The determinants of capital structure across firms’ sizes:The U.K evidence

This paper explores the leverage determinants across firms’ sizes based on the two main theories behind the capital structure, the trade-off and the pecking order theories. A panel data is sued to find the relationship between capital structure and the variables that proxy for benefits and costs of debt during 1990 to 2006. Our findings show that both principles help to explain the capital structure of small, medium, and large firms. However, greater emphasised should be placed on the tradeoff theory. In addition, small firms differ from large companies in level of growth opportunities, structure of assets, and probability of bankruptcy and agency costs. Therefore, different firms’ characteristics are important to affect the power of leverage determinants and thus leverage determinants are likely to be size dependant. These results support the existing differences between small and large firms considering the agency costs and the bankruptcy costs.