Determinants of Corporate Capital Structure in New Zealand

Choosing the way to fund new projects would be one of the toughest tasks for top management in the real business world. Among the long history of study in financial management, several theories have developed to explain corporate capital structure such as net income approach, trade-off, agency costs and pecking order.This paper identifies determinants of capital structure based on a sample of 155r 5-year financial statements from31 of NZX 50 companies utilising statistical analysis: descriptive statistics, correlation and multiple regression. This study finds that there is a positive relationship between leverage and company size measured as total assets, total revenue and EBIT. Four independent variables chosen for the regression analysis are: a ratio of income tax expense divided by total assets; return on net assets (profit after tax divided by non-current assets plus working capital); aggregate of depreciation, amortisation, lease, occupancy and impairment expenses; and dividend pay-out ratio. Findings are consistent with the tax shield effect arising from the use of debt, which is given by the trade-off theory while being inconsistent with the notion of non-debt tax shield. Moreover, findings are also consistent with pecking order theory. However, the four independent variables only explain the leverage ratio at 46.76 percent.

Determinants of Corporate Capital Structure in New Zealand Keywords:

Capital structure , Taxation , New Zealand