Which determinants matter for capital structure? Evidence from polish and portuguese nonfinancial firms

Abstract

This paper uses ANOVA and static and dynamic panel regression analyses, to investigate the capital structure behavior of strongly balanced and matched samples of Polish (PL) and Portuguese (PT) nonfinancial firms, over the 2011-2019 period. We test for capital structure determinants at the firm, industry, and country level, whether firms revert to leverage target ratios, and whether euro area affiliation matter in terms of the cost of capital. We found that capital structure is significantly and positively associated with financial slack, debt tax shields and growth opportunities, and negatively related to the asset tangibility, internal funding, non-debt tax shields, exposure to bankruptcy risk and the cost of capital. The magnitude of those relationships is stronger for PT firms on the exposure to bankruptcy risk and growth opportunities, but weaker for those firms on the cost of capital, sovereign risk, and business cycle. On the relationships with financial slack, debt and non-debt tax shields, PL firms exhibit stronger effects. We also found that sample firms significantly revert their financial leverage to target leverage ratios. Last, results suggest that controlling for sovereign debt risk and business cycles, firm leverage is positively influenced by the affiliation with the euro zone. Our findings are robust to the endogenous nature of empirical corporate finance, and to alternative model and variable specifications.