Kumar 2017

International Journal of Managerial Finance
Research on capital structure determinants: a review and future directions

Satish Kumar, Sisira Colombage, Purnima Rao,
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IJMF
13,2 Research on capital
structure determinants:
a review and future directions
106 Satish Kumar
Department of Management Studies,
Received 5 September 2014
Revised 8 June 2015 Malaviya National Institute of Technology, Jaipur, India
Accepted 6 August 2015
Sisira Colombage
School of Business and Economics,
Federation University Australia, Churchill, Victoria, Australia, and
Purnima Rao
Department of Management Studies,
Malaviya National Institute of Technology, Jaipur, India
Abstract
Purpose – The purpose of this paper is to study the status of studies on capital structure determinants in the
past 40 years. This paper highlights the major gaps in the literature on determinants of capital structure and
also aims to raise specific questions for future research.
Design/methodology/approach – The prominence of research is assessed by studying the year of
publication and region, level of economic development, firm size, data collection methods, data analysis
techniques and theoretical models of capital structure from the selected papers. The review is based on
167 papers published from 1972 to 2013 in various peer-reviewed journals. The relationship of determinants
of capital structure is analyzed with the help of meta-analysis.
Findings – Major findings show an increase of interest in research on determinants of capital structure of the
firms located in emerging markets. However, it is observed that these regions are still under-examined which
provides more scope for research both empirical and survey-based studies. Majority of research studies are
conducted on large-sized firms by using secondary data and regression-based models for the analysis, whereas
studies on small-sized firms are very meager. As majority of the research papers are written only at the
organizational level, the impact of leverage on various industries is yet to be examined. The review highlights
the major determinants of capital structure and their relationship with leverage. It also reveals the dominance of
pecking order theory in explaining capital structure of firms theoretically as well as statistically.
Originality/value – The paper covers a considerable period of time (1972-2013). Among very few review
papers on capital structure research, to the best of authors’ knowledge; this is the first review to identify what
is missing in the literature on the determinants of capital structure while offering recommendations for future
studies. It also synthesize the findings of empirical studies on determinants of capital structure statistically.
Keywords Literature review, Leverage, Meta-analysis, Capital structure, Pecking order
Paper type Literature review
1. Introduction
The first decade of the twenty-first century witnessed enormous changes in terms of
booms and recessionary phases. It is believed that these different phases of business
cycles have impacted on the value of a firm. A firm is valued depending upon its past and
future investments. To finance these investments, the firm has to choose an appropriate
financial mix. Financing decisions also depend upon the business cycle dynamics
(i.e. whether there is an upsurge or slump in the economy). Because financial decisions relate
to market forces, they are vital for the economic welfare of the firm. Financial distress,
International Journal of Managerial
Finance potentially leading to bankruptcy may well be a reality where management make wrong or
Vol. 13 No. 2, 2017
pp. 106-132
incorrect decisions with the balance of the capital structure (Eriotis, 2007). Optimal capital
© Emerald Publishing Limited
1743-9132
structure helps in providing momentum to the development of an organization. It includes how
DOI 10.1108/IJMF-09-2014-0135 a firm decides its long-term investment decisions and identifies suitable sources of finance.
Therefore, capital structure is one of the major areas of concern for a firm. Thus, the above Capital
decisions are crucial as they significantly affect the financial performance of the firm. Financial structure
resources of a firm can be broadly classified into equity and debt. Capital structure is the determinants
explicit fusion of debt and equity which an organization uses to back up its operating and
investment decisions.
Thus, it is essential to know about the factors affecting the financial decisions of an
organization. Capital structure determinants serve as strong pillars that lend competitive 107
advantage to an organization. The factors determining the financial mix of an organization
are dynamic in nature. They are firm-specific and depend upon the industry to which the firm
belongs and on the micro- and macro-economic environment of the firm. Consequently, it can
be said that financial mix is an important strategic decision that is becoming increasingly
more crucial and challenging. Investment and financing decisions are mutually related to each
other. Investment in lucrative avenues requires money and thus it necessitates change in
financial structure by restructuring the proportion of alternative sources of funding. It thereby

creates an impact on existing capital structure, cost of capital, risk and earnings of the firm.
So, an optimal capital structure is required to maximize the value of the firm. A firm that plans
to venture into a new project or to upgrade its existing technology must make arrangements
to finance the project in such a way that it could minimize its cost of capital. By this, the firm
indirectly aims to increase returns to its shareholders. The basic goal of a firm is the
maximization of the shareholder’s wealth which will positively influence the firm’s value.
Because financing decisions have an impact on the firm’s value, capital structure decisions are
very vital for a firm’s progress. The literature examining the relevance or irrelevance of capital
structure proves the importance of capital structure.
1.1 Scope of the Study

The central idea of this study is to provide a comprehensive literature review on
determinants of capital structure. To the best of our knowledge, there is no literature review
on determinants of capital structure. This study is therefore the first to give a bird’s eye
view on the major work carried out on determinants of capital structure. More specifically,
it intends to study the major capital structure determinants which are consistent with
various theoretical models. This study reassesses the research investigating the
repercussion of determinants of financing decisions and categorizes selected research
articles as per their approach and methodologies. It further explores research gaps in the
related area and recommends potential directions for future capital structure research.
The study attempts to synthesize the literature findings on determinants of capital
structure. A systematic approach is applied to explain major findings of the review and
thereby highlighting the gaps in the literature. Thus, it provides a pathway for future
research in the area of capital structure.
Research in the area of capital structure has revealed that financing decisions are
inconclusive and still a puzzle for the researchers. This study has tried to detangle this
puzzle by combining the results of different research papers through meta-analysis. It was
found that the empirical studies conducted on capital structure have mainly focused on the
relationship of debt with various explanatory variables. Usually review papers report the
result and summarize the main study conclusions. However, this study tests the results of
empirical studies which have been statistically tested, revealing an overall relationship
between criterion and predictor variables. Therefore, the meta-analysis technique is applied
to synthesize the findings of the previous studies through a statistical evaluation to clarify
the previous inconclusiveness in the capital structure decisions.
This paper is divided into seven sections. Section 2 presents an overview of the various
theories of capital structure developed by eminent researchers. Section 3 offers a brief
review of the existing literature. Section 4 describes the methodology used in the paper
IJMF followed by an analysis of research articles selected for review in Section 5. Section 6
13,2 provides research findings and research gaps identified in the existing literature. Section 7
presents the conclusion and suggests areas of future research.
2. An overview of capital structure research

Major research work on capital structure originates from the well-known article of
108 Modigliani and Miller (1958) which has led to the emergence of various theories of capital
structure over the last five decades. Researchers, in general, tend to have different
perspectives of capital structure. Table I summarizes all the major views of renowned
researchers on capital structure.
From Table I, the following inferences can be drawn regarding the development in the
field of capital structure:
• The idealistic assumptions of irrelevancy theory of capital structure compel researchers

to rethink the direction of importance of financing decisions with respect to firm’s value.
• Emergence of new theoretical models of capital structure of a firm. For example, the
absence of taxes in irrelevancy theory give rise to the trade-off model, information
asymmetry in the market gives rise to the concept of pecking order, signaling effect
and behavioral aspects of capital structure.
Serial Name of
No. researcher Year Researcher’s outlook/contribution
1 Modigliani 1958 Laid the milestone in corporate finance by propounding the “Theory of
and Miller Irrelevancy.” As per this theory capital structure has no impact on firm’s value
2 Modigliani 1963 Included taxes and considered the effect on tax shield on interest payments
and Miller
3 Miller 1977 Included personal and corporate tax in the consideration of financing decisions
4 Kraus and 1973 Provided the classical version of “Trade-off theory (TOT).” This theory considers
Litzenberger the trade-off between cost of financial distress and benefits of tax shield of debt
5 Bradley et al. 1984 Presented “static trade-off theory”
6 Kane et al. 1984 First to consider the effect of continuous time model in trade-off theory
with cost, taxes, uncertainty and tax benefits. This is known as “Dynamic
Trade-off Theory”
7 Stiglitz 1973 Concluded that “Leverage ratio is the fortuitous outcome of the profit and
investment history of a firm.” Initiated the concept of pecking order
8 Fischer et al. 1989 Introduced the concept of transaction cost in the capital structure and argued that
variation in debt ratio can also occur due to a small transaction cost
9 Jensen and 1976 Put forward the concept of Agency cost and presented the effect of manager-
Meckling shareholder conflict and debt holder-shareholder conflict on financing decisions
and introduced “Theory of Agency Cost” in the literature of capital structure
10 Myers and 1984 Pioneered the concept of “Information asymmetry” that leads to “Adverse
Majluf Selection.” Based on this, they propounded “Pecking Order Theory” (POT),
which prefers internal funds to debt and debt to equity
11 Harris and 1991 Reviewed the literature of capital structure theories and found that “capital
Raviv structure decisions are inconclusive.” They put forward the concept of “control
driven theory”
12 Baker and 2002 Introduced “Market Timing Theory” in the area of capital structure. This
Wurgler theory states that firms issue equity when the market is overvalued and issue
debt when the market is undervalued
Table I. 13 Ross 1977 Perceived debt issuance as an indicator of good performance of a firm as
Emergence of new opposed to equity issuance. This led to the emergence of “Signaling Theory” of
concepts in capital capital structure
structure 14 Uckar 2012 Suggested the new concept of “Behavioral Element in Capital Structure”
3. Earlier review of literature on capital structure Capital
Although capital structure is considered as an important area, research has sought to structure
produce evidence and new ideas on issues that affect the value of the firm, only a handful of determinants
papers have reviewed literature on the topic. One of the major breakthroughs in the
literature review of capital structure is provided by Harris and Raviv (1991). The following
is the list of review papers on capital structure in chronological order:
(1) Harris and Raviv (1991); 109
(2) Lugi and Sorin (2009);
(3) Miglo (2010); and
(4) Iqbal et al. (2012).
One common observation about these reviews (except in Harris and Raviv, 1991) is that they
are based on theories of capital structure and no other chronological, methodological and
thematic approach is incorporated in analyzing literature. Therefore, to the best of the
authors’ knowledge, the present paper is the first attempt in providing a comprehensive and
systematic review of literature from the reputed journals. This highlights the major work
done in the area while aiming at providing potential directions for future research.
4. Research methodology
The methodology used for reviewing the literature must be systematic; it must explicitly
describe the procedure for conducting the review, comprehensive in scope and include all
relevant material related to particular phenomena (Fink, 2005). In this paper, we have used
systematic literature review methodology to analyze the research work on capital structure.
A systematic review is a tool used to summarize, appraise and communicate the results and
implications of a large quantity of research and information. It aims to provide an
exhaustive summary of current literature relevant to the research question. The systematic
review methodology is designed to reduce any unintended bias, which may occur in the use
of other review methodologies (Bimrose et al., 2005).
4.1 Time horizon

In this review we have selected journal articles published during 1958-2013, but the majority
of the articles are those published during 1972-2013. We did this primarily to include the
seminal paper on capital structure by Modigliani and Miller (1958). Most of the work on
capital structure was reported after MM theory of irrelevancy. Therefore, we felt that a time
span of approximately 40 years was sufficient to review the literature comprehensively.
4.2 Literature collection and boundary identification

We started our review with a keyword/phrase search and then delimited the literature using
a combination of deductive and inductive approaches. As input criteria, we initially used
words like capital structure. We assumed that determinants of capital structure would be
present in the abstract or keywords or title of the article. We searched this term in all types
of documents including case study, research paper, technical paper, review paper,
conceptual paper and working paper documents. Our initial search database includes
EBSCO, Emerald, Social Science Research Network (SSRN), Google Scholar but we got most
relevant results from Emerald and EBSCO. In the preliminary phase of the review, we have
searched papers on capital structure and found 6,303 initial results on EBSCO. We then
developed the following delimiting conditions to get the most relevant results:
• articles published only in peer-reviewed journals were considered;
• articles were collected for a period of 40 years (1972-2013);
IJMF • articles written only in the English language were included;
13,2 • articles addressing determinants of capital structure were considered; and
• articles were collected with full text.
Using the above delimiting criteria, we found 180 research papers from reputed journals, of
which 13 articles provide theoretical framework for the study. These studies (13 in all),
110 include all review articles on capital structure and articles based on theoretical models of
capital structure and thus were excluded for the purpose of this present study. Table II
summarizes our database search approach.
5. Research segmentation and categorization

The research articles that finally met our delimitation criteria were analyzed for the research
outlets. After selection, we classified relevant research articles based on various parameters
to better understand the research done so far regarding capital structure determinants.
While designing the categorization parameters, we ensured that there was synchronization
and relevance of classification so that a well-organized and systematic analysis of the extant
literature was performed. We then classified our studies under the following categories:
• Year of publication
• Geographic region
• Level of economic development
• Type of industry
• Research methods
• Firm size
• Data analysis techniques
• Empirical findings
• Meta-analysis
• Citation analysis
The synthesis of literature review involves itemization of selected articles, and it unearths the
explicit and implicit relevant facts from the existing body of knowledge. In this section, we
provide a detailed analysis of research articles using the classification scheme we designed.
Search criteria Total Total No. of

Serial Keywords or abstract Period of No. of papers Final
No. Database or title search papers excluded Exclusion criteria set
1 EBSCO Capital structure or October- 161 75 Not relevant to our 86

determinants of capital December study
structure in keywords 2013
or abstract
2 Emerald October- 146 93 Due to duplicity, 53
December and irrelevancy for
2013 our study
Table II. 3 Others – December 28 – – 28
Database and 2013
search criteria Source: Authors’ own calculation
5.1 Year of publication and geographic region Capital
This sub-section, classifies studies based on the year and region of publication. structure
Figure 1 presents the previous work on determinants of capital structure based on region determinants
and year of publication.
Although it shows an exponential growth in number of studies dealing with capital
structure in the recent past, there are very few publications in the 1980s and 1990s. Figure 1
clearly identifies that major work on determinants of capital structure acquired momentum 111
after 2001, particularly more so between 2005 and 2013. This implies a growing interest in
corporate financial make-up research. The analysis by year confirms that selected articles
were published periodically from 2005 to 2013. This also evidences the significance of the
field and most capital structure studies originated in America and Europe. We can also
observe that major work was performed in Europe and America until 2002 and capital
structure was studied only in these two continents. More importantly, we see that in the first
decade of the twenty-first century there is a surge in the number of articles published on
capital structure. This indicates that the subject gained prominence in Asia-Pacific and
African continents. The number of articles published in 2013 clearly shows more
researchers have been focusing their interest on capital structure.
5.2 Level of economic development

According to Booth et al. (2001), capital structure is the function of economic development
that mainly includes the economy growth rate, capital market development, inflation rate,
etc. The concept of capital structure was first studied only in the context of advanced
markets such as the USA, the UK and other developed markets and was then gradually
investigated across the world. In this sub-section, research papers are classified on the basis
of level of economic development worldwide. Classification helps us to appreciate the fact
that economic development has initiated studies on capital structure. The selected research
articles were categorized based on their country of study. Undoubtedly, studies are still
being more intensely conducted in developed economies as compared to those in emerging
economies. Table III shows that 90 studies have been carried out in developed countries,
35
30
25
Asia-Pacific
20
Multiple Regions
Middle East
15
Europe
America and Europe
10
America
Africa
5
Figure 1.
Capital structure
0 research by region
and year of
84
86
88
95
98
99
00
01
02
03
04
05
06
07
08
09
10
11
12
13
19
19
19
19
19
19
20
20
20
20
20
20
20
20
20
20
20
20
20
20
publication
Year of Publication
IJMF whereas only 73 were performed in developing countries. This suggests that there is a shift
13,2 in the work done on this topic toward emerging economies, with a view to exploring the
caveats between the financial practices of developed and developing nations. Because some
studies entail a comparison of developed and developing economies, they have been
included as a separate category.
Table III shows that most studies conducted in developing countries pertain to
112 Asia-Pacific and Africa. It clearly indicates the growing interest of researchers toward
developing countries. Moreover the institutional settings of developing countries are
different from the developed countries. As such, there is more scope for studying the firms
of emerging markets with respect to other firms operating in different institutional and
regulatory environments. This clearly calls for a cross-country analysis.
5.3 Firm size

Economic growth of any nation is the function of production, investment and savings.
Savings channelize investment which boost production and thus help accelerating the
economic growth of a country. Audretsch and Keilbach (2004) and Audretsch (2007)
document that young and small firms are important determinants of economic growth and
that they pave the way to investigate the financial mix of firms based on their size
(Table IV). Literature on capital structure reveals that majority of work is concentrated on
large firms and only a small fraction of studies are done on small-sized firms. It also shows
that only eight studies have been done on SMEs in Asia-Pacific region and eight in Africa.
The highest number of studies report in Europe which is almost 50 percent (23 of 45) of the
investigations on capital structure on SMEs.
Table IV significantly reveals the dearth of research on financial practices of
SMEs. According to Lopez-Gracia and Sogorb-Mira (2008) financing decisions of SMEs
Regions No. of developing economies No. of developed economies Both
Africa 21 1
America 6 28
America and Europe 1
Asia-Pacific 37 9
Europe 2 48 1
Table III. Middle East 4 1
Classification by Multiple regions 3 2 2
level of economic Grand total 73 90 4
development Source: Authors’ own calculation
Region No. of large firms No. of small-sized firms Both
Africa 13 8 1
America 29 5
America and Europe 1
Asia-Pacific 39 8
Europe 27 23 1
Middle East 5
Table IV. Multiple regions 7
Classification Grand total 120 45 2
by firm size Source: Authors’ own calculation
are clearly different from large ones and therefore it is essential to study financing Capital
preference of SMEs particularly in the context of firms located and operated in structure
emerging markets. determinants
5.4 Industry-wise classification
The financial structure of a company also depends on the industry in which it operates; the
type of industry is an influential factor in the determination of the capital structure of a firm. 113
The majority of articles (121) include all firms from all economy sectors making the work on
determinants of capital structure is least industry-specific. The existing evidence is based
more on the whole of the economy rather than on the various industries operating in that
economy. It is evident from Table V that no single industry has a share of W10 percent in
the total sample of 167 papers. Seventy three percent studies include all types of firms from
different industries.
5.5 Data analysis techniques

For data analysis one can use either simple descriptive statistics or more sophisticated
statistical inferences. We have divided our sample of 167 papers applying various statistical
procedures into ten major categories, to ascertain the most popular and recent technique of
analysis. Table VI shows that the majority of papers have used panel data and regression
analysis. In our regression statistical procedure, we adopted various estimation techniques
such as simple regression, ordinary least square, fixed and random effect, logistic, stepwise
regression, Tobit and Probit regression, generalized method of moments, etc. Our findings
show that regression analysis is the most popular technique used by researchers to carry
out empirical studies on capital structure determinants. Apart from intensive use of
regression-based models many scholars have also applied techniques like structural
equation modeling, factor analysis, etc. Researchers have also used self-developed models,
Non-parametric test, Simulation, Jensen Alpha and Sharpe’s measure techniques that are
included in the “others” category in Table VI.
Industry type No. of papers (%)
All 121 73
Mixed 12 7
Manufacturing 8 5
Banking 6 4
Real estate 5 2
Hospitality 2 1
Micro-finance 2 1
Retail 2 1
Cement 1 1
Cotton 1 1
Electric appliance 1 1
Financial 1 1
Heavy industries 1 1
Insurance 1 1
Lodging 1 1
Service and manufacturing 1 1
Wine 1 1 Table V.
Grand total 167 100 Industry-wise
Notes: All, no specific industry is mentioned; mixed, includes multiple industries classification
Source: Authors’ own calculation of articles
IJMF
Conjoint Descriptive Factor Ratio Grand
13,2 Years analysis Correlation statistics EBA analysis analysis Regression SEM Mixed Others total
1984 1 1
1986 1 1
1988 1 1
1995 1 1
114 1998 1 1
1999 2 2
2000 2 2
2001 1 2 1 4
2002 1 2 3
2003 2 2
2004 1 2 3
2005 3 1 2 6
2006 1 1 4 1 1 8
2007 1 2 1 5 1 10
2008 1 1 9 1 12
2009 1 1 19 2 1 24
2010 1 13 2 16
2011 1 1 11 1 14
2012 1 2 2 23 1 1 30
2013 1 1 22 1 1 26
Grand
total 1 4 11 3 3 4 120 4 4 13 167
Table VI. Notes: EBA, extreme bound analysis; SEM, structured equation modeling; Others, includes Non-parametric test,
Data analysis simulation, Jensen Alpha and Sharpe’s measures
techniques Source: Authors’ own calculation
5.6 Type of research

We classified articles into different types of research based on the following criteria:
• analytical studies: they include those papers in which a technique or models
developed earlier by others has been used to check the concepts;
• empirical studies: they comprise articles in which secondary data are analyzed by
using various statistical procedures;
• survey-based studies: they mostly include primary data in their analysis; and
• conceptual studies: in these, a model is developed to build a concept.
In our sample of 167 studies, literature is dominated by the presence of empirical articles.
It constitutes 83.83 percent (140) of total papers which clearly signifies the supremacy of
empirical research in this area. It shows that researchers are more inclined toward
secondary data, since primary data collection might be a difficult task due to lack of
necessary responses required by a researcher in this field. We have found only 19
survey-based studies using questionnaire, structured or semi-structured interviews, focus
group studies and mail surveys.
5.7 Empirical findings

Empirical studies on capital structure that followed theoretical studies form a large body of
the literature. Empirical research on financing decisions was first published in the 1980s
(Bradley et al., 1984; Taggart, 1986; Titman and Wessels, 1988) and was mostly carried out
in developed countries (Germany, Spain, France, Italy, the USA and UK). A few examples of
these studies are Titman and Wessels (1988); Harris and Raviv (1991); Rajan and Zingales Capital
(1995); Shyam-Sunder and Myers (1999); Bevan and Danbolt (2000); Graham and structure
Harvey (2001); Bancel and Mitto (2004) and Hall et al. (2004). Capital structure studies that determinants
are performed on emerging economies (China, India, Brazil, Mexico, Malaysia, Africa, etc.)
are limited in number as compared to developed economies (Booth et al., 2001; Pandey, 2001;
Chen, 2004; Colombage, 2007). Financing decisions of firms vary among these economies,
due to the presence of institutional, regulatory and cultural differences in developed and 115
emerging markets. Cook (2001) pointed out that the USA and UK are the major contributors
to studies on finance and on SMEs. This implies that research on financing decisions of
SMEs has originated in developed countries. While reviewing, we also came to find that the
majority of research done on capital structure is focused on large firms (Titman and
Wessels, 1988; Rajan and Zingales, 1995; Booth et al., 2001; Chakraborty, 2010). A careful
examination of the literature highlights that very few studies on capital structure of SMEs
have been examined so far, compared to those on the financial make-up of larger firms.
Because financing decisions of SMEs are clearly different from larger ones, it is worth
studying financing preference of SMEs in a broader context.
By examining 167 empirical studies, we analyzed the impact of leverage on various
firm-, industry- and country-specific variables, to understand the micro and macro views of
variables related to corporate capital structure. Table VII presents a summary of reviews
with respect to the direction of the relationship between independent variables
(firm, industry and country) and a firm’s capital structure.
To start its operations, every firm requires funds which are obtained from various financial
sources. Capital structure involves the inclusion of all available financial resources. How an
organization pools its funds depends on various factors, which can be firm-, industry-or
country-specific. Many studies have been conducted to determine the factors affecting capital
structure decisions and these have different impacts on leverage based on the context in
which they are studied. Corporate financing decisions are affected by the same factors in
developed and developing countries except for institutional and cultural differences
(Booth et al., 2001; Chen, 2004; Foster and Young, 2013). Therefore, the capital structure of a
firm is the outcome of the interaction of institutional differences and business practices
(Bancel and Mitto, 2004). As in the case of Baltic countries, Norvaisiene (2012) and Colombage
(2007) found different determinants of capital structures for the firms operating in developing
countries. Country-specific factors (e.g. gross domestic product growth, inflation, interest rates
and financial development) have an indirect influence on firm-specific factors, and they also
help in explaining how a firm’s capital structure is designed. In the case of European SMEs,
firm-specific factors explain the nature of capital structure decisions, and similarity in the
capital structure of SMEs is attributed to the country, institutional factors and common civil
law system (Daskalakis and Psillaki, 2008). In India, SMEs rely more on internal funds
(Dogra and Gupta, 2009). Industry effects also play an important role in making capital
structure decisions in small and medium-sized firms (Abor, 2007). Table VII shows that
industry-specific variables are under-studied as compared to firm-specific variables.
This therefore indicates that researchers are more inclined toward investigating firm-level
factors and that there is a call for studying industry-specific factors as well. Apart from all
these factors, there are some cognitive variables that affect the process of financing
decision-making of the firm. This indicates that behavioral aspects of financial
decision-makers are not studied in much detail, for example, overconfidence and optimism.
These non-considerations of behavioral aspects of managers led them to issue excessive debt
or to invest in risky projects with negative NPV which finally led to financial distress.
Capital structure decisions are complex in nature and hard to study the effect of its
determinants independently due to frequent interaction among the determinant factors.
Therefore optimal capital structure of a firm requires the inclusion of the explicit and
IJMF Leverage increases Supportive
13,2 (+)/decreases ( ) Empirical evidence theory
Panel A: impact of firm-specific factors on leverage

Profitability (+) Al-Ajmi et al. (2009); Kaur and Rao (2009); Nunkoo and Boateng TOT
(2010); Zhang (2010)
Profitability () Titman and Wessels (1988); Rajan and Zingales (1995); Michaelas POT
116 et al. (1999); Fama and French (2002); Cassar and Holmes (2003);
Hall et al. (2004); Sogorb-Mira (2005); Mazur (2007); Daskalakis and
Psillaki (2008); Antoniou et al. (2008); Frank and Goyal (2009);
Chakraborty (2010); Arvanitis et al. (2012); Van Caneghem and
Van Campenhout (2012)
Size (+) Michaelas et al. (1999); Sogorb-Mira (2005); Nguyen and TOT
Ramachandran (2006); Antoniou et al. (2008); Abor and Biekpe (2009);
Al-Ajmi et al. (2009); Bevan and Danbolt (2000); Črnigoj and Mramor
(2009); Pathak (2010); Zhang (2010); Sheikh and Wang (2011)

Size ( ) Titman and Wessels (1988); Hall et al. (2004); Chakraborty (2010) POT
Tangibility (+) Michaelas et al. (1999); Antoniou et al. (2008); Sogorb-Mira (2005); TOT, POT,
Abor and Biekpe (2009); Bevan and Danbolt (2000); Frank and ACT
Goyal (2009); Chakraborty (2010); Nunkoo and Boateng (2010);
Pathak (2010); Zhang (2010); Cortez and Susanto (2012);
Arvanitis et al. (2012); Moosa et al. (2011)
Tangibility ( ) Nguyen and Ramachandran (2006); Al-Ajmi et al. (2009); Karadeniz na
et al. (2009); Črnigoj and Mramor (2009); Sheikh and Wang (2011)
Liquidity (+) Bradley et al. (1984); Kaurand Rao (2009) na
Liquidity () Mazur (2007); Pathak (2010); Sheikh and Wang (2011); Alom (2013) POT
Age (+) Abor and Biekpe (2009) na
Age ( ) Michaelas et al. (1999); Hall et al. (2004); Viviani (2008); na
Črnigoj and Mramor (2009)
Growth (+) Michaelas et al. (1999); Sogorb-Mira (2005); Nguyen and POT
Ramachandran (2006); Al-Ajmi et al. (2009); Bevan and Danbolt
(2000); Črnigoj and Mramor (2009); Pathak (2010); Odit and
Gobardhan (2011)
Growth ( ) Kaur and Rao (2009); Nunkoo and Boateng (2010); Zhang (2010) TOT and
ACT
Managerial ownership (+) Bokpin (2009) na
Managerial ownership () Abor (2008); Florackis (2008) ACT
Uniqueness (+) Kaur and Rao (2009) na
Uniqueness ( ) Titman and Wessels (1988); Chakraborty (2010) TOT
Operating cash flow (+) Upneja and Dalbor (2001); Honjo and Harada (2006) TOT
Operating cash flow ( ) Mateeva et al. (2013) ACT
Non-debt tax shield (+) Kaur and Rao (2009); Chakraborty (2010) na
Non-debt tax shield ( ) Bradley et al. (1984); Sogorb-Mira (2005); Viviani (2008); Cortez and TOT
Susanto (2012)
Business risk (+) Nguyen and Ramachandran (2006); Kaur and Rao (2009) na
Business Risk () Al-Ajmi et al. (2009); Chen et al. (2009); Pathak (2010) TOT
Bankruptcy (+) Upneja and Dalbor (2001) na
Bankruptcy ( ) Bradley et al. (1984) TOT
Agency cost ( ) Morellec et al. (2012) na
Dividend payout () Al-Ajmi et al. (2009); Bokpin (2009) na
Managerial skills Grunert and Norden (2012) na
Panel B: impact of leverage on industry-specific factors
Capex Taggart (1986) na
Industry leverage Abor (2007); Frank and Goyal (2009) na
Table VII. Creditors Fan et al. (2012); Serrasqueiro (2011) na
Empirical evidence
on factor affecting
capital structure (continued )
Leverage increases Supportive
Capital
(+)/decreases ( ) Empirical evidence theory structure
determinants
Panel C: impact of leverage on economy/time-specific factors
Capital markets Abor and Biekre (2006) na
Interest rate ( ) Colombage (2007); Kaya (2011) na
Inflation (+) Frank and Goyal (2009) na
Inflation ( ) Bokpin (2009) na 117
ROE (+) Abor (2005); Madan (2007) na
GDP growth () Bokpin (2009) na
Tax system(+) Amidu (2007); Colombage (2007); Arvanitis et al. (2012) na
Institutional ownership (+) Al-Ajmi et al. (2009) TOT
Institutional ownership ( ) Casey et al. (2006) na
Notes: POT, pecking order theory; TOT, trade-off theory; ACT, agency cost theory; na, not applicable
(no empirical evidence found in support of any theory of capital structure) Table VII.
implicit effects of these variables. Generally, an organization collects funds from two main
sources i.e. debt and equity. According to MM theory (revised 1963), firms should try to
obtain 100 percent debt to maximize the firm’s value. This is practically not possible
because of many other costs such as cost of financial distress, agency cost and cost of
uncertainty, etc. that are associated with debt. Financing with all equity funds is also not
feasible due to the problem of adverse selection by investors which in turn makes the cost
of equity more expensive for the company. Therefore firms maintain their capital
structure based on the environment in which they operate. The choice of having equity or
debt or reliance on internal funds or mixture of all in the composition of firm’s financial
structure depends on various factors. In Table VII, these factors are classified on the basis
of their operating environment i.e. firm, industry and country. Firm and industry both
constitute micro-level environment and country-specific factors constitute macro
environment for the organization. Table VII shows the impact of these factors on
leverage based on empirical evidence of various studies performed on determinants of
capital structure. Empirical studies are generally supported by the predictions of various
capital structure theories. It is evident from Table VII that empirical evidences of
firm-specific factors do not follow a particular direction of relationship with leverage.
Many studies reveal diverse results, thereby providing mixed and confusing evidence
about capital structure decisions.
The basic foundation of capital structure theory was provided by Modigliani and Miller
(1958) and then several theories have emerged from this. Because the assumptions of MM
theory were idealistic not realistic, the subsequent empirical evidence do not support the
theory. Due to the inclusion of tax, imperfect markets, information asymmetry, agency
conflicts, several prominent theories providing judicious explanation of financing decisions
were propounded. In this paper, we have made an attempt to analyze which type of
financing pattern are followed by firms and we found that out of 167 articles 52 articles
followed peking order theory (POT). This indicates high emphasis on the risk aversion
criteria followed by firms. A hierarchical order is followed for usage of funds. POT is
redefined in the form of new pecking order theory (NPOT) and modified pecking order
theory (MPOT). In NPOT hierarchical order is changed in terms of outside funding, making
equity preferred over debt (Chen, 2004). MPOT includes both trade-off and pecking order
models and it is suitable in hybrid systems (Bontempi, 2002). Frank and Goyal (2003) also
concluded that equity financing is preferred over debt. Shyam-Sunder and Myers (1999)
argue that both TOT and POT do well when applied independently but jointly pecking
order performs better. As TOT suffers from type II error, it is rejected. It is also argued that
IJMF POT and TOT are not mutually exclusive to each other. Both theories provide reasonable
13,2 explanation to financing decisions and 20 studies support both TOT and POT. We found
that 15 articles support TOT and 12 articles support agency cost theory. Florackis (2008)
argues that financial carrots motivate managers to enhance firm value. Therefore, agency
problem is being tackled by firms having low and high growth opportunities by providing
ownership control in the case of high-growth firms and monitoring control in low-growth
118 firms. This is also evident from the fact that POT has been exploited through diminishing
returns (Harris and Raviv, 1991). Therefore, new theories should be tested extensively, for
example, some studies have supported market timing theory (Baker and Wurgler, 2002), and
behavioral finance theory (Uckar, 2012); however, these theories are still in their nascent
stage. We confirm that the capital structure puzzle is still unresolved as we found 39 articles
in which there is no consensus with any other theoretical findings (Table VIII).
5.8 Meta-analysis
Empirical studies on capital structure are mainly focused on firm-specific variables.
Profitability, tangibility, size, growth, age, liquidity, risk and non-debt tax shield (NDTS)
are the primarily studied variables in the vast literature of capital structure. All these
firm-specific variables are explanatory variables. Researchers have analyzed the
relationship between firm-specific variables and leverage through various forms of
regression and discussed their statistical significance. Though the dependent and
independent variables are same in most of the empirical studies, their relationship with each
other is not consistent in all studies. Moreover, the definition of the dependent variable
(leverage) and the independent variables varies among the empirical studies undertaken by
various researchers all over the globe. The reasons behind the difference in the magnitude
and direction of the relationship between leverage and various firm-specific variables is
documented in the literature, these reasons vary as per the relationship found between
criterion and predictor variables. There are large number of empirical studies conducted on
determinants of capital structure and therefore in order to study what literature overall says
about the relationship of leverage with its determinants, meta-analysis is highly essential.
Asia- Middle Multiple Grand

Theoretical models Africa America pacific Europe east regions total
ACT 7 2 2 1 12
Conventional theory 1 1
Dynamic trade-off theory 1 1
Market timing theory 1 2 2 1 6
MPOT 1 1 2
NPOT 1 1
Ownership theory 1 1 1 3
POT and TOT 1 3 9 5 1 1 20
POT and ACT 3 1 4
POT 2 5 14 25 2 4 52
Signaling theory 1 1
Signaling and control drive
theory 1 1
Table VIII. Theory of irrelevancy 1 1
Capital structure
TOT 4 5 2 3 1 15
theories and no.
of times their Mixed 1 2 4 1 8
assumptions are Grand Total 17 22 36 42 5 6 128
used to explain the Note: Mixed, denote multiple theories have been tested by the researcher(s)
capital structure Source: Authors’ own calculation
Meta-analysis means analysis of the analysis. It is an important research strategy designed Capital
to enable the synthesis of results of various studies for an issue to determine a generalized structure
statement. In other words, it helps researchers to explore the past and put forth the determinants
generalized facts for future research. This technique allows researchers to compare or
combine the results of various studies. Therefore, individual studies are considered as units
for meta-analysis. It is a more efficient and effective way to summarize the results of a large
number of studies (Burns and Burns, 2008). Thus meta-analysis helps in removing 119
subjectivity and brings objectivity in the review of literature.
In this study, determinants of capital structure are studied in detail and the findings
are summarized statistically employing the meta-analysis technique. If the results are
summarized by a counting method, say number of studies to determine a statistically
significant positive relationship between two variables or negative relationship or
non-statistically significant relationship, it would produce erroneous result as it does not
take into account the difference between studies in terms of statistical significances and
sample size (Cooper, 1998). To mitigate the error of a counting method two quantitative
procedures; namely, combined significance test and effect size index are developed.
In combined significance test, the statistically computed z-values associated with the
findings of earlier studies are integrated to produce a generalize result. On the other hand,
effect size method involves the combination of coefficient of correlation across studies
(Wolf, 1986; Cooper, 1998). According to Greenberg (1992) when previous
studies document some significant and some non-significant results, combined
significance technique is more accurate. Therefore, to analyze the determinants of
capital structure, combined significance technique is applied. Combined significance test
also has some disadvantages like it gives equal weight to all studies and ignores the effect
of sample size. Basically, a study with a large number of observations is more accurate
and exact as compared to a study with fewer observations (Al-Dohaiman, 2008).
This problem can be circumvented with the help of Weighted Stouffer Test (WST)
(Cooper, 1998; Greenberg, 1992, Wolf, 1986). WST uses degree of freedom associated with
each statistical test. The formula for WST is:
X qffiffiffiffiffiffiffiffiffiffiffiffiffiffi
X 2
Zc ¼ df Z = df (1)
where Zc is standard normal deviate associated with one tailed p-value and df is degree of
freedom. The procedure for calculating Zc is described as follows:
• Record the t-test, p-value or z-value or standard error associated with the findings of
the study.
• Convert the standard errors into t-stats by dividing b coefficient with standard error.
• Transform t-statistics into p-value.
• Transform p-value into z-value.
• Finally calculates Zc by using above formula.
In this study, eight independent firm-specific variables are tested to report the overall
relationship of the variables with leverage. The analysis is further extended to test the
statistical significance of variables among different regions of the world.
5.8.1 Profitability. Profitability is one of the prime explanatory variables studied in the
literature of capital structure. In most of the studies it is defined as earnings before interest
and tax scaled by total assets or total sales. According to the WST, overall profitability is
negatively associated with the leverage and when the relationship is seen separately in
different regions of the world and it is found to be negatively related with the leverage.
IJMF The relationship is statistically significant at 99 percent confidence level. This explains the
13,2 fact that generally firms utilize their internal funds like retained earnings and owner’s
equity. The rationale behind choosing internal funds might be different in different regions.
In developing regions, firms do not have alternative resources and the cost of debt is also
high. Moreover, the capital markets are also not developed and there exists a problem of
asymmetry that makes equity costly. While in developed regions, these factors do not work
120 out but it might be the case that profitability is very high in these regions and there is an
easy availability of alternative sources of finance which makes the conventional sources less
lucrative. Overall, the firms follow a balancing approach and this also supports the pecking
order theory of capital structure. However, some studies have shown a positive relationship
but while considering the overall effect including the region-wise effect of profitability; it is
found to be inversely related with the leverage (Table IX).
5.8.2 Tangibility. Tangibility defines the asset structure of an organization. In most of
the studies it is defined as fixed assets scaled by total assets. It is also one of the important
determinants of the capital structure of a firm. If a firm has assets that can be used as
collateral, it will ease the access of money from external sources. Therefore, it should be
positively related to the capital structure of firms. Overall WST shows positive relationship
of tangibility with leverage; however, it differs when considering the region-wise effect of
tangibility. In the case of countries from Middle East, tangibility is negatively related with
leverage. It is possibly due to the structure of Islamic contracts which do not require
collateral for long-term loans. However, most of the Arabian firms rely on short-term loans
and also these firms are heavily capitalized and finance their long-term requirements
through equity (Al-Ajmi et al., 2009). In case of Africa, though tangibility is positively
related to leverage, it is not statistically significant. It is due to the fact that almost
50 percent of the studies show negative impact of tangibility on leverage, because these
studies are conducted on small firms and the dependent variable is short-term debt.
Therefore, in Africa tangibility is inversely associated with leverage for small firms but
positively associated with leverage in case of large firms. Hence, the overall result as
per WST comes out to be insignificant (Table X).
5.8.3 Size. Firm size has also a powerful impact on the capital structure decisions.
As per WST, it is positively related with leverage. It means that large firms have more
debt as compared to small firms. Firm size is calculated by taking log of sales or log of
asset in most of the studies. In all the regions of the world size is positively related with
leverage except Asia-Pacific. It is due to the fact that Asia being a developing continent
where capital markets are not well-developed or in a transitory stage, firms face difficulty
in issuing equity as it becomes more expensive than debt. It forces firms for looking at
debt as a source of finance. In American continent, a study (Nunkoo and Boateng, 2010)
considering determinants of Canadian firms also shows negative relationship of firm
size with leverage. It is being discussed separately since the observations are too large in
No. of Sum of Sum of Sum of Sum of Square

Region observations z-scores df Z × df square of df root of df Zc p-value Direction
Africa 4,151 −29.7129 4,042 −9,445.8704 1,674,248 1,293.927 −7.30016 0 Negative

America 162,815 −59.2451 162,666 −481,264.27 5,624,990,392 74,999.94 −6.41686 0 Negative
Asia-Pacific 94,391 −248.603 94,193 −2,373,840.7 912,369,359 30,205.45 −78.5898 0 Negative
Europe 553,778 −168.538 553,515 −936,143.89 34,941,053,807 186,925.3 −5.00812 0 Negative
Table IX. Middle East 1,040 −10.1833 996 −2,484.709 24,8196 498.1927 −4.98745 0 Negative
Meta-analysis results Notes: df, degree of freedom it is calculated as number of observations – number of explanatory variables. p-value is
of profitability significant at 99 percent confidence level
this study which changes the overall effect of size for American firms. As shown in Capital
Table XI, for all the other empirical studies on firm size considered in the sample show a structure
positive association with leverage. determinants
5.8.4 Age. According to the WST, the age of the firm is negatively related to
leverage in developed countries and positively related to leverage in developing countries.
As per the findings reported in Table XII, age is negatively associated with leverage in
American and European countries and statistically significant at 99 percent confidence 121
level. The plausible explanation is the availability of alternative sources of finance
and moreover equity markets are highly developed in these regions. Financial resources
are easily approachable and accessible to firms in American and European countries.
On the other hand age it is positively related to leverage in Asian and African continents.
It is due to the fact that these are developing regions and alternative sources of
finance are limited. Therefore, firms rely more on formal sources of finance mainly debt.
No. of Sum of Sum of Sum of Sum of square Square root

Region observations z-scores df Z × df of df of df Zc p-value Direction
Africa 4,151 −19.134 4,042 1,102.174 1,674,248 1,293.927 0.852 0.197** Positive
America 42,371 −24.102 42,270 63,626.381 1,127,752,110 33,582.021 1.895 0.0294* Positive
Asia-Pacific 95,107 79.639 94,908 1,272,803.231 909,377,290 30,155.883 42.207 0 Positive
Europe 528,687 19.322 528,441 4,255,012.753 34,335,862,107 185,299.385 22.963 0 Positive
Middle East 1,040 −7.399 996 −1,859.683 248,196 498.193 −3.733 0 Negative
Notes: df, degree of freedom it is calculated as number of observations – number of explanatory variables. Table X.
p-value is significant at 99 percent confidence level; *p-value is significant at 95 percent confidence level, Meta-analysis results
**p-value is not significant of tangibility

Africa 4,151 15.647 4,042 3,498.942 1,674,248 1,293.927 2.704 0 Positive

America 37,799 16.026 37,717 36,785.964 481,630,045 21,946.071 1.6761 0 Positive
Asia-Pacific 98,430 66.587 98,234 −60,150.122 922,197,152 30,367.699 −1.981 0.023* Negative
Europe 554,423 94.287 554,155 2,061,828.914 34,941,463,407 186,926.358 11.030 0 Positive
Middle East 795 52.911 759 13,386.357 192,027 438.209 30.548 0 Positive Table XI.
Notes: df, degree of freedom it is calculated as number of observations – number of explanatory variables. p-value is Meta-analysis
significant at 99 percent confidence level; *p-value is significant at 95 percent confidence level results of size
No. of Sum of Sum Sum of Sum of Square

Region observations z-scores of df Z × df square of df root of df Zc p-value Direction
Africa 1,084 5.146 1,024 791.939 152,182 390.105 2.030 0 Positive

America 30,680 −4.202 30,662 −64,413.372 470,079,122 21,681.308 −2.971 0 Negative
Asia-Pacific 12,934 13.466 12,894 30,248.313 32,494,512 5,700.396 5.306 0 Positive
Europe 84,380 −61.078 84,251 −816,424.534 1,327,078,327 36,429.086 −22.411 0 Negative
Middle East 245 2.491 237 590.351 56,169 237.000 2.491 0 Positive
Table XII.
Notes: df, degree of freedom it is calculated as number of observations – number of explanatory variables. p-value is Meta-analysis
significant at 99 percent confidence level results of age
IJMF But debt is only available to old and mature firms because of their credit worthiness
13,2 in the market.
5.8.5 Growth. Empirical studies on capital structure measure growth by taking the
percentage change in sales or assets or by market to book ratio of equity. Overall growth is
positively related to leverage. Growth leads to investment and investment require funds.
As equity is more costly than debt, debt is preferred. But in Asia-Pacific region growth is
122 negatively related to leverage. According to pecking order theory a high premium
is charged by the investors to lend funds to high-growth firms (Myers and Majluf, 1984).
This will increase the costs and therefore high-growth firms are reluctant to seek this form
of debt raising (Table XIII).
5.8.6 Liquidity. Liquidity is negatively related to capital structure. Liquidity is captured
by the current ratio in most of the studied. Higher liquidity ensures positive working capital
and therefore funds can be saved for long-term investments. Moreover, in this case there is
no need to borrow from other external sources. WST also reveals a negative relationship of
liquidity with leverage in different regions of the world and it is statistically significant at
99 percent confidence level (Table XIV).
5.8.7 NDTS. NDTS includes items such as depreciation and amortization providing a
tax shield in addition to debt. The greater the number of items included, the lesser will be the
motivation for managers to include debt in the capital structure. Therefore, WST reports a
negative relationship of NDTS with debt. In Asia-Pacific Region, NDTS is positively
associated with the debt because firms can take benefit from the tax shield provided due to a
deduction in interest payments (Chakraborty, 2010) (Table XV).
5.8.8 Business risk. Business risk is measured by variability in earnings. In the
literature, it is defined as a standard deviation of EBIT or as a coefficient of variability
in EBIT. Business risk increases the financial risk of a company, therefore capital
structure theory (POT, TOT) predicts a negative relationship of business risk with
leverage and it is also confirmed statistically by WST. For the studies conducted in the
European region, the relationship is found to be positively and significantly associated

Africa 3,737 25.097 3,664 5,403.13 1,626,620 1,275.390 4.236 0 Positive

America 71,473 30.848 71,336 132,292.90 1,592,294,124 39,903.560 3.315 0 Positive
Asia-Pacific 89,934 −12.050 89,736 −126,232.98 902,737,316 30,045.587 −4.201 0 Negative
Europe 522,353 −2.995 522,121 395,873.07 34,317,503,811 185,249.842 2.137 0 Positive
Table XIII. Middle East 1,040 17.831 996 4,370.04 248,196 498.193 8.772 0 Positive
Meta-analysis Notes: df, degree of freedom it is calculated as number of observations – number of explanatory variables. p-value is
results of growth significant at 99 percent confidence level
No. of Sum of Sum Sum of Sum of Square

Region observations z-scores of df Z × df square of df root of df Zc p-value Direction

Europe 9,149 −50.440 9,088 −65,575.271 20,257,888 4,500.876 −14.569 0 Negative
Middle East 775 −10.493 743 −2,625.350 184,187 429.170 −6.117 0 Negative
Table XIV.
Meta-analysis Notes: df, degree of freedom it is calculated as number of observations – number of explanatory variables. p-value is
results of liquidity significant at 99 percent confidence level
with leverage. It is seen that for a negative relationship between debt and risk, bankruptcy Capital
cost should be very high (Bradley et al., 1984). This is not the case with European firms. structure
Furthermore it is a contrasting finding which supports the fact that determinants of determinants
capital structure vary in the different regions of the world (Table XVI).
5.8.9 Summary of meta-analysis results. Table XVII provides a summary of the
nature of relationship exists between capital structure determinants and leverage. It is
confirmed from Table XVI that overall firms follows pecking order theory. The results are 123
significant at 99 percent confidence level. Table XVII documents that most firms follow a
financial hierarchy model, but the possibility of trade-off theory is not completely ruled
out. In addition to this, when the results of different regions are compared, variables like
age, growth, NDTS and risk differ; their direction of relationship with leverage
differs. This further documents the fact that the capital structure decisions differ across
the regions.
5.9 Citation analysis

Citation is the list of references pointing to prior publications (Smith, 2012). According to
Ziman (1968), “a scientific paper does not stand alone; it is embedded in the literature of the
subject.” A citation represents relationship between cited entity and citing document.
Citation analysis acts as a tool for collection of relevant studies. It helps in identifying the
most important studies related to the work concerned. The citation count serves as a quality
indicator of the literature referred in the analysis. The quality of the study is positively
correlated with a higher number of citation counts. Citation analysis measure is derived
from citation count high-face validity.
For our present study, citation data are collected from Google scholar citation index and
EBSCO host database. Table XVIII provides the list of top 34 papers whose
citation is more than 100. Citation analysis helps in proving the reliability of the
No. of Sum of Sum of Sum of Sum of square Square

Region observations z-scores df Z × df of df root of df Zc p-value Direction
Africa 2,994 5.128 2,950 2,665.526 5,490,787 2,343.243 1.138 0.127a Positive
Asia-Pacific 53,329 26.973 53,232 625,611.629 20,257,888 4,500.876 138.998 0 Positive
Europe 486,703 −43.988 486,582 −1,358,302.807 184,187 429.170 −3,164.952 0 Negative Table XV.
Notes: anot significant. df, degree of freedom it is calculated as number of observations – number of explanatory variables. Meta-analysis results
p-value is significant at 99 percent confidence level of non-debt tax shield
No. of Sum of Sum of Sum of Sum of Square

Region observations z-scores df Z × df square of df root of df Zc p-value Direction
Africa 1,693 −6.677 1,626 1,095.895 514,586 717.346 1.528 0.063a Positive
Europe 119,095 1.868 118,964 109,945.579 2,032,737,882 45,085.894 2.439 0 Positive
Middle East 1,040 −7.026 996 −1,764.599 248,196 498.193 −3.542 0 Negative
Table XVI.
Notes: aNot significant. df, degree of freedom it is calculated as number of observations – number of explanatory Meta-analysis results
variables. p-value is significant at 99 percent confidence level of business risk
IJMF sample, and it also provides a list of the most important articles in a specific area. Out of
13,2 top listed 34 articles, 23 articles are published after year 2000, providing evidence of an
increasing trend of capital structure research performed in the twenty-first century.
The remaining articles form the basis of theoretical concepts of capital structure in the
field of corporate finance.
124 6. Research gaps

In this paper, we present our analysis sequentially, and we thereby make an attempt to
unearth the gaps in the existing literature on capital structure determinants. We sum up our
findings as follows:
(1) Our empirical study shows the predominance of capital structure literature in
developed economies. The study also shows that there is only a limited knowledge
available on emerging markets. Recently, studies on emerging markets have gained

in popularity, because the capital and stock markets in emerging markets are
relatively less efficient and incomplete compared with those in the developed
markets. This causes financing decisions to be incomplete and subject to
irregularities (Eldomiaty, 2007). This aspect makes emerging markets interesting to
study and thereby contribute to the literature.
(2) Our review of literature indicates the relationship among managerial characteristics
such as age, education, experience and gender and financing preferences among
firms. However, these characteristics are not studied in detail for firms in both
developed and developing countries which highlight another gap in the existing
work on capital structure.
(3) Our meticulous literature review also indicates mixed evidence about the
determinants of capital structure. Their direction and significance of relationship
changes when applied in different environment. This is the reason why capital
structure decisions are inconclusive (Harris and Raviv, 1991).
(4) Our literature review evidences that most of the studies on capital structure are based
on empirical research and very few studies are based on primary data. Although, it is
difficult to collect information through primary data due to poor response rate, etc.,
this useful gathering of facts cannot be obtained through secondary data. The analysis
based on primary data is more qualitative and it seeks to describe patterns, opinions
and beliefs of those managing capital structures of firms.
(5) Our literature survey indicates that most of the researchers applied
regression-based models to find the determinants of capital structure.
The results vary when the same models are applied in different institutional
settings. There is thus a need for a more robust method to analyze the firm-specific
determinants of capital structure.
Region Profitability Tangibility Size Age Growth Liquidity NDTS Risk
Africa −*** +*** +*** +*** +*** Nil +

a
+a
America −*** +** +*** −*** +*** −*** −*** −***
Asia-Pacific −*** +*** −** +*** −*** −*** +*** +***
Table XVII. Europe −*** +*** +*** −*** +*** −*** −*** −***
Summary of findings Middle East −*** −*** +*** +*** +*** −*** Nil −***
of capital structure Overall −*** +*** +*** −*** +*** −*** −*** −***
through meta-analysis Notes: aNot significant. **,***Significant at 95 and 99 percent confidence levels, respectively
No. of
Capital
Serial times structure
No. Title of the paper Author Journal Year cited determinants
1 Theory of the firm: managerial behavior, agency costs Jensen and JFEa 1976 41,943
and ownership structure Meckling
2 The cost of capital, corporation finance and theory of Modigliani AERb 1958 12,920
investment and Miller 125
a
3 Corporate and financing decisions when firm have Myers and JFE 1984 12,063
information that investors do not have Majluf
4 The capital structure puzzle Myers JFc 1984 5,394
5 What do we know about capital structure: some Rajan and JFc 1995 4,261
evidence from international data Zingales
6 The determinants of capital structure choice Titman and JFc 1988 3,859
Wessels
c
7 The theory of capital structure Harris and JF 1991 3,370
Raviv
8 The determination of financial structure: the incentive Ross BJEd 1977 3,256
and signaling approach
e
9 Testing trade-off and pecking order predictions about Fama and RFS 2002 3,079
dividend and debt French
10 Debt and taxes Miller JFc 1977 2,952
11 Testing trade-off against pecking order theory models Shyam- JFEa 1999 1,889
of capital structure Sunder and
Myers
12 The dynamic specification of pecking order theory: its Bontempi EEf 2002 1,535
relevance in italy
c
13 Capital structure in developing countries Booth et al. JF 2001 1,453
14 Testing the pecking order theory of capital structure Frank and JFEa 2003 1,261
Goyal
15 On the existence of optimal capital structure: theory and Bradley et al. JFc 1984 1,257
evidence
16 Capital structure decisions: which factors are reliably Frank and FMg 2009 750
important? Goyal
h
17 Financial policy and capital structure choice in UK SMEs: Michaelas SBE 1999 451
empirical evidence from panel data et al.
18 An international comparison of capital structure and debt Fan et al. JFQAi 2012 387
maturity choice
a
19 The theory and practice of corporate finance: evidence Graham and JFE 2001 384
from the field Harvey et al.
20 Trade-off and pecking order theories of debt Frank and HECF j 2005 371
Goyal
g
21 Cross-country determinants of capital structure choice: a Bancel and FM 2004 337
survey of European firms Mitto
22 How persistent is the effect of market timing on capital Alti JFc 2006 305
structure
a
23 Testing static trade-off against pecking order models of Chirinko and JFE 2000 297
capital structure: a critical approach Singha
24 Capital structure and financing of smes: Australian Cassar and AFk 2003 265
evidence Holmes
l
25 Determinants of the capital structure of European SMEs Hall et al. JBF 2004 238
26 The determinants of capital structure: capital market- Antoniou et al. JFQAi 2008 202
oriented vs bank-oriented institutions
27 Industry effects on the determinants of unquoted SMEs’ Hall et al. IJEBm 2000 199
capital structure Table XVIII.
Citation analysis of
important studies on
(continued ) capital structure
IJMF No. of
13,2 Serial times
No. Title of the paper Author Journal Year cited
28 Does asymmetric information drive capital structure Bharath et al. RFSe 2009 196
decisions?
29 The effect of capital structure on profitability – an Abor JRFn 2005 186
126 empirical evidence from listed firms
30 Small and medium size enterprise financing – a note on Watson and JBFA 2002 o
173
some of empirical implications of pecking order Wilson
31 How SME uniqueness affects capital structure: evidence Sogorb-Mira SBEh 2005 150
from a 1994-1998 Spanish data panel
p
32 Specificity and opacity as a resource-based Vincente- SBJ 2001 136
determinants of capital structure: evidence from Spanish Lorente
manufacturing firms
33 Capital structure and debt structure Rauh and Sufi RFSe 2010 132
34 Potential competitive effects of Basel II on banks in SME Berger JFQAi 2006 110
credit market in the USA
Note: Coding pattern: aJournal of Financial Economics, bAmerican Economic Review, cJournal of Finance, dThe
Bell Journal of Economics, eReview of Financial Studies, fEmpirical Economics, gFinancial Management, hSmall
Business Economics, iJournal of Financial and Quantitative Analysis, jHandbook of Empirical Corporate Finance,
k
Accounting and Finance, lJournal of Business Finance, mInternational Journal of the Economics of Business,
n
Table XVIII. Journal of Risk Finance, oJournal of Business Finance and Accounting, pStrategic Business Management
(6) Our survey shows that firm-specific determinants of capital structure are found to
vary largely. Further, most of the studies undertaken so far have used firm-specific
variables/factors, and provide less evidence about effect of industry- and
country-specific variables on capital structure of firms.
7. Future avenues for research

Although it is clear from our literature survey that researchers, academics and practitioners
have considered capital structure to be one of the most interesting topics to explore in the past
40 years, capital structure decisions remain inconclusive (Harris and Raviv, 1991). This paper
has shown the current status of the existing literature on capital structure determinants from
the perspective of region, year of study, state of economy, size of firms, type of industry, data
collection methods, data analysis techniques and theories supporting empirical literature.
Undoubtedly, research needs to be done meticulously, and the focus should be on providing a
solution to real-life problems. We have identified the following issues that may require further
investigation:
(1) As discussed in the research gaps section, empirical studies depict the dominance of
capital structure literature in developed countries. Our literature review clearly
points out the growing interest of researchers toward studying developing
countries. Therefore, to comprehend the actual differences between the financing
decisions of developed and developing countries, research must be conducted to
contribute to the extant literature of capital structure determinants.
(2) In recent years, SMEs are one of the major contributors of growth in developing
countries and are leading employment providers in world economies. Studies on
capital structure decisions have predominantly relied on large-scale industries and
are scant for small firms. Therefore, a comprehensive study on capital structure
determinants of SMEs must be carried out to bridge these gaps and provide
insightful knowledge in this area.
(3) Until recently, research has been mainly focused on firm-specific variables of capital Capital
structure. However, manager/owner-specific variables, such as their growth structure
intentions, education, risk propensity and experience, should be studied in detail determinants
to provide a more transparent view on capital structure decisions.
(4) Most of the studies have used regression-based models for analyzing the
determinants of capital structure. The results of the existing studies are inconsistent
when these models are applied in a different context. A study must be performed 127
using alternative methodologies (other than regression-based methodology) to solve
the inconclusive capital structure puzzle and obtain solutions.
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Corresponding author
Satish Kumar can be contacted at: scholar.satish@gmail.com
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Research on capital structure determinants: a review and future directions

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financial structure by restructuring the proportion of alternative sources of funding. It thereby

1.1 Scope of the Study

2. An overview of capital structure research

• The idealistic assumptions of irrelevancy theory of capital structure compel researchers

4.1 Time horizon

4.2 Literature collection and boundary identification

5. Research segmentation and categorization

Search criteria Total Total No. of

1 EBSCO Capital structure or October- 161 75 Not relevant to our 86

5.2 Level of economic development

5.3 Firm size

Regions No. of developing economies No. of developed economies Both

Region No. of large firms No. of small-sized firms Both

5.5 Data analysis techniques

Industry type No. of papers (%)

5.6 Type of research

5.7 Empirical findings

Panel A: impact of firm-specific factors on leverage

(2009); Pathak (2010); Zhang (2010); Sheikh and Wang (2011)

Asia- Middle Multiple Grand

No. of Sum of Sum of Sum of Sum of Square

Africa 4,151 −29.7129 4,042 −9,445.8704 1,674,248 1,293.927 −7.30016 0 Negative

No. of Sum of Sum of Sum of Sum of square Square root

No. of Sum of Sum of Sum of Sum of square Square root

Africa 4,151 15.647 4,042 3,498.942 1,674,248 1,293.927 2.704 0 Positive

No. of Sum of Sum Sum of Sum of Square

Africa 1,084 5.146 1,024 791.939 152,182 390.105 2.030 0 Positive

No. of Sum of Sum of Sum of Sum of square Square root

Africa 3,737 25.097 3,664 5,403.13 1,626,620 1,275.390 4.236 0 Positive

No. of Sum of Sum Sum of Sum of Square

America 3,988 −50.952 3,945 −26,274.971 5,490,787 2,343.243 −11.213 0 Negative

5.9 Citation analysis

No. of Sum of Sum of Sum of Sum of square Square

No. of Sum of Sum of Sum of Sum of Square

124 6. Research gaps

available on emerging markets. Recently, studies on emerging markets have gained

Region Profitability Tangibility Size Age Growth Liquidity NDTS Risk

Africa −*** +*** +*** +*** +*** Nil +

7. Future avenues for research

Journal of Business & Society, Vol. 19 Nos 1/2, pp. 187-201.

countries”, The Journal of Finance, Vol. 56 No. 1, pp. 87-130.

(accessed May 10, 2014).

1. Wiener-FererhoferAlexander, Alexander Wiener-Fererhofer. 2017. Credit rating process. Journal

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Africa −* +* +* +* +*** Nil +