Academic journal article Journal of Business Economics and Management

Capital Structure and Its Determinants in New Zealand Firms

Academic journal article Journal of Business Economics and Management

Capital Structure and Its Determinants in New Zealand Firms

Article excerpt

1. Introduction

This study investigates the capital structure of New Zealand's large listed companies on the New Zealand Stock Exchange. A number of empirical studies find that firm capital structure is related to firm characteristics; namely firm size, tangibility, profitability, tax-shield, growth, liquidity, firmrisk level and industry type (Fattouh et al. 2008; Saksonova 2006; Fattouh et al. 2005; McConnell, Pettit 1984). Moreover, recent literature focuses on the subject matter of capital structure decisions, and association of corporate governance practices (Berger et al. 1997; Wen et al. 2002). Therefore, this study considers how firm characteristics and corporate governance practices both impact in capital structure choice in New Zealand listed firms.

New Zealand provides an interesting case study for corporate financing policy and corporate governance. Although, the current 28% corporate tax rate reduces tax incentives for using debt in New Zealand's large corporations, this tax rate is high compared to similar sized OECD countries whose average is 25%. Therefore, tax incentives play a significant role in determining capital structure in New Zealand firms. This is confirmed by Business Finance in New Zealand (2004), which indicates that New Zealand firms finance their assets more by debt than equity. Further, it shows the mean ratio of New Zealand firms debt-to-assets ratio is 0.60. This may be due to the broad range of financial instruments available in the New Zealand financial market. Smith, Chen and Anderson (2010) report, because of the low level of market anomalies and a developed banking system, New Zealand firms issue significantly more debt than equity. Though firms enjoy high debt levels, the identity of optimal level of debt is important in New Zealand firms because the country's bankruptcy laws do not protect business owners as much as USA laws do. As an example, New Zealand does not provide homestead exemption or future earnings exceptions in their bankruptcy law. A personal cross guarantee requirement in the bank lending processes has worsened this problem. Additionally, the New Zealand Securities Commission introduced a principal-based voluntary corporate governance code in 2004, this recent corporate governance changes have also had significant impact on the capital structure choices of New Zealand firms.

The current study aims to empirically explore the relationship between firm characteristics, the corporate governance practices and the capital structure of New Zealand listed companies by applying the method of conditional quantile regression. This quantile regression sketches the entire distribution of leverage, conditional on a set of explanatory variables. Moreover, since this study sample comprises large outliers and the distribution of the disturbances is non-normal, quantile regression is robust for this study.

This paper makes a number of contributions to firm capital structure research. First it provides evidence that firm characteristics and corporate governance practices impact on firm capital structure choice. Secondly, most existing studies use data from listed companies in large markets such as the USA and UK, but it is important to consider how Australasian market firms, firm characteristics and corporate governance practices relate to capital structure choice. Finally, the econometric analysis is more robust than prior research due to the use of the quantile regression analysis. Quantile regression examines the whole distribution of the capital structure distribution of firms rather than a single measure of the central tendency of the capital structure distribution.

The next section of the paper reviews prior research. This is followed by a discussion of the data, variables, method and procedures used in this present study. The findings and implications then follow.

2. Literature review

Since the Modigliani and Miller (1958) seminal study of the debt irrelevance proposition in a perfect capital market, financial economists have introduced four new theories to explain the variations in debt ratios across firms. …

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