Proceedings of The 2nd World Conference on Management and Economics
How Macroeconomic Factors Affect Capital Structure Choices during an Economic Crisis
Amir Moradi and Elisabeth Paulet
This paper studies the macro-economic determinants of the capital structure during an economic crisis: the Euro Crisis. In this study, the pooled and fixed effects multivariate regression models are employed to quantify the influence of five macroeconomic independent variables, during the time period of 1999-2015, on three dependent variables of book leverage, net equity, and debt-to-equity ratio of a balanced panel of 621 European publicly traded firms which are divided into three industries of retail trade and services, manufacturing and construction, and transportation and tourism. The signs of the statistically significant coefficients disclose that our findings are consistent with the market timing theory of capital structure. Our empirical results shed light on the macroeconomic determinants of the capital structure during the Euro Crisis and provide evidence that the eurozone firms count on equity when they operate in economic growth, the European Central Bank adopts the expansionary monetary policy, they expect the interest rate falls, the inflation rate drops and their respective government faces a budget deficit. Conversely, eurozone businesses rely on debt in recessions, contractionary monetary policy, increasing interest rates, inflationary economy, and budget surplus. In addition, we conclude that in capital structure decisions, the more investment required, the more macroeconomic determinants exist.
keywords: Euro Crisis; fixed effects multivariate regression model; macroeconomic determinants; theories of capital structure.