Finance Discipline Group
UTS Business School
University of Technology, Sydney

Working Paper Series

Determinants of Corporate Capital Structure: Australian Evidence
Author(s): Carl Chiarella, Toan Pham, Ah Boon Sim and Madeleine Tan
Date of publication: June 1991
Working paper number: 3

This study seeks to provide evidence on the importnace and significance of capital structure determinants in the Australian context. The analysis was implemented on a sample of 226 Australian companies from 1977 to 1985. The following results are obtained.

Company non-debt tax shields display a negative relationship with respect to each of the debt ratios. This evidence is consistent with the theory proposed by DeAngelo and Masulis (1980) that firms with non-debt tax shields at their disposal can use these as substitutes for interest tax shields. The evidence canvassed also lends some support to the pecking order hypothesis of Myers and Majluf (1984). Specifically, significant negative relationships between profitability and all debt ratios are found. The implication is that the sample of firms studied prefer to finance investments with internally retained funds before issuing debt. Some evidence of a size effect is present and this indicates that the larger firms in the sample tended to employ more debt in their capital structures. The positive relationship between cash holdings and debt ratios indicates some support for the free cash flow hypothesis of Jensen (1986), although these estimates are not significant. No support for the growth opportunity and collateral value attributes as determinants of deb ratios can be discerned, consistent with Titman and Wessels (1988).

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Published as: Chiarella, C., Pham, T., Sim, A. B. and Tan, M. 1992, "Determinants of Corporate Capital Structure: Australian Evidence", in G.S. Rhee and R. P. Chan, Pacific Basin Capital Markets Research, Vol. III, North Holland, Amsterdam, pp. 139-158.
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