Determinants of Capital Structure and Speed of Adjustment: Evidence from Iran and Australia

Abstract

This study investigated different companies’ capital structures using a comparative approach in a developing country (Iran) and a developed country (Australia). The purpose of this study was to identify the factors affecting the capital structure based on the company's characteristics in Iran and Australia. The main characteristics of the companies used in this research are mainly based on the variables used in Pecking order theory and the Trade-off theory namely tangibility, firm size, profitability, and business risk. Three other variables including liquidity, asset utilization ratio and speed of adjustment were also investigated. Two indicators of total debt ratio and long-term debt ratio have been used as corporate leverage index. The population of this study included 178 Iranian companies listed on Iran's stock exchange and 187 Australian companies listed on Australia’s stock exchange from 2009 to 2015. To test the hypotheses, Panel data and Eviews software were used. To ensure robustness of the results, the speed of adjustment was estimated using GMM and OLS (with fixed and random effects).The results of this study showed that dynamic trade-off theory could better explain the changes in capital structure in Iran and Australia. The results also revealed significant differences in factors affecting the capital structure in Iran and Australia.