Impact of Financial Crisis on Firms’ Capital Structure in ......University of Kent, UK This study...
Transcript of Impact of Financial Crisis on Firms’ Capital Structure in ......University of Kent, UK This study...
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Impact of Financial Crisis on Firms’ CapitalStructure in UK, France, and Germany
Abdullah IqbalUniversity of Kent, UK
Ortenca Kume*University of Kent, UK
This study examines the impact of the recent financial crisis on the capitalstructure decision of UK, French and German firms. The results show thatoverall leverage ratios increase from pre-crisis (2006 and 2007) to crisis (2008and 2009) years and then decrease in the post-crisis (2010 and 2011) years.Both equity and debt levels change during the crisis and post-crisis years. Thefindings further reveal that firms with lower than industry average capitalstructure ratios in the pre-crisis period experience a gradual increase in theirleverage during crisis and post-crisis periods. However, firms with higher thanindustry average capital structure ratios in the pre-crisis periods experience asignificant decrease in the leverage ratios particularly in the post-crisis periodmainly due to changes in their equity levels. (JEL: G14, G15, G32)
Keywords: financial crisis; capital structure; leverage; UK; France; Germany
I. Introduction
Most of the extant literature shows that changes in capital structureaffect firm value. Prior studies (Demirgüç-Kunt and Maksimovic, 1999;Booth et al., 2001; Graham, Leary and Roberts, 2014, etc.) find that thecapital structure decision is influenced not only by firm-specific factorsbut also by institutional settings and macroeconomic uncertainty. Thisstudy examines changes in capital structures of non-financial/non-utilityEuropean firms around the crisis period of 2007–08. It focuses mainly
* Dr Ortenca Kume, Lecturer in Finance, Kent Business School, University of Kent, Canterbury, CT2 7PE, UK. Email: [email protected]
(Multinational Finance Journal, 2014, vol. 18, no. 3/4, pp. 249–280)© Multinational Finance Society, a nonprofit corporation. All rights reserved. DOI: 10.17578/18-3/4-3
Multinational Finance Journal250
on the UK, France, and Germany because these countries represent themost developed countries in Europe. Further, these countries havedifferent financial and institutional characteristics with UK being amarket-based economy (similar to the US) and France and Germany onthe other side being typical bank-based economies (similar to Japan).There are differences even among firms operating in bank-basedeconomies. For example, Brun et al. (2013) argue that German firmsemploy higher levels of debt than their UK and French counterparts dueto their long-term relationship with “HausBanks”. Bancel and Mittoo(2011) note that French economy was hit harder than UK and Germaneconomies during the crisis. They also show that unlike their Germancounterparts, French firms relied heavily on trade financing. However,none of these papers examines the time-series variation in leveragelevels across firms in all three countries (the UK, France, and Germany)around the recent financial crisis.
The major contribution of this study is that it provides an insight onthe impact of 2007–08 financial crisis on capital structure decisions ofnon-financial/non-utility firms in market-based (UK) and bank-based(France and Germany) economies. Secondly, it identifies the financingalternatives (short-term debt, long-term debt or equity) that are used byfirms operating in these economies around the crisis period. Finally, itshows how leverage ratios change during and after the crisis period forfirms with conservative and aggressive pre-crisis leverage ratios.
The results indicate that, on average, leverage ratios for firms in theUK and Germany increase from pre-crisis (2006–2007) to crisis period(2008–2009) but decrease from crisis (2008–2009) to post-crisis(2010–2011) period. However, leverage ratios from pre-crisis level topost-crisis level are not significantly different from each othersuggesting that post-crisis leverage ratios of these firms are back tosimilar levels as they were in the pre-crisis period with an adjustmentin the interim (i.e. crisis period). This study finds no evidence of asignificant change in the leverage ratios from pre- to crisis and fromcrisis to post-crisis period for French firms. In addition, leverage ratiosof firms with pre-crisis conservative capital structure across the threecountries increase significantly during the crisis period due to higherdebt levels. Contrarily, leverage ratios of firms with pre-crisisaggressive capital structure decrease from pre- to post-crisis period.While the gradual decrease in leverage ratio from pre- to post-crisisperiod for the UK firms is due to significant and gradual changes inboth debt and equity, the significant change in the leverage ratio for
251Impact of Financial Crisis on Firms’ Capital Structure
German and French firms occurs in the post-crisis period and is mainlydue to the increase in the levels of equity. The panel data regressionresults also confirm that crisis period has had a significant impact on theleverage ratios of both aggressive and conservative subsamples. Overall,these observations are consistent with those of Graham and Harvey(2001), Leary and Roberts (2005), Fosberg (2012), and Graham, Learyand Roberts (2014). Finally, the results show that changes in capitalstructure can be attributed to an active use of both short-term andlong-term debt as well as equity, during and after the crisis period.
The rest of the study is organised as follows. Section II reviews theexisting literature on leverage changes in different countries duringdifferent crisis periods. Section III describes data selection and researchmethodology. Section IV presents empirical findings. Finally, SectionV summarises and concludes the paper.
II. Literature review
The financial crisis that started at the end of 2007 in the subprime creditmarket led to a liquidity crisis in the short-term money markets(Brunnermeier, 2008; Fosberg 2012, etc). The crisis had itsconsequences in many European countries where troubled mortgageproviders or banks were rescued (Hodson and Quaglia, 2009; Alter andSchόler, 2012). Consequently banks were asked to issue additionalequity to maintain the minimum required capital ratios. Lack of banks’confidence on each other’s financial securities led to an increase in theinterbank lending rates and consequently to a reduction in the supply ofloans to non-financial firms (Fosberg 2012).
Kahle and Stulz (2013) argue that the financial crisis of 2007–08created a supply shock even in the equity markets due to the flight toquality in bond markets, which made it costly for high-levered firms toraise additional equity. In addition, this crisis resulted in a lowerdemand for consumption and higher uncertainty about economicrecovery thus leading to a decline in demand for products and servicesand resultantly a fall in debt and equity issuance and an increase in cashholdings due to postponement of investments. Graham, Leary, andRoberts (2014) report that during periods of economic downturns (oruncertainty), investment opportunities are rare and hence the need forexternal capital is weak leading to a reduction in firms’ leverage ratios.Based on a survey of U.S. chief financial officers’ views about the
Multinational Finance Journal252
impact of 2007–08 crisis on firms’ financial performance, Campello,Graham, and Harvey (2010) find that due to the reduction in demand aswell as cash flows, additional funding was perceived costly and difficultto raise thus there was no additional demand for funding.
Overall, empirical evidence on the impact of various financial criseson firms’ capital structure is sparse. Lim (2003) finds that large Koreanfirms left financial intermediaries and turned to capital markets after theKorean crisis. Similarly, Voutsinas and Werner (2011) note thatextreme credit supply fluctuations in Japan had a significant negativeimpact on Japanese firms’ financial leverage levels. This impact wasmore pronounced for bank-dependent firms. Consistent with theprevious studies, Balsari and Kirkulak (2010) report a negative impactof 1994 crisis on Turkish firms’ leverage ratios, but note that the rise inshort-term debt and the fall in Turkish firms’ equity levels during the2001–02 financial crisis led to a positive impact of this crisis on firms’leverage ratios.
Empirical studies considering the impact of 2007–08 financial crisison capital markets (Fosberg, 2012 and Kahle and Stulz, 2013) revealthat, in general, firms relied heavily on the use of public debt marketsduring the crisis. Kahle and Stulz (2013) note that net debt issuancesincreased during the first year of the 2007–08 crisis for bothbank-dependent and non-bank-dependent firms, but fell after 2008.Fosberg (2012) also report significant increase in debt ratios of USfirms over the pre-crisis period of 2006–08 followed by a gradualdecline in debt levels by the end of 2010 (i.e. post-crisis period) to thepre-crisis level. Pattani, Vera, and Wackett (2011) observe similarpatterns in public debt issued by UK firms. They also report an increasein public equity issuance in 2008–09 and a decline in 2009–10. Theyfurther note that the increase in equity issuance (not a first time issue)was mainly used for bank loan repayments because managers perceivedtheir firms to have high pre-crisis leverage ratios. On the contrary, theproceeds from equity issuance in 2010–11 were used to finance newprojects. Akbar, Rehman, and Ormrod (2013) find that the crisis did nothave a significant impact on the long-term financing channels for UKprivate firms, but impaired the financing channels of short-term debtand trade-credit for these firms. They also suggest that in order to hedgeagainst the negative impact of credit contractions, UK private firms heldmore cash and issued more equity. Similarly, Brun et al. (2013) arguethat the increase in equity of French firms after the crisis resultedmainly from the increase in retained earnings particularly for SMEs and
253Impact of Financial Crisis on Firms’ Capital Structure
an increase in the issue premiums received by large firms. Overall, prior literature offers mixed results on changes in capital
structure during various crises periods in different countries/institutionalsettings. This study aims to shed further light on changes in leverageratios of European firms during and after 2007–08 financial crisis.
III. Data and methodology
The sample in the study consists of firms from three major Europeancountries that are UK, France, and Germany over 2006–11 period. Therelevant data are extracted from Datastream. Initial sample is selectedusing the following criteria:
1. Firms are listed on London Stock Exchange for UK, EuronextParis for France, and Frankfurt Stock Exchange for Germany.
2. Firms operate in non-financial and non-utility sectors.
These criteria produce initial samples of 1748 firms for UK, 1622for France, and 1345 for Germany. Outliers and firms with negativemarket values and negative capital structure ratios are also excluded.Both for France and Germany, some firms appear twice or more withsimilar figures in the shortlisted sample. Upon investigation, it is foundthat Datastream uses separate codes for the same firm if it has issuedfurther equity, thus such French and German firms are also removed.Firms that do not belong to any Datastream Level-3 Industry Group arealso excluded. Finally, firms for which Datastream does not provideenough data to estimate the leverage ratio ((short-term debt + long-termdebt)/total capital) during either the ‘pre-crisis and crisis’ years or‘crisis and post-crisis’ years are removed too.
These restrictions produce samples of 871 firms for UK, 564 forFrance, and 392 for Germany across 13 Level-3 Datastream industrysectors, as reported in table 1. The study uses firm-year observations foranalysis, which vary depending on the availability of relevant data.
Capital structure or leverage ratio (LEV) is estimated for each yearacross all firms for each industry group. Similar to Al-Najjar andHussainey (2011), capital structure ratio is measured as total debt tototal capital ratio, where total debt is estimated as the sum of total (long-and short-term) loans and preference capital, and total capital includes
Multinational Finance Journal254
both total debt and total shareholders’ equity.1 This measure of leverageratio is also consistent with previous studies undertaken in this area(Harris and Raviv, 1991; Rajan and Zingales, 1995; Chen, 2004; Learyand Roberts, 2005; Huang and Song, 2006).
Financial years 2006 and 2007 are defined as ‘pre-crisis’ period,2008 and 2009 as ‘crisis’ period, and 2010 and 2011 as ‘post-crisis’period. The study employs t-tests for difference in means (assumingunequal variances) to identify if equally-weighted mean leverage ratiosare significantly different from each other during the three periodsnamely ‘pre-crisis to crisis’, ‘crisis to post-crisis’, and ‘pre-crisis topost-crisis’. Prior literature suggests that firms have target leverageratios (Leary and Roberts, 2005) and they use debt and/or equity toadjust their interim capital structure. This study uses t-test to examinewhether there are any significant changes in the levels of debt (short-and/or long-term) or equity across the three periods.
This study further investigates the changes in leverage ratios ofsample firms by classifying them into two subsamples based on whethertheir pre-crisis leverage ratios are higher or lower than their
TABLE 1. Distribution of sample firms by industry (Datastream Level-3) for eachcountry
Sector UK France Germany
Automobiles & Parts — 15 17Basic Resources 57 14 9Chemicals 15 15 22Construction and Materials 35 22 15Food and Beverage 35 42 17Healthcare 72 45 28Ind. Goods & Services 268 116 99Media 76 48 23Oil & Gas 61 13 25Personal & Household Goods 43 59 39Retail 50 30 20Technology 94 119 67Travel and Leisure 65 26 11
Overall (Total) 871 564 392
Note: The table reports the distribution of sample firms by country and industry usingDatastream Level-3 industrial classification, for the three countries.
1. We use alternative measures of leverage ratio and find similar results.
255Impact of Financial Crisis on Firms’ Capital Structure
Level-3Datastream industry mean leverage ratios.2 Datastream industrymean leverage ratios. Firms with higher than industry mean leverageratios are identified as aggressive and those with lower than industrymean values are named as conservative subsamples. Again, t-test is usedto examine differences in mean leverage ratios and debt and equitylevels between pre-crisis, crisis and post-crisis periods for each of thesetwo subsamples across the three countries.
This paper also examines the impact of the financial crisis on firms’leverage ratios in a more formal setting. Similar to Lemmon, Roberts,and Zender (2008), a fixed-effect panel data regression model is used,including crisis and post-crisis dummies, to capture the impact of thefinancial crisis. The model also controls for other firm-specific factorsthat may have an impact on leverage ratios, as suggested by Frank andGoyal (2003):
0 1 2 3 4it it it it itLEV Tangibility Size MVBV Growth
5 6 7it it itAssetUniqueness BusinessRisk PPETA
(1) 8 9 10it i itROA CD POCD u e
where: asset tangibility (Tangibility) ratio is calculated as fixed assetsdivided by total assets while fixed assets are estimated as the differencebetween total and short-term assets; firm’s size (Size) is defined as thenatural logarithm of firm’s total assets; the market value to book valueratio (MVBV) is employed to capture firm’s growth opportunities;growth (Growth) is a proxy for firm’s growth in total assets andmeasured as the change in total assets; firm’s uniqueness(AssetUniqueness) proxy is defined as research and developmentexpenses divided by total assets; business risk variable (BusinessRisk)is defined as the coefficient of variation in sales over five-years onrolling basis (standard deviation of sales/average of sales); PPETArepresents the ratio of property, plant and equipment divided by totalassets; return on assets (ROA) is estimated as net income beforepreferred dividends divided by total assets; crisis period (CD), the mainvariable of interest, in the regression model is represented by a dummyvariable that takes a value of 1 for years 2008 and 2009 and zero for2006–2007 (pre-crisis period) and 2010–2011 (post-crisis period);post-crisis period dummy (POCD) variable takes the value of 1 for years
2. Please refer to table 1, for Level-3 Datastream industry classifications.
Multinational Finance Journal256
2010 and 2011 and zero for the other years in the sample period.To account and control for time-varying changes in firms’
observable determinants of leverage, crisis and post-crisis dummies areinteracted with control variables in Equation 1, as follows:3
0 1 2 3 4it it it it itLEV Tangibility Size MVBV Growth
5 6 7it it itAssetUniqueness BusinessRisk PPETA
8 9 10 11it itROA CD POCD Tangibility CD
12 13 14it it itSize CD MVBV CD Growth CD
15 16it itAssetUniqueness CD BusinessRisk CD
17 18it itPPETA CD ROA CD
19 20it itTangibility POCD Size POCD
21 22it itMVBV POCD Growth POCD
23 itAssetUniqueness POCD
24 25it itBusinessRisk POCD PPETA POCD
(2) 26 it i itROA POCD u e
IV. Empirical findings
A. Univariate results
Table 2 reports descriptive statistics of all variables across all firm-yearobservations used in this study. Similar to Dang (2013), the figuresshow that the mean leverage ratio (26.40%) in the UK (a market-basedeconomy) is lower than the respective mean ratios (32.40% and33.10%) in France and Germany (bank-based economies). Medianvalues of leverage ratios also depict a similar picture. It is also clear thatthe average level of debt as a percentage of equity is the lowest (about48% of equity) in the UK and highest (about 111% of equity) inGermany with France in the middle (about 83% of equity).
Figure 1 graphically presents annual mean leverage ratios for the fullsample of firms for each country from 2006 to 2011. It shows that the
3. We thank the anonymous referee for this suggestion.
257Impact of Financial Crisis on Firms’ Capital Structure
TA
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E 2
.D
escr
ipti
ve s
tati
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s fo
r al
l var
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ased
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atio
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or U
K, F
ranc
e an
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ian
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V r
atio
0.26
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239
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970.
324
0.31
20.
220
3210
0.33
10.
310
0.23
123
36L
T d
ebt
2536
1930
8612
1025
545
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2140
425
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6525
7312
110
3351
129
2287
SH
T d
ebt
7440
519
5155
2815
4584
2530
3170
6215
5084
032
1139
6741
8217
3155
313
2259
Tot
al d
ebt
3273
9383
5815
8068
945
9985
4187
1817
631
9459
432
1110
4445
725
738
6322
098
2287
Equ
ity
6803
2334
786
4277
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4596
1021
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440
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6312
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9862
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ty0.
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e11
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722
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sset
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70.
000
0.06
244
920.
058
0.02
50.
097
1124
0.02
00.
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0.04
422
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usin
ess
0.37
50.
247
0.37
349
560.
255
0.17
20.
262
2988
0.49
20.
187
1.11
723
52P
PE
TA
0.24
10.
151
0.24
444
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0.05
60.
056
3060
0.22
80.
189
0.19
122
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0.58
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116
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40.
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0.15
422
86
Not
e: T
his
tabl
e re
port
s so
me
desc
ript
ive
stat
isti
cs (
mea
n, m
edia
n, s
tand
ard
devi
atio
n, a
nd f
irm
yea
r ob
serv
atio
ns)
of a
ll th
e va
riab
les
used
in th
is s
tudy
for
the
UK
, Fra
nce
and
Ger
man
y fr
om 2
006
to 2
011.
The
var
iabl
es a
re a
s fo
llow
s: L
EV
rat
io is
mea
sure
d as
tota
l deb
t to
tota
l cap
ital
rati
o, w
here
tota
l deb
t is
mea
sure
d as
the
sum
of
tota
l (lo
ng-
– L
T d
ebt,
and
shor
t-te
rm –
SH
T d
ebt i
n £0
00)
loan
s an
d pr
efer
ence
cap
ital
, whe
reas
tota
l cap
ital
incl
udes
bot
h to
tal d
ebt a
nd to
tal s
hare
hold
er’s
equ
ity
(Equ
ity
in £
000)
; ass
et ta
ngib
ilit
y (T
angi
bili
ty) r
atio
is c
alcu
late
d as
fixe
d as
sets
divi
ded
by to
tal a
sset
s w
here
fixe
d as
sets
are
est
imat
ed a
s th
e di
ffer
ence
bet
wee
n to
tal a
sset
s an
d sh
ort-
term
ass
ets;
fir
m’s
siz
e (S
ize)
is d
efin
ed a
sth
e na
tura
l log
arit
hm o
f fir
m’s
tota
l ass
ets;
the
mar
ket v
alue
to b
ook
valu
e ra
tio
(MV
BV
) is
empl
oyed
to c
aptu
re fi
rm’s
gro
wth
opp
ortu
niti
es; g
row
th(G
row
th)
is a
pro
xy f
or f
irm
’s g
row
th i
n to
tal
asse
ts a
nd m
easu
red
as t
he c
hang
e in
tot
al a
sset
s; f
irm
’s u
niqu
enes
s (A
sset
uni
quen
ess)
pro
xy i
sde
fine
d as
rese
arch
and
dev
elop
men
t exp
ense
s di
vide
d by
tota
l ass
ets;
bus
ines
s ri
sk v
aria
ble
(Bus
ines
s R
isk)
is d
efin
ed th
e co
effi
cien
t of v
aria
tion
in s
ales
ove
r a
five
-yea
r ro
llin
g ba
sis
(sta
ndar
d de
viat
ion
of s
ales
div
ided
by
aver
age
of s
ales
); P
PE
TA
rep
rese
nts
the
rati
o of
pro
pert
y, p
lant
and
equi
pmen
t div
ided
by
tota
l ass
ets;
ret
urn
on a
sset
s (R
OA
) is
est
imat
ed a
s ne
t inc
ome
befo
re p
refe
rred
div
iden
ds d
ivid
ed b
y to
tal a
sset
s.
Multinational Finance Journal258
FIGURE 1.— Graph of annual mean leverage ratios for the fullsample for UK, France and GermanyNote: This graph shows annual mean leverage ratios for the UK, French and German samplefirms. Leverage ratio is determined as total debt to total capital ratio, where total debt ismeasured as the sum of total (long- and short-term debt) loans and preference capital, whiletotal capital includes both total debt and total shareholder’s equity of sample firms over theperiod 2006–2011.
mean leverage ratio is higher for German firms than for French and UKfirms across all years except in 2006. It also shows that leverage ratiosincrease for German and UK firms from pre-crisis (2006 and 2007) tocrisis years (2008 and 2009) and decline in the post-crisis years (2010and 2011). The trend in leverage ratios for both UK and German firmslooks similar during the sample period despite differences in theirinstitutional settings. On the other hand, mean leverage ratio for Frenchfirms does not show such a pattern. It decreases steadily from 2008onwards. Overall, by 2011, the mean leverage ratios for UK andGerman firms are back to their 2006 levels, whereas for French firmsthe mean leverage ratio in 2011 is slightly lower than the level in 2006.
Table 3 reports mean and t-test results for leverage ratios and itscomponents (short-term debt, long-term debt, and equity) across threeperiods: pre-crisis (2006–2007), crisis (2008–2009) and post-crisis(2010–2011) for the full sample (Panel A), conservative sub-sample(Panel B) and aggressive sub-sample (Panel C). For UK, Panel A figuresindicate that mean leverage ratio of 27.70% for the crisis period is
0.2
0.22
0.24
0.26
0.28
0.3
0.32
0.34
0.36
0.38
0.4
2006 2007 2008 2009 2010 2011
Germany
France
UK
259Impact of Financial Crisis on Firms’ Capital Structure
higher than the level in pre-crisis (25.80%) and post-crisis (25.70%)periods. This trend shows an increase in leverage ratios during the crisisperiod and a decrease after the crisis with both of these changes beingstatistically significant at the 1% level. Additionally, t-test results showthat there is no significant difference in leverage ratios between the pre-and post-crisis periods.
The trend in leverage ratios for German firms is also similar to thatof UK with an initial increase during the crisis period and then areversal after the crisis years. These results are in line with thosereported by Leary and Roberts (2005) for the US market. Finally,leverage ratios in French firms show a steady downward trend in crisisand post-crisis years with none of the changes being statisticallysignificant. Overall, univariate results indicate that leverage ratios ofsample firms in all three countries change during the crisis and/or in thepost-crisis periods.
Panel A also shows whether it is equity or debt that causes thechange in capital structures of sample firms during and/or after thecrisis. The changes in equity are significant in UK firms during thecrisis years however this is not the case for French or German firms.4
The t-test results show a significant increase in equity levels for samplefirms in UK and France in the post-crisis years when compared to theirpre-crisis or the crisis years’ levels. For German firms, the change inequity is only significant from pre- to post-crisis period. Panel A showsthat mean levels for total debt also increase significantly from pre-crisisto both crisis and post-crisis periods for UK firms, but this increase issignificant only from pre-crisis to the post-crisis period for Frenchfirms. However, German firms do not experience any significant changein their total debt levels either in the crisis or post-crisis years. Thisshows that in Germany (a bank-based economy), debt levels did notchange however equity levels increase overall from pre- to post-crisisyears.
Akbar, Rehman, and Ormrod (2013) find that during the financialcrisis of 2007–08, changes in short-term debt led to changes in capitalstructures of UK private firms. This paper also examines if it is thelong-term or the short-term debt that leads to a change in the capitalstructure in the short-run. The results are mixed. For example, Panel A
4. This is consistent with the statistics reported by London Stock Exchange for furtherequity issues in the UK.
Multinational Finance Journal260
TA
BL
E 3
.M
ean
and
t-te
st f
or d
iffe
renc
e in
mea
n va
lues
bet
wee
n pr
e-cr
isis
, cri
sis,
and
pos
t-cr
isis
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iods
A. M
ean
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ats
for
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ple
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irm
s fo
r U
K, F
ranc
e an
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erm
any
UK
Fra
nce
Pre-
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Cri
sis-
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70.
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10.
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0.31
7t-
stat
–2.5
27**
*2.
60**
*0.
205
–0.9
361.
501
0.54
8
Ln
(Equ
ity)
Mea
n10
.371
10.7
4110
.741
10.9
7110
.371
10.9
7110
.985
10.9
8110
.981
11.2
6710
.985
11.2
67t-
stat
–5.1
06**
*–2
.938
***
–7.6
90**
*0.
037
–2.8
37**
*–2
.738
***
Ln
(Tot
. Deb
t)
Mea
n9.
050
9.41
79.
417
9.62
09.
050
9.62
09.
893
9.97
29.
972
10.1
239.
893
10.1
23t-
stat
–3.4
99**
*–1
.794
**–5
.080
***
–0.6
12–1
.153
–1.7
15**
Ln
(LT
Deb
t)
Mea
n8.
667
9.05
39.
053
9.36
98.
667
9.36
99.
425
9.52
49.
524
9.62
99.
425
9.62
9t-
stat
–3.1
92**
*–2
.394
***
–5.4
32**
*–0
.728
–0.7
60–1
.437
Ln
(SH
T D
ebt)
Mea
n7.
681
7.99
17.
991
8.18
97.
681
8.18
98.
877
8.93
38.
933
9.10
58.
877
9.10
5t-
stat
–3.0
87**
*–1
.832
**–4
.807
***
–0.4
37–1
.367
*–1
.759
*
( C
onti
nued
)
261Impact of Financial Crisis on Firms’ Capital Structure
TA
BL
E 3
.(C
onti
nued
)
A. M
ean
and
t-st
ats
for
the
full
sam
ple
of f
irm
s fo
r U
K, F
ranc
e an
d G
erm
any G
erm
any
Pre-
Cri
sis
Cri
sis-
Post
Pre
-Pos
t
Lev
. Rat
io
Mea
n0.
316
0.35
80.
358
0.31
90.
316
0.31
9t-
stat
–3.5
7***
3.34
5***
–0.2
58
Ln
(Equ
ity)
Mea
n11
.119
11.2
2511
.225
11.3
8711
.119
11.3
87t-
stat
–0.9
80–1
.510
–2.4
38**
Ln
(Tot
. Deb
t)
Mea
n 10
.219
10.3
9310
.393
10.4
2510
.219
10.4
25t-
stat
–1
.285
–0.2
37–1
.467
Ln
(LT
Deb
t)
Mea
n 9.
769
9.90
59.
905
10.0
559.
769
10.0
55t-
stat
–0
.927
–1.0
2–1
.918
*
Ln
(SH
T D
ebt)
Mea
n 9.
004
9.23
09.
230
9.18
69.
004
9.18
6t-
stat
–1
.630
0.32
3–1
.284
( C
onti
nued
)
Multinational Finance Journal262
TA
BL
E 3
.(C
onti
nued
)
B. M
ean
and
t-st
ats
for
the
cons
erva
tive
sub
-sam
ple
of f
irm
s fo
r U
K, F
ranc
e an
d G
erm
any
UK
Fra
nce
Pre-
Cri
sis
Cri
sis-
Post
Pre
-Pos
tP
re-
Cri
sis
Cri
sis-
Post
Pre
-Pos
t
Lev
. Rat
io
Mea
n0.
113
0.16
90.
169
0.17
50.
113
0.17
50.
168
0.20
30.
203
0.20
90.
168
0.20
9t-
stat
–8.6
94**
*–0
.774
–8.4
65**
*–3
.794
***
–0.6
16–4
.163
***
Ln
(Equ
ity)
Mea
n10
.042
10.4
0010
.400
10.5
7610
.042
10.5
7610
.689
10.6
7310
.673
10.9
2710
.689
10.9
27t-
stat
–3.8
95**
*–1
.771
**–5
.357
***
0.13
4–1
.993
**–1
.822
**
Ln
(Tot
. Deb
t)
Mea
n7.
657
8.31
18.
311
8.58
67.
657
8.58
68.
606
8.86
78.
867
9.07
28.
606
9.07
2t-
stat
–4.7
79**
*–1
.855
**–6
.260
***
–1.5
74*
–1.2
35–2
.714
***
Ln
(LT
Deb
t)
Mea
n7.
166
7.82
57.
825
8.26
87.
166
8.26
88.
134
8.50
78.
507
8.55
58.
134
8.55
5t-
stat
–4.1
08**
*–2
.541
***
–6.3
82**
*–2
.192
**–0
.279
–2.3
61**
*
Ln
(SH
T D
ebt)
Mea
n6.
576
7.07
47.
074
7.35
76.
576
7.35
77.
730
7.90
27.
902
8.21
77.
730
8.21
7t-
stat
–3.6
39**
*–1
.910
**–5
.362
***
–1.0
03–1
.887
–2.7
99**
*
( C
onti
nued
)
263Impact of Financial Crisis on Firms’ Capital Structure
TA
BL
E 3
.(C
onti
nued
)
B. M
ean
and
t-st
ats
for
the
cons
erva
tive
sub
-sam
ple
of f
irm
s fo
r U
K, F
ranc
e an
d G
erm
any
Ger
man
y
Pre-
Cri
sis
Cri
sis-
Post
Pre
-Pos
t
Lev
. Rat
io
Mea
n0.
151
0.23
50.
235
0.21
90.
151
0.21
9t-
stat
–7.6
59**
*1.
216
–5.9
97**
*
Ln
(Equ
ity)
Mea
n 10
.921
10.9
7710
.977
11.1
6410
.921
11.1
64t-
stat
–0.3
78–1
.279
–1.6
30
Ln
(Tot
. Deb
t)
Mea
n9.
074
9.40
19.
401
9.52
99.
074
9.52
9t-
stat
–1.8
202
–0.7
09–2
.413
**
Ln
(LT
Deb
t)
Mea
n8.
588
8.85
58.
855
9.15
68.
588
9.15
6t-
stat
–1.3
57–1
.478
–2.7
89**
*
Ln
(SH
T D
ebt)
Mea
n8.
073
8.38
58.
385
8.37
58.
073
8.37
5t-
stat
–1.6
83*
0.05
4–1
.577
( C
onti
nued
)
Multinational Finance Journal264
TA
BL
E 3
.(C
onti
nued
)
C. M
ean
and
t-st
ats
for
the
aggr
essi
ve s
ub-s
ampl
e of
fir
ms
for
UK
, Fra
nce
and
Ger
man
y
UK
Fra
nce
Pre-
Cri
sis
Cri
sis-
Post
Pre
-Pos
tP
re-C
risi
sC
risi
s-Po
stPr
e-Po
st
Lev
. Rat
io
Mea
n0.
430
0.41
10.
411
0.35
70.
430
0.35
70.
4800
0.46
590.
4659
0.43
040.
4800
0.43
04t-
stat
2.03
4**
4.78
4***
7.01
8***
1.26
62.
953*
**4.
241*
**
Ln
(Equ
ity)
Mea
n10
.761
11.1
6211
.162
11.4
5910
.761
11.4
5911
.287
11.3
0611
.306
11.6
2411
.287
11.6
24t-
stat
–3.6
00**
*–2
.474
***
–5.8
80**
*–0
.124
–2.0
67**
–2.1
41**
Ln
(Tot
. Deb
t)
Mea
n10
.476
10.6
8910
.689
10.7
8010
.476
10.7
8011
.195
11.1
2111
.121
11.2
1111
.195
11.2
11t-
stat
–1.6
75**
–0.6
17–2
.193
**0.
439
–0.5
06–0
.094
Ln
(LT
Deb
t)
Mea
n10
.022
10.3
6710
.367
10.5
0210
.022
10.5
0210
.665
10.5
3610
.536
10.6
9710
.665
10.6
97t-
stat
–2.3
18**
*–0
.783
–2.9
42**
*0.
685
–0.8
23–0
.166
Ln
(SH
T D
ebt)
Mea
n8.
790
9.00
59.
005
9.10
98.
790
9.10
910
.002
9.96
79.
967
9.99
510
.002
9.99
5t-
stat
–1.7
14–0
.754
–2.4
21**
*0.
216
–0.1
640.
040
( C
onti
nued
)
265Impact of Financial Crisis on Firms’ Capital Structure
TA
BL
E 3
.(C
onti
nued
)
C. M
ean
and
t-st
ats
for
the
aggr
essi
ve s
ub-s
ampl
e of
fir
ms
for
UK
, Fra
nce
and
Ger
man
y
Ger
man
y
Pre-
Cri
sis
Cri
sis-
Post
Pre
-Pos
t
Lev
. Rat
io
Mea
n0.
494
0.49
00.
490
0.42
60.
494
0.42
6t-
stat
0.27
54.
310*
**4.
499*
**
Ln
(Equ
ity)
Mea
n 11
.324
11.4
9111
.491
11.6
2011
.324
11.6
20t-
stat
–1.0
62–0
.830
–1.8
38*
Ln
(Tot
. Deb
t)
Mea
n11
.338
11.4
5311
.453
11.3
4211
.338
11.3
42t-
stat
–0.6
750
0.63
6–0
.025
Ln
(LT
Deb
t)
Mea
n10
.841
10.9
2810
.928
10.9
2810
.841
10.9
28t-
stat
–0.4
740.
000
–0.4
61
Ln
(SH
T D
ebt)
Mea
n9.
887
10.1
2810
.128
10.0
049.
887
10.0
04t-
stat
–1.3
060.
693
–0.6
17
( C
onti
nued
)
Multinational Finance Journal266
TA
BL
E 3
.(C
onti
nued
)
Not
e: T
he ta
ble
repo
rts
mea
ns a
nd t-
test
res
ults
for
dif
fere
nce
in m
eans
for
dif
fere
nt v
aria
bles
for
the
full
(P
anel
A),
con
serv
ativ
e (P
anel
B)
and
aggr
essi
ve (P
anel
C) s
ampl
es o
f UK
, Fre
nch,
and
Ger
man
fir
ms
acro
ss th
ree
peri
ods.
Yea
rs 2
006
and
2007
are
def
ined
as
pre-
cris
is, 2
008
and
2009
as
cris
is, a
nd 2
010
and
2011
as
post
-cri
sis
year
s. F
irm
s wit
h le
ss (h
ighe
r) th
an in
dust
ry m
ean
of le
vera
ge ra
tio
are
clas
sifi
ed a
s th
e co
nser
vati
ve(a
ggre
ssiv
e) s
ubsa
mpl
e (p
leas
e re
fer
to t
able
1 f
or in
dust
ry g
roup
s).
For
eac
h co
untr
y, f
irst
col
umn
repo
rts
the
resu
lts
for
the
diff
eren
ce b
etw
een
pre-
and
cri
sis
year
s; s
econ
d co
lum
n fo
r cri
sis
and
post
-cri
sis
year
s; a
nd th
ird
colu
mn
for t
he p
re- a
nd p
ost-
cris
is y
ears
. The
var
iabl
es re
port
ed h
ere
are:
leve
rage
(Lev
.) ra
tio
mea
sure
d as
tota
l deb
t to
tota
l cap
ital
rati
o, w
here
tota
l deb
t is
the
sum
of t
otal
(lon
g- a
nd s
hort
-ter
m) l
oans
and
pre
fere
nce
capi
tal,
and
tota
l ca
pita
l in
clud
es b
oth
tota
l de
bt a
nd t
otal
sha
reho
lder
’s e
quit
y; n
atur
al l
og o
f eq
uity
; na
tura
l lo
g of
tot
al d
ebt;
nat
ural
log
of
long
-ter
m d
ebt;
and
nat
ural
log
of
shor
t-te
rm d
ebt,
resp
ecti
vely
. L
n re
fers
to
the
natu
ral
loga
rith
mic
val
ues.
Fin
ally
, **
*, *
*, a
nd *
rep
rese
ntst
atis
tica
l sig
nifi
canc
e at
1%
, 5%
, and
10%
leve
ls, r
espe
ctiv
ely.
267Impact of Financial Crisis on Firms’ Capital Structure
shows that changes in both short-term and long-term debts aresignificant for UK firms during the crisis and post-crisis years butinsignificant for French and German firms.These results suggest thatchanges in both short- and long-term debts are mainly responsible forchanges in leverage ratios from pre- to crisis and post-crisis periodsin the UK, however this is not the case for France and Germany. Thisseems plausible in a market-based economy (such as UK) as comparedto a bank-based economy (such as France or Germany).
Panel B of table 3 shows that leverage ratios increase from pre- tocrisis and pre- to post-crisis periods for the conservative subsamplesacross all three major European countries. For UK, this increase is dueto increases in both equity and debt (short- and long-term) from pre- tocrisis and to post-crisis periods. For French subsample, this increase isdue to an increase in both short- and long-term debt and equity frompre- to post-crisis years, whereas for German subsample, it is due tochanges in long-term debt from pre- to post-crisis periods.
Panel C of table 3 shows that leverage ratios decrease steadily forUK, French and German aggressive subsamples during both crisis andpost-crisis periods. For UK subsample, a statistically significantdecrease from pre- to crisis period is observable but this is not the casefor French and German subsamples. However, the decrease becomesstatistically significant from pre- to post-crisis periods for all threesubsamples. This decrease is mainly due to an increase in equity, eitherin the crisis or post-crisis periods. For the UK, this study also finds asignificant increase in debt during the crisis period but the increase indebt is smaller than the increase in equity.
Figure 2 plots the graphs of the yearly averages (2006–2011) ofleverage ratios for conservative and aggressive subsamples in the threecountries. It shows a steady increase in leverage ratios for conservativesubsamples and a steady decrease for aggressive subsamples across thethree countries from pre-crisis to post-crisis years. It is also interestingthat the movement in leverage ratios for conservative firms in the pre-and crisis years and for aggressive firms in the post-crisis year arealmost similar for firms in the UK (a market-based economy) andGermany (a bank-based economy). The results for the conservative andaggressive subsamples are in line with those reported by Leary andRoberts (2005). They find that leverage ratios are more likely toincrease (decrease) if they are relatively low (high).
B. Regression results
Panel A of table 4 reports regression results for full samples in threecountries (UK, France, and Germany). The main variables of interest are
Multinational Finance Journal268
Conservative subsample:
Aggressive subsample:
FIGURE 2.— Graphs of annual mean leverage ratios forconservative and aggressive subsamples for UK, France and Germany.Note: The graphs show annual mean leverage ratios for UK, French and German firms fortheir conservative and aggressive subsamples, respectively. Firms with less than industrymean leverage ratio are identified as conservative and those with higher than industry meanvalue are named as aggressive subsamples (please refer to table 1 for industry groups).Leverage ratio is calculated as total debt to total capital ratio, where total debt is measuredas the sum of total (long- and short-term debt) loans and preference capital, while total capitalincludes both total debt and total shareholder’s equity of sample firms over the period2006–2011.
0.05
0.1
0.15
0.2
0.25
0.3
2006 2007 2008 2009 2010 2011
Germany
France
UK
0.2
0.25
0.3
0.35
0.4
0.45
0.5
0.55
2006 2007 2008 2009 2010 2011
Germany
France
UK
269Impact of Financial Crisis on Firms’ Capital Structure
the crisis (CD) and post-crisis dummies (POCD). Regression results(Equations 1 and 2) for full samples of UK and Germany show that the coefficients for CD for these two countries are positive and statisticallysignificant, but for French sample this coefficient is insignificant. These results suggest that leverage ratios are higher for UK and Germanfirms during the crisis period (2008–2009) than during pre-crisis periodeven after controlling for time-varying effects of determinants of capitalstructure, as shown in Equation 2. While this evidence is similar to thatof Fosberg (2012) for the US market, it is inconsistent with the resultsreported by Akbar, Rehman, and Ormrod (2013) for UK private firms.The coefficients for the post-crisis dummies across the three countriesare statistically insignificant for the full sample based on bothregression models. These findings support the univariate resultsreported earlier and are in line with Fosberg’s (2012) which suggeststhat leverage ratios for the US firms in post-crisis periods revert back totheir pre-crisis levels. Overall, these results are also consistent withthose of Kayhan and Titman (2007) and Leary and Roberts (2005) thatover time leverage ratios move towards target levels.
Regression results (Equations 1 and 2) in Panel B of table 4 forconservative subsamples show that coefficients for both the crisis (CD)and post-crisis (POCD) dummy variables are positive and statisticallysignificant for all three countries. The results highlight the fact thatleverage ratios for conservative firms increase during the crisis andpost-crisis periods across the three countries, despite controlling fortime-varying changes in factors affecting capital structure.
Panel C of table 4 reports regression results (Equations 1 and 2) foraggressive subsamples. The results indicate negative and statisticallysignificant coefficients for post-crisis dummy (POCD) variable acrossthe three countries for these subsamples. These findings are opposite tothose of conservative subsamples, as expected. Further, this study findsa marginally significant and negative coefficient for the crisis dummy(CD) for French subsample indicating that leverage ratio changes foraggressive subsample occurred in the post-crisis period. Overall, thesefindings are consistent with the results reported in table 3 Panels B andC and suggest that the changes in the leverage ratios for conservativeand aggressive subsamples are significant but in opposite directions.
The coefficients for the crisis dummy (CD) in equation 1 for the fullsamples in UK and Germany indicate that the increase in leverage ratios(between 2 and 3 percentage points) though statistically significant iseconomically small.
Multinational Finance Journal270
TA
BL
E 4
.P
anel
dat
a re
gres
sion
res
ults
of
leve
rage
rat
ios
A. R
egre
ssio
n re
sults
for
ful
l sam
ples
for
UK
, Fra
nce,
and
Ger
man
y
LE
V R
atio
(F
ull S
ampl
e)U
KF
ranc
eG
erm
any
Equ
atio
n 1
Equ
atio
n 2
Equ
atio
n 1
Equ
atio
n 2
Equ
atio
n 1
Equ
atio
n 2
Tan
gibi
lity
0.06
6***
0.06
9***
0.12
5*0.
129*
*0.
284*
**0.
282*
**Si
ze0.
010*
0.01
0*0.
059*
**0.
056*
**0.
082*
**0.
082*
**M
VB
V0.
003*
**0.
003*
**0.
005*
**0.
005*
**0.
018*
**0.
018*
**G
row
th0.
0002
0.00
010.
051*
**0.
050*
**–0
.000
1–0
.000
1A
sset
Uni
quen
ess
–0.0
76–0
.077
–0.0
52–0
.058
0.24
10.
240*
Bus
ines
sRis
k–0
.030
***
–0.0
31**
*–0
.039
–0.0
38–0
.003
–0.0
03P
PE
TA
0.03
90.
044.
025
4.31
40.
045
0.03
8R
OA
0.00
20.
002
–0.5
24**
*–0
.522
***
0.03
30.
033
Cri
sis
Dum
my
(CD
)0.
024*
**0.
046*
**0.
006
0.00
60.
029*
**0.
030*
**P
ost-
Cri
sis
Dum
my
(PO
CD
)0.
003
0.00
8–0
.004
–0.0
03–0
.003
–0.0
03T
angi
bili
ty*(
CD
)–
–0.0
05–
0.00
8–
0.00
6Si
ze*(
CD
)–
0.00
2–
0.00
03–
0.00
04M
VB
V*(
CD
)–
–0.0
04**
*–
0.00
02–
0G
row
th*(
CD
)–
–0.0
001
–0.
009
–0.
002
Ass
etU
niqu
enes
s*(C
D)
–0.
089
––0
.056
––0
.188
**B
usin
essR
isk*
(CD
)–
0.03
6**
––0
.010
–0.
001
PP
ET
A*(
CD
)–
0.01
3–
–0.0
23–
0.00
4R
OA
*(C
D)
–0.
016
––0
.037
––0
.011
Tan
gibi
lity
*(P
OC
D)
–0.
029
––0
.025
––0
.008
Size
*(P
OC
D)
––0
.002
–0.
001
––0
.001
( C
onti
nued
)
271Impact of Financial Crisis on Firms’ Capital Structure
TA
BL
E 4
.(C
onti
ued)
A. R
egre
ssio
n re
sults
for
ful
l sam
ples
for
UK
, Fra
nce,
and
Ger
man
y
LE
V R
atio
(F
ull S
ampl
e)U
KF
ranc
eG
erm
any
Equ
atio
n 1
Equ
atio
n 2
Equ
atio
n 1
Equ
atio
n 2
Equ
atio
n 1
Equ
atio
n 2
MV
BV
*(P
OC
D)
––0
.002
*–
–0.0
003
–0.
001
Gro
wth
*(P
OC
D)
–0.
001
––0
.002
–0.
001
Ass
etU
niqu
enes
s*(P
OC
D)
––0
.077
–0.
247
––0
.096
Bus
ines
sRis
k*(P
OC
D)
–0.
049*
**–
0.02
7–
0.02
0**
PP
ET
A*(
PO
CD
)–
–0.0
05–
–0.0
17–
0.04
4**
RO
A*(
PO
CD
)–
–0.0
03–
–0.0
02–
–0.0
33C
onst
ant
0.10
20.
104
–0.4
92**
–0.4
61*
–0.8
71**
*–0
.870
***
No
of o
bser
vati
ons
4180
4180
860
860
2026
2026
No
of g
roup
s85
385
319
919
937
837
8R
-squ
are
over
all
0.70
30.
700
0.82
00.
818
0.79
70.
798
F-t
est
7.07
***
3.94
***
27.4
8***
10.6
9***
14.5
6***
17.2
9***
( C
onti
nued
)
Multinational Finance Journal272
TA
BL
E 4
.(C
onti
nued
)
B. R
egre
ssio
n re
sult
s fo
r co
nser
vati
ve s
ubsa
mpl
es f
or U
K, F
ranc
e, a
nd G
erm
any
LE
V R
atio
(Con
serv
ativ
e su
bsam
ple
)U
KF
ranc
eG
erm
any
Equ
atio
n 1
Equ
atio
n 2
Equ
atio
n 1
Equ
atio
n 2
Equ
atio
n 1
Equ
atio
n 2
Tan
gibi
lity
0.08
4***
0.08
4**
0.29
8***
0.30
1***
0.24
9***
0.25
0***
Size
0.00
60.
050.
050*
*0.
046*
*0.
078*
**0.
077*
**M
VB
V0.
006*
**0.
005*
**0.
024*
**0.
024*
**0.
019*
**0.
019*
**G
row
th0
–0.0
001
0.06
9***
0.07
0***
–0.0
03–0
.004
Ass
etU
niqu
enes
s–0
.187
***
–0.1
88**
*–0
.121
–0.1
150.
253
0.26
0B
usin
essR
isk
–0.0
09–0
.009
–0.0
51**
–0.0
53**
–0.0
07–0
.006
PP
ET
A0.
066*
0.06
6*–0
.258
–0.4
230.
101*
0.10
3**
RO
A–0
.019
–0.0
18–0
.398
***
–0.3
84**
*–0
.001
0.00
9C
risi
s D
umm
y (C
D)
0.05
4***
0.06
3***
0.04
4***
0.04
3***
0.06
0***
0.06
1***
Pos
t-C
risi
s D
umm
y (P
OC
D)
0.05
6***
0.05
8***
0.04
0***
0.03
9***
0.04
2***
0.04
4***
Tan
gibi
lity
*(C
D)
–0.
022
–0.
031
–0.
012
Size
*(C
D)
––0
.002
–0.
000
–0.
001
MV
BV
*(C
D)
–0.
002
–0.
001
––0
.002
Gro
wth
*(C
D)
–0.
002
–0.
005
–0.
003
Ass
etU
niqu
enes
s*(C
D)
–0.
027
–0.
091
––0
.223
*B
usin
essR
isk*
(CD
)–
0.00
6–
–0.0
24–
0.00
9P
PE
TA
*(C
D)
––0
.004
–2.
271
––0
.007
RO
A*(
CD
)–
–0.0
16–
–0.0
04–
–0.1
56**
( C
onti
nued
)
273Impact of Financial Crisis on Firms’ Capital Structure
TA
BL
E 4
.(C
onti
nued
)
B. R
egre
ssio
n re
sult
s fo
r co
nser
vati
ve s
ubsa
mpl
es f
or U
K, F
ranc
e, a
nd G
erm
any
LE
V R
atio
(Con
serv
ativ
e su
bsam
ple
)U
KF
ranc
eG
erm
any
Equ
atio
n 1
Equ
atio
n 2
Equ
atio
n 1
Equ
atio
n 2
Equ
atio
n 1
Equ
atio
n 2
Tan
gibi
lity
*(P
OC
D)
–0.
058*
*–
–0.0
67–
0.01
0Si
ze*(
PO
CD
)–
–0.0
04**
–0.
003
–0.
000
MV
BV
*(P
OC
D)
–0.
001
–0.
000
–0.
001
Gro
wth
*(P
OC
D)
–0.
001
–0.
050
––0
.003
Ass
etU
niqu
enes
s*(P
OC
D)
––0
.178
––0
.014
––0
.020
Bus
ines
sRis
k*(P
OC
D)
–0.
047*
*–
–0.0
04–
0.00
4P
PE
TA
*(P
OC
D)
–0.
006
–1.
727
––0
.004
RO
A*(
PO
CD
)–
0.00
5–
–0.0
60–
–0.0
63**
*C
onst
ant
–0.0
090.
001
–0.5
65**
–0.5
30**
–0.9
27**
*–0
.927
***
No
of o
bser
vati
ons
2297
2297
492
492
1033
1033
No
of g
roup
s46
246
211
611
619
419
4R
–squ
are
over
all
0.53
80.
537
0.79
80.
793
0.66
20.
661
F-t
est
18.9
7***
7.83
***
21.7
2***
8.46
***
34.1
8***
13.6
1***
( C
onti
nued
)
Multinational Finance Journal274
TA
BL
E 4
.(C
onti
nued
)
C. R
egre
ssio
n re
sult
s fo
r ag
gres
sive
sub
sam
ples
for
UK
, Fra
nce,
and
Ger
man
y
LE
V R
atio
(Agg
ress
ive
sub
sam
ple)
UK
Fra
nce
Ger
man
y
Equ
atio
n 1
Equ
atio
n 2
Equ
atio
n 1
Equ
atio
n 2
Equ
atio
n 1
Equ
atio
n 2
Tan
gibi
lity
–0.0
07–0
.001
–0.0
60–0
.031
0.28
3***
0.27
6***
Size
0.00
30.
002
0.06
3*0.
054
0.06
7***
0.06
6***
MV
BV
0.00
10.
001
0.00
4***
0.00
4***
0.01
6***
0.01
5***
Gro
wth
0.00
00.
000
0.03
20.
032
0.00
00.
000
Ass
etU
niqu
enes
s0.
566*
*0.
572*
*0.
353
0.28
60.
238
0.24
3B
usin
essR
isk
–0.0
58**
*–0
.063
***
0.03
90.
041
–0.0
03–0
.003
PP
ET
A–0
.082
–0.0
8617
.517
**18
.473
***
0.00
5–0
.007
RO
A0.
008*
0.00
8*–0
.653
***
–0.6
60**
*0.
073*
**0.
066*
**C
risi
s D
umm
y (C
D)
–0.0
110.
029
–0.0
23*
–0.0
23*
–0.0
04–0
.003
Pos
t-C
risi
s D
umm
y (P
OC
D)
–0.0
62**
*–0
.058
***
–0.0
45**
*–0
.044
***
–0.0
48**
*–0
.048
***
Tan
gibi
lity
*(C
D)
––0
.026
––0
.038
–0.
008
Size
*(C
D)
––0
.003
–0.
003
––0
.001
MV
BV
*(C
D)
––0
.006
***
–0.
000
–0.
001
Gro
wth
*(C
D)
–0.
000
–0.
014
–0.
004
Ass
etU
niqu
enes
s*(C
D)
–0.
150
––0
.093
––0
.127
Bus
ines
sRis
k*(C
D)
–0.
066*
*–
–0.0
32–
0.00
0P
PE
TA
*(C
D)
–0.
002
––0
.043
–0.
030
RO
A*(
CD
)–
0.04
4–
–0.0
74–
0.04
1
( C
onti
nued
)
275Impact of Financial Crisis on Firms’ Capital Structure
TA
BL
E 4
.(C
onti
nued
)
C. R
egre
ssio
n re
sult
s fo
r ag
gres
sive
sub
sam
ples
for
UK
, Fra
nce,
and
Ger
man
y
L
EV
Rat
io
(Agg
ress
ive
sub
sam
ple)
UK
Fra
nce
Ger
man
y
Equ
atio
n 1
Equ
atio
n 2
Equ
atio
n 1
Equ
atio
n 2
Equ
atio
n 1
Equ
atio
n 2
Tan
gibi
lity
*(P
OC
D)
–0.
022
–0.
020
––0
.016
Size
*(P
OC
D)
–0.
000
––0
.001
––0
.001
MV
BV
*(P
OC
D)
––0
.002
––0
.005
–0.
000
Gro
wth
*(P
OC
D)
–0.
007
––0
.002
–0.
004
Ass
etU
niqu
enes
s*(P
OC
D)
–0.
094
–0.
483*
––0
.246
*B
usin
essR
isk*
(PO
CD
)–
0.04
2–
0.06
1–
0.02
2***
PP
ET
A*(
PO
CD
)–
–0.0
39**
–0.
024
–0.
075*
**R
OA
*(P
OC
D)
––0
.022
–0.
014
––0
.021
Con
stan
t0.
423*
**0.
448*
**–0
.415
–0.3
17–0
.553
***
–0.5
34**
*
No
of o
bser
vati
ons
1883
1883
368
368
993
993
No
of g
roup
s39
239
283
8318
418
4R
-squ
are
over
all
0.58
20.
586
0.67
90.
670
0.73
10.
734
F-t
est
8.89
***
4.57
***
15.0
1***
5.96
***
19.2
7***
8.32
***
( C
onti
nued
)
Multinational Finance Journal276
TA
BL
E 4
.(C
onti
nued
)
Not
e:
Thi
s ta
ble
repo
rts
fixe
d-ef
fect
pan
el d
ata
regr
essi
on r
esul
ts u
sing
Equ
atio
ns (
1) a
nd (
2) f
or t
he f
ull
sam
ples
(P
anel
A),
con
serv
ativ
esu
bsam
ples
(P
anel
B)
and
aggr
essi
ve s
ubsa
mpl
es (
Pan
el C
) fo
r U
K, F
ranc
e an
d G
erm
any.
The
var
iabl
es a
re a
s fo
llow
s: L
EV
rat
io (
the
depe
nden
tva
riab
le) i
s m
easu
red
as to
tal d
ebt t
o to
tal c
apit
al ra
tio,
whe
re to
tal d
ebt i
s m
easu
red
as th
e su
m o
f tot
al (l
ong-
– L
T d
ebt,
and
shor
t-te
rm –
SH
T d
ebt)
loan
s an
d pr
efer
ence
cap
ital
, and
tota
l cap
ital
incl
udes
bot
h to
tal d
ebt a
nd to
tal s
hare
hold
er’s
equ
ity
(Equ
ity)
; ass
et ta
ngib
ilit
y (T
angi
bili
ty)
rati
ois
cal
cula
ted
as f
ixed
ass
ets
divi
ded
by to
tal
asse
ts w
here
fix
ed a
sset
s ar
e es
tim
ated
as
the
diff
eren
ce b
etw
een
tota
l ass
ets
and
shor
t-te
rm a
sset
s;fi
rm’s
siz
e (S
ize)
is d
efin
ed a
s th
e na
tura
l log
arit
hm o
f fir
m’s
tota
l ass
ets;
the
mar
ket v
alue
to b
ook
valu
e ra
tio
(MV
BV
) is
empl
oyed
to c
aptu
re fi
rm’s
grow
th o
ppor
tuni
ties
; gro
wth
(G
row
th)
is a
pro
xy f
or f
irm
’s g
row
th in
tota
l ass
ets
and
mea
sure
d as
the
chan
ge in
tota
l ass
ets;
fir
m’s
uni
quen
ess
(Ass
et u
niqu
enes
s) p
roxy
is d
efin
ed a
s re
sear
ch a
nd d
evel
opm
ent e
xpen
ses
divi
ded
by to
tal a
sset
s; b
usin
ess
risk
var
iabl
e (B
usin
ess
Ris
k) is
def
ined
the
coef
fici
ent o
f va
riat
ion
in s
ales
ove
r a
five
-yea
r ro
llin
g ba
sis
(sta
ndar
d de
viat
ion
of s
ales
div
ided
by
aver
age
of s
ales
); P
PE
TA
rep
rese
nts
the
rati
o of
pro
pert
y, p
lant
and
equ
ipm
ent d
ivid
ed b
y to
tal a
sset
s; re
turn
on
asse
ts (R
OA
) is
esti
mat
ed a
s ne
t inc
ome
befo
re p
refe
rred
div
iden
ds d
ivid
edby
tota
l ass
ets.
Cri
sis
dum
my
(CD
) rep
rese
nts
cris
is p
erio
d th
at ta
kes
a va
lue
of 1
for y
ears
200
8 an
d 20
09 a
nd z
ero
for 2
006–
2007
(pre
-cri
sis)
and
2010
–201
1 (p
ost-
cris
is)
and
post
-cri
sis
dum
my
(PO
CD
) ta
kes
valu
es o
f 1
for
year
s 20
10 a
nd 2
011
and
0 fo
r th
e ot
her
year
s in
the
sam
ple
peri
od.
In E
quat
ion
(2),
eac
h of
the
inde
pend
ent v
aria
ble
is in
tera
cted
wit
h bo
th C
D a
nd P
OC
D. F
inal
ly, *
**, *
*, a
nd *
rep
rese
nt s
tati
stic
al s
igni
fica
nce
of th
e co
effi
cien
ts a
t 1%
, 5%
, and
10%
leve
ls, r
espe
ctiv
ely
(see
Equ
atio
ns 1
&2)
.
277Impact of Financial Crisis on Firms’ Capital Structure
However, this paper finds that the corresponding increase forconservative subsamples during the crisis period is economically larger(between 4.4 and 6.0 percentage points) across the three countries. Theeconomic impact of the crisis is also captured by the post-crisis dummy(POCD) coefficients across the three countries showing an increase of4.0 and 5.6 percentage points for the conservative subsamples and adecrease of 4.5 and 6.2 percentage points for the aggressive subsamples,as compared to the pre-crisis period. Results from equation 2, across allsubsamples, show that the significant impact of crisis and post-crisisdummies persists even when the interaction dummies with the controlvariables are included.
V. Summary and Conclusion
This study contributes to the extant literature by examining the capitalstructure or leverage ratios of non-financial/non-utility firms in threemain European countries (UK, France and Germany) around 2007–08financial crisis. The sample period is segregated into three periods ofinterest: 2006–2007 as the pre-crisis period, 2008–2009 as the crisisperiod, and 2010–2011 as the post-crisis period. Univariate and paneldata regression results reveal that, on average, leverage ratiossignificantly increase from pre- to crisis periods and then revert topre-crisis levels in the UK and Germany. These changes areinsignificant across the three periods for French firms. This study findsthat during the crisis period, the increase in leverage ratios for UK firmsis mainly due to the use of both short- and long-term debt, whereas inthe post-crisis period the reversion back to the pre-crisis levels is mainlydue to the use of equity. There are no significant changes in either short-or long-term debt of full samples of French and German firms, either inthe crisis or post-crisis years.
Considering the availability of excessive leverage for firms beforethe financial crisis (for example, Fosberg, 2012), the sample firms ofeach country are segregated into two subsamples (conservative andaggressive) based on the levels of their pre-crisis leverage ratios ascompared to their industry average ratios during this period. Firms areconsidered to follow a conservative (aggressive) funding strategy in thepre-crisis period if they had lower (higher) than industry mean leverageratio during that period. The evidence on conservative subsamplesshows a significant increase in leverage ratios from pre- to crisis period.
Multinational Finance Journal278
Furthermore, t-test results reveal that the increase in leverage ratios tocrisis period for UK conservative firms is mainly due to the significantincrease in debt rather than in equity. This study does not find suchstrong evidence on the use of debt or equity for French and Germanconservative firms.
Findings from the aggressive firms indicate that overall the leverageratios in the post-crisis period are significantly lower than theirpre-crisis levels across the three countries. While this decrease is morepronounced from the crisis to post-crisis period for French and Germanaggressive sub-samples, the leverage ratios for UK subsample havesignificantly and gradually fallen from pre- to crisis and then inpost-crisis period. This gradual decline is mainly due to the significantreduction in equity levels across the three periods. Additionally, t-testresults indicate a significant increase in debt (though lower than theincrease in equity) for UK aggressive subsample from pre- to crisisperiod. Finally, this study does not find any significant evidence onincreases in debt or equity levels for either French or German aggressivesub-samples.
Overall, the results show that 2007–08 financial crisis had asignificant impact on leverage ratios of firms in both market-based (theUK) and bank-based (Germany and France) economies. Leverage ratiosof sample firms in the post-crisis period revert back to their pre-crisislevels with adjustments during the crisis years. Consistent with Learyand Roberts (2005), this paper finds that firms with lower thanindustry-average debt ratios experience an increase in debt ratios andthose with higher than industry-average debt ratios experience adecrease in these levels from pre- to the post-crisis periods.
Accepted by: Prof. P. Theodossiou, Editor-in-Chief, July 2014
References
Akbar, S.; Rehman, S.; and Ormrod, P. 2013. The impact of recent financialshocks on the financing and investment policies of UK private firms.International Review of Financial Analysis 26(4): 59–70.
Al-Najjar, B., and Hussainey, K. 2011. Revisiting the capital-structure puzzle:UK evidence. Journal of Risk Finance 12(4): 329–338.
Alter, A., and Schόler, Y. S. 2012. Credit spread interdependencies of Europeanstates and banks during the financial crisis. Journal of Banking & Finance36(12): 3444–3468.
279Impact of Financial Crisis on Firms’ Capital Structure
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