The determinants of corporate capital structure in Europe

This thesis tests the pecking order hypothesis of capital structure (POH) against the static trade-off theory of capital structure (STT). A sample of 1310 European listed firms was used in 3 cross sectional studies to find evidence for the POH. The studies were performed for the years 2000, 2004 and 2008. The data was divided by financial deficit size, company size and size of the debt to equity ratio. Small deficits seem to follow the POH more closely than large deficits, but no clear relation between company size and pecking order behavior was found, nor was there any evidence of a relationship between pecking order behavior and D/E ratios. Overall little evidence was found to support the POH. To test the STT 622 European listed firms were used. Again three cross sectional studies were performed for the years 2000, 2004 and 2008. With the exception of 2008 (possibly due to the credit crisis), strong evidence was found to support the STT. Beta’s of 0.5 and 0.59 showed fast paced reverting to optimal debt ratios.