied in
different environment. This is the reason why capital structure decisions are inconclusive
(Harris & Raviv, 1991).
4. Our literature review evidences that most of the studies on capital structure are based
on empirical research and very few studies are based on primary data. Although, it is
difficult to collect information through primary data due to poor response rate etc., this
useful gathering o f facts cannot be obtained through secondary data. The analysis based
on primary data is more qualitative and it seeks to describe patterns, opinions and beliefs of
those managing capital structures of firms.
5. Our literature survey indicates that most of the researchers applied regression based models
to find the determinants of capital structure. The results vary when the same models are
applied in different institutional settings. There is thus a need for a more robust method to
analyse the firm specific determinants of capital structure.
33
6. Our survey shows that firm-specific determinants of capital structure are found to vary
largely. Further, most of the studies undertaken so far have used firm-specific
variables/factors, and p r o v i d e less evidence about effect of industry- specific and
country- specific variables on capital structure of firms.
7. FUTURE AVENUES FOR RESEARCH

Although it is clear from our literature survey that researchers, academics and practitioners
have considered capital structure to be one of the most interesting topics to explore in the
past 40 years, capital structure decisions remain inconclusive (Harris & Raviv, 1991). This
paper has shown the current status of the existing literature on capital structure determinants
from the perspective of region, year of study, state of economy, size of firms, type of
industry, data collection methods, data analysis techniques and theories supporting empirical
literature. Undoubtedly, research needs to be done meticulously, and the focus should be on
providing a solution to real-life problems. We have identified the following issues that may
require further investigation.
1. As discussed in the research gaps section, empirical studies depict the dominance of
capital structure literature in developed countries. Our literature review clearly points out
the growing interest of researchers towards studying developing countries. Therefore, to
comprehend the actual differences between the financing decisions of developed and
developing countries, research must be conducted to contribute to the extant literature of
capital structure determinants.
2. In recent years, SMEs are one of the major contributors of growth in developing countries
and are leading employment providers in world economies. Studies on capital structure
decisions have predominantly relied on large-scale industries and are scant for small firms.
Therefore, a comprehensive study on capital structure determinants of SMEs must be carried
out to bridge these gaps and provide insightful knowledge in this area.
3. Until recently, research has been mainly focused on firm-specific variables of capital
structure. However, manager/owner-specific variables, such as their growth intentions,
education, risk propensity and experience, should be studied in detail to provide a more
transparent view on capital structure decisions.
4. Most of the studies have used regression-based models for analysing the determinants of
capital structure. The results of the existing studies are inconsistent when these models are
34
applied in a different context. A study must be performed using alternative methodologies
(other than regression-based methodology) to solve the inconclusive capital structure puzzle
and obtain solutions.
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Research on capital structure determinants: a review and future directions

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helps in providing momentum to the development of an organization. It includes how a firm

recommends potential directions for future capital structure research.

Table 1. Emergence of New Concepts in Capital Structure

propounding the “Theory of Irrelevancy”. As per

The idealistic assumptions of irrelevancy theory of capital structure compel researchers

3. EARLIER REVIEW OF LITERATURE ON CAPITAL STRUCTURE

Table 2. Database and Search Criteria

1 EBSCO October- 161 75 Not 86

5. RESEARCH SEGMENTATION AND CATEGORIZATION

5.1 Year of Publication and Geographic Region

Table 3. Classification by Level of Economic Development

Table 4. Classification by Firm Size

Table 5. Industry-Wise Classification of Articles

5.5. Data Analysis Techniques

Table 6. Data Analysis Techniques

5.6. Type of Research

Table 7. Empirical Evidence on Factor Affecting Capital Structure

Managerial Ownership (+) Bokpin (2009) N.A.

Theory (MPOT). In NPOT hierarchical order is changed in terms of outside funding,

POT & TOT 1 3 9 5 1 1 20

5.8 Meta –Analysis

Zc=∑df Z/√∑df2 (1)

Table 12. Meta- Analysis Results of Age

Table 13. Meta- Analysis Results of Growth

df= degree of freedom it is calculated as number of observations – number of explanatory

Sum Sum of Square

5.8.7 Non Debt Tax Shield

Table 15. Meta- Analysis Results of Non Debt Tax Shield

5.8.8 Business Risk

Table 17. Summary of Findings of Capital Structure through Meta-Analysis

Region Profitability Tangibility Size Age Growth Liquidity NDTS Risk

Africa -*** +*** +*** +*** +*** Nil +a +a

5.9 Citation Analysis

Table 18. Citation Analysis of Important Studies on Capital Structure

8 The Determination of Financial Structure Ross BJEd 1977 3256

12 The Dynamic Specification of Pecking Bontempi EEf 2002 1535

13 Capital Structure in Developing Booth et al. JFc 2001 1453

18 An International Comparison of Capital Fan et al. JFQAi 2012 387

21 Cross Country Determinants of Capital Bancel &Mitto FMg 2004 337

22 How Persistent is the Effect of Market Alti JFc 2006 305

Capital Structure and Financing of Cassar &Holmes 2003 265

Determinants of the Capital Structure of Hall et al. JBFl 2004 238

Specificity and Opacity as a Resource Vincente-Lorente SBJp 2001 136

Potential Competitive Effects of Basel II Berger JFQAi 2006 110

emerging markets interesting to study and thereby contribute to the literature.

7. FUTURE AVENUES FOR RESEARCH

1. Abor, J. & Biekpe,N. (2009),"How do we explain the Capital Structure of SMEs in

3. Abor, J. (2007), "Industry classification and capital structure of Ghanian SMEs",

Choice:A Survey of European Firms", Financial Management , Vol.33 No.4, pp.103-

28. Chakraborty, I. (2010), "Capital Structure in an Emerging Stock Market-Case of

68. Mazur, K. (2007),"The Determinants of Capital Structure Choice: Evidence from

Economics Letters , Vol.17 No.10, pp.983-990.

Dimension of Science. Cambridge: Cambridge University Press, pp. 58.

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Africa -* +* +* +* +*** Nil +a +a