| Summary: | This paper investigates the determinants of capital structure in firms from the United Kingdom. It aims
to determine which of the theories of capital structure is most relevant and applicable to these firms. It
intends to compare the results to previous empirical and theoretical predictions. The study includes 81
companies from 10 different industries from 8 different years from 2001-2008. A panel data regression
and an ANOVA test is run to analyze what are the determinants of a firm’s short term and long term
leverage and how do these determinants influence the capital structure decisions. The impact of
industry classification is also captured by the ANOVA test. The industries are introduced as
dummy variables in the analysis. Each of the tests are run on Long-Term Leverage as well as
Short-Term Leverage as dependent variables. Firm Size, Profitability, Asset Tangibility, Growth
Opportunities, Non-Debt Tax Shields and Volatility are the independent variables included.
Most of the factors follow the predictions of the Pecking Order Theory of Capital Structure. This
states that firms follow a certain order in order to raise finance. However no conclusive
evidence is found supporting one single theory that can explain the capital structure decisions
of a firm in the United Kingdom. The determinants still remain a puzzle which would be
debatable for years to come.
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