Capital Structure: Some Evidence From European Panel Data

Abstract

This study examines the relationship between the level of debt and different firm characteristics (non-debt tax shield, financial distress cost, investment and cash flow) using a target adjustment model. The results for a sample of companies from five countries (France, Germany, Italy, Spain and the UK) during the period 1998-2008 reveal, in general terms, that debt has an inverse relationship to non-debt tax shields and cash flow, and a direct relationship with investment in fixed assets. Furthermore, the inverse relationship between cash flow and debt diminishes when the level of asymmetric information is less important. The relationship between financial distress cost and debt level is not clear and varies across countries as well. Finally, our results support the relevance of institutional differences across countries to explain the level of leverage. In particular, the singularity of the UK (a market-oriented country) as opposed to France, Germany, Italy and Spain (bank-oriented countries).