Determinant Factors of the Capital Structure of a Firm- an Empirical Analysis

AbstractThis paperwork investigates the relative importance of five factors upon the capital structure decisions of Romanian firms listed at the Bucharest Stock Exchange and operating in the construction sector of the industry. The analysis is based on panel data estimations on a sample of 20 companies, observed during three years (2009-2011). Traditional explanatory variables are adopted in the study, including profitability, company size, tangibility of assets, liquidity and asset turnover. By employing the ordinary least squares method and the fixed effects model, simple and multiple linear regressions are obtained. These are further selected and interpreted in order to determine the influence of the independent variables upon the leverage of a company. The results show that profitability and liquidity ratios are negatively affecting the total debt ratio of Romanian companies. The tangibility of assets is also having a negative impact on leverage, strengthening the findings of previous empirical studies which claim that this indicator moves in opposite direction with the debt ratio of companies located in developing countries. On the other hand, the size of a company and its asset turnover have a positive correlation with leverage. The explanatory variable which has the highest impact on the capital structure choices is profitability