CAPITAL STRUCTURE BEHAVIOUR IN UK

Empirical Investigation of Capital Structure Behaviour by UK Companies

Table of Contents

Chapter 1: Introduction3

Background of the study3

Problem Statement3

Purpose of the study4

Rationale of the study5

Significance of the study6

Chapter 2: Literature Review7

Chapter 3: Methodology11

Research Design11

Data Collection & Procedure11

Data Analysis12

Chapter 4: Findings & Results19

Chapter 5: Discussion & Conclusion34

References37

Appendices41

Chapter 1: Introduction

Background of the study

The original study of Modigliani and Miller (2008) shows that the estimation of firms will be unaligned from its economic structure under certain key assumptions. Internal and external capital may be considered as flawless alternates in a world where capital markets perform flawlessly, where there are no transactions or bankruptcy charges, no distortion taxation and the creative undertaking of the firm is unaligned of its procedures of financing. Once these basic assumptions are calm, although, capital structure may become applicable. Additionally, companies may find that there are limits to their get access to external financing, and the charges of alternate types of external investment may differ. Under such market imperfections, companies will try to choose grades of debt and equity in alignment to come to a maximum capital structure.

 

Problem Statement

Prior study on behaviour of capital structure by Rajan and Zingales (2009) proposes that the grade of gearing in businesses in UK from distinct industries is positively associated to dimensions and tangibility, and contrary correlated with profitability and the grade of development opportunities. However, as contended by Harris and Raviv (2009), 'The understanding of outcomes should be moderated by a perception of the adversities engaged in assessing both leverage and the explanatory variables of interest'. In this study the aim is on the adversities of assessing gearing, and the sensitivity of Rajan and Zingales' outcomes to variations in gearing measures are tested.  Rajan and Zingales outcomes are discovered to be highly definitional-dependent. The determinants of gearing emerge to alter considerably, counting upon which constituent of debt is being analysed. In specific, important dissimilarities are discovered in the determinants of long- and short-term types of debt. Given that trade borrowing and matching, on mean, anecdotes for more than 62% of total debt, the outcomes are especially perceptive to if such debt is encompassed in the gearing measure. It is contended, thus, that investigation of capital structure is incomplete without a comprehensive written check of all types of firm's debt. (Brounen 2006, 1409-1442)

This study endeavours to continue behaviour of capital structure and its determinants in 4 UK companies from each of the IT, healthcare care & automobile industry.

 

 

Purpose of the study

     The purpose of the study is to analyze an empirical investigation of capital structure behaviour by 4 UK companies from each of the three industries that are IT, healthcare care & automobile industry.

 

Rationale of the study

Empirical investigation of capital structure is laden with adversity, and as contended by Harris and Raviv (2009), 'The understanding of outcomes should be moderated by a perception of the adversities engaged in assessing both leverage and the explanatory variables of interest'. This study focuses on the adversities in characterising ...