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Regression Analysis of Macroeconomic Conditions and Capital Structures of Publicly Listed British Firms

Elmina Homapour Orcid Logo, Larry Su Orcid Logo, Fabio Caraffini Orcid Logo, Francisco Chiclana Orcid Logo

Mathematics, Volume: 10, Issue: 7, Start page: 1119

Swansea University Author: Fabio Caraffini Orcid Logo

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DOI (Published version): 10.3390/math10071119

Abstract

Using an unbalanced panel of 922 non-financial companies publicly listed on the London Stock Exchange during January 1995 and September 2014, this article tests the predictions of Pecking Order Theory (POT), Trade-off Theory (TOT) and Market Timing Theory (MTT) of capital structure through the lens...

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Published in: Mathematics
ISSN: 2227-7390
Published: MDPI AG 2022
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URI: https://cronfa.swan.ac.uk/Record/cronfa60902
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last_indexed 2023-01-13T19:21:22Z
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spelling 2022-09-23T12:20:25.8573202 v2 60902 2022-08-28 Regression Analysis of Macroeconomic Conditions and Capital Structures of Publicly Listed British Firms d0b8d4e63d512d4d67a02a23dd20dfdb 0000-0001-9199-7368 Fabio Caraffini Fabio Caraffini true false 2022-08-28 MACS Using an unbalanced panel of 922 non-financial companies publicly listed on the London Stock Exchange during January 1995 and September 2014, this article tests the predictions of Pecking Order Theory (POT), Trade-off Theory (TOT) and Market Timing Theory (MTT) of capital structure through the lens of macroeconomic conditions. We find strong evidence that leverage is negatively associated with the business cycle but positively related to stock market performance, which is consistent with POT. In addition, leverage is negatively related to financial market risk, as predicted by TOT. Furthermore, leverage is positively related to credit supply, which is in line with both the POT and TOT. Finally, there is no evidence in support of MTT. The above results are robust with respect to the measurement of macroeconomic variables, the choice of estimation methods and the inclusion of a dummy variable to account for the effect of the 2008 financial crisis. An important implication is that, because firms tend to be highly levered during business cycle downturns, expansionary fiscal and monetary policies to encourage more business borrowings may not be effective after all. Journal Article Mathematics 10 7 1119 MDPI AG 2227-7390 capital structure; macroeconomic conditions; firm-specific variables; pecking order theory; trade-off theory; market timing theory 31 3 2022 2022-03-31 10.3390/math10071119 COLLEGE NANME Mathematics and Computer Science School COLLEGE CODE MACS Swansea University This research received no external funding 2022-09-23T12:20:25.8573202 2022-08-28T18:55:42.2249325 Faculty of Science and Engineering School of Mathematics and Computer Science - Computer Science Elmina Homapour 0000-0001-9756-2744 1 Larry Su 0000-0001-8285-5122 2 Fabio Caraffini 0000-0001-9199-7368 3 Francisco Chiclana 0000-0002-3952-4210 4 60902__25199__a08987309513410581b5095e8f3696f2.pdf 60902_VoR.pdf 2022-09-23T12:17:56.4240220 Output 544959 application/pdf Version of Record true © 2022 by the authors. This article is an open access article distributed under the terms and conditions of the Creative Commons Attribution (CC BY) license true eng https://creativecommons.org/licenses/by/4.0/
title Regression Analysis of Macroeconomic Conditions and Capital Structures of Publicly Listed British Firms
spellingShingle Regression Analysis of Macroeconomic Conditions and Capital Structures of Publicly Listed British Firms
Fabio Caraffini
title_short Regression Analysis of Macroeconomic Conditions and Capital Structures of Publicly Listed British Firms
title_full Regression Analysis of Macroeconomic Conditions and Capital Structures of Publicly Listed British Firms
title_fullStr Regression Analysis of Macroeconomic Conditions and Capital Structures of Publicly Listed British Firms
title_full_unstemmed Regression Analysis of Macroeconomic Conditions and Capital Structures of Publicly Listed British Firms
title_sort Regression Analysis of Macroeconomic Conditions and Capital Structures of Publicly Listed British Firms
author_id_str_mv d0b8d4e63d512d4d67a02a23dd20dfdb
author_id_fullname_str_mv d0b8d4e63d512d4d67a02a23dd20dfdb_***_Fabio Caraffini
author Fabio Caraffini
author2 Elmina Homapour
Larry Su
Fabio Caraffini
Francisco Chiclana
format Journal article
container_title Mathematics
container_volume 10
container_issue 7
container_start_page 1119
publishDate 2022
institution Swansea University
issn 2227-7390
doi_str_mv 10.3390/math10071119
publisher MDPI AG
college_str Faculty of Science and Engineering
hierarchytype
hierarchy_top_id facultyofscienceandengineering
hierarchy_top_title Faculty of Science and Engineering
hierarchy_parent_id facultyofscienceandengineering
hierarchy_parent_title Faculty of Science and Engineering
department_str School of Mathematics and Computer Science - Computer Science{{{_:::_}}}Faculty of Science and Engineering{{{_:::_}}}School of Mathematics and Computer Science - Computer Science
document_store_str 1
active_str 0
description Using an unbalanced panel of 922 non-financial companies publicly listed on the London Stock Exchange during January 1995 and September 2014, this article tests the predictions of Pecking Order Theory (POT), Trade-off Theory (TOT) and Market Timing Theory (MTT) of capital structure through the lens of macroeconomic conditions. We find strong evidence that leverage is negatively associated with the business cycle but positively related to stock market performance, which is consistent with POT. In addition, leverage is negatively related to financial market risk, as predicted by TOT. Furthermore, leverage is positively related to credit supply, which is in line with both the POT and TOT. Finally, there is no evidence in support of MTT. The above results are robust with respect to the measurement of macroeconomic variables, the choice of estimation methods and the inclusion of a dummy variable to account for the effect of the 2008 financial crisis. An important implication is that, because firms tend to be highly levered during business cycle downturns, expansionary fiscal and monetary policies to encourage more business borrowings may not be effective after all.
published_date 2022-03-31T05:06:02Z
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score 11.089407

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