Determinants of capital structure in Asian firms: new evidence on the role of firm level factors, industry characteristics, and institutions

This thesis investigates the determinants of capital structure in Asian countries. The aim is to provide new evidence on the role of firm’s specific factors, industry characteristics and institutions on firms’ capital structure decision. The Asian markets have significantly benefitted from economic expansion and have experienced a series of financial system reforms in the recent decades. The rapid growth attained by the Asian economies, was also accompanied by periods of financial turmoil. These factors collectively call for investigating the factors affecting the decision of capital structure particularly in the last decade. The study thus provides new empirical evidence on the determinants of capital structure in Asia during the period 2006-2011. The result reveals that financing patterns of firms can be driven by their own firm characteristics, industry nature, general economic condition and institutional attributes. Firstly, profitability, administration expenses, firm size, firm liquidity, market-to-book ratio have shown significant association to firm’s capital structure decision in Asia. There empirical evidence supports the existence of dynamic capital structure, which is in line with trade-off theory. During the recent financial crisis (2008-2009), the results show no evidence of adjustment to target capital by Asian firms. In general, the firm-specific factors have a more powerful explanation on firm’s financing decisions in mature industries compared to growing industries. In particular, firms from technology or healthcare sectors, most of these types of firms are still young and at start-up stage in Asia and they hardly rely on debt finance with lesser credit record, higher R&D expenses, higher risk and more future uncertainties. The institutional and macroeconomic factors have a more significant impact on a firm’s long-term financing decision compared short-term financial decision. In Asia, the firms tend to excessively rely on short-term debt to meet long-term financing requirement under a weaker institutional environment.