DETERMINANTS OF CAPITAL STRUCTURE IN CEMENT INDUSTRY: A

CASE OF NIGERIAN LISTED CEMENT FIRMS

Abstract
This article examines an empirical analysis of determinant of capital structure in
Nigerian Cement Industry for the period of 2000 2009. The analyses are
performed using time series data pertaining four listed cement firms. The
regression analyses are estimated using OLS. We used eight exogenous variables
to measure their effect on capital structure. Seven of our variables were
significantly related to leverage ratio whereas the remaining one variable was not.
Considering the results, profitability, size of the firm, liquidity and lag of leverage
are negatively significantly related to leverage whereas potential for growth, age
of the firm, tangibility are positively significantly related with the leverage ratio.
Our results approve the prediction of pecking order theory in case of profitability
where as earnings volatility fails to confirm to trade- off theory. We therefore
recommend that firms should always consider their position using above variables
as yardstick before embarking on debt financing decision.
Key words: Capital Structure, Leverage, Cement Industry, Nigeria

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Electronic copy available at: http://ssrn.com/abstract=1905096

1.0

INTRODUCTION

Capital structure refers to the mix of debt and equity used by a firm in financing its assets. The
capital structure decision is one of the most important decisions made by financial management.
The capital structure decision is at the center of many other decisions in the area of corporate
finance. These include dividend policy, project financing, issue of long term securities, financing
of mergers, buyouts and so on. One of the many objectives of a corporate financial manager is to
ensure the lower cost of capital and thus maximize the wealth of shareholders. Capital structure
is one of the effective tools of management to manage the cost of capital. An optimal capital
structure is reached at a point where the cost of the capital is minimal. What are the potential
determinants of such optimal capital structure? This is the questions to be answered in this study.
Quite a large strand of theoretical and empirical research has focused on the area of capital
structure since the path-breaking paper on capital structure by Miller and Modigliani published
in 1958. However, most of the research work has been carried out in developed economies and
very little is known about the capital structure of firms in developing economies. With this very
little research, we are not sure whether conclusions from theoretical and empirical research
carried out in developed economies are valid for developing countries too; or a different set of
factors influence capital structure decisions in developing countries. Also, we are not sure
whether conclusions from researches on capital structure are portable across countries in general.
Rajan and Zingales (1995) studied the G-7 countries while Booth, Aivazian, Demirguc-Kunt, and
Maksmivoc, (2001) extended this work by including some data from emerging markets. The
conclusions from these studies were that there were some common features in the capital

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Electronic copy available at: http://ssrn.com/abstract=1905096

structures of firms in different countries but that further research was necessary to identify the
determinants of capital structure in particular institutional settings or countries.
Nigeria is a developing country with a single stock exchange (Nigerian Stock Exchange NSE)
but with few branches across the country, accommodate about 260 securities. Like other
developing economies, the area of capital structure is relatively unexplored in Nigeria. Limited
research work exists on this area, like salawu (2007) studied empirical analysis of determinants
of capital structure of 50 selected non financial companies between 1999 and 2004. This study
built on that of Salawu (2007) by adding to exogenous variables, using a wider time frame and
considering the impact of the previous years leverage on the current year ones. However, this
study was confined only to listed firm in the cement industry in Nigeria. Nigeria's cement sector
is entering a phase of major change, as producers expand capacity to cope with the countrys
critical infrastructure and housing needs. (CBN report 2009)
In 2008, the Nigerian cement industry had an estimated market size of N361 billion (US$2.4
billion), or in aggregate consumption terms, 13.4 million tonnes, of which 46% (6.2
million tonnes) was produced in Nigeria. The Federal Ministry of Commerce and Industry
estimates that effective demand was around 18 million tonnes. Driven by the acute infrastructure
deficit and significant demand for housing, domestic production volumes have grown at 25%
(CAGR) over the last four years. Given the strong correlation between GDP growth and cement
consumption, cement production growth has also been helped by Nigeria's strong economic
performance in recent years. (CBN report 2009)
According to the Central Bank of Nigeria, the country needs US$510 billion in investments in
infrastructure over the next eleven years if the nation is to achieve its vision of being one of the
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top-twenty economies in the world by 2020. The increasing demand for good quality housing,
which is estimated at around 16 million housing units, is also expected to be a key catalyst for
industry sales growth. Consequently, we anticipate that demand will remain strong, with industry
growth averaging between 12% and 15% in 2009 and 10%-12% in 2010, despite the weak
economic environment.
Based on the above magnificent important of this industry to the economy as whole (especially
in the attainment of the vision 20:2020), we are motivated to conduct an analysis of the various
factors that determine the financial mix of this noble sector in Nigeria.
The main objective of this study is to identify the potential determinants of capital structure in
the listed cement firms in Nigeria. The time frame of the study ranged from 2000 to 2008 (Nine
year). The corporate financial managers thus can benefit from this to make an optimal mix of
debt and equity in order to minimize the cost of capital and place more emphasis on those factors
that are of significant to determinant of capital structure of their various firms. The existing and
potential investors in the industry will also find the results of this study useful.
The rest of this paper is structured as follows: Section 2 summarizes the related literature.
Section 3 gives description of the data and measurement of the variables and presents the
discussion on specification of model. Section 4 discusses the results from the models used and
section 5 presents the conclusion.

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LITERATURE REVIEWS
2.1

THEORETICAL FRAMEWORK.

In their landmark paper in 1958, Modigliani and Miller (MM) showed that if a companys
investment policy was taken as given, then in a world of perfect marketsa world without taxes,
perfect and credible disclosure of all information, and no transaction costs associated with raising
money or going bankruptcythe extent of debt in a companys capital structure would not affect
the firms value. The perfect capital markets they assumed have attracted a wide variety of
research of somewhat-less-than-perfect capital markets. The development of agency theory in the
1980s, coupled with detailed research into the extent and effects of bankruptcy costs, has lead to
the current mainstream view that corporations act as if there is a unique, optimal capital structure
for individual firms that results from a trade-off between the tax benefits of increasing leverage
and increasing agency and bankruptcy costs that higher debt entails.
Because of the unrealistic assumptions in MM irrelevance theory, research on capital structure
gave birth to other theories. The trade off theory says that a firms adjustment toward an optimal
leverage is influenced by three factors namely taxes, costs of financial distress and agency costs.
Baxter (1967) argued that the extensive use of debt increases the chances of bankruptcy because
of which creditors demand extra risk premium. He said that firms should not use debt beyond the
point where the cost of debt becomes larger than the tax advantage. Kraus and Litzenberger
(1973) argue that if a firms debt obligations are greater than its earnings then the firms market
value is necessarily a concave function of its debt obligations. DeAngelo and Masulis (1980)
worked further on Millers differential tax model by including other non-debt shields such as
depreciation charges and investment tax credits. They concluded that each firm has an internal
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optimal capital structure that maximizes its value. The capital structure is determined only by the
interactions of personal and corporate taxes as well as positive defaults costs. Altman (1984) was
the first to identify direct and indirect costs of bankruptcy. By studying 12 retail and 7 industrial
firms, he found that firms in the sample faced 12.2% of indirect bankruptcy costs at time t-1 and
16.7% at time t. He concluded that capital structure should be such that the present value of
marginal tax benefits is equal to marginal present value of bankruptcy costs. Bradley, Jarrell and
Kim (1984) used a model that synthesized modern balancing theory of optimal capital structure.
They found strong direct relationship between non-tax shields and the firms debt level.
Agency theory suggests that there exists an optimal debt level in capital structure that can
minimize the above agency costs. To mitigate the agency problems, various methods have been
suggested. Jensen and Meckling (1976) suggest either to increase the ownership of the managers
in the firm in order to align the interest of mangers with that of the owners or increase the use of
debt which will reduce the equity base and thus increase the percentage of equity owned by
mangers. (Grossman and Hart, 1982) suggest that the use of debt increases the chances of
bankruptcy and job loss that further motivate managers to use the organizational resources
efficiently and reduce their consumption on perks. Jensen (1986) present free-cash flow
hypothesis. Free cash flow refers to cash flow available after funding all projects with positive
cash flows. Managers having less than 100% stake in business and their compensation tied to
firms expansion may try to use the free cash flows sub-optimally and increase firm size
resulting in greater compensation (Baker, Jensen, and Murphy, (1988); Donaldson, 1984). Jensen
(1986) suggests that this problem can be somehow controlled by increasing the stake of
managers in the business or by increasing debt in the capital structure, thereby reducing the
amount of free cash available to managers.

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Harris and Reviv (1990) gave one more reason of using debt in capital structure. They say that
management will hide information from shareholders about the liquidation of the firm even if the
liquidation will be in the best interest of shareholders because managers want the perpetuation of
their service. Similarly, Amihud and Lev (1981) suggest that mangers have incentives to pursue
strategies that reduce their employment risk. This conflict can be solved by increasing the use of
debt financing since bondholders will take control of the firm in case of default as they are
powered to do so by the debt indentures. Stulz (1990) said when shareholders cannot observe
either the investing decisions of management or the cash flow position in the firm, they will use
debt financing. Managers, to maintain credibility, will over-invest if it has extra cash and underinvest if it has limited cash. Stulz (1990) argued that to reduce the cost of underinvestment and
overinvestment, the amount of free cash flow should be reduced to management by increasing
debt financing.
Another approach to explain the capital structure of firms is the differences in the level of
information, which the insiders and outsiders have about the investment opportunities and
income distribution of the firm. Myers and Majful (1984) provided theoretical basis for this
theory. He said that there exists a degree of asymmetry of information between the firms
managers and investors concerning the real value of firms present and future investment. Ross
(1977) says that mangers have better knowledge of the income distribution of a firm. When they
issue debt, it may generate positive signals to the outside world about the firms income
distribution suggesting that the firm has stable income and is able to pay the periodic
installments and interest payments. In this regard, higher debt may show higher confidence of
managers in the firms smooth income distribution and adequacy of the income. Thus firms in

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their efforts to increase investors confidence and thus increase the value of equity will use
higher debt in the capital structure.
2.2

REVIEW OF EMPERICAL LITERATURE ON THE DETERMINANTS OF

CAPITAL STRUCTURE

In order to present the findings of various earlier studies on the subject matter of this study, we
adopted exhaustive with selection citation approach of literature review as put forward by
Cooper (1988) in Randolph (2009). Previous studies suggest that the level of leverage depends
upon the definition of leverage. Several research studies have used both market and book value
based measures of leverage (Titman and Wessels 1988, Rajan and Zingales 1995). We use the
book value measure of leverage. This can be justified with the argument that optimal level of
leverage is determined by the trade-off between the benefits and costs of debt financing. The
main benefit of leverage is the cash savings generated because of the debt-tax shield. This tax
shield benefits are not changed by market value of the debt once it is issued. Banerjee,
Heshmati, and Wihlborg (2000).

Tangibility of Assets (TG): A firm with large amount of fixed asset can borrow at relatively
lower rate of interest by providing the security of these assets to creditors. Empirical evidence
reveals mix conclusion on the effect of tangibility on capital structure across various studies.
While Wiwattanakantang (1999) finds negative relationship between tangibility and leverage for
Thai firms, Prasad, Green, Murinde (2003) and Suto (2003) find a positively significant
relationship for Malaysian firms whereas Booth et al. (2001) find a negative relationship for Thai
firms. Having the incentive of getting debt at lower interest rate, a firm with higher percentage of
fixed asset is expected to borrow more as compared to a firm whose cost of borrowing is higher

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because of having less fixed assets. Thus we expect a positive relationship between tangibility of
assets and leverage of Nigerian listed cement firms.
Size (SZ): There are two conflicting viewpoints about the relationship of size to leverage of a
firm. First, large firms dont consider the direct bankruptcy costs as an active variable in
deciding the level of leverage as these costs are fixed by constitution and constitute a smaller
proportion of the total firms value. And also, larger firms being more diversified have lesser
chances of bankruptcy (Titman and Wessels 1988). Following this, one may expect a positive
relationship between size and leverage of a firm. Second, contrary to first view, Rajan and
Zingales (1995) argue that there is less asymmetrical information about the larger firms. This
reduces the chances of undervaluation of the new equity issue and thus encourages the large
firms to use equity financing. This means that there is negative relationship between size and
leverage of a firm. Following Rajan and Zingales (1995), we expect a negative relationship
between size and leverage of the cement firms in Nigeria.
Growths (GT): Empirically, there is much controversy about the relationship between growth
rate and level of leverage. According to pecking order theory hypothesis, a firm will use first
internally generated funds which may not be sufficient for a growing firm. And next options for
the growing firms is to use debt financing which implies that a growing firm will have a high
leverage (Drobetz and Fix 2003). On the other hand, agency costs for growing firms are expected
to be higher as these firms have more flexibility with regard to future investments. The reason is
that bondholders fear that such firms may go for risky projects in future as they have more
choice of selection between risky and safe investment opportunities. Deeming their investments
at risk in future, bondholders will impose higher costs at lending to growing firms. Growing
firms, thus, facing higher cost of debt will use less debt and more equity. Congruent with this,
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Titman and Wessels (1988), Barclay, Smith and Watts (1995) and Rajan and Zingales (1995) all
find a negative relationship between growth opportunities and leverage. Initially we expect that
firms with higher growth opportunities will have lower level of leverage. Different research
studies have used different measures of growth; like market to book value of equity, research
expenditure to total sales measure and annual percentage increase in total assets (Titman and
Wessels, 1988).Given the structure of data we measure growth (GT) as a percentage increase in
net total assets and hypothesized that leverage level of Nigeria cement firms is negatively related
to the growth opportunities.
Profitability (PF): Given the pecking order hypothesis firms tend to use internally generated
funds first and than resort to external financing. This implies that profitable firms will have less
amount of leverage (Myers and Majluf 1984). We expect a negative relationship between
profitability and leverage. We measure profitability (PF) as the ratio of net income after taxes
divided by total sales. It is therefore expected that leverage level of Nigerian cement firms is
negatively related to the profitability.
Earning volatility (EV): Earning volatility is considered to be either the inherent business risk
in the operations of a firm or a result of inefficient management practices. In either case earning
volatility is proxy for the probability of financial distress and the firm will have to pay risk
premium to outside fund providers. To reduce the cost of capital, a firm will first use internally
generated funds and then outsider funds. This suggests that earning volatility is negatively
related with leverage. This is the combined prediction of trade-off theory and pecking order
theory. However, Wiwattanakantang (1999) find that there is no significant relationship between
the capital structure and volatility in earnings but in the view of Cools (1993) following the
agency theory, he suggests positive relationship between earning volatility and leverage. He says

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that the problem of underinvestment decreases when the volatility of firms returns increases. By
this, it is assumed that earning volatility (EV) is positively related to leverage levels of cement
firms in Nigeria.
AGE (AG): Age of the firm is a standard measure of reputation in capital structure models. As a
firm continues longer in business, it establishes itself as an ongoing business and therefore
increases its capacity to take on more debt; hence age is positively related to debt. Before
granting a loan, banks tend to evaluate the creditworthiness of entrepreneurs as these are
generally believed to pin high hopes on very risky projects promising high profitability rates. In
particular, when it comes to highly indebted companies, they are essentially gambling their
creditors money. If the investment is profitable, shareholders will collect a significant share of
the earnings, but if the project fails, then the creditors have to bear the consequences (Myers,
1977). To overcome problems associated with the evaluation of creditworthiness, Diamond
(1984) suggests the use of firm reputation. He takes reputation to mean the good name a firm has
built up over the years; the name is recognized by the market, which has observed the firms
ability to meet its obligations in a timely manner. We therefore hypothesized that age of the firm
is positively related to leverage in Nigeria listed cement firms
LIQUIDITY: This is defined as the ratio of current assets to current liabilities. As predicted by
the pecking order theory, firms with high liquidity will borrow less. In addition, managers can
manipulate liquid assets in favour of shareholders against the interest of debt holders, increasing
the agency costs of debt. Thus, a negative relationship between liquidity and leverage is expected
3.0

Data and Measurement of Variables

The study employed secondary sources of data as data were extracted from the NSE factbooks
and firms annual financial reports from 2004 to 2008. The population of the study comprises of
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five listed cement firms in Nigeria out of which four (Cement Company of Northern Nigeria
CNN, Ashaka Cement ASC, Benue Cement BEC, and Lafarge Cement WAPCO Nigeria LCW)
were randomly selected representing 80% of the entire population. Descriptive statistics (mean
median, mode, range and standard deviation), using SPSS 17 version, were used. The ordinary
Least Squares (OLS) model was estimated using E-view 3.1 statistical package.
3.1

Specification of the Model

The model specification builds on an empirical framework using the determinants mentioned
under the review of empirical determinants of capital structure above to discern the determinants
of the capital structure of Nigerian Listed cement firms. This is functionally stated as:
LEVt = f (TANGt, SIZEt, GROWTHt, PROFt, ENVTt, AGEEt, LIQUIDITYt LEVt-1)
This is therefore stated in stochastic model as:

LEVt =

+
+

+
t+

Where:
LEV = Leverage (measured as book value of long term debts divided by Capital Employed i.e
long term debts plus shareholder funds)
TANG = Tangibility of Assets (measured as fixed assets divided by Net Total Assets)
SIZE =Size of the firms (measured as log of Net Total Assets)
GROWTH = Growth Potential (measured as % Increase in Net Total Assets)
PROF = Profitability (measured as earning after tax divided turnover)
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ENVT = Earnings Volatility (measured as value of the deviations from means of net profit
divided by total number of years).
LIQUIDITY = Liquidity of firms (measured as current liabilities divided by current assets)
LEVt-1 = Lag of the current year leverage value.
= coefficients of explanatory variables
= constant or intercept.

4.0

Analysis of Results

This subsection explains the results of findings of this study. Firstly, brief general description of
the summary statistics of the dependent and independent variables. This is followed by analyses
of measures of determinants of capital structure along side with testing of the study hypotheses.
The section ends with a summary of research results.
4.1

Summary Statistics

This section will analyze the simple statistics description of dependent and independent variables
of the regression model.
Table 4.1
summary of descriptive statistics (2000- 2008 Data)
leverage
Size
Liquidity
Growth
Age
Tangibility
Profitability
Earnings Volatility

Minimum
0.0000
5.4606
0.0000
0.2571
1.5185
0.2561
-2.1696
-7.9547

Maximum
0.9589
7.6402
15.2434
0.9812
1.6902
30.9033
1.6933
10.7163

Mean
0.3630
6.7395
1.8182
0.8421
1.6007
2.0827
0.0669
0.0214

Std. Deviation
0.3872
0.5737
2.9607
0.1759
0.0776
4.9966
0.6750
2.7102

observation
36
36
36
36
36
36
36
36

Sources: SPSS Regression Results Using Secondary Data (Appendix A)

From table 4.1, the leverage ratio of industry is about 36%. The maximum of the leverage level
is about 96% while the minimum is 0%. The table also indicates that earnings vitality, tangibility
of asset and liquidity position of the firms in the industry have the highest standard deviation, it
is expected that these exogenous variables will contribute less to the endogenous variable under
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this study. The profitability in the industry stood at an average of 6% under the period of the
study whereas the potential for growth is about 84%. This can be justified by the enabling
environment being put in place by government so as to ensure the achievement of 16 housing
units at the end of 2020 as part of her noble vision of 20:2020. On the average, earnings volatility
stood at about 2% during the period of this study, this can be justified by the means of the
profitability of the industry.
Table 4.2: Regression results
Regression results estimate using OLS
Variables

Co-efficient

t- Statistical

Probabilities

Constant

-0.5003

-0.4287

0.6722

Size
Liquidity
Growth
Age
Tang
Prof
ENVT
Lev (-1)

-0.5451
-0.0314
2.2411
1.4470
0.0473
-01643
0.025
-0.5003

-3.0550
-1.7904
3.1654
2.0870
4.0101
-1.7266
1.616
-0.4287

0.0056
0.0866
0.0043
0.0482
0.0005
0.098
0.119
0.000

Source: Results of Analysis using E-view (Appendix B)

Regression Equation:
LEV = -0.5003 0.5452 SIZE 0.0314 LIQUIDITY + 2.2411 GROWTH + 1.4470 AGE +
SE
(0.178)
(0.018)
(0.708)
(0.693)
0.0473 TANG 0.1643 PROF + 0.025 ENVT + 0.782 LEV (-1)
(0.012)
(0.095)
(0.015)
(0.125)
Note: SE is estimated Standard Errors.
Table 4.2 above shows the results of the regression analysis estimated by OLS. The table
consists of coefficient of various deterministic factors, their estimate t- statistics as well as their
probability value. The table indicates that all explanatory variables are significant with
dependent variable except earnings volatility.
The relationship between leverage and tangibility (TANG) is positive as expected and is
statistically significant. This result confirms our expectation that there is positive relationship
between tangibility of assets and leverage of Nigerian listed cement firms.
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This result is consistent with Prasad et al. (2003) and Suto (2003) who find a positively
significant relationship for Malaysian firms. It is however in contrast with the findings of Booth
et al. (2001) and Wiwattanakantang (1999). They both find a negative relationship for Thai
firms. The relationship between profitability (PROF) and leverage is found to be negative as
postulated and statistically significant at 10%. This is in order with the pecking order hypothesis
that firms tend to use internally generated funds first and than resort to external financing. This
finding is consistent with that of Myers and Majluf (1984). We therefore conclude that there is a
negative relationship between profitability and capital structure of Nigerian cement industry.
Firm size (SIZE) is found to be negatively related with capital structure at 1% significant level.
This is consistent with our previous expectation that there is a negative relationship between size
and leverage of the cement firms in Nigeria. The result is in line that of Rajan and Zingales
(1995) who argues that there is less asymmetrical information about the larger firms. This
reduces the chances of undervaluation of the new equity issue and thus encourages the large
firms to use equity financing.
For growth potential, inverse relationship with capital structure is found as we expect the
relationship to be negative. The results indicate positive statistically significant relationship
between the endogenous variable and exogenous variable. Contrary to this findings are the study
of Titman and Wessels (1988), Barclay et al. (1995) and Rajan and Zingales (1995). They all
find a negative relationship between growth opportunities and leverage.
Similarly, liquidity has a negative and significant relationship with leverage. This is in line with
the expectation of the study. The implication of this findings might be that firms tend to use their
liquid assets to finance their investment in preference to raising external debt, and that they tend
to prefer equity to debt when share prices are rising. On the other hand, consistent with
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Wiwattanakantang (1999) earnings volatility appears to have no significant effect on leverage.

Firms may ignore the volatility of earnings if the risk and costs of entering into liquidation are
low. This may occur if the borrowing level of firms is well below their debt servicing capacity.
This can also be explained further by the industry average earnings volatility which is just about
2% as indicated in summary of statistic in the table 4.3 above.
For the age of firms, the results indicate that there significant positive relationship with capital
structure of the firms. This is in consistent with the expectation of this study in which we
hypothesized that age of the firm is positively related to leverage in Nigeria listed cement firms.
Consistent with this finding is work of Diamond (1984). He takes reputation to mean the good
name a firm has built up over the years; the name is recognized by the market, which has
observed the firms ability to meet its obligations in a timely manner.
Finally, the leverage of previous years has impact on the current years leverage. This is in line
with common knowledge in finance that the potential investors will analyze the financial
statement of the firms to see the leverage position before part away with their resources. As for
this study, the results indicate a positive significant relationship between the previous leverage
(lagged by 1) and current years leverage position. This might be as a result of the industry
average leverage position which is still manageable. That is the average leverage level (about
36%) in the industry indicates that no firm is highly geared.
In order to test for overall fitness of the estimated model, table 4.4 below has been extracted
from the results of the regression model in appendix B.

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Table 4.3 Test for overall fitness of the estimated model

Durbin Watson

R2

Adjusted R2

F- Statistic

2.4480

0.7548

0.670

8.8512 (0.0000)

Source: Results of Analysis using E-view (Appendix B)

Table 4.3 above indicate that there is absent of autocorrelation among the exogenous variables
under study. This is depicted by Durbin Watson figure which about 2. The explanatory variables
all put together explain the dependent up to about 67% as this is shows by the adjusted R2. FStatistic result indicates that the model is well fitted as is significant at 1%

5.0

Conclusion

This paper presents an analysis of the determinants of capital structure choices of Nigerian listed
cement firms based on the data available on their annual reports for the period 2000 2008. The
effect of eight explanatory variables is measured on leverage ratio which is calculated by
dividing the total debt by total assets. We first present some descriptive statistics on our selected
variables. The most interesting finding of our descriptive statistics is the average of earnings
volatility is just 2% for the industry. Our explanation of this fact is that there stability in the
expected returns in the industry. Simple regression analysis was applied with the assumption that
there were no industry or time effects. We used eight explanatory variables to measure their
effect on leverage ratio. Seven of our variables were significantly related to leverage ratio
whereas the remaining one variable was not statistically significant in having relationship with
the debt ratio. Previous leverage level has significant negative relationship with the current year
leverage ratios in the industry at 1%. Profitability is the most significant explanatory variable
Page 17 of 22

and is negatively related to leverage. The negative sign confirms to prediction of the pecking
order theory.
Tangibility is positively significantly capital structure. The prediction of trade-off theory is
confirmed by our result that creditors prefer the security of specific claim on fixed assets. The
study did not find any evidence that earning volatility influence the decision of leverage of the
sample firms. Growth potential and age variable are both having positive relationship with
capital structure, while the former is significant at 1%, the latter is at 5%. The liquidity has
negative relationship at 10% significant level. Finally, size, measured by natural log of net total
assets, has a positive coefficient and is significant1%. It means that firms in the sample do
consider their sizes as an active variable in deciding the leverage level.

Page 18 of 22

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Appendix A
The Descriptive Statistics results analyzed by SPSS statistical Package
Descriptive Statistics
N
LEV
SIZE
LIQUIDITY
GROWTH
AGE
TANG
PROF
ENVT
Valid N (listwise)

Minimum
36
36
36
36
36
36
36
33
33

.0000
5.4606
.0000
.2571
1.5185
.2561
-2.1696
-7.9547

Maximum
.9589
7.6402
15.2434
.9812
1.6902
30.9033
1.6933
10.7163

Mean
.362981
6.739461
1.818245
.842148
1.600737
2.082667
.066890
.021446

Std. Deviation
.3871994
.5737397
2.9607254
.1758993
.0775815
4.9966293
.6749800
2.7102312

Appendix B
The regression results analyzed by E- view statistical Package
Dependent Variable: LEV
Method: Least Squares
Date: 09/04/10 Time: 22:25
Sample(adjusted): 2 36
Included observations: 32
Excluded observations: 3 after adjusting endpoints
Variable

Coefficient

Std. Error

t-Statistic

Prob.

SIZE
LIQUIDITY
GROWTH
AGE
TANG
PROF
ENVT
LEV(-1)
C

-0.545136
-0.031433
2.241133
1.447070
0.047265
-0.164283
0.025050
0.782031
-0.500265

0.178437
0.017556
0.708015
0.693379
0.011784
0.095148
0.015495
0.124670
1.167038

-3.055053
-1.790450
3.165376
2.086985
4.010990
-1.726595
1.616637
6.272787
-0.428662

0.0056
0.0866
0.0043
0.0482
0.0005
0.0976
0.1196
0.0000
0.6722

R-squared
Adjusted R-squared
S.E. of regression
Sum squared resid
Log likelihood
Durbin-Watson stat

0.754823
0.669544
0.225332
1.167811
7.563651
2.447988

Mean dependent var

S.D. dependent var
Akaike info criterion
Schwarz criterion
F-statistic
Prob(F-statistic)

0.349812
0.391982
0.089772
0.502010
8.851228
0.000018

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