Capital Structure and Financing Choices in Australia
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Authors
Buhr, Klaus
Cross, Roy
Rainsbury, Liz
Cross, Roy
Rainsbury, Liz
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2012
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Conference Contribution - Paper in Published Proceedings
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framework analysis
financing choices
Australia
financing choices
Australia
ANZSRC Field of Research Code (2020)
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Buhr, K., Cross, R., and Rainsbury, E. (2012). Capital Structure and Financing Choices in Australia. World Finance & Banking Symposium. 17-18 December, Shanghai, China.
Abstract
We use a modified pecking order framework to analyse financing choices for Australian
firms. The traditional pecking order model has been extended to allow a non-linear
relationship between a firm’s requirements for external capital (the financial deficit) and the
amount of external debt used to meet these requirements. The pecking order theory predicts
that firms will follow a defined hierarchy of financing choices with internal funds being used
first, followed by external debt and as a last resort the issuance of external equity.
Our main finding is that Australian firm’s do not follow the pecking order as closely as in
other markets as the model explains less of the variation in debt issuance. Importantly, we
find that this is not related to debt capacity constraints, which has been hypothesized by other
researchers as a legitimate reason why firms, small firms in particular, would not appear to be
following the pecking order theory. We use Altman’s Z-Score, which is a commonly used
measure of financial distress, to identify firms that are relatively unconstrained in terms of
debt capacity. We also find that while controlling for debt capacity does improve the
explanatory power of our model, the improvement is only marginal. We do find evidence
against the static trade-off theory of capital structure. In particular firms that are
unconstrained in terms of debt capacity and not facing significant capital expenditure do not
increase leverage towards an optimal capital structure in the manner predicted by the static
trade-off theory.
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