Industry Effects on the Capital Structure Decisions of Australian Companies

The paper examines the applicability of the theory of optimum capital structure at the industry level, using a sample of 112 Australian companies, over 14 industrial classifications, for the period firom 1980 to 1994. A major proposition of Static Trade-Off and Pecking Order theories is that capital structure decisions are influenced by macroeconomic determinants. Accordingly, firms in the same industry which are exposed to similar economic conditions should exhibit capital structures with similar characteristics, in contrast to firms across industries. The empirical work in this paper uses three related, but distinct tests to establish that differences exist in the capital structure of the sample industry groups. Firstly, ANOVA tests are used to measure differences in the debt to equity ratio between industries, as well as to calculate the cross-sectional variance in firm leverage that can be explained by industry classification. Secondly, an OLS regression estimation procedure is applied to calculate whether industrial classification is a significant determinant of financial leverage. Finally, a seemingly unrelated regression procedure is used to test the similarity between a series of nominated industry relationships; namely size, profitability, growth and volatility. The study finds some evidence consistent with capital structure theory being relevant in the sample period and industries examined, using all three econometric techniques. Following the establishment of differences between the capital structures of the selected industries, the study uses a non-parametric test involving correlation analysis to estabhsh whether macroeconomic shocks could be expected to have a similar effect on the various capital structures. The results of a correlation analysis provide an explainable relationship for a number of industries, but overall the results are inconclusive.