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Abstract

The determinants of capital structure in a dynamics context have been analysed by investigating the derivatives of gearing ratios with respect to the hypothesised determinants. Data from 651 UK listed companies for a period of 16-years from 1985 to 2000 have been used. Moving windows regressions have been used and the results of two alternative methodologies have been compared in order to determine their relative merits. It has been found that traditional OLS-regressions perform as well as structural equation modelling (SEM) in the analysis of adjustment towards the optimal capital structure. Supportive of prior literature, gearing ratios appear to respond positively to changes in firm size and changes in corporate taxes. Also consistent with the theory, gearing ratios respond negatively to changes in non-debt tax shields, profitability, and cash holdings. However, gearing responds negatively to growth only in the short-term, and there is no consistent relationship between changes in tangibility and gearing over time.

Keywords

Capital Structure Dynamic Analysis Structural Equation Modelling

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The Dynamics of Capital Structure

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