Macro Uncertainties and Tests of Capital Structure Theories across Renewable and Non-Renewable Resource Companies

Author: Denny Irawan, Tatsuyoshi Okimoto

Executive Summary


Capital structure is one of the most critical decisions for ?rms in business. This study examines the role of macro (economic and non-economic) uncertainties in affecting ?rms� capital structure management. Three prominent capital structure theories are tested for global resource ?rms: (1) static trade-off, (2) pecking order, and (3) market timing theory. The results suggest that no single theory prevails, although both pecking order and market timing theories have certain explanatory power to explain sample ?rms� ?nancing behaviour. The pecking order theory is strongly supported by the results of the leverage target adjustment model. However, the downward cyclical patterns of pecking order coef?cients suggest that the resource ?rms tend to choose debt ?nancing less and less over time, particularly after 2008. The market timing theory holds strong, as indicated by the signi?cance of macro condition (uncertainties) variables in determining sample ?rms� capital structure, especially after 2008 and for non-renewable ?rms. However, the main proxies of the cost of debt are not statistically signi?cant. In conclusion, this study ?nds that resource ?rms have a particular pecking order preference when they need ?nancing, and the in?uence of macro uncertainties are vital in determining their capital structure.

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