Determinants of Capital Structure: Evidence from a Small Island Developing State
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26 November 2022
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The existing empirical research on capital structure is largely confined to the US and other developed countries, with very few studies on developing economies. This paper attempts to supplement the existing literature by bringing in new evidence on the determinants of capital structure for companies listed on the Stock Exchange of the Small Island Developing State (SIDS) of Mauritius. Results from the study reveal that certain firm-specific factors which explain capital structure in developed countries are also relevant to a small island economy like Mauritius. The estimates presented in the paper for 38 firms of the Stock Exchange of Mauritius, for the period 1994-2004, show that the most important firm-specific factors that influence the capital structure choice are profitability, size, tangibility and liquidity. Other factors like business risk, non-debt tax shield effects and growth opportunities do not seem to affect the capital structure. Industry disaggregated investigation indicates that there is not much difference in the determinants of capital structure across industries. The Trade-off Model and Pecking Order Hypothesis—derived from the western setting—thus provide only a partial explanation to the capital structure choices of Mauritian firms.
Capital structure is one of the most important issues in corporate finance. It has been the focus of many empirical studies ever since the seminal work by Modigliani and Miller (1958). However the majority of these studies have been confined to the United States and other developed countries, with little work done for developing countries cases ; and until now, none for the Small Island Developing States (SIDS) cases. Empirical evidences from the latter are expected to supplement the existing literature, given the fact that such economies have different institutional structures and have specificities of their own as far as the financial markets and the economy in general are concerned. Moreover, these economies have undergone a substantial transformation during the previous decade as witnessed by the move towards privatization/free market, coupled with the widening and deepening of various financial markets, including the capital market.