Do Determinants Influence the Capital Structure Decision in Bangladesh? A Panel Data Analysis
Abstract
More than two decades, capital structure decision marked as variation from optimal decisions as determinants are not properly considered due to the collapse of corporate governance. This study examines the impact of determinants on capital structure decisions in Bangladesh using Fixed-Effect Model (FEM) and Panel Corrected Standard Error (PCSE). The study revealed that debt structure is considerably influenced by liquidity, firm size, asset structure, non-debt tax shield, and operational age of companies. The study also indicates that the companies, which are not financially, sound, but used more debt because the owners of such companies are politically empowered in stock market. The firms that hold less fixed assets (as a percentage of total assets, particularly the family-run and politically affiliated firms used more debt regardless of their tax bracket, profitability and growth—showed a greater capacity for increased debt. This study primarily focused on financial framework to make capital structure decision based on related determinants.
References
Ahmed, N., Ahmad, Z., & Ahmed, I. (2010). Determinants of capital structure: A case of life insurance sector of Pakistan. European Journal of Economics. Finance and Administrative Sciences, 24, 7-12.
Alber, W., & Youssef, I. S. (2020). Capital structure determinants: A cross-country analysis. International Business Research, 13(5), 95-112. https://doi.org/10.5539/ibr.v13n5p95
Alom, K. (2013). Capital structure choice of Bangladeshi firms: An empirical investigation. Asian Journal of Finance and Accounting, 5(1), 320-333. https://doi.org/10.5296/ajfa.v5i1.3495
Amidu, M. (2007). Determinants of capital structure of banks in Ghana. Baltic Journal of Management, 2(1), 67-79. https://doi.org/10.1108/17465260710720255
Beck, N., & Katz, J. N. (1995). What to do (and not to do) with time series cross-section data. American Political Science Review, 89(3), 634-647. https://doi.org/10.2307/2082979
Bradley, M., Jarrell, G. A., & Kim, E. H. (1984). On the existence of an optimal capital structure: Theory and evidence. The journal of Finance, 39(3), 857-878. https://doi.org/10.1111/j.1540-6261.1984.tb03680.x
Buferna, F., Bangassa, K., & Hodgkinson, L. (2005). Determinants of capital structure: Evidence from Libya (University of Liverpool Research Paper Series No. 2005/08). https://www.researchgate.net/profile/Iynn-Hodgkinson/publication/238498700_Determinants_of_Capital_Structure_Evidence_from_Libya/links/00b4952eb6ae2791ce000000/Determinants-of-Capital-Structure-Evidence-from-Libya.pdf
Caglayan, E., & Sak, N. (2010). The determinants of capital structure: Evidence from the Turkish banks. Journal of Money, Investment and Banking, 15(1), 57-64.
Chen, J. J. (2004). Determinants of capital structure of Chinese-listed companies. Journal of Business Research, 57(12), 1341-1351. https://doi.org/10.1016/S0148-2963(03)00070-5
Daskalakis, N., & Psillaki, M. (2008). Do country or firm factors explain capital structure? Evidence from SMEs in France and Greece. Applied Financial Economics, 18(2), 87-97. https://doi.org/10.1080/09603100601018864
Deesomsak, R., Paudyal, K., & Pescetto, G. (2004). The determinants of capital structure: Evidence from the Asia Pacific region. Journal of Multinational Financial Management, 14(4-5), 387-405. https://doi.org/10.1016/j.mulfin.2004.03.001
Diamond, D. W., & Rajan, R. G. (2000). A theory of bank capital. The Journal of Finance, 55(6), 2431-2465. https://doi.org/10.1111/0022-1082.00296
Fama, E. F., & French, K. R. (2002). Testing trade-off and pecking order predictions about dividends and debt. The Review of Financial Studies, 15(1), 1-33. https://doi.org/10.1093/rfs/15.1.1
Güner, A. (2016). The determinants of capital structure decisions: New evidence from Turkish companies. Procedia Economics and Finance, 38, 84-89. https://doi.org/10.1016/S2212-5671(16)30180-0
Habib, S. M. A. (2019). Financial sector in Bangladesh: Recent trends and benchmarking for the government (Central for Policy Dialogue Working Paper No. 128). https://cpd.org.bd/wp-content/uploads/2019/10/CPD-Working-Paper-128-Financial-Sector-in-Bangladesh.pdf
Hausman, J. A. (1978). Specification tests in econometrics. The Journal of Econometrics, 46(6), 1251-1271. https://doi.org/10.2307/1913827
Hoque, J., Hossain, A., & Hossain, K. (2014). Impact of capital structure policy on value of the firm - A study on some selected corporate manufacturing firms under Dhaka Stock Exchange. Ecoforum, 3(2), 1-9.
Hosen, M., Imran, M., & Chowdhury, M. A. F. (2021). Nexus between sectoral shift and stock return: Insights from Bangladesh. International Journal of Asian Business and Information Management, 12(1), 75-93. https://doi.org/10.4018/IJABIM.20210101.oa5
Hossain, F., & Ali, A. (2012). Impact of firm specific factors on capital structure decision: An empirical study of Bangladeshi Companies. International Journal of Business Research and Management, 3(4), 163-182.
Hossain, I., & Hossain, M. A. (2015). Determinants of capital structure and testing of theories: A study on the listed manufacturing companies in Bangladesh. International Journal of Economics and Finance, 7(4), 176-190. https://doi.org/10.5539/ijef.v7n4p176
Hossain, M. M., & Yakub, K. M. (2014). Impact of firm characteristics on capital structure of banking industry of Bangladesh. IOSR Journal of Business and Management, 16(4), 17-25. https://doi.org/10.9790/487X-16441725
Huang, G. (2006). The determinants of capital structure: Evidence from China. China Economic Review, 17(1), 14-36. https://doi.org/10.1016/j.chieco.2005.02.007
Icke, B. T., & Ivgen, H. (2011). How firm specific factors affect capital structure: An emerging market practice-Istanbul Stock Exchange (ISE). Middle Eastern Finance and Economics, 13, 90-102.
Imtiaz, F., Mahmud, K., & Mallik, A. (2016). Determinants of capital structure and testing of applicable theories: Evidence from pharmaceutical firms of Bangladesh. International Journal of Economics and Finance, 8(3), 23-32. https://doi.org/10.5539/ijef.v8n3p23
Islam, R. (2016). Determinants of capital structure choices for listed manufacturing companies in Bangladesh. Research Journal of Finance and Accounting, 7(7), 44-53.
Jahan, N. (2014). Determinants of capital structure of listed textile enterprises of Bangladesh. Research Journal of Finance and Accounting, 5(20), 11-20.
Jiang, T. (2009). Capital Structure Determinants and Governance Structure Variety in Franchising (Publication No. EPS-2009-158-ORG) [Doctoral dissertation, Erasmus University Rotterdam]. ERIM PhD Series in Research in Management. https://repub.eur. nl/pub/14975/
Khrawish, H. A., & Khraiwesh, A. H. A. (2010). The determinants of the capital structure: Evidence from Jordanian industrial companies. Journal of King Abdulaziz University: Economics and Administration, 24(1), 173-196. https://doi.org/10.4197/Eco.24-1.5
Kim, W. S., & Sorensen, E. H. (1986). Evidence on the impact of the agency costs of debt on corporate debt policy. Journal of Financial and quantitative analysis, 21(2), 131-144. https://doi.org/10.2307/2330733
López-Gracia, J., & Sogorb-Mira, F. (2008). Testing trade-off and pecking order theories financing SMEs. Small Business Economics, 31(2), 117-136. https://doi.org/10.1007/s11187-007-9088-4
Mantobaye, M., Rea, W. S., & Reed, W. R. (2017). Which panel data estimator should I use? A corrigendum and extension (Economics Discussion Papers No. 2017-58). http://www.economics-ejournal.org/dataset/PDFs/discussionpapers_2017-58.pdf
Mazur, K. (2007). The determinants of capital structure choice: Evidence from Polish companies. International Advances in Economic Research, 13(4), 495-514. https://doi.org/10.1007/s11294-007-9114-y
Modigliani, F., & Miller, M. H. (1958). The cost of capital, corporation finance, and the theory of investment. The American Economic Review, 48(3), 261-297.
Morri, G., & Beretta, C. (2008). The capital structure determinants of REITs. Is it a peculiar industry? Journal of European Real Estate Research, 1(1), 6-57. https://doi.org/10.1108/17539260810891488
Mutairi, A. A, and Naser, K. (2015). Determinants of capital structure of banking in GCC: An empirical investigation. Asian Economics and Financial Review, 5(7), 959-972. https://doi.org/10.18488/journal.aefr/2015.5.7/102.7.959.972
Najjar, N., & Petrov, K. (2011). Capital structure of insurance companies in Bahrain. International Journal of Business and Management, 6(11), 138-145. https://doi.org/10.5539/ijbm.v6n11p138
Nejad, W. R., & Wasiuzzaman, S. (2015). Multilevel determinants of capital structure: Evidence from Malaysia. Global Business Review, 16(2), 199-212. https://doi.org/10.1177/0972150914564274
Nyeadi, J. D., Banyen, K. T., & Mbawuni, J. (2017). Determinants of capital structure of listed firms in Ghana: Empirical evidence using a dynamic system GMM. The Journal of Accounting and Management, 7(2), 159-179.
Ozkan, A. (2001). Determinants of capital structure and adjustment to long run target: Evidence from UK company panel data. Journal of Business Finance and Accounting, 28(1‐2), 175-198. https://doi.org/10.1111/1468-5957.00370
Petersen, M. A., & Rajan, R. G. (1994). The benefits of lending relationships: Evidence from small business data. The Journal of Finance, 49(1), 3-37. https://doi.org/10.1111/j.1540-6261.1994.tb04418.x
Rahman, M. H., & Rana, S. (2018). Present crisis of the banking industry of Bangladesh: Causes and remedial measures. Journal of Business and Management, 20(4), 13-21.
Rajan, R. G., & Zingales, L. (1995). What do we know about capital structure? Some evidence from international data. The Journal of Finance, 50(5), 1421-1460. https://doi.org/10.1111/j.1540-6261.1995.tb05184.x
Rashid, M. M., & Johara, F. (2018). Corruption and institutional integrity: The case of Bangladesh. International Journal of Engineering Technologies and Management Research, 5(2), 133-142. https://doi.org/10.29121/ijetmr.v5.i2.2018.156
Salawu, R. O., & Agboola, A. A. (2008). The determinants of capital structure of large non-financial listed firms in Nigeria. The International Journal of Business and Finance, 2(2), 75-83.
Sayeed, A. M. (2011). The determinants of capital structure for selected Bangladeshi listed companies. International Review of Business Research Papers, 7(2), 21-36.
Sbeiti, W. (2010). The determinants of capital structure: Evidence from the GCC countries. International Research Journal Finance and Accounting, 47, 54-79.
Schulman, C. T., Thomas, D. W., Sellers, K. F., & Kennedy, D. B. (1996). Effects of tax integration and capital gains tax on corporate leverage. National Tax Journal, 49(1), 31-54. https://doi.org/10.1086/NTJ41789184
Sheikh. N. A., & Wang, Z. (2011). Determinants of capital structure: An empirical study of firms in manufacturing industry of Pakistan. Managerial Finance, 37(2), 117-133. https://doi.org/10.1108/03074351111103668
Shibru, W. (2012). Determinants of capital structure of commercial banks in Ethiopia (Unpublished Master's thesis). Addis Ababa University.
Shubiri, F. A. (2010). Determinants of capital structure choice: A case study of Jordanian industrial companies. An-Najah University Journal of Research, 24(8), 2458-2493.
Sibindi, A. (2016). Determinants of capital structure: A literature review. Risk Governance and Control: Financial Markets and Institutions, 6(4-1), 227-237. https://doi.org/10.22495/rcgv6i4c1art13
Siddiqui, S. S. (2012). Capital structure determinants of non-bank financial institutions (NBFIs) in Bangladesh. World Review of Business Research, 2(1), 60-78.
Singh, D. (2016). A panel data analysis of capital structure determinants: An empirical study of non-financial firms in Oman. International Journal of Economics and Financial Issues, 6(4), 1650-1656.
Stulz, R. (1990). Managerial discretion and optimal financing policies. Journal of financial Economics, 26(1), 3-27. https://doi.org/10.1016/0304-405X(90)90011-N
Titman, S., & Wessels, R. (1988). The determinants of capital structure choice. The Journal of Finance, 43(1), 1-19. https://doi.org/10.1111/j.1540-6261.1988.tb02585.x
Uddin, M. N. (2021). Leverage structure decisions in Bangladesh: Managers and investors' view. Heliyon, 7(6), e07341. https://doi.org/10.1016/j.heliyon.2021.e07341
Uddin, M. N., Hosen, M., Chowdhury, M. M., Tabassum, T., & Mazumder, M. A. (2021). Does corporate governance influence firm value in Bangladesh? A panel data analysis. E&M Economics and Management, 24(2), 84-100. https://doi.org/10.15240/tul/001/2021-2-006
Uddin, M. N., Khan, M. S. U., & Hosen, M. (2019). Does corporate governance influence leverage structure in Bangladesh? International Journal of Financial Studies, 7(3), 50-66. https://doi.org/10.3390/ijfs7030050
Zeitun, R, & Tian, G. (2008). The determinants of capital structure: The case of long-term debt instruments for Jordanian firms. Corporate Ownership and Control, 6(5), 22-37. https://doi.org/10.22495/cocv6i1p3
Copyright (c) 2022 UNIMAS Publisher
This work is licensed under a Creative Commons Attribution-NonCommercial-ShareAlike 4.0 International License.
Copyright Transfer Statement for Journal
1) In signing this statement, the author(s) grant UNIMAS Publisher an exclusive license to publish their original research papers. The author(s) also grant UNIMAS Publisher permission to reproduce, recreate, translate, extract or summarize, and to distribute and display in any forms, formats, and media. The author(s) can reuse their papers in their future printed work without first requiring permission from UNIMAS Publisher, provided that the author(s) acknowledge and reference publication in the Journal.
2) For open access articles, the author(s) agree that their articles published under UNIMAS Publisher are distributed under the terms of the CC-BY-NC-SA (Creative Commons Attribution-Non Commercial-Share Alike 4.0 International License) which permits unrestricted use, distribution, and reproduction in any medium, for non-commercial purposes, provided the original work of the author(s) is properly cited.
3) For subscription articles, the author(s) agree that UNIMAS Publisher holds copyright, or an exclusive license to publish. Readers or users may view, download, print, and copy the content, for academic purposes, subject to the following conditions of use: (a) any reuse of materials is subject to permission from UNIMAS Publisher; (b) archived materials may only be used for academic research; (c) archived materials may not be used for commercial purposes, which include but not limited to monetary compensation by means of sale, resale, license, transfer of copyright, loan, etc.; and (d) archived materials may not be re-published in any part, either in print or online.
4) The author(s) is/are responsible to ensure his or her or their submitted work is original and does not infringe any existing copyright, trademark, patent, statutory right, or propriety right of others. Corresponding author(s) has (have) obtained permission from all co-authors prior to submission to the journal. Upon submission of the manuscript, the author(s) agree that no similar work has been or will be submitted or published elsewhere in any language. If submitted manuscript includes materials from others, the authors have obtained the permission from the copyright owners.
5) In signing this statement, the author(s) declare(s) that the researches in which they have conducted are in compliance with the current laws of the respective country and UNIMAS Journal Publication Ethics Policy. Any experimentation or research involving human or the use of animal samples must obtain approval from Human or Animal Ethics Committee in their respective institutions. The author(s) agree and understand that UNIMAS Publisher is not responsible for any compensational claims or failure caused by the author(s) in fulfilling the above-mentioned requirements. The author(s) must accept the responsibility for releasing their materials upon request by Chief Editor or UNIMAS Publisher.
6) The author(s) should have participated sufficiently in the work and ensured the appropriateness of the content of the article. The author(s) should also agree that he or she has no commercial attachments (e.g. patent or license arrangement, equity interest, consultancies, etc.) that might pose any conflict of interest with the submitted manuscript. The author(s) also agree to make any relevant materials and data available upon request by the editor or UNIMAS Publisher.
