DETERMINANTS OF CAPITAL STRUCTURE DURING THE CRISIS PERIOD: EVIDENCE FROM THE RECENT FINANCIAL CRISIS (2007-2009)

Abstract

This study examines the factors that affect the capital structure decisions of private firms in normal and during credit crunch period. The fixed effects model is used to investigate this issue. The final sample of the study includes 4,973 private firms. The results of the study show that sales growth and tangible assets are significant determinants of firms’ capital structure both in the pre-crisis and during the credit contraction period. It further highlights that profitability is significant in normal time period only. It does not play an important role in firm financing decisions in the credit drought period. The crisis dummy is significant which means that credit supply condition is also one of the important factors that need to be considered while determining the financing mix in the crisis period. Hence, the results suggest that demand side and credit supply friction are significant factors to be considered in the firm financial decisions especially in the credit contraction period.