Analyse The Determinants Of The Capital Structure Of A Company (Statistics Project Sample)

REGRESSION ANALYSIS OF THE FACTORS AFFECTING THE CAPITAL STRUCTURE OF A COMPANY
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Introduction
This essay is based on the analysis of the determinants of the capital structure of companies using the multiple linear regression analysis which is done using the ordinary least square method. Capital structure of a company can be explained as the ability or how the given company finances its day to day operations and the overall growth of the company using the available different and diverse sources of funds and capital. For any company to growth there is need for a better capital structure where the company is able to grow faster without liabilities or undergoing financial strains. This analysis involved the use of 697 financial companies in the United Kingdom which are listed in the London stock exchange and other 628 non financial companies from China. The data relating to the various variables was collected and analyzed using Microsoft excel. A regression analysis was carried out for the variables and the results of the data analysis summarized in the paper.
Variable definition
In the analysis of the capital structure of the company, the study used a number of financial ratios and values to measure how the company finances its operations to and ensure growth. The dependent variable in this analysis was the leverage ratio of the company which was calculated as the ratio of total debt to total assets of the company.
The explanatory variables in this analysis are the tangibility of the company which is the ratio of property plant and equipment to total assets, the market to book ratio of the companies which is the (total assets - book value of equity + market value of equity), the size of the given companies which is measured by the logarithm of the total sales made by the given companies under study and the profitability of the companies given by the ratio of earnings before interest and tax to total assets.
Brief analysis of past literature on the determinants of capital structure
This section provides an analysis of the previous studies and researches which have been done on the determinants of the capital structure of companies. It provides a detailed analysis of those literature including the data used, methods used by the studies for analysis of data. The variables they also applied in the analysis of capital structure determinants. The result, findings, limitations, conclusions and recommendations of these studies have also been analyzed in this study.
Literature review
Han suck Hong (2005) carried out a study on the determinants of the capital structure of the companies in Sweden using empirical estimation. He used data of around 6000 companies and using a wide span of years from 1992 to 2000. This provided enough data for him to arrive at reliable conclusions and provide robust results which would be applied later by other researchers. The study concluded that the companies in Sweden are highly leveraged that is they have a high leverage ratios and also the short terms debts of the companies formed the major part of the total debts of the companies. The study used the leverage ratio as the depend variable and the explanatory variables were , tangibility of the companies used in the analysis, the non-debt tax shield of the companies, profitability of the company, the size of the company, the expected growth, uniqueness of the companies under study, the income variability of the companies, and time dummies. The study also separated the long term debts and the short term debts of the companies. In the findings, he found that the tangibility of the companies were positively related with the long term debts and negatively related with the short term debts of the companies. He also encountered some limitations in the data since it was difficult for him to separate the short term debt determinants and the long term debts determinants.
Nelson Vergas et al (2015) carried out a research on the determinants of the capital structure of the listed companies in Portugal using non- financial companies. They used the following factors and determinants of the capital structure of the companies namely; the tangibility of the company, the profitability of the company, other sources of tax optimization of the companies, growth opportunities, the size of the company and the market value. The results showed that the profitability had a negative impact on the companies; both the growth opportunities and other sources of tax optimization had a positive impact on the capital structures. They employed the use of regression equations to carry out the analysis and measure how much the determinants of the capital structure affected the leverage ratios of the selected non-financial companies. In their research, they concluded the supremacy of the pecking order theory where the managers of the companies made decisions. They concluded that the most important factors which affect the debts ratios of the companies where the profitability which was negatively related and the growth opportunities of the company had a positive impact on the leverage.
Data
The data which was used in this analysis was obtained from 697 financial companies listed in the London stock exchange and other 628 non financial companies from the United States which are also listed in China. This gave a total of 1325 companies which would provide enough data to produce accurate and reliable information. There was no specific method used in the collection or selection of the companies but the study used companies whose data was convenient to obtain and those which had a higher market values. The data was collected for the most recent financial statements of the companies which were the end of the 2016 financial year reports. The choice of the most recent financial statements would help obtain accurate and reliable results due to the changing capital structures of the companies in general which changing customer needs and the market.
Methodology
The study employed the multiple linear regression technique where the dependent variable which is the leverage ratio was regressed against the explanatory variables of, tangibility, market to book value ratio, size and profitability. The ordinary list square method was applied to estimate the parameters of each of the determinants of the capital structures. The significance and detailed explanation of each of the parameters in relation to the factors they represent was provided. The adequacy of the model was tested and the necessary conclusions made in the study. The predictability of the model was also tested to provide more reliable and robust results from the analysis which would be used to make future decisions which could affect the companies both short term and long term performance. The necessary conclusions from the results of the data analysis have also been made and further recommendations.
Data analysis and empirical results
The results of the data analysis have been summarized in this section and the necessary conclusions done from the results. The regression equation is given by the following equation
The regression equation from China companies is given by;
R-squared value 0.6245
The regression equation for the United Kingdom companies is given by;
R-squared value 0.0013
Discussion of the results and comparison of the results from the two countries
Tangibility
From the data results above, it can be seen that the companies in china had a leverage ratio negatively related with the tangibility. This means that an increase in the tangibility of those companies led to a decrease in their leverage ratios. The data for the companies in the UK, the analysis showed that an increase in tangibility showed an increase in the leverage ratio of the financial companies selected in the UK. This showed that with increase of the tangible assets of the companies in the UK led them to borrow more using the assets as securities hence raising their leverage ratios. While in china where the non- financial companies were selected, increased tangible assets decreased their debts hence decrease in the overall leverage ratios.
Size
The size of the company in this case had a positive impact on the leverage ratio of the given companies under the study in the UK. In china, the size of the company had negative impact on the leverage ratio of the company. The large the size of the company which is this case was measured by the logarithm of the total sales made by the company, the higher the leverage ratio for UK and the lower the leverage ratio for the China companies. Large companies tend to borrow more in terms of debts. This is to help them finance their activities and day to day operations of the given company. In the data analysis it was noted that most of the financial companies were much affected by the size in terms of the leverage ratio. Financial companies were much affected by the short term debts while the non financial ones were much affected on the basis of their long term debts. The overall conclusion is that the increases in the size of the company led to a corresponding increase on the leverage ratio since higher companies tend to borrow large debts as compared to small companies. This shows that the small companies were more strained in terms of the total term debts and had to take borrowing to finance their activities and investments. For the non financial companies in China, the higher the size of the company the lower the leverage ratios of these companies. This showed more sales led to fewer debts to the companies in china which has led to the growth of the companies and decrease in the leverage ratios.
Profitability
In this analysis the profitability of the company had a positive relationship with the leverage ratio of the given companies of the data collected...