| Summary: | Empirical investigation has uncovered some facts about capital structure in the USA; very little research based upon firms in UK. Using a partial adjustment model and panel methodology for a sample of 20 UK firms during 1990 -2010, this paper shed new light on: (i) identify a target capital structure; (ii) investigate evidence of adjustment towards the target; and (iii) identify the determinants of capital structure in the target capital structure model.
According to the empirical results of partial adjustment model, we can obtain positive and significant coefficients of the one period lagged leverage, which confirms that firms do identify and pursue target debt ratios and adjust their debt level to achieve the targets. Besides, they adjust the capital structures with a speed of 41 - 87 per cent per year. Furthermore, industry effects do influence capital structure choice in UK. Firms in the manufacture industry have the highest adjustment speed, then the retail industry, and the software industry slowest. However, there is no evidence to prove that firms in the travel and leisure industry have target capital structures.
This paper also throws lights on the determinants of target capital structure, which uncover that tangibility, firm size, liquidity, market-to-book ratio and industry effects are key determinants of UK firms’ debt ratio. While there is no evidence to prove that profitability and growth rate is significantly related to the leverage level in UK.
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