Research in International Business and Finance 47 (2019) 150–161

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Research in International Business and Finance

journal homepage: www.elsevier.com/locate/ribaf

The firm-specific determinants of capital structure – An empirical

T
analysis of firms before and during the Euro Crisis
⁎
Amir Moradia, , Elisabeth Pauletb
a
Arnhem Business School of HAN University of Applied Sciences, Ruitenberglaan 31, 6826 CC Arnhem, the Netherlands
b
ICN Business School, Campus Nancy, 13 Rue Michel Ney, 54000 Nancy, France

A R T IC LE I N F O ABS TRA CT

JEL classifications: This paper intends to address the effects of firm-specific characteristics on the formation of ca-
C3 pital structure amongst a balanced panel sample of 559 firms in six European countries before
G3 and during the period of 1999–2015. We find that growth, profitability, tax shields and the
L6 effects of the Euro Crisis are significantly negatively related to leverage plus debt-to-equity ratio
L8
and are significantly positively correlated with net equity. Additionally, we detect that size, asset
L9
M2
tangibility, non-debt tax shields and earnings volatility are significantly positively correlated
with leverage along with debt-to-equity ratio and have a significantly negatively relation with net
Keywords:
equity. Our model tests the effectivity of trade-off, pecking order and agency cost theories of
Capital structure
capital structure. Besides, we divide the full sample into three subsamples illustrating different
Firm-specific determinants
The Euro Crisis industries of retail trade and services, manufacturing and construction plus transportation and
The fixed effects model tourism. We find that the transportation and tourism industry is more negatively impacted by the
Euro Crisis than the other two industries.

1. Introduction

The recognition of the capital structure determinants has been a subject of controversy over the years. Capital structure is
normally stable over time (Lemmon et al., 2008; Andres et al., 2014) until some changes in either firm-specific or macroeconomic
factors happen (Korajczyk and Levy, 2003; Andres et al., 2014) and researchers have devoted a significant effort to review these two
distinctive categories of capital structure determinants.
A considerable body of literature on determinants of capital structure has investigated the effects of certain firm characteristics
such as growth, size, profitability, asset tangibility, non-debt tax shields, tax shields, earnings volatility, industry classification, risk,
stock return, intangible assets, liquidity, availability of internal funds, agency cost of equity, operating leverage, financial constraints,
age, default probability, regulation, inside ownership, firm’s value and uniqueness. Although the findings are blended in these
studies, Harris and Raviv (1991) infer that leverage is expanded with fixed assets, non-debt tax shields, growth opportunities and size
and is curbed with earnings volatility, advertising expenditures, research and development expenditures, bankruptcy probability,
profitability and uniqueness of the product. The prevailing empirical studies have asserted interesting findings on capital structure
choices, but these studies are largely pertaining to firms operating in the US as well as the UK and it is not clear how these facts relate
to firms in different geographical locations, macroeconomic context and time periods.
As external factors over which managers do not have control, macroeconomic factors are important parameters that have a
potential to induce substantial changes in capital structure choices. A number of studies have investigated the impacts of some

⁎
Corresponding author.
E-mail addresses: amir.moradi@han.nl (A. Moradi), elisabeth.paulet@icn-groupe.fr (E. Paulet).

https://doi.org/10.1016/j.ribaf.2018.07.007
Received 4 November 2017; Received in revised form 7 July 2018; Accepted 14 July 2018
Available online 17 July 2018
0275-5319/ © 2018 Elsevier B.V. All rights reserved.
A. Moradi, E. Paulet Research in International Business and Finance 47 (2019) 150–161

macroeconomic variables and country-specific factors such as economic growth, interest rate, inflation rate, money supply, market
return, stock market indicator, financial intermediary development, income per capita, liquid liabilities, bond market structure, stock
market structure, capital formation, macroeconomic uncertainty, participation of firms and industries in the economy, average time
for establishing a business in the country, institutional development, taxation, tax revenue, government debt and unemployment rate.
In these studies, the two mostly investigated variables are economic growth proxied by GDP growth rate and inflation rate indicated
by either consumer price index (CPI) or wholesale price index (WPI). After reviewing the different papers in the literature, we
conclude that leverage is positively correlated with economic growth, interest rate, inflation rate, the commercial paper spread, bond
market development, banking sector development, budget surplus, creditor protection index and judicial enforcement and is ad-
versely related to money supply, government tax revenue, stock market return and stock market development.
This study is a contribution to the ongoing debate about the effects of firm-specific factors on the decisions related to capital
structure. Particularly, it extends empirical work on capital structure in three ways. First, this paper investigates the impacts of the
currently exiting Euro Crisis on capital structure of European firms. This contribution is twofold: we use a sample of European firms,
which makes a distinction between our paper and the majority of papers that report results from firms operating in the US or the UK
and we monitor the financing choices of firms during an ongoing crisis, which has considerably changed the structure of the un-
derlying economies. Second, it extends the range of theoretical determinants of capital structure by introducing an explanatory
variable representing the effects of the Euro Crisis. Third, we form three subsamples indicating three different industries because
leverage and its determinants may differ across industries. Our primary research question is which firm-specific variables, during the
Euro Crisis, are mainly decisive when capital structure is going to be formed. Based on the aforementioned researches, we form a set
of three dependent variables of book leverage (BL), net equity (NE) and debt-to-equity ratio (DER) and an assortment of seven firm-
specific factors of growth, size, profitability, asset tangibility, non-debt tax shields, tax shields and earnings volatility plus a dummy
variable describing the effects of the Euro Crisis to investigate the firm-specific determinants of capital structure in our empirical
analysis.
The balance of this paper is organized as follows. We, firstly, explain the attributes of pervious empirical work on the selected
independent variables as firm-specific determinants of capital structure. After that, we describe our econometric model, the de-
pendent variables and the sample. Then, we employ the model for a balanced sample of 559 European registered firms from Austria,
Belgium, France, Germany, Luxembourg and the Netherlands during a 17-year period starting from 1999 and for three industry
subsamples of retail trade and services, manufacturing and construction, and transportation and tourism. We document that growth,
profitability, tax shields and the effects of the Euro Crisis are significantly negatively related to BL plus DER and are significantly
positively correlated with NE. Additionally, we find that size, asset tangibility, non-debt tax shields and earnings volatility are
significantly positively correlated with BL along with DER and have a significantly negatively relation with NE.

2. Firm-specific determinants of capital structure

In what follows, we provide a brief review of the various empirical results of prior studies on selected explanatory variables, a
brief rationale for including them in our model and the sign that we expect to find in our estimation.

2.1. Growth

There are conflicting theoretical predictions on the effects of growth on leverage. While some studies (Kim et al., 2006; De Jong
et al., 2008) conclude a significant inverse relation between growth and leverage, the others (Fama and French, 2002; Hall et al.,
2004) find a significant direct correlation. Some authors such as Long and Malitz (1985); Rajagopal (2010) and Yang et al. (2010)
find both signs of positive and negative for the coefficients of growth based on the proxies used in their studies. Consequently, the
association between growth and leverage is not as simple as previous studies might seem to suggest and we are inconclusive about
this relation. Our model construes two proxies for firm growth: annual percentage change in total assets (PCTA) and research and
development expenditure scaled by total assets (RDTA). The former displays all investments occurred in the firm regardless of
distinguishing between expansion and economic growth. The latter shows the intangible investment opportunities, more specifically
in future, and captures economic growth of a firm based on entrepreneurial activities to introduce new products or services.

2.2. Size

Most authors find that firm size is positively related to leverage. The rationale for this belief is that large firms are more diversified
(Ferri and Jones, 1979; Titman and Wessels, 1988; Ozkan, 2001), easily access to the capital market (Ferri and Jones, 1979; Ozkan,
2001), are granted higher credit rating in debt issuance (Ferri and Jones, 1979; Ozkan, 2001), borrow at favorable interest rates (Ferri
and Jones, 1979; Ozkan, 2001), have lower cost of bankruptcy as well as equity issuance (Titman and Wessels, 1988) and own less
information asymmetry (Rajagopal, 2010). Hence, we expect to find a positive relationship between size and leverage. We utilize the
natural logarithm of total assets (NLTA) as a proxy for the firm size because the natural logarithm transformation scales down the
amount of total assets and approximates the proportional differences amongst different levels of total assets, reflecting the magnitude
of asset diversification and the information possessed by the outside investors.

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2.3. Profitability

Consistent with pecking order theory, most authors such as Fama and French (2002); Drobetz and Wanzenried (2006) and Kim
et al. (2006) cite evidence for a significantly inverse relation between leverage and profitability; that is, profitable firms picks
retained earnings when they face financing needs. We also anticipate a negative correlation between profitability and leverage in our
model. We employ return on assets (ROA) calculated by EBIT deflated by total assets as a proxy for profitability because not only it is
calculated regardless of the interest due and regardless of the tax levied by the respective government, but also it is the appropriated
measure of profitability when we aim at gauging the tax benefits of debt financing.

2.4. Asset tangibility

It is proven by a dominant strand of papers on the determinants of capital structure that asset tangibility of a firm positively relate
to leverage for two reasons (Hovakimian et al., 2001; De Jong et al., 2008; Yang et al., 2010). First, firms with tangible assets that can
be used as collateral issue more debt to take advantage of tax deductibility. Second, lenders feel secured due to the guarantee
provided. Accordingly, we expect to find a positive sign for the coefficient of asset tangibility when BL is the dependent variable. To
estimate this relation between asset tangibility and leverage, we apply fixed asset ratio as a measure for asset tangibility. We adopt
this proxy because it explicitly shows the collateral value of total assets and provides firms with the opportunity to match the
maturities of their debt with the lifespan of their assets. We calculate fixed asset ratio (FAR) by the ratio of net property, plant and
equipment over total assets.

2.5. Non-debt tax shields (NDTS)

Researchers such as Kim et al. (2006) and Rajagopal (2010) assert a significantly negative linkage between leverage and non-debt
tax shields. The reason attributed to the fact that tax deductibility of certain items such as depreciation, amortization, depletion,
advertising, research and development (R&D), investment tax credits and operating tax loss carryforward credits reduce not only the
end-of-period earnings before interest and tax (EBIT), but also the tax advantage of issuing debt. As a result, non-debt tax shields can
be substitutes for the tax deductibility of debt financing and we expect to find a negative relation between non-debt tax shields and
leverage. We designate the ratio of depreciation and amortization to total assets (DATA) as a proxy for non-debt tax shields because
the higher level of depreciation and amortization expenses reduces the amount of taxable income, leading to a discouragement for
firms to use more debt. Besides, regardless of the industry in which the firm is doing business, these expenses are almost reported in
any income statement, so the availability of the data is guaranteed.

2.6. Tax shields

As noted by some authors (De Angelo and Masulis, 1980; Homaifar et al., 1994; Walsh and Ryan, 1997), the tax deductibility of
corporate debt positively influences the debt issuance. Thus, we expect to find support for the direct relation between leverage and
tax shields. We assign the ratio of total income taxes to total assets (TATA) as a proxy for tax shields because the amount of tax
payable by a firm is scaled down by the magnitude of corresponding total assets to provide an appropriate measure for comparing the
taxable capacity of firms.

2.7. Earnings volatility

This variable shows the uncertainty of future income streams and the risk. As the income is a key factor in the ability to meet
interest charges and to pay dividends, we anticipate that earnings volatility is negatively correlated with BL, NE and DER. That is,
when earnings volatility is high, firms are relatively incapable of issuing debt or equity because investors and lenders are unwilling to
put their money in a firm with high risks of default and bankruptcy. The findings of some previous work (Homaifar et al., 1994;
Banerjee et al., 2004; Kim et al., 2006; Rajagopal, 2010) support our reasoning, but few authors (Kim and Sorensen, 1986; Bennett
and Donnelly, 1993; Fama and French, 2002) identify a direct relation being consistent with the agency cost of debt which asserts
risky firms borrow more. We employ the standard deviation of the first difference in the ratio of EBIT scaled by total assets (VOL) as a
proxy for earnings volatility because it is a properly scaled measure for observing the firm’s ability to satisfy fixed charges. Besides, as
the optimal level of debt decreases the earnings volatility (Titman and Wessels, 1988), the debt level of a firm cannot directly affect
this indicator.

2.8. Effect of the Euro Crisis

We define a dummy variable (EC) to examine the effects of the Euro Crisis on the debt-equity mixture. The value of dummy
variable equals one (D = 1) since the inception of the Crisis in 2009 and afterwards and equals zero (D = 0) for the years before
2009. We expect to have a negative correlation between dummy variable and leverage because after the Euro Crisis the availability of
debt has been decreased due to the eroded capital of European banks (Moradi and Paulet, 2015) and the banking system in Europe
has adopted a tighter lending policy.

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3. Research design

We attempt to explain the firm-specific determinants of capital structure by assigning variables suggested by prior studies and
testing the empirical validity of such determinants amongst the Eurozone firms. We estimate a panel data model to incorporate the
selected firm-specific factors and the equation is the following:

DepVari,t = c i,t + β₁Growthi,t + β ₂Sizei,t + β ₃Profitabilityi,t + β ₄AssetTangibilityi,t + β ₅NDTSi,t + β ₆TaxShieldsi,t

+ β ₇EarningsVolatilityi,t + EC + AR(1) + εi,t (1)
where the subscript i defines the observations that belong to the i firm and the subscript t denotes the time period. In this model, the
th

dependent variables (BL, NE and DER) of firm i over the time period t (DepVari,t ) are regressed on a set of potential firm-specific
determinants such as growth (Growthi,t ), size (Sizei,t ), profitability (Profitabilityi,t ), asset tangibility (AssetTangibility ), non-debt tax
shields (NDTSi,t ), tax shields (TaxShields i,t ), earnings volatility (EarningsVolatilityi,t ), effect of the Euro Crisis (EC ) and the lagged
value of dependent variable (AR(1)). Moreover, c i,t , εi,t and βi represent the intercept term of the multivariate regression, the error
term for the ith observation in the period t and the slope coefficient for the ith independent variables, respectively.
As shown in the literature on the determinants of capital structure, the proxies for dependent variables are dominantly presented
as a fraction in which the numerator is a combination of market and book values of parameters such as total debt, long-term debt,
short-term debt, total liabilities, long-term liabilities and equity and in which the denominator is a mixture of market and book values
of items such as total assets, total debt plus equity, long-term debt plus equity, total liabilities plus net worth, long-term liabilities plus
net worth and equity. In this research, we delineate book leverage (BL), net equity (NE) and debt-to-equity ratio (DER) as three
proxies for how the firm’s capital structure is formed. Book leverage (BL) is defined by the book value of total debt divided by the
book value of total assets. We define total debt as long-term debt plus interest-bearing short-term debt and do not consider non-
interest bearing liabilities, such as accounts payable, accrued liabilities and deferred taxes, debt. Net equity (NE) equals the book
value of total assets less the book value of total liabilities scaled by the book value of total assets and debt-to-equity ratio (DER) is
measured by total debt over equity. The reason for selecting a group of three dependent variables is attributed to the mathematical
fact that choosing one variable explicitly shows neither the behavior of both debt and equity nor the proportional variations. To
exemplify, DER employed by Mukherjee and Mahakud (2010) and Sett and Sarkhel (2010) does not indicate that an increase in DER
is a result of an increase in the level of debt, a decrease in the level of equity or both. Besides, proxies similar to BL and NE, which are
mainly applied in the prior studies, solely observe the fluctuation in the level of debt and equity respectively, but not the practice of
the other one. To illustrate, assume that the levels of total debt and equity in a firm are both evenly increased by 50% and the amount
of total assets is unchanged. If we measure leverage as total debt over total assets like Ferri and Jones (1979); Friend and Lang (1988);
Shyam-Sunder and Myers (1999); Ozkan (2001); Baker and Wurgler (2002) and Fama and French (2002), leverage is increased by
50%, but we neglect to report an equal increase happened in equity which is a pivotal aspect of capital structure. As a result, we make
use of three indicators for capital structure not only to follow the pattern of each component of capital structure, but also to observe
the proportional fluctuations.
The lagged value of dependent variable (AR(1)) is added to our model to remove the serial correlation problem and acts as a proxy
for the status quo of capital structure, representing the cumulative result of past decisions on financing choices over time. Under the
above assumptions of the model, the following equations can be written to estimate the defined firm-specific determinants of debt-
equity mix.

BL i,t = c i,t + β₁PCTAi,t + β ₂RDTA i,t + β ₃NLTA i,t + β ₄ROA i,t + β ₅FAR i,t + β ₆DATA i,t + β ₇TATA i,t + β ₈VOLi,t + EC
+ AR(1) + εi,t (2)

NEi,t = c i,t + β₁PCTAi,t + β ₂RDTA i,t + β ₃NLTA i,t + β ₄ROA i,t + β ₅FAR i,t + β ₆DATA i,t + β ₇TATA i,t + β ₈VOLi,t + EC
+ AR(1) + εi,t (3)

DERi,t = c i,t + β₁PCTAi,t + β ₂RDTA i,t + β ₃NLTA i,t + β ₄ROA i,t + β ₅FAR i,t + β ₆DATA i,t + β ₇TATA i,t + β ₈VOLi,t + EC
+ AR(1) + εi,t (4)
Since we tend to mathematically describe the relationship between a set of explanatory variables and the dependent variables and
we posit the existence of linear relationship, a multivariate regression model is chosen as the appropriate statistical technique. We
follow a three-step procedure for each of our demonstrated results in order to not only correct the violations of the underlying
assumptions of the linear regression model, but also choose the most appropriate statistical method. First, the model is tested for
heteroskedasticity, autocorrelation and multicollinearity by performing model diagnostics of the Breusch-Pagan chi-square test, the
Durbin-Watson test and the variance inflation factors (VIFs), respectively. The model is corrected for heteroskedasticity and auto-
correlation by applying the estimated generalized least square (EGLS) method and by adding the autoregressive variable. The VIF
statistics, in addition to the low correlation coefficients among the independent variables for the full sample reported in Table 1,
indicate that multicollinearity is not a problem because the centered VIF statistic for all variables is less than 4.8 and far from 10,
which is a threshold for being cautious about the existence of multicollinearity in the model.
Second, since an autoregressive variable is used in the model and the panel data has the characteristics of the time series, we test
the model for covariance stationarity. Because the absolute value of the inverted autoregressive root is less than 1and the absolute

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Table 1
The correlation coefficient amongst independent variables for the full sample.
PCTA RDTA NLTA ROA FAR DATA TATA VOL

PCTA 1.0000 −0.0062 0.0516 0.0009 0.0033 −0.0015 −0.0060 0.1217

RDTA −0.0062 1.0000 −0.0889 −0.0534 −0.0516 0.0504 −0.0025 −0.0048
NLTA 0.0516 −0.0889 1.0000 0.0996 0.0667 −0.1159 −0.0346 0.0225
ROA 0.0009 −0.0534 0.0996 1.0000 0.0219 −0.0060 −0.1290 0.6745
FAR 0.0033 −0.0516 0.0667 0.0219 1.0000 0.2415 0.0276 −0.0013
DATA −0.0015 0.0504 −0.1159 −0.0060 0.2415 1.0000 0.0962 0.0108
TATA −0.0060 −0.0025 −0.0346 −0.1290 0.0276 0.0962 1.0000 −0.1299
VOL 0.1217 −0.0048 0.0225 0.6745 −0.0013 0.0108 −0.1299 1.0000

value of the lag coefficient is less than 1, the model have a finite mean-reverting level and is covariance stationary. Additionally, we
perform the augmented Dickey-Fuller (ADF) test and the null hypothesis is rejected, which shows that the panel data does not have a
unit root and is covariance stationary. Third, amongst the panel models of pooled, fixed effects or random effects, the suitable one
should be selected for our analysis. Hence, we perform three tests of F-test, Breusch-Pagan Lagrange Multiplier (LM) and Hausman
specification. For the full sample and the three subsamples, the results prove the most appropriate statistical method is the fixed
effects model.

4. Sample

As corporate rating is a function of country rating and firms typically cannot borrow from the financial markets at interest rates
below the rates on their respective government bonds, any sovereign debt spreads will translate into financing problems of firms.
During the period under investigation, we observe the credit rating of Eurozone countries measured by the Standard and Poor’s and
we find six countries whose rating has never stood lower than AA. This rating reveals that firms operating in these six European
countries have not dramatically suffered from a sudden decrease in their national credit rating and have relied on their own credit
rating to issue either equity or debt in the financial markets. Consequently, the data used in the study are limited to the registered
corporations in six Eurozone member countries of Austria, Belgium, France, Germany, Luxembourg and the Netherlands. We pass the
following steps to form the sample.
First, a primary sample of all publicly traded firms in Austria, Belgium, France, Germany, Luxembourg and the Netherlands during
the time period of 1999–2015 is extracted from the Compustat Global Fundamentals Annual database. We focus on book values,
gathered from the audited financial reports, rather than market values because calculating the market value is highly dependent on
the analyst, increases the complexity of the datasheet, reduces the reliability of the data and is difficult to defend. Second, the firms
are shortlisted by excluding the inactive companies. Third, because financial institutions are obliged to follow a set of special
regulations, which may drive their leverage decisions, and because the nature of the industry is highly levered, their capital structures
are highly likely to be significantly different from the capital structures of other firms in our sample. So these institutions are forgone
in this study. From this narrowed dataset, we limit the sample by eliminating the firms with missing values and observations with
negative values for current assets, total assets, current liabilities, long-term debt, total liabilities and equity. Using these criteria, we
identify a balanced panel data sample comprised of 559 firms from six strong economies of Continental Europe over 17 successive
years; that is, we have the total panel observations of 9503. However, the employment of the autoregressive variable reduces the
observations to 8385 firm-years when we run the model. The distribution of the sample is described in Table 2.
Additionally, the recognition of firm-specific determinants of capital structure for a sample of firms operating in inherently
different industries may not be useful and the values generated may not convey meaningful results. Hence, by using the Standard
Industrial Classification (SIC) codes, 559 firms are categorized into three industry-specific subsamples of retail trade and services,
manufacturing and construction, and transportation and tourism. This categorization makes us enable not only to recognize business
drivers of capital structure, but also compare the effects of firm-specific factors on different industrial segments. A brief overview of
the subsamples is described as follows.

4.1. Retail trade and services (RTS

This industry is engaged with final consumers who are mainly obliged to shop from this industry in order to handle their daily
lives. As shown in Table 2, this industry has the highest level of prospective growth rate and the lowest level of fixed assets amongst
the subsamples, meaning that the intangible assets have been the main driver of their expansion.

4.2. Manufacturing and construction (MC)

This industry is heavily capital driven with lengthy projects to implement. The MC industry has an average amount of short-term
debt equals to the sum of average short-term debt in the other two industries, which means a considerable part of debt is allocated to
finance business operations. As revealed in Table 2, equity is preferred choice of financing in this industry and MC has enjoyed the
topmost level of profitability.

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Table 2
Full sample summary of regression variables.
Country N (firms) BL NE DER PCTA RDTA NLTA ROA FAR DATA TATA VOL

MV SD MV SD MV SD MV SD MV SD MV SD MV SD MV SD MV SD MV SD MV SD

Austria 29 0.26 0.19 0.39 0.25 2.82 8.92 0.71 4.72 0.01 0.04 6.79 2.51 0.04 0.08 0.18 0.18 0.04 0.04 0.01 0.02 0.00 1.72
Belgium 43 0.23 0.18 0.53 0.24 0.69 0.89 1.25 9.09 0.03 0.09 6.27 2.13 0.06 0.14 0.20 0.22 0.03 0.04 0.02 0.03 0.00 1.01
France 234 0.20 0.21 0.46 0.26 2.48 12.81 5.78 101.36 0.02 0.05 4.44 2.33 0.01 0.68 0.17 0.20 0.04 0.07 0.01 0.04 0.00 12.4
Germany 202 0.21 0.17 0.40 0.21 1.52 6.17 3.59 84.80 0.01 0.05 6.15 2.82 0.05 0.11 0.14 0.15 0.03 0.05 0.02 0.03 0.00 12.2
Luxembourg 6 0.20 0.18 0.53 0.29 1.16 1.90 0.51 3.23 0.00 0.01 6.33 2.43 0.07 0.10 0.23 0.26 0.02 0.02 0.01 0.02 0.00 1.63
the Netherlands 45 0.26 0.20 0.39 0.23 1.73 5.48 1.85 23.72 0.01 0.03 6.85 2.65 0.02 0.62 0.15 0.17 0.04 0.17 0.01 0.11 0.00 2.02
Full sample 559 0.21 0.19 0.44 0.24 1.94 9.46 4.00 83.39 0.02 0.05 5.54 2.71 0.03 0.48 0.16 0.18 0.04 0.07 0.01 0.05 4.89 2.75

155
Industry
Retail trade and services 210 0.21 0.20 0.44 0.24 2.39 12.27 3.92 88.25 0.02 0.05 5.48 2.60 0.03 0.20 0.15 0.17 0.04 0.09 0.01 0.03 4.87 2.62
Manufacturing and construction 310 0.21 0.19 0.44 0.24 1.57 7.01 3.55 72.86 0.01 0.05 5.50 2.74 0.04 0.29 0.17 0.19 0.04 0.06 0.02 0.06 4.84 2.81
Transportation and tourism 39 0.20 0.19 0.43 0.26 2.50 8.90 8.04 124.73 0.01 0.06 6.19 3.00 −0.03 1.56 0.17 0.19 0.03 0.04 0.02 0.03 5.36 2.82
Full sample 559 0.21 0.19 0.44 0.24 1.94 9.46 4.00 83.39 0.02 0.05 5.54 2.71 0.03 0.48 0.16 0.18 0.04 0.07 0.01 0.05 4.89 2.75

MV stands for the mean value of the variable and SD represents the standard deviation of the variable. Book leverage (BL) equals the book value of total debt divided by the book value of total assets. Net
equity (NE) is the book value of total assets less the book value of total liabilities scaled by the book value of total assets. Debt-to-equity ratio (DER) is equal to total debt over equity. PCTA is the annual
percentage change in total assets (a proxy for growth). RDTA is the research and development expenditure scaled by total assets (a proxy for growth). NLTA is the natural logarithm of total assets (a proxy
for size). ROA is the return on assets calculated by EBIT deflated by total assets (a proxy for profitability). FAR is the fixed asset ratio measured by net property, plant and equipment over total assets (a
proxy for asset tangibility). DATA is the ratio of depreciation and amortization to total assets (a proxy for non-debt tax shields). TATA is the ratio of total income taxes to total assets (a proxy for tax
shields). VOL is the standard deviation of the first difference in the ratio of EBIT scaled by total assets (a proxy for earnings volatility). The data are book values and are extracted from the database of the
Compustat Global Fundamentals Annual.
Research in International Business and Finance 47 (2019) 150–161
 A. Moradi, E. Paulet

Table 3
The regression estimates for the full balanced panel sample.
Dependent Variable Intercept PCTA RDTA NLTA ROA FAR DATA TATA VOL EC AR(1) R2 Adjusted R2 F-statistic

Book leverage 0.0891 0.0000 −0.0528 0.0155 −0.0345 0.2385 0.0446 −0.0821 0.0044 −0.0025 0.6360 0.8973 0.8899 120.26
(0.0000) (0.3031) (0.0005) (0.0000) (0.0000) (0.0000) (0.0004) (0.0000) (0.0605) (0.0242) (0.0000) (0.0000)
*** *** *** *** *** *** *** * ** *** ***
Net equity 0.5965 −0.0000 0.1370 −0.0259 0.0817 −0.0706 −0.3127 0.0865 −0.0127 0.0054 0.6527 0.9558 0.9526 297.90
(0.0000) (0.1479) (0.0000) (0.0000) (0.0000) (0.0000) (0.0000) (0.0092) (0.0040) (0.0018) (0.0000) (0.0000)
*** *** *** *** *** *** *** *** *** *** ***
Debt-to-equity ratio 1.8864 0.0002 −2.3435 0.0092 −2.6242 0.7554 2.1078 2.2081 0.5838 −0.0624 0.3909 0.6386 0.6124 24.31
(0.0000) (0.0167) (0.0000) (0.1130) (0.0000) (0.0000) (0.0000) (0.0000) (0.0000) (0.0000) (0.0000) (0.0000)
*** ** *** *** *** *** *** *** *** *** ***

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This table reports the results of DepVari,t = c i,t + β₁PCTAi,t + β ₂RDTA i,t + β ₃NLTA i,t + β ₄ROA i,t + β ₅FAR i,t + β ₆DATA i,t + β ₇TATA i,t + β ₈VOLi,t + EC + AR(1) + εi,t , where three dependent vari-
ables of firm i over the time period t (DepVari,t ) are separately regressed on a set of potential firm-specific determinants. Moreover, c i,t , εi,t and βi represent the intercept term of the multivariate regression,
the error term for the ith observation in the period t and the slope coefficient for the ith independent variables, respectively. Book leverage (BL) equals the book value of total debt divided by the book value
of total assets. Net equity (NE) is the book value of total assets less the book value of total liabilities scaled by the book value of total assets. Debt-to-equity ratio (DER) is equal to total debt over equity.
PCTA is the annual percentage change in total assets (a proxy for growth). RDTA is the research and development expenditure scaled by total assets (a proxy for growth). NLTA is the natural logarithm of
total assets (a proxy for size). ROA is the return on assets calculated by EBIT deflated by total assets (a proxy for profitability). FAR is the fixed asset ratio measured by net property, plant and equipment
over total assets (a proxy for asset tangibility). DATA is the ratio of depreciation and amortization to total assets (a proxy for non-debt tax shields). TATA is the ratio of total income taxes to total assets (a
proxy for tax shields). VOL is the standard deviation of the first difference in the ratio of EBIT scaled by total assets (a proxy for earnings volatility). EC is a dummy variable (D = 1 during 2009 and
afterwards and D = 0 otherwise) and a proxy for the Euro Crisis. AR(1) is the lagged indicator of the dependent variable. The model is corrected for heteroskedasticity and autocorrelation and is
covariance stationary. We apply the fixed effects regression model estimated by the panel EGLS method in this equation. The figures display the coefficient of independent variables, p-values are shown in
parentheses and ***, ** and * indicate significant at 0.01, 0.05 and 0.10 level, respectively.
Research in International Business and Finance 47 (2019) 150–161
A. Moradi, E. Paulet Research in International Business and Finance 47 (2019) 150–161

4.3. Transportation and tourism (TT)

This industry is connected with recreational activities which consumer use when they can afford, so it is expected that the
industry be heavily influenced by the Euro Crisis. As Table 2 illustrates, firms in the TT industry have the highest level of DER, size
and tangible assets, but the average ROA is negative showing that hotels, resorts, airlines, railway companies, travel agencies are
severely negatively affected by the Euro Crisis as people are financially weak to travel.

5. Empirical results

In what follows, we discuss the results of running Eqs. (2)–(4) and examine the full sample as well as the subsamples corresponding to
each specified industry and country. We first estimate the multivariate regression equation for the full panel sample, that is, all data without
any distinction in either industries or countries. The estimated intercept and coefficients for the model, their corresponding p-values, R2,
Adjusted R2, F-statistic values along with inverted AR roots are presented in Table 3. Given the high value of the F-statistic and the
corresponding p-value of zero, the regression is significant at the level of 1%. The coefficients for nine regressors and the intercept are
statistically significant for all three dependent variables. As the sample is large, reporting the residuals is not possible in this paper, but it is
worthwhile to mention that the mean of residuals is zero by considering 16 decimal places. Moreover, the reported high adjusted R2s,
88.99%, 95.26% and 61.24% for BL, NE and DER respectively, reveal that the model includes all the relevant predictors and can be used to
forecast. To check whether the outcome of these high values is due to the existence of the autoregressive variable in our model, we estimate
the model without the autoregressor and the adjusted R2s are 81.43%, 91.37% and 50.37% for BL, NE and DER respectively. As a result, our
model reports a high value for coefficients of determination, both adjusted and non-adjusted, showing that the entire set of independent
variables are highly effective in explaining the behavior of the dependent variables.
The intercept term and the autoregressive variable are significantly positively correlated with all three regressands at the 1% level.
Between two employed proxies for growth, RDTA indicates a significantly negatively relation with BL plus DER and a significantly positively
correlation with NE at the significance level of 1%. However, the coefficients for PCTA are statistically insignificant for BL and NE. The sign
of significant variable is in accordance with previous work (Kim and Sorensen, 1986; Chung, 1993; Homaifar et al., 1994; Lasfer, 1995; Rajan
and Zingales, 1995; Hovakimian et al., 2001; Ozkan, 2001; Baker and Wurgler, 2002; Drobetz and Wanzenried, 2006; Kim et al., 2006; De
Jong et al., 2008; Mukherjee and Mahakud, 2010) and admits that either high-growth firms are not effectively monitored by lenders because
when the expenditure on R&D goes up, the level of book leverage decreases or they prefer essentially to be more flexible and not to involve in
the restrictive debt covenants. Therefore, they have lower level of leverage and mainly rely on the retained earnings or the contributions of
their shareholders. The converse relationship between RDTA and BL may also show that the tax deductibility of R&D investments is fairly
reasonable, so firms do not intend to eat up debt tax shields. An alternative explanation consistent with the trade-off theory of capital
structure is that the shareholders recognize an increase in RDTA as a sign of future growth opportunities and they are dissuaded from sharing
the benefits with creditors; hence, the level of leverage decreases. Besides, the result contradicts the agency cost of debt, which argues the
shareholders prefer to finance growth with debt in order to transfer the associated risks to would-be lenders. Considering the outset of the
Euro Crisis, a highly likely explanation results from the lenders’ unwillingness or inability to finance the growth opportunities during the
Crisis due to the erosion of capital in the banking sector and the vague future for economic prospects; as a result, shareholders face a credit
crunch in Europe and have no other choices except financing the growth projects with their own money. Furthermore, RDTA as a proxy for
growth opportunities possess the second largest magnitude of coefficients amongst other independent variables in Eq. (3), which shows
shareholders mainly consider the future opportunities of a firm when they invest.
The significant effects of size noted in the models for two dependent variables indicate that size can account for differences in financial
structure. Our findings show that NLTA is significantly positively correlated with BL and DER and is significantly negatively related to NE at
the 1% level and support the prior studies such as Friend and Lang (1988); Bennett and Donnelly (1993); Homaifar et al. (1994); Rajan and
Zingales (1995); Booth et al. (2001); Hovakimian et al. (2001); Ozkan (2001); Baker and Wurgler (2002); Giannetti (2003); Banerjee et al.
(2004); Drobetz and Wanzenried (2006); Kim et al. (2006) and Yang et al. (2010). As noted previously, there are six reasons for such a
relationship: large firms are more diversified, easily access to the capital market, are granted higher credit rating in debt issuance, borrow at
favorable interest rates, have lower cost of equity issuance and own less information asymmetry.
In accordance with our expectations, ROA as a proxy for profitability is significantly negatively related to BL plus DER and is
significantly positively correlated with NE at the level of 1%, meaning profitable firms borrow less. This finding provides evidence for
the pecking order theory of capital structure, which declares using the retained earnings has the highest priority over the other
choices of financing and is aligned with prior studies (Friend and Lang, 1988; Titman and Wessels, 1988; Rajan and Zingales, 1995;
Shyam-Sunder and Myers, 1999; Booth et al., 2001; Hovakimian et al., 2001; Ozkan, 2001; Baker and Wurgler, 2002; Fama and
French, 2002; Giannetti, 2003; Banerjee et al., 2004; Hall et al., 2004; Lööf, 2004; Drobetz and Wanzenried, 2006; Kim et al., 2006;
De Jong et al., 2008; Bastos et al., 2009; Mukherjee and Mahakud, 2010; Rajagopal, 2010; Yang et al., 2010). However, the result is at
variation with the trade-off theory of capital structure, which expresses that profitability and leverage have a positive correlation
because profitability escalates the benefits of debt tax shields.
As an estimator of asset tangibility, FAR is significantly positively correlated with BL and DER and is significantly negatively related to NE
at the 1% level. The regressor enters the model with expected sign because firms with high levels of tangible assets issue more debt to take
advantage of tax deductibility and use this type of assets as collateral to ensure lenders about the safety of their investments. Also, this finding
is compatible with the pecking order theory of capital structure, which states issuing debt is prior to issuing equity and is consistent with the
dominant view in the literature (Bennett and Donnelly, 1993; Chung, 1993; Rajan and Zingales, 1995; Walsh and Ryan, 1997; Shyam-Sunder
and Myers, 1999; Hovakimian et al., 2001; Baker and Wurgler, 2002; Hall et al., 2004; Hovakimian et al., 2004; Lööf, 2004; Drobetz and

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Wanzenried, 2006; De Jong et al., 2008; Rajagopal, 2010; Yang et al., 2010). Excluding autoregressive variable, FAR has the highest value of
coefficients among other explanatory variables in Eq. (2); that is, the collateral value of assets and the asset tangibility are the major
contributors when a firm intends to issue debt.
Acting as a proxy for non-debt tax shields, DATA is significantly directly correlated with BL and DER and significantly inversely
related to NE at the 1% level. This finding is contrary to our expectation, but aligned with a few prior studies such as Bradley et al.
(1984) and Mukherjee and Mahakud (2010) that report that non-debt tax shields are significantly positively related to leverage. The
lack of negative correlation between DATA and BL casts doubt on the validity of argument in some prior studies such as Bowen et al.
(1982); Kim and Sorensen (1986); Bennett and Donnelly (1993); Ozkan (2001); Lööf (2004); Kim et al. (2006) and Rajagopal (2010)
that deduce non-debt tax shields are substitutes for interest tax shields. The plausible explanation can be pretax earnings are large
enough for the European firm to fully exploit both non-debt tax shields and tax shields. An alternative explanation is that due to
eroded capital of European bank (Moradi and Paulet, 2015) and the reluctant lenders, firms are restricted to use methods other than
issuing debt to diminish their taxes. The latter explanation is reinforced by the findings for the proxy of tax shields. In addition, the
result is consistent with the coefficient signs of FAR; that is, firms, which heavily invest in fixed assets and consequently report high
level of depreciation in their income statements, have a tendency to be highly levered.
The proxy of tax shields in our model, TATA, is significantly negatively related to BL and has a significantly positively correlation with NE
and DER at the significance level of 1%. The significant negative relation is in contradiction to our prediction, the benefits of tax shields firstly
introduced by Modigliani and Miller (1963) and the conclusions of some prior studies (De Angelo and Masulis, 1980; Homaifar et al., 1994;
Walsh and Ryan, 1997). There are two probable explanations for such a finding. First, firms perform a cost-benefit analysis when they intend
to choose the method of financing (Bradley et al., 1984; Titman and Wessels, 1988). The inverse relation found in our study exhibits that the
cost of issuing debt outweighs the corresponding benefits because either the expected bankruptcy cost is high or no taxable capacity left for
firms to enjoy the tax deductibility of debt financing. By reviewing Table 2 which demonstrates our sample summary, we recognized that the
average ROA measured by EBIT scaled by total assets fluctuates between 1% and 7% in different countries and from -3% to 4% in different
industries; that is, the low value of EBIT reduces the tax desirability of debt. Second, even though firms determine to issue debt, the scarcity of
lenders such as banks in the markets impedes them to do so. This explanation is consistent with our findings regarding non-debt tax shields
because firms are obliged to embrace other choices to reduce the level of taxable income.
VOL as a proxy for earnings volatility and risk is positively correlated with BL and DER and negatively correlated with NE at the
significance level of either 1% or 10%. This finding is consistent with the agency cost of debt, which states risky firms borrow more
and is supported by researches performed by Kim and Sorensen (1986); Bennett and Donnelly (1993) and Fama and French (2002).
As a result, shareholders prefer not to engage in risky activities by buying more equity and intend to pass the risk burden to the
lenders’ shoulders. The result also contravenes some prior studies such as Friend and Lang (1988); Chung (1993); Homaifar et al.
(1994); Banerjee et al. (2004); Kim et al. (2006) and Rajagopal (2010) which believe that risky firms have less capacity to bear more
risk by issuing debt. The sheer number of bad debt in the banks’ financial statements reinforces our finding during the Euro Crisis,
which shows risky and incapable entities have eroded the capital of banks during a decade.
The model shows that the capital structure has been affected by the Euro Crisis and suggests a significantly negative linkage
between EC and BL plus DER and a significantly positive relation with NE at the significance levels of 1% or 5%. We find support for
the view that the Euro Crisis shapes a firm’s debt-equity combination in a way that leads to a reduction in DER. The plausible reason is
that the European firms are mainly dependent on banks to satisfy their debt requirements, but the banking system in Europe was
forced to restructure after the outbreak of the Crisis and was faced with deteriorated capital due to huge investment in the sovereign
bonds of PIIGS countries. Subsequently, the Crisis adversely influenced the availability of bank loans and the willingness of lenders.
In sum, we conclude that during the time period of 1999–2015, the European firms count on debt financing when they have low-
growth opportunities, the firm size is large, they experience low levels of profitability, they own a considerable amount of tangible
assets, amortization and depreciation expenditures reasonably reduce their tax liabilities, active lenders exist in the markets and the
earnings volatility is high. Conversely, Eurozone businesses rely on equity financing when they face high-growth opportunities, the
firm size is small, they are highly profitable, there is lack of appropriate collateral, the magnitude of non-debt tax shields is not
noticeable, lenders are unenthusiastic and the firm risk is tiny. Additionally, the Euro Crisis decreases the weight of debt in the debt-
equity ratio, which is negatively affected.
Second, we analyze to see whether we could obtain a better fit by considering the three categories of industries. This also helps us
to check the robustness of our model. Accordingly, the full sample is divided in three subsamples based on the SIC classification (see
Table 4) in order to investigate the firm-specific determinants in different industries of retail trade and services, manufacturing and
construction, plus transportation and tourism.
We apply the regression model to annual data from 1999 to 2015 and implement the three-step procedure, explained in the
research design section, which verifies the fixed effects model is the most appropriate statistical method. We correct the model for

Table 4
The SIC classification of three subsamples.
Subsamples SIC Codes

Retail trade and services industry 01, 02, 07, 08, 43, 46, 48-59, 72-73, 75-76, 78, 80-83, 86-89, 91-97, 99
Manufacturing and construction industry 10, 12-17, 20-39
Transportation and tourism industry 40-42, 44-45, 47, 70, 79, 84

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 Table 5
The regression estimates for three subsamples.
Sub-samples Dependent Intercept PCTA RDTA NLTA ROA FAR DATA TATA VOL EC AR(1) R2 Adjusted R2 F-statistic
A. Moradi, E. Paulet

Variable

retail trade and services industry Book leverage 0.1341 0.0001 −0.0709 0.0100 −0.0274 0.1780 0.0699 −0.1955 0.0011 −0.0007 0.6285 0.8983 0.8907 118.15
(0.0000) (0.0000) (0.0279) (0.0000) (0.0000) (0.0000) (0.0000) (0.0000) (0.0014) (0.8209) (0.0000) (0.0000)
*** *** ** *** *** *** *** *** *** *** ***
Net equity 0.5917 −0.0000 0.1905 −0.0269 0.0875 −0.0315 −0.3570 0.2127 0.0009 0.0618 0.6680 0.9628 0.9600 346.30
(0.0000) (0.0000) (0.0001) (0.0000) (0.0000) (0.0698) (0.0000) (0.0023) (0.0000) (0.0084) (0.0000) (0.0000)
*** *** *** *** *** * *** *** *** *** *** ***
Debt-to-equity 2.6638 0.0005 −3.0110 0.0456 −1.3531 1.0001 3.9288 −2.5331 −0.0153 −0.0644 0.4460 0.6429 0.6162 24.08
ratio (0.0000) (0.0641) (0.0000) (0.0068) (0.0000) (0.0000) (0.0000) (0.0001) (0.3094) (0.0278) (0.0000) (0.0000)
*** * *** ** *** *** *** *** ** *** ***

manufacturing and construction Book leverage 0.0688 −0.0000 −0.0680 0.0175 −0.0334 0.2973 −0.0180 −0.0910 −0.0000 −0.0022 0.6446 0.8958 0.8881 116.70
industry (0.0000) (0.7251) (0.0169) (0.0000) (0.0000) (0.0000) (0.5206) (0.0000) (0.7839) (0.3304) (0.0000) (0.0000)
*** ** *** *** *** *** *** ***
Net equity 0.6225 0.0000 0.1209 −0.0272 0.0533 −0.1359 −0.3270 0.0088 −0.0002 0.0004 0.6612 0.9354 0.9306 196.49
(0.0000) (0.1603) (0.0216) (0.0000) (0.0000) (0.0000) (0.0000) (0.8296) (0.0143) (0.9021) (0.0000) (0.0000)
*** ** *** *** *** *** ** *** ***
Debt-to-equity 0.9241 −0.0000 −2.0363 0.1047 −3.4452 0.6412 0.5476 7.6754 −0.0008 −0.0204 0.4374 0.7189 0.6982 34.72
ratio (0.0000) (0.9461) (0.0000) (0.0000) (0.0000) (0.0000) (0.0543) (0.0000) (0.2132) (0.1118) (0.0000) (0.0000)
*** *** *** *** *** * *** *** ***

159
transportation and tourism industry Book leverage 0.0314 −0.0000 0.0442 0.0216 −0.0262 0.1943 0.1169 −0.0526 −0.0034 −0.0068 0.6747 0.8647 0.8526 71.39
(0.1948) (0.2289) (0.2017) (0.0000) (0.0066) (0.0000) (0.1291) (0.5254) (0.0000) (0.4081) (0.0000) (0.0000)
*** *** *** *** *** ***
Net equity 0.6289 0.0000 −0.0771 −0.0336 0.0782 0.0598 −0.3060 −0.0233 0.0055 0.0152 0.5594 0.9629 0.9569 290.13
(0.0000) (0.1981) (0.4691) (0.0000) (0.0000) (0.1571) (0.1309) (0.9133) (0.0000) (0.0203) (0.0000) (0.0000)
*** *** *** *** ** *** ***
Debt-to-equity 2.1729 −0.0004 0.0250 0.0628 −0.1139 0.1232 1.7639 −1.2064 −0.0124 −0.0550 0.3959 0.6784 0.6496 23.60
ratio (0.0000) (0.4232) (0.9513) (0.0187) (0.2430) (0.5782) (0.0677) (0.2934) (0.0084) (0.3342) (0.0000) (0.0000)
*** ** * *** *** ***

This table reports the results of DepVari,t = ci,t + β₁PCTAi,t + β ₂RDTA i,t + β ₃NLTA i,t + β ₄ROA i,t + β ₅FAR i,t + β ₆DATA i,t + β ₇TATA i,t + β ₈VOL i,t + EC + AR(1) + εi,t , where three dependent variables of firm i over
the time period t (DepVari,t ) are separately regressed on a set of potential firm-specific determinants. Moreover, c i,t , εi,t and βi represent the intercept term of the multivariate regression, the error term for
the ith observation in the period t and the slope coefficient for the ith independent variables, respectively. Book leverage (BL) equals the book value of total debt divided by the book value of total assets.
Net equity (NE) is the book value of total assets less the book value of total liabilities scaled by the book value of total assets. Debt-to-equity ratio (DER) is equal to total debt over equity. PCTA is the
annual percentage change in total assets (a proxy for growth). RDTA is the research and development expenditure scaled by total assets (a proxy for growth). NLTA is the natural logarithm of total assets
(a proxy for size). ROA is the return on assets calculated by EBIT deflated by total assets (a proxy for profitability). FAR is the fixed asset ratio measured by net property, plant and equipment over total
assets (a proxy for asset tangibility). DATA is the ratio of depreciation and amortization to total assets (a proxy for non-debt tax shields). TATA is the ratio of total income taxes to total assets (a proxy for
tax shields). VOL is the standard deviation of the first difference in the ratio of EBIT scaled by total assets (a proxy for earnings volatility). EC is a dummy variable (D = 1 during 2009 and afterwards and
D = 0 otherwise) and a proxy for the Euro Crisis. AR(1) is the lagged indicator of the dependent variable. The model is corrected for heteroskedasticity and autocorrelation and is covariance stationary.
We apply the fixed effects regression model estimated by the panel EGLS method in this equation. The figures display the coefficient of independent variables, p-values are shown in parentheses and ***,
** and * indicate significant at 0.01, 0.05 and 0.10 level, respectively.
Research in International Business and Finance 47 (2019) 150–161
A. Moradi, E. Paulet Research in International Business and Finance 47 (2019) 150–161

heteroscedasticity and autocorrelation and the model is covariance stationary. The results of the regression are reported in Tables 5,
which discloses that the significant findings are similar to those for the full sample with some minor deviations in the significance
levels. However, the difference amongst the significant variables in both the level of significance and the magnitude of coefficients
shows that the determinants of capital structure differ across industries. Besides, the existence of industry heterogeneity is evidence of
the diverse impact of the firm-specific factors and the Euro Crisis across different economic sectors.
In what follows, we pinpoint the differences among the three industries. As exhibited in Table 5, the RTS industry mimics the full
sample in the coefficient signs of significant variables and the only considerable discrepancy is that the PCTA is statistically sig-
nificant, but PCTA shows a very small magnitude ranging from -0.0000 to 0.0005. Like Long and Malitz (1985); Rajagopal (2010) and
Yang et al. (2010), we find both signs of positive and negative for the different proxies of growth. PCTA as a proxy for growth in total
assets is positively related to leverage, while RDTA as a proxy for growth in intangible assets is negatively correlated with leverage.
The result presents that firms with low R&D intensity and hefty tangible assets can use more debt because of the collateral value of
tangible assets, which protect the bondholders, and lenders who recognize the investment opportunity and monitor the investment
decisions. This interpretation is credited by the sign of FAR found in our model and endorses that the type of assets is a main driver of
financing decision in this industry. On the other hand, firms with high R&D intensity and impoverished tangible assets have low
leverage.
In the MC industry (see Table 5), the significant factors follow the pattern of the full sample. Although EC has the same sign as it
has in the full sample, it does not significantly affect any dependent variables, showing that the Euro Crisis has had no significant
influence on the mixture of debt-equity in this industry. The plausible explanation for this result is that firms operating in this
category mainly rely on debt financing and as they can provide sufficient collaterals such as plants, land and machinery to place
confidence for debtholders, they are not significantly affected by financial crisis when forming the capital structure is a case. This
explanation is supported with the results of FAR as a proxy for asset tangibility because the coefficients of FAR for BL, NE and DER
have the highest magnitude amongst all the models estimated in the MC industry.
As depicted in Table 5, many of the estimated coefficients for the TT industry are statistically insignificant, but NLTA as a proxy
for size and VOL as a proxy for earnings volatility play significant roles. NLTA enters into the regression with similar signs as full
sample, but VOL shows different behavior. VOL is significantly negatively correlated with BL and DER and significantly positively
correlated with NE at the 1% level, meaning the earnings volatility and the risk negatively affect the debt issuance. The result
contravenes the agency cost of debt which states risky firms borrow more, but reinforces the estimations performed by Homaifar et al.
(1994); Banerjee et al. (2004); Kim et al. (2006) and Rajagopal (2010). The reason is attributed to the fact that the financial crises
affect the affordability of the recreational activities, so not only managers use less debt during the era of volatile earnings not to have
any challenges for paying timely interest rates, but also creditors do not dare to put their money at risk. Growth proxies, PCTA and
RDTA, are insignificant because during the Crisis, the number of travels and the occupancy rate of hospitality industry are severely
dropped, so there is no growth possibilities and investors along with lenders do not tend to participate in this segment of the markets.
For the same reason, FAR shows insignificant behavior. As the profitability in the TT industry is evaporated, there is no need for using
tax shields; therefore, DATA and TATA show insignificant correlation with three dependent variables.
Besides, in regressions performed for the full sample and three subsamples, the autoregressive variable is always significant at the
1% level and its absolute value is much higher than the absolute value of the other significant predictor variables. This finding
expresses that the status quo of capital structure dominantly influences the equity-debt mix; that is, finance managers are bounded by
the cumulative result of their own past decisions on financing choices over time and the possibility of a sharp deviation from the past
is not proven by our findings.

6. Conclusion and discussion

When a financial crisis occurs, firms who are vulnerable to the shocks in the financial markets absorb the negative impact earlier
than the others do. In fact, in financial crises, the credit providers dictate their preferred method of financing to firms, even gov-
ernments, seeking for capital. As a result, if a firm manager searches for capital, he should fully understand the preferences of skeptic
investors and precisely respond to the conservative behavior of credit owners. In general, investors chase interest plus a guarantee for
principle payment, but during financial crises, the nature of this business changes and security will be the first priority of any
creditors because banks are unsafe to park money, financially distressed governments are unreliable to lend and firms are accused of
using creative accounting methods. On the other hand, creditors such as financial institutions and fund managers are obliged to make
timely payments to fulfill their financial commitments. Hence, the creditors face a dilemma: invest or not to invest. Firm managers
should be aware of the creditor’s dilemma and try to attract investors’ trust based on the firm-specific features of their corresponding
companies.
This paper derives a multivariate linear regression model in order to explain the firm-specific determinants of capital structure
before and during the Euro Crisis. We apply the fixed effects regression model, corrected for heteroskedasticity and autocorrelation
and estimated by the panel EGLS method, in this research. Our study investigates the statistical significance of firm-specific factors
such as growth, size, profitability, asset tangibility, non-debt tax shields, tax shields and earnings volatility plus the effects of the Euro
Crisis on the three dependent variables of book leverage, net equity and debt-to-equity ratio. Our balanced panel sample consists of
559 publicly traded firms that are registered in six European countries of Austria, Belgium, France, Germany, Luxembourg and the
Netherlands. This paper observes the model on the full sample and three subsamples indicating different industries. The results
indicate that growth, profitability, tax shields and the effects of the Euro Crisis are significantly negatively related to leverage plus
debt-to-equity ratio and are significantly positively correlated with net equity. Additionally, we observe that size, asset tangibility,

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non-debt tax shields and earnings volatility are significantly positively correlated with leverage along with debt-to-equity ratio and
have a significantly negatively relation with net equity.
It is probable that this research has some limitations. In particular, if a firm uses off-balance-sheet financing instruments, the
capital structure may be affected, but the effects are not evident on the balance sheet and are difficult to recognize. Besides, this
research is bounded by the shortcomings inherent in any regression analysis such as parameter instability, which states that linear
relationship can change over time. Another limitation of our study is the sensitivity of dependent variables to end-of-period financing
and operating decisions that can potentially affect total debt and equity. Furthermore, because only firms that have survived during
the period of measurement are included in our sample, the historical estimate may be upward biased and the survivorship bias may
exist.
The model and the empirical results are suggestive of promising avenues for future theoretical and empirical work. In particular,
it would be of interest to examine how quickly firms converge to their optimal capital structure and what are the determinants of the
speed at which they adjust to their optimal capital structures in the Euro Crisis.

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