Epistemology of capital structure decisions by building contractors in Hong Kong

Abstract

PurposeThis paper aims to identify a set of potential determinants of capital structure. By knowing the key determinants, it is possible to understand how building contractors make decisions on capital structure.Design/methodology/approachA questionnaire survey was conducted to solicit Hong Kong building contractors' view on the predictive power of a set of financial ratios on capital structure. Each of the seven proxies of capital structure was regressed on the five financial ratios. The usual diagnostic tests (i.e. Durbin‐Watson and variance inflation factor tests) and plots of residuals and normality were carried out to ensure that assumptions of linear regression analysis were met. To validate the findings, eight contractors were further interviewed.FindingsBoth measures of long‐term debts (i.e. “long‐term debt divided by total assets” and “long‐term debt divided by total debt”) are proven to be related to “tangibility” significantly. Also, perceived growth opportunities are significantly related to three proxies for capital structure (i.e. total debt to capital, long‐term debt and long‐term leverage).Research limitations/implicationsFurther research should be undertaken to improve the quality of data and to enrich the understanding of how contractors define their capital structures.Originality/valueDespite a plethora of research having been done by financial researchers, there are very few relevant papers in the construction field. This paper is intended to explore how building contractors made decisions on capital structure.