Determinants of corporate leverage: An empirical study

Abstract

This study is an attempt to empirically test for thedeterminants of corporate leverage in Turkey. Leverage hereis taken to be the debt - equity ratio, and the va~iablesconsidered are profitability, risk, size, groy,th andindustry classification. Two separate tests, one using thebook values, the other using the inflation-corrected 'valuesof balanc~ sheet and income statement items are performed inOrdinary Least Squares regression on 47 manufacturing firmsin eight different industries.It is observed that the variables considered explain half ofthe cross-sectional variations in corporate leverage, Which,in view of of the numerous factors affecting this ~atio, maybe considered a `good` result. Findings indicate that all of'the variables e}{cept for growth have statisticallysignificant correlation with leverage. Regression resultsalso support the initial hypothesis that the employment ofthe inflation-corrected values improves the explanatorypower of the test.The study starts with a discussion of former theoretical andempirical research conducted in this area. Section I Iexplains the methodology used in correcting figures forinflation, remarks on the regression analysis and presentsthe regression results. This is foil o'tled by aninterpretation of results in view of the assumptions madeand the limitations of the methodology. The final sectionpresents concluding remarks.