A Model To Examine The Influence of Risks On Capital Structure

Abstract

This study examines the influence of risks on capital structure decision across different countries and economic sectors from 2005 to 2015 in Egypt, Turkey, Brazil and Argentina. Classification of selected variables in a combined setup as core risk factors in capital structure decision; was driven by increased application of internal credit ratings by banks for both existing and potential clients to estimate probability of default over specific time horizon. Leverage level for corporations is an outcome of borrower – bank relationship based on aggregated valuation procedure whereby internal credit rating represents the basis for loan approval, pricing, monitoring and loan loss provisioning. Internal credit ratings is based on a mix of both financial / quantitative factors and non-financial / qualitative factors. This study focused on key financial (firm-specific) factors and in a broader sense on macroeconomic variables with validated quantification measures; whereby their combined use rather than their single use, allow for more accurate prediction for risk of default and hence capital structure decision. The book leverage sensitivity to explanatory variables (profitability, firm size, tangibility, volatility, GDP growth, inflation and stock market development) was examined using different estimation methods. Profitability was the only variable consistently highly significant with negative coefficient obtained in our regressions for four countries and economic sectors studied. Inconsistency of results for other variables prevailed. Estimation methods used are: Ordinary Least Squares (OLS), Fixed Effect (FE) and System Generalized Method of Moments (System GMM).