FUNDAMENTAL DETERMINANTS OF CAPITAL STRUCTURE CHOICE: A SURVEY OF ROMANIAN COMPANIES

One of the longest-standing questions about capital structure is whether companies have target debt ratios. The most important arguments for what could determine capital structure is trade-off theory and the pecking order theory. The goal of this paper is to express the linkage between financial leverage and characteristics of the company, in an emerging market such as the Romanian one. To address this problem, we used a simple linear regression model throughout the analysis in order to put the focus on within-company changes in financial leverage. We consider factors related to the demand for and the supply of debt financing. Together, the magnitude of the estimated effects of supply and demand factors appears large enough to account the most or the entire long-term trend in emerging market debt ratios. On the demand side, theory suggests, and prior empirical evidence of companies, that fundamental company-level characteristics influence the degree to which companies take on debt. In a linear simple regression model, we found a negative correlation between financial leverage, return on operational income to total assets or growth opportunities and a positive correlation between financial leverage, the rate of tangible assets or turnover.