Empirical testing of static trade-off theory predictions: cross-country comparison

Abstract

In this review author addresses the problem of finding the empirical evidence for propositions of static trade-off theory of capital structure. The object of the ongoing analysis is the results of studies, in which the features of companies’ capital structure in different countries are compared. The review covers a number of sophisticated researches by different authors, who use classic investigation approaches (regressions) and some less widely spread ones. It is found to be clear that in most cases the results depend much on the approach used by the author. The stress is put on some alternative methods, particularly, on the surveys of chief executives in order to uncover their opinion about the importance of different factors affecting the process of making financial decisions. The aim of the review is to examine the three sides of the comparative analysis between different countries: 1) contribution of “classic” factors (tax shield and costs of financial distress) into the capital structure of companies in different countries; 2) the “degree” of confirmation of static trade-off theory in American and non-American companies; 3) influence of country-specific factors on the capital structure. In result author comes to a conclusion that though some difference in capital structure determinants between countries exists, it is not dramatic. Nevertheless the need to investigate of country-specific factors still remains, considering the growth of multinational companies and cross-country transactions. It is important that the common tendencies are noticed among large number of countries, but this fact doesn’t mean that the static trade-off theory is confirmed for all of its propositions in all economies, especially considering the gradation of some capital structure factors for managers according to the surveys. On the contrary there is strong evidence that the trade-off model does not explain all of the features of capital structure in the world, though in some cases it can be useful to describe financial policies in particular countries, depending on the quality of political and financial system.