Academic journal article Journal of International Business Research

The Determinants of Corporate Capital Structure: Evidence from Japanese Manufacturing Companies

Academic journal article Journal of International Business Research

The Determinants of Corporate Capital Structure: Evidence from Japanese Manufacturing Companies

Article excerpt


The debates regarding determinants of corporate capital structure have been progressing for a few decades since the first capital structure theory was found by Modigliani and Miller in 1958. Their theory evolved into two main theories; static trade off theory by Krauz & Litzebnerger (1973), and pecking order theory by Myers & Majluf (1984). The studies related to corporate capital structure often use firms in developed countries as their sample data. Japan, which is one of the largest economies in the world, regularly becomes a part of these studies.

In this study, we aim to determine the relations between the firm specific experience and debt level in Japanese firms. We choose manufacturing companies as the subject of study because the sector is vital to the Japanese economy. Moreover, Japanese manufacturing companies are also very influential in the global economy. With this study, we intend to contribute to the literature by examining the determinants of corporate capital structure in Japan, one of the major developed markets.

We use panel data and multiple regression to analyze the relationships between the dependent variable, namely leverage, and the independent variables, tangibility, profitability, non-debt tax shield, size, growth in fixed assets, and growth in total assets. We find that size, growth in fixed assets, and growth in total assets are not significant. However, we also reveal that the variable tangibility, profitability, non-debt tax shield are statistically significant. Tangibility has a positive relation with debt level while profitability and non-debt tax shield have negative relation with debt level. These relationships are predicted in either static trade off theory and pecking order theory but none of the theories show a more dominant predictive capability over the other. Therefore, we propose the Trade-off adjusted Order Theory, which combines the elements of the latter theories, as a possible explanation for this behavior.

(ProQuest: ... denotes formulae omitted.)


A firm's capital structure is the combination of a firm's equity, debt, and hybrid securities which finances the whole business operation. A capital may be composed of equity, debt or even hybrid securities. The comparison ratio between the equity and the debt is usually known as the leverage.

The pioneers of the determinants of corporate capital structure are Modigliani & Miller (1958), which published their work almost half a century ago. Their main theory, widely known as the Modigliani-Miller Theory, explains that the value of a firm is unaffected by how that firm is financed. This simple theory is probably quite acceptable fifty years ago when the business environment and condition, especially the finance and capital market, was not as complex and as complicated as the current capital market. This theory said that the capital structure of the company hold no importance or relevancy to the company's value at all. That is why this theory is also known as capital structure irrelevance principle.

Following on from the pioneering work of Modigliani and Miller (1958), capital structure has aroused intense debate in the financial management arena for the last fifty years.

Even though there are other theories that tried to explain the determinants of capital structure, the number of factors that have the possibility to influence the decision making process is overwhelmingly large that a single theory is not able to explain the whole capital structure. Moreover, in spite of the continuing theoretical debate on capital structure, there is relatively little empirical evidence on what factors could influence the firm's capital structure.

As the capital structure becomes more complex, the factors that influenced the determination of a capital structure have been studied thoroughly by the researchers over the years. Japan, as one of the most developed economics in the world, has often been included in such research as a comparison to other industrialized countries, but the researches that focus on Japanese firms are rarely found. …

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