The Firm-Specific Determinants of the Target Capital Structure: Evidence from Bosnia and Herzegovina Panel Data
AbstractThe purpose of this study is to carry out a comprehensive and robust analysis of the determinants of the capital structure of the Federation Bosnia and Herzegovina (FBiH) companies at the industry level. A large number of hypotheses of different classes of theories are tested. Estimating the dynamic panel models using the system of generalized method of moments (GMM) estimator, we captured both cross-sectional and inter-temporal relationships between the leverage in companies and its determinants. The results show that profitability, collateral value of the assets and the risk, measured by earnings volatility, negatively affect company's leverage, while inconsistent results were for the relationship between different proxies for firm's future growth opportunities and leverage, whereby the firm size overall has no relationship with the firm' s leverage. The findings reflect the transitional nature of the FBiH corporate environment.They suggest that some of the insights from modern finance theory of capital structure are applicable in the FBiH in that certain firm-specific factors that are relevant for explaining capital structure in developed economies are also relevant in the FBiH. Overall, the empirical evidence presented in this Study finds it difficult to demonstrate the validity of the trade-off and the pecking order theories as stand-alone models. The Study’s results also point at several unique aspects of financing behavior in developing countries, from which specific implications for further research follow.
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