What Determines the Capital Structure of the Largest Brazilian Firms? An Empirical Analysis Using Panel Data

17 Pages Posted: 25 May 2007

See all articles by Carlos Correa

Carlos Correa

Mackenzie Presbyterian University

Leonardo Cruz Basso

Mackenzie Presbyterian University - Business Administration

Wilson Toshiro Nakamura

Mackenzie Presbiterian University - PPGAE

Date Written: February 22, 2007

Abstract

This paper sought to analyze some of the supposed determinants of capital structure of the largest Brazilian firms, in light of the Pecking Order theory and the Trade-Off theory, testing the empirical validity of these theories in the local scenario. The study is an adaptation of the paper developed by Gaud et al., (2005) in Switzerland, whose work served as a basis for the choice of some variables and of the econometric tests conducted, and uses the Panel Data methodology. Dynamic tests were carried out in addition to static tests, aiming to analyze the adjustment process of the capital structure over time, toward an assumed optimal target level. The tests were supplemented by analyses of variance. The results demonstrated that leverage is negatively related to the importance of tangible assets and to profitability, while it is positively related to business risk. They also demonstrated that foreign owned companies are more in debt than national firms. The analysis suggests that the Pecking Order theory is more consistent than the Trade-Off theory to explain the capital structure of the largest Brazilian firms. The dynamic analysis showed a slow adjustment process of the capital structure towards the target level, suggesting the existence of high adjustment costs and confirming the Pecking Order behavior of managers.

Keywords: Panel Data, Capital Structure, TOT, POT

JEL Classification: G12

Suggested Citation

Correa, Carlos Alberto and Cruz Basso, Leonardo and Nakamura, Wilson Toshiro, What Determines the Capital Structure of the Largest Brazilian Firms? An Empirical Analysis Using Panel Data (February 22, 2007). Available at SSRN: https://ssrn.com/abstract=989047 or http://dx.doi.org/10.2139/ssrn.989047

Carlos Alberto Correa (Contact Author)

Mackenzie Presbyterian University ( email )

Rua da Consolação 920
São Paulo, 010302907
Brazil

HOME PAGE: http://www.mackenzie.br

Leonardo Cruz Basso

Mackenzie Presbyterian University - Business Administration ( email )

Rua da Consolacao, 896 7 - andar sala 73
01302-907 Sao Paulo
Brazil
+55 11 32368597 (Phone)
+55 11 32368600 (Fax)

Wilson Toshiro Nakamura

Mackenzie Presbiterian University - PPGAE ( email )

Rua da Consolacao, 896 - 5o. andar
01302-907 Sao Paulo
Brazil
+55 11 236 8669 (Phone)
+55 11 236 8600 (Fax)

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