The Determinants of Capital Structure: Evidence from Listed Companies in Balkan Countries

AuthorAjla Ngjeliu
PositionMediterranean University of Albania
Pages18-34
Vol. 4 No. 1
March, 2018
Academic Journal of Business, Administration, Law and Social Sciences
IIPCCL Publishing, Graz-Austria
ISSN 2410-3918
Acces online at www.iipccl.org
18
The Determinants of Capital Structure: Evidence from Listed Companies in
Balkan Countries
Ajla Ngjeliu
Mediterranean University of Albania
Abstract
As most of the empirical literature regarding the determinants of capital structure relies on
developed economies, this study contributes to the existing literature by looking at listed
companies in the Balkan region. It investigates 760 companies over a 6-year period from 2007
to 2013 using a random e ect model. The leverage is speci ed as a function of rm-speci c
characteristics, and the results are in line with previous empirical studies. Respectively,
it is seen that a positive correlation is signi cant for size, while a negative one is found for
pro tability. Observing the decomposition of leverage, it can be assessed that the Balkan
companies rely mostly on short-term debt. Furthermore, this study aims and nds signi cant
di erences between the determinants of capital structure of the companies established in EU
and those in non-EU countries. The z-score indicated that when looking at the total debt ratio
there is only one determinant which is statically signi cant.
Keywords: capital structure, random e ect, pecking order theory and Balkan companies.
Introduction
The capital structure of the listed companies in transitional economies is still a puzzle.
Therefore, recently the companies, which operate in these economies, have a racted
the a ention of researchers and scholars. It is noticed that there is a lack of empirical
studies when discussing the capital structure of the companies in emerging markets,
especially in Balkan countries. Many empirical studies conducted, provide some
evidences regarding the determinants of the nancial leverage, yet the conclusions
are vague.
Balkan economies are considered transitional economies as they opened up to the
global market a er 1990s. All the countries changed their economic model towards
a market-oriented one. A very important event is the recent global nancial crisis
of 2007-08. This crisis had a di erent e ect on these economies considering both
timing and impact. The banking system is considered to be the main driven of the
nancial sector, so this global nancial crisis hit mostly the banks, by increasing non-
performing loans to very high levels. The currencies of the countries also devaluated
sharply, as in the case of Serbia, where dinar depreciated by 20% between 2008 and
2009 (IMF, 2015). This depreciation was followed by a triple recession in six years.
The other Balkan economies su ered from the same issues. Hence, while observing
that these countries are still recovering from the crisis, a question arises. Is the
existing literature, both the theoretical and the empirical one able to explain the
capital structure of public companies in Balkan? Are the determinants of the capital
structure decision the same, or are there signi cant di erences? Therefore, this study
Vol. 4 No. 1
March, 2018
ISSN 2410-3918
Acces online at www.iipccl.org
19
Academic Journal of Business, Administration, Law and Social Sciences
IIPCCL Publishing, Graz-Austria
aims to clarify and de ne the empirical studies conducted for the companies in the
developed economies are applicable on the companies in the transitional economies,
like Balkan countries. Also, it considers shedding light at the di erences that might
exist within these countries, by simply dividing the companies, into EU companies
and non-EU companies.
The research has the following structure. The second section covers the literature
review. The third section includes the methodology and data collection. Results and
ndings are presented in section four. The last section the conclusion and limitations.
Literature Review
The theoretical literature is composed by three main theories. Trade o theory refers
to the situation, when the corporate income tax was found to be bene cial for debt
and was used as a tax shield, the linear function based on Modigliani and Miller
(1963) proposition, a 100% debt nancing policy is implied. Hence, the o se ing cost
of debt is considered the bankruptcy cost. According to Kraus and Litzenberg (1973),
there should be an optimal leverage that re ects the trade-o between the deadweight
bankruptcy costs and the tax bene ts of debt. Further, Myers (1984) argue that if a
company follows the trade-o theory, it will set a target for the debt level and tries to
move towards this target.
The agency cost theory was a development of Jensen and Meckling (1976) and Jensen
(1986). The con icts of interest can result as an issue of residual claims between
shareholders and managers. According to Jensen (1986), managers should own a
larger amount of the residual claims. This would mitigate the managers’ incentive
to participate in riskier investment, as they can capture and obtain the bene ts of a
good performance of the company. So, keeping the managers’ investment constant,
a company nanced by debt should reduce the amount of free cash available to the
managers. An increase in debt would increase the responsibility and the managers
would put more e ort in the company’s performance. This mitigation of the managers
and shareholders con ict creates the bene t of debt nancing on a company.
Pecking order theory stems from Myers (1984). According to him “a rm is said to
follow a pecking order if it prefers internal to external nancing and debt to equity
if external nancing is used”. This theory consists of two main components, adverse
selection and agency costs. Therefore, there is a hierarchical structure related to the
nancing policy. Companies prefer to use the retained earnings as a rst route of
nancing, as the cheapest one and without containing any asymmetric information.
The second method used is debt. It is also considered as a method that does not
hold a lot asymmetric information, as periodic xed payments are required. The nal
nancing method is the equity issue, known as the last resort, because the company
would lead the investors’ expectations in the wrong directions, and it is more costly
compared to the two previous methods. Knowing that managers act on behalf of the
shareholders, the shareholder maximization value would not be applied in this case,
and this is why it is seen as a negative signal. So, based on the pecking order theory,
the debt ratio of the company will re ect the need for external nancing.

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