Were Modern Capital Structure Theories Valid Before World War I?
37 Pages Posted: 21 Feb 2007
Date Written: January 2007
This study investigates whether capital structure theory can explain debt ratios in an historical environment which was characterized by poor investor protection, booming stock markets and strong banks, and in which corporate income tax did not affect capital structure. Our results, based on a unique, hand-collected sample of 556 firm-year observations for 129 listed companies in pre-World War I Belgium, are remarkably similar to findings for present-day samples. Leverage was positively related to asset tangibility, firm size and firm age, and it was negatively related to profitability and prior stock returns. Bank relationships were associated with lower leverage.
Keywords: capital structure, corporate income tax, investor protection, bank relationships, universal banks
JEL Classification: G32, G21
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