The determinants of capital structure in Maltese companies

Abstract

The objective of this study is to examine the capital structure of listed companies and its determinants. The study has been conducted using a sample of fifteen non-bank companies listed on the Malta Stock Exchange during 2010 and 2011. The study analyses the financial statements of these companies to establish whether firm-specific variables affect the debt and equity components of their capital structures. The variables selected for analysis include size, profitability, business risk, dividend payout, tangibility, non-debt tax shield, growth rate, debt capacity, operating leverage and market-to-book value. The study finds that size, profitability, dividend payout, growth rate and debt capacity are significant determinants of financial leverage in Maltese listed companies. The findings of the research also support the pecking order theory of capital structure which suggests that firms, in raising finance, have a preference for internally generated funds, then for debt and finally equity. The results of this research are relatively consistent with the theoretical framework as well as empirical studies carried out abroad. The study contributes to an understanding of corporate financing behaviour and of the factors that trigger changes in the capital structures of local listed companies.