CAPITAL STRUCTURE BEHAVIOUR IN UK

Empirical Investigation of Capital Structure Behaviour by UK Companies

Table of Contents

Chapter 1: Introduction4

Purpose of the study5

Chapter 2: Literature Review6

Hypothesis Development15

Chapter 3: Methodology20

Theoretical Framework20

Research Design23

Data sample23

Data calculated23

Chapter 4: Analysis of Industries26

Discussions for Real Estate Industry27

Discussions for Pharmaceutical Industry29

Discussions for Oil & Gas Industry30

Analysis of the three industries as a whole32

Chapter 5: Conclusion and limitations38

References41

Bibliogrpahy59

Appendices A61

Appendices B63

Appendices C65

Appendices D66

Appendices E- Companies data67

Appendices F- SPSS output70

Chapter 1: Introduction

The report determines what factors effect capital structure of the firm or does the firm has a optimum capital structure. The companies are all U.K based companies and are on London Stock Exchange which will be analysed statictically. Therefore, we will analyze four companies from 3 sectors (industries). We will be analyzing those 3 sectors for four years from 2004 to 2007 to see the performance of the company in long run. Hereby, the investigation focuses on the relationship between leverage, defined as debt to equity, and seven company variables: firm size, tangibility of assets, volatility, growth, profitability, tax and age. I would determine the relationship between debt/equity and tax, firm size, growth, profitability, tangibility of assets, volatility and age.

This report will be having Literature review and then analysing factors affecting capital structure of the companies. The analysis will lead us to come to a conclusion where we can say which industry relies more on debt and equity.

This study endeavours to continue behaviour of capital structure and its determinants in 4 UK companies from each of the Real Estate, Pharmaceutical & oil and Gas.

 

 

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 Real Estate, Pharmaceutical & oil and Gas industry.

 

 

Chapter 2: Literature Review

 

Capital structure of a company refers to how a company has been financed using debt and equity capital (Ram Ramesh,2001). Capital structure is the backbone of the company. Sweeney (2003) states that it is very difficult to have an ideal capital structure in today's world because there is so much volatility. Capital structure should be balanced according to the industry and volatility. In today's world there is high volatility so there is very less possibility to maintain capital structure When decision is made my managers about the capital structure they have a chance of loosing more rather than gaining (Tim Koller etal,2005). The Shareholders, lenders, financers all require a fare rate of return as for taking risk, in order to get benefit to all, for this purpose I will analyze the capital structure of the company and the theories based on capital structure.

A important financial decision facing firms is the choice between debt and equity capital (Glen and Pinto, 1994). Capital structure, which is defined as total debt to total assets at book value, influences both the profitability and riskiness of the firm (Bos and Fetherston, 1993). The greater the gearing a firm exhibits, the higher the potential for failure if cash flows fall short of those ...