Determinants of capital structure of French SBF 120 listed companies: A comparison between trade-off theory and pecking order theory

Abstract

In this paper, we attempt to identify the firm-specific determinants of the capital structure of a sample of non-financial firms listed on the SBF 120 French index between 2009 and 2019 and to test whether the determinants offered by the two principal financial theories (e.g., trade-off theory and pecking order theory) are able to provide convincing explanations for their behavior in terms of financing decisions. Capital structure determinants discussed are size, profitability, asset tangibility, growth opportunities, liquidity, effective tax rate, and risk. The empirical analysis is carried out within a panel data estimation framework. Panel estimation techniques of fixed and random effects and ordinary least squares (OLS) estimation have been to test the hypothesized relationships. Empirical results showed that the majority of determinants had been significant. The size of the firm and its previous leverage have been found positively related to present leverage. The growth opportunities and the profitability have been found negatively related and the asset tangibility, the effective tax rate, and the firm risk were not significant. Then two variables follow the trade-off theory predictions, two variables follow those of the pecking order and three others do not follow anyone. No theory alone then can best explain the behavior of the French firms in terms of capital structure. But none of them can be rejected