The determinants of Corporate Leverage of UK firms

Prior researches on determinants of corporate leverages have raised heated discussion in 19th century. Study on capital structure by Bevan and Danbolt (2004) suggests that the OLS results are consistent with most of empirical studies while the results of fixed effects estimation model contribute significant differences. Bevan and Danbolt (2004) conclude that prior influential studies may be biased owing to failing to control for firm-specific time-invariant heterogeneity. This article analyses capital leverage and its determinants for a firm-level panel of 200 non-financial UK firms over the time period from 2005 to 2011, giving a total 1292 observations. In this study, the focus is on the reliable relations between six factors (future growth opportunity, profitability, firm size, asset structure, tax shield effects and operating risk) and two leverage measures (total debt leverage ratio and long-term debt leverage ratio). Several capital structure theories are reviewed for formulating the influence of each factor and aggregate measure of leverage is employed. In order to take account the individual effect of each firm, two estimation models employed, pooled OLS and fixed effects panel estimation models. Comparing the results of two estimations, most of the factors under the pooled OLS estimation are consistent with existing studies while fixed effects estimation illustrates important difference. The results of controlling for firm-specific time-invariant heterogeneity suggest that future growth opportunity, operating risk and firm size are not reliable determinants. The profitability negatively related to gearings using both estimation techniques, asset structure to be positively correlated with the level of gearings. However, the result of tax effects shield shows positive relationship with gearings under two estimation models, although it contradicts expected sign