The Determinants of Capital Structure Choice: Evidence from Libyan Firms

Abstract

This study investigates the determinants of capital structure of Libyan firms listed in the stock exchange. The investigation is performed using two models Generalised Method of Moments (GMM) for panel data and OLS cross-sectional regression estimator approach for eighth listed firms over the period 2008 to 2013. This study employs two alternative leverage measures including: equity book value (LEVB) and equity market value (LEVM) as dependent variables and three determinant factors including: financial market development variables, banking sector development variables and individual firm leverage variables as determinants of capital structure.

Empirical findings reveal that both the trade-off and the pecking order theories can explain in Libyan firms’ financing decisions. These results indicate that high price-earnings ratios and high interest rates will cause firms to choose equity over debt, as both of these factors reduce the cost of equity finance. Furthermore, the results suggest an unimportant role for economic growth and inflation rates in explaining the variation in debt-equity ratios. Results show that further development in the stock market indicators are negatively and significantly related to the leverage ratios in (Libyan firms) suggesting that as equity markets become more developed and their liquidity improves, their importance as tools for corporate financing increase by allowing firms to issue more equity and reduce their reliance on debt, which implies that transaction costs for equity are high relative to debt, firms are credit constrained or that the issue cost of equity high due lack of competition among investment banks, or it is possible that improved information dissemination, monitoring and risk sharing, market firms better credit risks for bank loans,  while banking sector variables (especially bank deposits) are significantly and positively associated with debt equity ratio.

Keywords: Capital Structure, Stock Exchange, Trade-off Theory, Pecking Order Theory, Agency Theory, OLS Cross-sectional Regression, GMM Estimation, Libyan Emerging Markets.