This paper discusses the determinants of capital structure with a focus on both publicly-owned and privately-owned firms. We use annual financial statement data for over 1,000 publicly-owned and privately-owned Brazilian firms covering the 2012-2015 period. The methodology takes into account the interdependency between debt and dividend policies, recognized in the literature on determinants of both capital structure and dividend policies. We also take into account that both debt and dividend policies can be used to mitigate agency problems.
In the present paper, we attempt to test for the usual determinants of a firm’s capital structure, as proxied by its proportion of debt, not as a competition between the two major theories, but with an interest at assessing the impact of the following aspects: (1) the possible interdependency between debt and dividend policies, (2) the possible differences with which the usual determinants variously affect financially constrained and unconstrained firms, using a seldom employed criterion for classifying firms as constrained or unconstrained.
The issuance of debt creates opportunities for outside monitoring, in this case by creditors, as discussed by Jensen and Meckling (1976). In turn, higher payout also creates opportunities for outside monitoring, as pointed out by Rozeff (1982). Hence they may be substitutes or complements for each other. According to Lemmon and Zender (2010), when firms must seek debt, unconstrained firms primarily use it to fill their financing deficits, while constrained firms use internal equity. Almeida and Campello (2010) claimed the inverse relation between debt or equity would be stronger in unconstrain
The methodology takes into account the interdependency between debt and dividend policies. We also take into account that both debt and dividend policies can be used to mitigate agency problems, and that the presence of agency problems may in turn affect the choice of capital structure and dividend policy in a firm. As a proxy for the agency cost of equity, the firm’s inverted asset turnover ratio is used. Our empirical strategy treats debt and dividend policies and agency cost as dependent variables and leads to the use of a system of three equations, which are estimated with the GMM.
In particular, we find that both payout and previous debt levels are positive and significant determinants of debt levels, but that there are differences in how important they are for privately-owned firms, on one hand, and publicly-owned firms, on the other. Also, some usual determinants of capital structure are significant for one group: for privately-owned firms (cash flow), for publicly-owned firms (intangibility), but not for the other, pointing out the importance of analyzing such firms separately.
We find that payout policy is a significant and positive determinant of debt, both for privately-owned and publicly-owned firms, but more strongly for the former. The preexisting level of debt is a strong determinant, meaning that this significant variable has usually been omitted from Brazilian studies. the separate analysis of capital structure determinants for these two groups of firms has produced some very different results, indicating that studies that focus on listed companies due to the greater data availability may not be representative of what generally happens in Brazilian companies
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