The Determinants of Capital Structure: An Empirical Study of New Zealand-Listed Firms

Abstract

This paper investigates capital structure determinants of New Zealand-listed firms. This study is an extension from previous studies conducted by Boyle and Eckhold (1997) and, Wellalage & Locke (2012). Boyle and Eckhold and, Wellalage and Locke examine capital structure choices in New Zealand, especially the debt choices of NZ’s corporate firms. Using a balanced-panel of 79 New Zealand-listed firms, this study employs a balanced panel method, using dynamic-panel Instrumental Variable-Generalised Methods of Moments (IV-GMM) as it corrects heteroskedasticity and endogeneity problems which might result in an unbiased and inconsistent estimation. All variables, apart from non-debt tax shields and profitability exhibit a significant impact on total debt. Overall, these variables confirm the trade-off theory, even though the coefficient for non-debt tax shield confirms the pecking-order theory. The empirical evidence is less conclusive than that of previous studies in other countries, particularly Australia where capital structure confirms the pecking-order theory. Overall, the trade-off theory is more appropriate in explaining New Zealand listed firms’ capital structure. In addition, it appears that the capital structure theories applied to each study are contradictory, even though the result is in line with Boyle and Eckhold and, Wellalage and Locke which find that those firms’ specific characteristics play a significant role in determining the firm’s debt level. However, the contradictory results may be due to the different methods, time frames and scope of the samples used.