Examining the Capital Structure Determinants: Empirical Analysis of Companies Traded on Abu Dhabi Stock Exchange

Abstract

The choice of the financial policy is one of the most important decisions that the company will ever take. It consists on determining the optimal capital structure of the companies. Recently, the capital structure has increasingly gained importance sine many companies have experienced financial distress and bankruptcy caused by the last financial crisis, it has drawn the interest of many researchers and it was a subject of considerable debate in both theoretical and empirical studies. This paper analyzes the explanatory power of some of the theories that have been proposed in the literature to explain changes the in the capital structures across companies. In particular, this study investigates capital structure determinants of companies traded on Abu Dhabi Stock Exchange based on a panel data set over 2008 and 2009 comprising 33 companies from different industries. In the literature, there are many potential factors that could affect the capital structure such as: the tangibility (asset structure), the non-debt tax shield, the profitability, the size, the expected growth, the uniqueness, the income variability, the industry classification dummies, the ownership structure and the age of the company. The purpose of this study is to examine the link between a number of potential capital structure determinants and the debt level of the companies included in our analysis. In the financial literature, there are several measures of the financial leverages (long-term, short-term, and convertible debt divided by market and book values of equity) but because of the non availability of the data, we will limit our study to the leverage measures in terms of the book values rather than the market ones. Our book leverage measures are decomposed into short-term and long-term debt ratios to highlight the magnitude of the components of the capital structure. At the first look of the capital structure of the companies, we can easily confirm that they are on average highly leveraged but it stays to determine the relationship between the potential determinants of the capital structure and the different leverage measures.