International Review of Economics and Finance 59 (2019) 425–437

Contents lists available at ScienceDirect

International Review of Economics and Finance

journal homepage: www.elsevier.com/locate/iref

Firm and industry specific determinants of capital structure:

Evidence from the Australian market
Larry Li, Silvia Z. Islam *
School of Economics, Finance and Marketing, RMIT University, 445 Swanston Street, Melbourne, 3001, Victoria, Australia

A R T I C L E I N F O A B S T R A C T

JEL classifications: We demonstrate the importance of firm-specific and industry-specific factors in the leverage de-
G3 cision on a sample of Australian publicly listed companies from 1999 to 2012. Empirical findings
G30 show that some firm-specific factors vary across industries, whereas, several previous studies find
G32
an equal impact of these factors. In addition, we find that industry-specific factors have direct and
Keywords: indirect impacts on the formation of the capital structure of Australian firms, but the results of
Leverage
some industry-specific factors are subject to the choices of leverage ratios. Overall, we conclude
Capital structure
that industry-specific factors are important in terms of corporate capital structure formation.
Industry
Australian firms

1. Introduction

One of the major issues in corporate finance is the choice of capital structure, and the seminal work of Modigliani and Miller (1958) is
the cornerstone of capital structure theory, leading to the conclusion that financial leverage does not affect firm market value. Ever since
the findings of Modigliani and Miller (1958), extensive research has been carried out on firm capital structure decision (Harris & Raviv,
1991; MacKay & Philips, 2005; Myers, 1984), and several theories have been developed to examine the effects of financial structure of
the firm, for example, the static trade-off and pecking order theories (Delcoure, 2007; Fama & French, 2002; Frank & Goyal, 2009;
Goyenko, Holden, & Trzcinka, 2009; Kayhan & Titman, 2007), agency costs (Jensen, 1986), market timing (Baker & Wurgler, 2002; Bie
& Haan, 2007; Hovakimian, 2006; Jenter, 2005) and stock returns (Welch, 2004). Empirically, prior research finds that the capital
structure of a firm is not only influenced by firm-specific factors but also by country-specific factors (Bancel & Mittoo, 2004; De Jong,
Kabir, & Nguyen, 2008). Studies considering a single country generally employ firm-specific factors to explain differences in capital
structure amongst companies from that country. Global studies, on the other hand, compare differences in capital structure choice of
firms in different countries, employing firm- and country-specific factors to provide explanations for differences in capital structure. The
general conclusion is that both firm and country-specific factors have significant explanatory power in formation of capital structure.
Although number of studies in the past decade have investigated capital structure determinants using Australian data, the impor-
tance of industry-specific factors is largely overlooked in the literature. The objective of this paper is to explain the leverage decisions of
Australian firms by examining the importance of industry-specific factors on capital structure decisions, along with firm-specific factors,
using a large and comprehensive dataset. A common assumption of capital structure studies is that the impact of industry-specific factors
on leverage decisions is constant across firms within a country (Booth, Aivazian, Demirguc-Kunt, & Maksimovic, 2001; Psillaki &
Daskalakis, 2009; Fan, Titman, & Twite, 2012; Moosa & Li, 2012). However, we argue that the impact of industry-specific factors varies

* Corresponding author.
E-mail addresses: larry.li@rmit.edu.au (L. Li), silslam@studygroup.com (S.Z. Islam).

https://doi.org/10.1016/j.iref.2018.10.007
Received 26 August 2015; Received in revised form 29 August 2018; Accepted 10 October 2018
Available online 13 October 2018
1059-0560/© 2018 Published by Elsevier Inc.
L. Li, S.Z. Islam International Review of Economics and Finance 59 (2019) 425–437

in terms of signs, magnitudes, and significance as industry factors, such as business environment, industry regulations, and competition,
are important for firms’ capital structure decisions (MacKay & Philips, 2005). Additionally, our employment of a pooled firm-year
regression with industry dummies, which is a popular choice for data analysis, ensures that the firm-specific variables possess the
same value of coefficient, meaning that the chance of producing statistically significant results is dramatically increased for the large
panel data set employed.
Identifying the effect of industry-specific factors on leverage decision is important for the debate on why leverage decision varies
significantly across industries. Additionally, we argue that further research is required to better understand the impact of industry-
specific factors on firms' capital structure choices. Therefore, in this study we follow De Jong et al. (2008)'s approach and provide a
more reliable analysis on the importance of industry-specific factors. Our aim is to find the answer as to whether and in what form
industry-specific factors affect leverage decision.
Our empirical analysis is conducted in two steps. Firstly, undertake a standard analysis of the impact of firm-specific factors on
capital structure for each industry included in this sample, finding that firm size is the only firm-specific variable which consistently and
significantly affects capital structure determination across industries, a finding that is consistent with existing literature. However, we
do not find a significantly consistent relationship between other firm-specific variables, such as market-to-book ratio, profitability, and
tangibility, and capital structure. Our statistical tests also show that coefficients of firm-specific variables vary across industries,
implying that the effect of firm-specific variables on capital structure formation differs across industries.
Following the approach of De Jong et al. (2008), the Second phase of the analysis investigates the direct impact of industry-specific
factors on capital structure. We find that the economic significance of industry explains variation in capital structure across industries.
For example, we find that a firm's leverage ratio (both book leverage and market leverage) is positively and significantly related to GDP
contribution of industry, suggesting that firms borrow more if they operate in economically important industries, because generally
these industries are in favour while credit allocation and government support. Also, we consider the indirect impact of industry-specific
factors, captured via firm-specific factors, with our results indicating that industry-specific factors do have a significant impact on
formation of firm-specific factors, but it is sensitive to the choice of leverage ratios. For example, we find that Tobins’Q is positively and
significantly related to the asset tangibility across all regressions. Additionally, industry average growth rate has consistent, negative
and significant explanatory power on asset tangibility. Other industry-specific variables fail to provide consistent and significant results
when we use different leverage measures.
This paper is structured as follows. Section 2 describes the data and methodology employed, while Sections 3 and 4 provide the
literature review, model specification, and empirical findings on the relationship between capital structure and firm-specific and
industry-specific factors, respectively. Section 5 concludes the paper.

2. Data and methodology

Firm-specific and industry-specific determinants are the two major types of variables that we consider in analysing the impacts on
firms' capital structure. The final sample employed in this study consists of publicly-listed Australian firms on SIRCA for the period 1999
to 2012, comprising 1709 firms with 8623 firm-year observations. Following Islam and Khandaker (2015) and Carlson and Fargher
(2007), the study classifies sample firms into 20 industries, as defined by the Global Industry Classification Standard (GICS) by the
Australian Stock Exchange (ASX), except for the banking and financial service industries, with outliers also excluded and with two
groups of variables included, these being firm-specific and industry-specific variables. Firm specific variables included in the analysis are
firm size, asset tangibility, profitability, and market-to-book ratio, as per previous studies such as Baker and Wurgler (2002), Cassar and
Holmes (2003), Ahktar (2005), Leary and Roberts (2005), and Hovakimian (2006). Industry-specific variables employed in this study
are growth rate of industry revenue, profit margin, beta, GDP contribution, average industry P/E ratio, a high technology industry
dummy, and Tobin's Q for market competition, as per previous studies, such as Hall, Hutchinson and Michaelas (2004), MacKay and
Philips (2005), Smith, Chen and Anderson (2015) and Kima, Lin, and Chen (2016).
Following De Jong et al. (2008), we required that firms in our sample have at least three years of available data over the study period.
As expected, the selection of time-period involves a trade-off between the number of firms and industries that can be included in the
study and the availability of enough firm-specific and industry-specific data. We even tried to collect missing data from other sources.
Hence, we excluded two industries while conducting De Jong et al. (2008) regression analyses due to which our final sample comprised
of 18 industries (presented in Tables 5 and 6). Realistically, we do recognise that it is mission impossible to obtain data for each variable
of all sample firms from all industries during the selected study period. Even though we aim to keep the number of industries high
enough and try to maintain a reasonable number of firms, our final dataset does unavoidably include a limited number of firms in a few
industries. Two industries that we excluded from our sample are, Household and Person industry that has only 3 firms, and Semi-
conductors (SCD) and SCD equipment industry that has only 2 firms.
In this paper, we measure leverage in two ways: 1) book value of leverage (BLEV), defined as book debt to assets, where book debt is
total assets minus book equity, and where book equity is defined as total assets less total liabilities; and 2) market value of leverage
(MLEV), defined as book debt divided by total assets, minus book equity plus market equity. If a company's debt and equity are publicly
traded (which is true for the firms studied in our paper), market value is an important measurement to proxy leverage as it reflects
current market information. In this study we employ long term leverage ratios, rather than short term leverage ratios, in order to capture
sample firms' capital structure, as short-term leverage consist largely of just trade credits (Booth et al., 2001; Hall et al., 2004; Titman
Wessels, 1988).
We include the following firm-specific factors in this study as these factors are considered in the established literature to be
important determinants of capital structure. These firm-specific variables are tangibility, profitability, firm size, and market-to-book

426
L. Li, S.Z. Islam International Review of Economics and Finance 59 (2019) 425–437

ratio. Tangibility (TANG) is defined as net property, plant and equipment divided by total assets. Profitability (PROFIT) is defined as
earnings before interest, taxes and depreciation, divided by total assets. Firm size (SIZE) is defined as the natural logarithm of total
revenue. Market-to-book ratio (MB) is measured as market capitalization of a firm to the book value of its equity. Table 1 below presents
the mean and median values of leverage and other firm specific variables for all 20 available industries for the period 1999 to 2012,
inclusive. As observed, the mean value of long-term book and market leverage ratios is 36.9% and 22.5%, respectively, while the median
value of long-term book and market leverage ratios is 21.9% and 12.8%, respectively. Additionally, we find that leverage ratios vary
significantly across industries, which is consistent with previous studies (Hawawini, Subramanian, & Verdin, 2003; Islam & Khandaker,
2015). For example, the energy industry has the lowest median book leverage ratio of 10.6%, while the food and staple retailing industry
has the highest median book leverage ratio of 61.2%. Turning to firm characteristics for each industry, we observe that the industry with
lowest median market-to-book ratio is transportation with a value of 1.006, while the house and personal products industry has the
highest median market-to-book ratio of 2.804. Moreover, it is not surprising to see that the transportation industry has the highest
median value of asset tangibility of 0.744, while the energy industry has the lowest median value of asset tangibility of 0.056. Based on
the sample firms studied, we find that the consumer durables industry has the highest median profitability of 13.2%, while the phar-
maceuticals & biotechnology is the least profitable industry, with median profitability of
28%. Firms in the food and staples retailing
industry tend to have a relatively large size, with a median value of 22.828, while the materials industry has the lowest median value of
size of 13.122.

Table 1
Cross industry summary statistics of leverage and firm specific variables.

BLEV MLEV MB TANG PROFIT SIZE Obs.

Total 0.369 0.225 1.91 0.242
0.138 15.371 8623

(0.219) (0.128) (1.43) (0.121) (-0.06) (15.522)
Automobiles & Comp 0.483 0.395 1.963 0.456
0.061 16.544 93
(0.522) (0.37) (1.331) (0.461) (0.055) (16.537)
Capital goods 0.474 0.468 1.455 0.373 0.026 17.952 737
(0.489) (0.43) (1.133) (0.343) (0.097) (18.193)
Commercial & Profit 0.432 0.371 1.685 0.256
0.008 17.612 427
(0.459) (0.332) (1.328) (0.163) (0.079) (18.199)
Consumer Durables 0.407 0.407 1.402 0.323 0.094 18.165 174
(0.419) (0.371) (1.206) (0.281) (0.132) (18.321)
Consumer Services 0.443 0.432 1.578 0.373 0.048 17.49 246
(0.454) (0.383) (1.278) (0.307) (0.09) (16.938)
Energy 0.183 0.209 1.953 0.203
0.202 14.02 1116
(0.106) (0.083) (1.491) (0.056) (-0.116) (13.913)
Food and Staples Ret 0.591 0.384 1.911 0.34 0.032 21.414 47
(0.612) (0.326) (1.882) (0.239) (0.126) (22.828)
Food, Beverage & Tobacco (FBT) 0.422 0.483 1.367 0.434
0.036 17.291 268
(0.437) (0.47) (1.033) (0.462) (0.05) (17.582)
Health Care Equipment 0.322 0.259 2.398 0.232
0.172 16.000 380
(0.298) (0.149) (1.817) (0.169) (-0.043) (15.884)
Household & Person 0.382 0.182 2.875 0.406
0.187 15.362 16
(0.461) (0.134) (2.804) (0.484) (-0.055) (15.747)
Materials 0.175 0.197 1.986 0.192
0.193 13.551 2996
(0.077) (0.055) (1.511) (0.047) (-0.106) (13.122)
Media 0.463 0.388 1.872 0.247
0.033 17.971 251
(0.471) (0.343) (1.318) (0.183) (0.071) (17.91)
Pharmaceuticals, Biotech & Life Science (PBL) 0.206 0.166 2.686 0.162
0.369 13.891 465
(0.138) (0.064) (2.221) (0.074) (-0.28) (13.993)
Retailing 0.464 0.361 1.888 0.332 0.051 18.574 258
(0.463) (0.301) (1.503) (0.273) (0.119) (18.773)
Semiconductors (SCD) & SCD Equipment 0.241 0.2 2.323 0.174
0.123 16.239 17
(0.162) (0.029) (1.315) (0.164) (-0.093) (15.966)
Software and services 0.372 0.31 2.093 0.193
0.105 16.147 485
(0.331) (0.224) (1.587) (0.124) (-0.004) (16.403)
Technology Hardwar 0.403 0.407 1.756 0.203
0.143 16.028 205
(0.395) (0.368) (1.197) (0.161) (-0.026) (16.082)
Telecommunications 0.412 0.398 1.695 0.369
0.072 17.664 139
(0.409) (0.31) (1.437) (0.315) (0.013) (17.164)
Transportation 0.519 0.518 1.129 0.618 0.089 19.428 140
(0.556) (0.498) (1.006) (0.744) (0.101) (19.268)
Utilities 0.38 0.392 1.543 0.327
0.106 15.93 163
(0.346) (0.314) (1.143) (0.186) (0) (16.427)

Averaged over the period 1999–2012.The top and bottom 5% data are excluded considering each variable to attain normal distribution. Table 1 presents mean (median in
parentheses) value of leverage and other firm-specific variables from 20 industries. All variables are averaged over the period 1999–2012. The top and bottom 5% data are
excluded considering each variable to attain normal distribution. Firm-specific variables are as follows. BLEV: Book value of leverage defined as book debt to assets where
book debt is the total assets minus book equity. Book equity is defined as total assets less total liabilities. MLEV: Market value of leverage is defined as the Book debt
divided by total assets minus book equity plus market equity. MB: Market to book ratio is measured as the market capitalization to the book value of equity. TANG:
Tangibility defined as net property, plant and equipment divided by total assets. PROFIT: Profitability defined as earnings before interest, taxes and depreciation divided
by total assets. SIZE: Firm size defined as the natural logarithm of total revenue. Obs. is the number of firm year observations per industry.

427
L. Li, S.Z. Islam International Review of Economics and Finance 59 (2019) 425–437

As discussed above, we employ a series of industry-specific factors to explain the capital structure of sample firms. We consider
number of variables capturing the business conditions and financial development of each industry, and these variables are averaged over
the study period. It is worth noting that the selection of industry-specific variables is difficult as the literature on industry factors and
capital structure is limited. To capture industry's business environment variables selection is mainly based on Miao (2005), and Frank
and Goyal (2009). Miao (2005) suggests that high growth industries have relatively lower leverage based on the theoretical model
presented in his paper, while Frank and Goyal (2009) find that industry-specific variables do have significant explanatory power on a
company's capital structure. The industry-specific variables employed in this study are growth rate of industry revenue, profit margin,
beta, market competition, P/E ratio, a high technology industry dummy, Tobin's Q, and GDP contribution. Table 2, below, summarise
the definition of all industry-specific variables.

3. Effect of firm-specific factors

In this section, we examine the effect of firm-specific factors on capital structure, presenting a brief literature review, followed by the
model specification and empirical findings.

3.1. Literature review

The determinants of capital structure have been the focus of investigation in several countries, including the US (Baker & Wurgler,
2002; Flannery & Rangan, 2006; Hovakimian, 2006; Kayhan & Titman, 2007; Leary & Roberts, 2005; Welch, 2004), the UK (Bevan &
Danbolt, 2002; 2004; Marsh, 1982), the Netherlands (Bie & Haan, 2007) and the Australia (Cassar & Holmes, 2003; Ahktar, 2005). This
previous literature reports that many factors are influential on corporate capital structure decision, including firm-specific variables,
such as profitability, size, growth, tangibility, as well as macroeconomic conditions (Frank & Goyal, 2009).
Theoretically, formation of capital structure is typically based on a small number of competing, but not mutually exclusive, theories
that focus on trade-off theory and the pecking order theory, agency costs, asymmetric information, market timing, and transaction costs
issues (Jensen & Meckling, 1976; Myers, 1984; Baker & Wurgler, 2002). According to the trade-off theory, a firm sets a target debt level
based on a trade-off between the costs and benefits of debt. The theory postulates that firms raise their debt level to the extent that the
marginal tax advantages of additional borrowing are offset by the increase in the cost of financial bankruptcy. Therefore, it is safe to
conclude that bankruptcy cost is negatively related to leverage ratio. The literature shows that firms with high levels of asset tangibility
represent lower risk for creditors; therefore, asset tangibility is expected to be positively related to leverage (Frank & Goyal, 2009; Rajan
& Zingales, 1995; Titman & Wessels, 1988). Similarly, larger firms are usually of lower bankruptcy risk as they are able to access a wider
range of financial sources, and have more flexibility in redeploying assets, as compared to smaller firms. Also, agency theory suggests
that firms with high leverage are reluctant to invest and, as a result, to transfer wealth from debt holders to equity holders. As a
consequence of this potential wealth transfer, lenders require collateral as the use of secured debt can reduce this problem. Hence, firms
unable to provide collateral must pay higher interest on debt, or be forced, to issue equity instead (Baker & Wurgler, 2002; Islam &
Khandaker, 2015; Scott, 1977). In addition, as large firms are less likely to face financial distress, size and tangibility are expected to
have positive impacts on leverage.
Pecking order theory, on the other hand, suggests that firms do not have a leverage target and focus on information costs and

Table 2
Description of industry-specific variables.

Name Definition Proxy Reference Statistics

Min Max Mean

Growth rate The geometric mean of sales revenues growth rate Growth rate McDougall, Covin,
34.88% 11.34%
1.89%
of each industry between 1999 and 2012 Robinson, and Herron
(1994)
Profit margin The average profit margin of each industry between Profit margin Wahlen et al. (2011)
13.47% 14.87% 6.46%
1999 and 2012
Beta The average value of beta of each industry between Risk Brooks, Faff, and 0.616 1.332 0.93
1999 and 2012 McKenzie (1998)
Market The average market share controlled by top 5 firms Competition Bikker and Haaf (2002); 61.68% 100% 84.02
competition of each industry between 1999 and 2012 Jimenez et al. (2013)
P/E The average value of Price Earnings ratio of each Market Wahlen et al. (2011) 12.59 41.005 22.26
industry between 1999 and 2012 expectation
High technology A dummy variable that equals 1 if the sample firm High technology Davidson and Heaney 0 1 0.222
industry belongs to Software and service, Technology, (ht) (2012)
dummy Hardware, and Telecommunication industries.
Tobin's Q The average Tobin's Q ratio of each industry Market Hovey, Li, and Naughton 1.137 4.392 2.425
between 1999 and 2012 performance (2003); Lewellen and
Badrinath (1997)
GDP contribution The average value of total revenue of each industry direct PCA (2014); Lindsey, 0.104% 35.64% 6.44%
to total GDP between 1999 and 2012 contribution to the Roulet, and Romanach
economy (2007)

Note: the calculation of industry-specific variables is mainly based on the aggregate firm-specific information of public companies listed on the Australian Stock Exchange.

428
L. Li, S.Z. Islam International Review of Economics and Finance 59 (2019) 425–437

signalling effects. Myers and Majluf (1984) demonstrate that cost of funds determines a firm's financial choices. Three major sources of
funds are available for firms: retained earnings, debt, and equity. Firms prefer to finance projects from internally generated cash flows —
namely, retained earnings. When this source of funds is exhausted, they next move on to debt, and additional equity is issued only when
debt is not sufficient to meet financing needs. This hierarchy is justified by differences in financing costs: issuing additional equity is the
most expensive source of financing as it encompasses information asymmetries between managers, existing shareholders and potential
new shareholders. Therefore, pecking order theory suggests that profitable firms will have more retained earnings, thus becoming less
leveraged, while unprofitable firms will have higher leverage ratios. Consequently, a negative relationship is predicted between
leverage and profitability.
Agency theory states that agency costs play an important role in financing decisions due to the conflict that may exist between
shareholders and creditors (Jensen & Meckling, 1976). An optimal capital structure is determined by minimising agency costs and
balancing the interests of the parties involved. Therefore, profitable firms with great potential are more likely to issue equity to fund new
projects instead of borrowing, implying that growth opportunities and profitability are expected to have a negative impact on a firm's
leverage ratio. In addition, tangible assets can normally be used as collateral to mitigate creditor risk, implying a positive relationship

Table 3
Impact of firm-specific variables on leverage across industries.

Panel A: Book Leverage

Intercept MB TANG PROFIT SIZE Obs. Adj R2

a b a a a
Total
0.360 (<0.001) 0.010 (0.023) 0.237 (<0.001)
0.277 (<0.001) 0.041 (<0.001) 8623 0.09
Automobiles & Comp
1.656b (0.017) 0.085c (0.068) 0.112 (0.545)
0.974a (<0.001) 0.119a (0.003) 93 0.21
Capital Goods 0.126 (0.426)
0.007 (0.735) 0.052 (0.437)
0.459a (<0.001) 0.023a (0.008) 737 0.02
Commercial & Profit
0.495a (0.002)
0.003 (0.861)
0.029 (0.742)
0.458a (<0.001) 0.057a (<0.001) 427 0.08
Consumer Durables
0.378c (0.056) 0.022 (0.271) 0.175b (0.017)
0.28c (0.098) 0.041a (<0.001) 174 0.09
Consumer Services
0.017 (0.91) 0.061a (0.001) 0.086c (0.099)
0.671a (<0.001) 0.027a (0.003) 246 0.15
Energy
0.181c (0.058) 0.018 (0.193) 0.393a (<0.001)
0.308a (<0.001) 0.019a (0.003) 1116 0.06
Food & Staples Retailing 1.156a (<0.001) 0.003 (0.91) 0.052 (0.578) 0.24b (0.032)
0.027a (0.002) 47 0.14
FBT 0.459 (0.131)
0.07c (0.062)
0.163 (0.234)
0.317 (0.055) 0.012 (0.427) 268 0.02
Health Care Equipment
0.175 (0.235)
0.031b (0.035) 0.315a (0.003)
0.202b (0.012) 0.033a (<0.001) 380 0.08
Household & Person 0.173 (0.625)
0.03 (0.618)
0.070 (0.544) 0.164 (0.212) 0.025b (0.087) 16 0.74
Materials
0.199a (<0.001) 0.019b (0.015) 0.419a (<0.001)
0.187a (<0.001) 0.023a (<0.001) 2996 0.08
Media
0.04 (0.802) 0.026 (0.114) 0.196b (0.025)
0.308a (<0.001) 0.024a (0.004) 251 0.10
PBL
0.284a (0.005) 0.001 (0.88) 0.319a (<0.001)
0.241a (<0.001) 0.029a (<0.001) 465 0.13
Retailing
0.200c (0.097)
0.022 (0.107) 0.034 (0.455)
0.307a (<0.001) 0.038a (<0.001) 258 0.14
SCD & SCD Equipment
1.295b (0.021) 0.035 (0.423) 0.159 (0.67) 0.045 (0.874) 0.09a (0.008) 17 0.56
Software & Service
1.050a (0.003) 0.086a (0.006) 0.673a (<0.001) 0.731a (<0.001) 0.076a (<0.001) 485 0.09
Technology Hardwar
0.592 (0.148) 0.026 (0.494) 0.098 (0.676)
0.055 (0.723) 0.066a (0.007) 205 0.02
Telecommunication
0.569a (0.008) 0.040c (0.084)
0.105 (0.341)
0.782a (<0.001) 0.058a (<0.001) 139 0.34
Transportation
0.080 (0.798)
0.012 (0.849)
0.029 (0.783)
1.699a (<0.001) 0.045a (0.006) 140 0.14
Utilities
0.428c (0.045) 0.047 (0.229) 0.269c (0.045)
0.310c (0.045) 0.043a (0.001) 163 0.16

Panel B: Market Leverage

Intercept MB TANG PROFIT SIZE Obs Adj R2

Total
0.146a (<0.001)
0.044a (<0.001) 0.109a (<0.001)
0.026a (0.003) 0.030a (<0.001) 8442 0.37
Automobiles & Comp
0.737a (0.005)
0.04b (0.024) 0.052 (0.458)
0.121 (0.237) 0.071a (<0.001) 93 0.35
Capital Goods 0.256a (<0.001)
0.118a (<0.001) 0.091a (0.003)
0.113b (0.018) 0.019a (<0.001) 721 0.24
Commercial & Profit
0.319a (<0.001)
0.091a (<0.001)
0.024 (0.559)
0.254a (<0.001) 0.048a (<0.001) 424 0.40
Consumer Durables 0.055 (0.73)
0.117a (<0.001) 0.114c (0.053)
0.681a (<0.001) 0.030a (0.001) 174 0.35
Consumer Services 0.688a (<0.001)
0.098a (<0.001) 0.037 (0.341)
0.097 (0.289)
0.007 (0.286) 243 0.26
Energy
0.033 (0.209)
0.019a (<0.001) 0.164a (<0.001)
0.017 (0.346) 0.013a (<0.001) 1092 0.21
Food & Staples Retailing 1.578a (<0.001)
0.111a (<0.001) 0.006 (0.946) 0.089 (0.395)
0.045a (<0.001) 47 0.64
FBT 0.527a (<0.001)
0.134a (<0.001)
0.132b (0.012) 0.035 (0.618) 0.009 (0.127) 256 0.27
Health Care Equipment
0.003 (0.963)
0.061a (<0.001) 0.035 (0.474)
0.003 (0.929) 0.024a (<0.001) 377 0.34
Household & Person 0.383 (0.235)
0.090 (0.112) 0.047 (0.639) 0.136 (0.24) 0.001 (0.952) 16 0.32
Materials
0.092a (<0.001)
0.018a (<0.001) 0.196a (<0.001)
0.009 (0.493) 0.019a (<0.001) 2940 0.32
Media
0.038 (0.728)
0.053a (<0.001)
0.001 (0.989)
0.073 (0.16) 0.028a (<0.001) 245 0.21
PBL 0.035 (0.463)
0.028a (<0.001) 0.194a (<0.001)
0.007 (0.737) 0.010a (0.003) 455 0.19
Retailing 0.045 (0.715)
0.112a (<0.001)
0.049 (0.263)
0.234a (<0.001) 0.028a (<0.001) 251 0.26
SCD & SCD Equipment
1.293b (0.030)
0.048 (0.304) 0.153 (0.703)
0.194 (0.527) 0.097a (0.008) 17 0.69
Software & Service
0.314a (0.001)
0.044a (<0.001) 0.043 (0.391)
0.125a (0.001) 0.043a (<0.001) 469 0.18
Technology Hardwar
0.413b (0.01)
0.052a (<0.001) 0.136 (0.116) 0.024 (0.683) 0.053a (<0.001) 193 0.32
Telecommunication 0.004 (0.983)
0.057a (0.003)
0.043 (0.619)
0.182c (0.034) 0.027a (0.004) 127 0.12
Transportation 0.385a (0.017)
0.204a (<0.001)
0.040 (0.458)
0.388c (0.036) 0.023a (0.005) 140 0.28
Utilities
0.272a (0.009)
0.045b (0.019) 0.240a (<0.001)
0.047 (0.540) 0.040b (<0.001) 162 0.58

This table presents regression results of leverage on firm-specific variables for 20 industries using annual average data of 1999–2012 estimated from Eq. (1):
Leverageit ¼ α þ β1MBit-1 þ β2TANGit-1þ β3PROFITit-1 þ β4 SIZEit-1þ εi
Where i denote an individual firm in each industry and t denotes time-period following traditional capital structure model. The superscripts a, b, and c indicate statistical
significance at 1%, 5% and 10% level, respectively. P-values are reported in parentheses. Obs. is the number of firm year observations per industry in the regressions. Adj-
R2 is the value of adjusted-R2 for the regression.

429
L. Li, S.Z. Islam International Review of Economics and Finance 59 (2019) 425–437

between tangibility and financial leverage, which is consistent with the pecking order theory. Therefore, a negative relationship be-
tween growth opportunities and leverage is expected.
Market timing theory suggests that both stock performance and debt market conditions play important roles in capital structure
determination, and a firm's financing decision based on current conditions in both debt and equity markets, with firms issuing either
debt or equity depending on which of the markets currently look more favourable (Baker & Wurgler, 2002). Market timing theory
postulates that firms prefer to issue equity in hot market periods, but will repurchase equity at low prices, meaning, therefore, that
beliefs about the value of a company relative to its market price may influence capital structure policy (Baker & Wurgler, 2002; Bie &
Haan, 2007; Kayhan & Titman, 2007). Consequently, this implies that capital structure is the cumulative outcome of past attempts at
equity market timing. As a proxy for market timing, in the literature, market-to-book ratio is employed and is expected to be negatively
related to leverage ratios, and the predictions of market timing theory are consistent with the cost of adverse selection proposed in
pecking order theory (Baker & Wurgler, 2002; Bie & Haan, 2007; Faulkender, 2005; Hovakimian, 2006; Hovakimian, Hovakimian, &
Tehranian, 2004; Huang & Ritter, 2009).

3.2. Model specification

We follow the tradition of capital structure studies and estimate a model in which leverage ratio is regressed on a set of potential
determinants of capital structure. We run firm-level ordinary least squares regression, with leverage ratios as dependent variables and
firm-specific factors as explanatory variables, for each of the 20 industries in our data set as follows:

Leverageit ¼ α þ β1MBit-1 þ β2 TANGit-1þ β3 PROFITit-1 þ β4 SIZEit-1þ εi (1)

In addition, number of statistical tests is conducted. Firstly, we test whether each firm-specific coefficient is equal across industries to
determine whether four firm specific coefficients, MB, TANG, SIZE, and PROFIT, maintain the same value across all industries in the
sample. Following the approach of De Jong et al. (2008), we employ an unrestricted regression model (where all coefficients can vary
across industries) to conduct these tests. Secondly, we test whether all firm-specific coefficients of the 20 industries possess the same
value. In other words, we assume that all firm-specific coefficients maintain the same value across industries per previous studies (Booth
et al., 2001; Fan et al., 2012; Psillaki & Daskalakis, 2009).
Verbeek (2004) and De Jong et al. (2008) discuss the joint test of significance regression coefficients, with the test statistics described
as follows:

ðSR
SUR Þ=J

F¼
SUR =ðN
KÞ

Where N is the number of observations, J is the number of regressors omitted in the restricted models, K is the number of regressors
remaining in the restricted models, including the intercept, and SR and SUR are the sum-squared residuals (SSR) of the restricted and
unrestricted models, respectively. Following De Jong et al. (2008), we get SUR by adding all sum-squared-residuals (SSR) from all the
equations for firm-specific determinants of leverage ratio. For SR in each test, we add the SSR from the restricted equations in the system
with the assumption that relevant coefficients are equal across all industries.

3.3. Empirical findings

Results of an industry-by-industry analysis of the relationship between firm-specific characteristics and leverage are presented in
Table 3. As predicted, we find that almost all coefficients of SIZE are positively and statistically significantly related to leverage, sug-
gesting that larger firms tend to borrow more. This finding is consistent with the international literature and results reported in previous
Australian studies (Cassar & Holmes, 2003; Akhtar, 2005). For example, Bunkanwanwanicha et al. (2008) find size to be an important
determinant of capital structure in Indonesia, both before and during the Asian financial crisis. De Jong et al. (2008) obtained a similar
result that firm size plays an important role as a determinant of capital structure; while Moosa and Li (2012) argue that information
asymmetries are less severe for large firms as compared to smaller firms. Furthermore, size can be used as a proxy for corporate risk as
large firms are able to diversify their investment projects on a broader basis, thus limiting their exposure to cyclical fluctuations in one
line of production.
We find that the relationship between profitability and both leverage ratios is consistent with previous literature. The overwhelming
negative relationship between profitability and leverage ratio is consistent with the pecking order and asymmetric information theories,
both of which suggest that firms raise capital by, firstly, resorting to retained earnings, then to debt, and, finally, to issuing new equity.
Thus, these two theories imply a negative relationship between leverage and profitability, and similar findings are reported in other
studies (Akhtar, 2005; Cassar & Holmes, 2003; Chang, Chen, & Liao, 2014; Chen, 2004; Fan et al., 2012; Islam & Khandaker, 2015; Li,
Yue, & Zhao, 2009; MacKay & Philips, 2005).
Titman and Wessels (1988), Rajan and Zingales (1995), and Fama and French (2000) argue that asset tangibility affects leverage. The
trade-off theory predicts a positive relationship between leverage and the proportion of tangible assets. On the other hand, since tangible
assets can be used as collateral (thus reducing creditor risk related to incurring agency costs of debt), a high fraction of tangible assets is
expected to be associated with higher leverage. However, we do not find a consistent relationship between asset tangibility and the two
leverage ratios employed. As observed, we find only nine and six positively significant coefficients for asset tangibility when book
leverage and market leverage ratios are employed as dependent variable, respectively. Mixed results on this variable are also found in

430
L. Li, S.Z. Islam International Review of Economics and Finance 59 (2019) 425–437

previous studies (Bhabra, Liu, & Tirtiroglu, 2008; Fan et al., 2012; Frank & Goyal, 2009; Shen, 2008). Finally, we find that growth
opportunities are significantly negatively related to market leverage ratio, generating 19 negative and significant coefficients, a finding
that supports the explanation of capital structure based on agency theory that shareholders of firms with greater growth prospects prefer
to sustain a lower leverage ratio in order to maintain control of a firm and to minimise wealth transfer to creditors from profitable
projects. Akhtar (2005) confirms that high growth rate lead to increase agency cost, that is inversely related to leverage. This result is
also supported by Titman and Wessels (1988) and Rajan and Zingales (1995). However, only a limited number of significant results are
found when book leverage ratio is employed as the dependent variable, and a possible explanation for this is that a firm's market value of
leverage varies closely with fluctuations in its own stock price, meaning that market leverage ratio is significantly related to growth
opportunities as measured by market-to-book ratio, while book value of leverage remains constant as the actual level of debt does not
vary significantly (Fama & French, 1992; Welch, 2004; Ozdagli, 2009).
At this stage, an important question to be answered is “Are firm-specific determinants of leverage ratio different across industries?” If
firm-specific determinants behave similarly across industries, we can easily apply an identical model to all sample firms and expect that
these firm-specific coefficients do not vary significantly across industries. As observed in Table 3 (Panels A and B), coefficients of firm-
specific determinants do vary across industries. Therefore, further tests are required to investigate whether each of the four-selected
firm-specific coefficients is invariant across industries. An F-test, the methodology of which is explained in Section 3.2, is employed
to test for the variability of the firm-specific coefficients across industries, and the results are presented in Table 4.
From Table 4 we can confirm that coefficients of firm-specific determinants do vary across industries. More importantly, the results
for the F-statistics are 1768.4 and 526.6, respectively, for all the firm-specific variables, strongly suggesting that all firm-specific de-
terminants are not simultaneously equal for the 20 industries in our sample. Therefore, the conclusion is that one model for all firms
from different industries is not valid in studies of capital structure, and that industry-specific factors related to business environment,
such as competition, risk, and growth, which can vary across industries, need to be considered in the capital structure studies.

4. Effect of industry-specific factors

In this section, we review the effect of industry-specific factors on capital structure from both a theoretical and empirical perspective
in order to address a number of research questions that continue to generate controversy in the literature. A brief review of the relevant
literature is summarized in section 4.1, followed by model specification and discussion of empirical findings in sections 4.2 and 4.3,
respectively.

4.1. Literature review

The literature shows that a firm's capital structure can be influenced by industry-specific factors. Scott and Martin (1975) argue that
the financial structure of firms is not identical across industries, and that firms in the mining industry are associated with the lowest
leverage ratio, while firms in the aerospace industry tend to have the highest average leverage ratio. Hall et al. (2004) confirm that most
firm-specific factors vary significantly across industries, as well as finding a significant relationship between firm-specific factors and
leverage ratios when sample firms from different industries are pooled into one regression model. Therefore, they argue that further
research is needed to consider the reasons for cross industry variation in capital structure studies. MacKay and Philips (2005) report that
industry factors help explain firm financial structure, and that the variation of capital structure within one industry is related to the
technology and risk profile of individual firms within an industry. Miao (2005) draws a similar conclusion in his theoretical modelling
paper, finding that firms tend to be less leveraged if they operate in industries associated with high technology growth, risky technology,
and high bankruptcy and fixed operating cost. Smith et al. (2015) suggest that the nature of each industry characteristic may provide
explanations for the variation in capital structure of firms from different industrial background. Further, Istaitieh and
Rodriguez-Fernandez (2006) explain that the nature of competition in an industry influences the capital structure of firms, a finding also

Table 4
F-test for equality of coefficients of firm-specific determinants across industries.

MLEV BLEV

MB TANG PROFIT SIZE ALL MB TANG PROFIT SIZE ALL

F-Statistics 392.46 230.19 255.49 1012.26 1768.4 80.67 199.13 769.97 269.31 526.66
P-value 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00
N 8623 8623 8623 8623 8623 8623 8623 8623 8623 8623
K 81 81 81 81 324 81 81 81 81 324
J 19 19 19 19 76 19 19 19 19 76
Result Rejection Rejection Rejection Rejection Rejection Rejection Rejection Rejection Rejection Rejection

This table present the test of whether each of firm-specific coefficients is the same across industries, and also whether all firm-specific coefficients of 20 industries have the
ðSR
SUR Þ=J
same value. The test statistic is F ¼ where N is the number of observations, J is the number of regressors omitted in the restricted models, K is the number of
SUR =ðN
KÞ
regressors remaining in the restricted models including the intercept, and SR and SUR denote the sum-squared-residuals of the restricted (equal coefficients are imposed)
and unrestricted (coefficients may differ across countries) models, respectively. Using the Seemingly Unrelated Regression (SUR) estimation method, we get SUR by
adding all sum-squared-residuals (SSR) from all the equations for firm-specific determinants of leverage. For SR in each test, we add the SSR from the restricted equations
in the system with respective assumptions that relevant coefficients are same across industries. Rejection means the null hypothesis is rejected at 5% level.

431
L. Li, S.Z. Islam International Review of Economics and Finance 59 (2019) 425–437

documented by Frank and Goyal (2009); Lemmon, Roberts, and Zender (2008) and Ross, Westerfield, and Jaffe (2008), whose study
indicate that firms in a given industry face common forces that affect their financing decisions, meaning, it is not surprising that industry
specific factors influence capital structure choice and it varies across industries. One explanation is that industry related variables are a
set of correlated factors jointly shaping the unique economic characteristics of a specific industry, including the capital structure
decisions.
In summary, we believe that industry-specific factors have a significant impact on firm capital structure decisions. On the one hand,
industry-specific factors directly impact firm capital structure because the economic characteristics and competitive dynamics of an
industry play a key role in influencing firm operating strategies and the format of financial statements in the industry (Wahlen, Baginski,
& Bradshaw, 2011). For example, generally, the leverage ratio of a commercial bank will be significantly higher than that of firms in
most other industries (such as in the retail industry). However, on the other hand, industry-specific factors can be indirectly related to
firm capital structure as the unique business features of each industry may influence firm operating behaviour. For example, it is logical
to assume that firms operating in a competitive industry are more likely to have lower profitability, thus having lower leverage.
Additionally, firms operating in industries with rapid technology growth are associated with a lower proportion of fixed asset on their
balance sheets, leading to lower leverage ratios for these firms. Firms in mature industries, on the other hand, are generally associated
with lower levels of growth opportunity, implying a positive relationship with leverage ratio.

4.2. Model specification

We employ the following model to analyse the direct impact of industry-specific variables on leverage ratios. The selection of
industry-specific variables related to leverage ratios is mainly based on the research findings of MacKay and Philips (2005), Hall,
Hutchinson, and Michaelas (2010) and Smith et al. (2015). Several industry-specific factors are employed to capture an industry's
overall market performance, business risk, growth potential, and relevant importance to the overall economy. Firstly, a simple pooled
OLS regression for all samples firms in all industries is conducted, taking into account cross-industry differences via industry-dummies:

X
18 X
18 X
18 X
18 X
18
LEVin ¼ αi dn þ β1n dn MBin þ β2n dn TANGin þ β3n dn PROFITin þ β4n dn SIZEin þ εin (2)
n¼1 n¼1 n¼¼1 n¼1 n¼1

Where LEVin, TANGin, PROFITin, SIZEin and MBin, are the leverage and firm-specific characteristics, respectively, of firm i in industry
n, while dn are the industry dummies. It is noteworthy that equation (2) generates similar results to those produced for equation (1).
Although our initial sample consists of all 20 industries that are available in ASX following the GICS, however, while conducting this
regression analysis, the final sample contains 18 industries to represent the Australian market. Household and Person industry and
Semiconductors (SCD) and SCD Equipment industry are excluded due to the limited number of firms and industry-specific information
of these two industries.
Secondly, we aim to investigate the explanatory power of industry-specific characteristics on a firm's capital structure. Following De
Long et al. (2008), we employ Weighted Least Squares (WLS) regression, where the weights are the inverse of the standard errors of the
corresponding industry dummies (αi), allowing us to consider the statistical significance of relevant variables. The regression is pre-
sented as follows:

αi ¼ χ 0 þ χ 1 RISKi þ χ 2 GROWTHi þ χ 3 COMPETITIONi þ χ 4 P=Ei þ χ 5 HTi þ χ 6 Profitmargin þ χ 7 Tobin'sQ þ χ 8 GDPContribution þ εi

(3)
In equation (3) RISKi, GROWTHi, COMPETITIONi, P/Ei, HTi, Profit Margini, Tobins’Qi and GDP Contributioni are industry-specific
characteristics as defined in Table 2. The dependent variable in eq (3) is the estimator of αi in model (2), plus residuals. Following Puri
(1996), we use alpha plus residuals to model unobserved factors that cannot be explained by firm level variables. Equation (3) is
conducted to test the notion that estimated coefficients of firm-specific determinants vary across industries.
Thirdly, we further test whether industry-specific factors have a significant impact on firm-specific factors. We first obtain the
regression coefficients of all firm-specific variables from equation (1) for each industry, and then employ these coefficients as dependent
variables explained by industry-specific factors. Similarly, WLS regression is employed to test for whether industry-specific factors
significantly impact on the formation of firm-specific factors, where the weights used are the inverse standard errors of the firm-specific
factors for each industry. This equation can be written as follows:

βin ¼ γ 0 þ γ 1 RISKi þ γ 2 GROWTHi þ γ 3 COMPETITIONi þ γ 4 P=Ei þ γ 5 HTi þ γ 6 Profitmargin þ γ 7 Tobins'Q þ γ 8 GDPContribution þ εi

(4)
In equation (4) βin represent the coefficients of firm-specific factors presented in equation (1). In addition, various reduced forms of
this question are tested in this study.

4.3. Empirical findings

As discussed above, the key objective of estimating equations (3) and (4) is to determine the direct and indirect impacts of industry-
specific variables on leverage ratios in Australia, and the empirical findings of the models are presented in Tables 5 and 6. Looking at
Table 5, it is firstly interesting to observe that the adjusted R2 of all regressions are above 90%, implying that the employed model

432
L. Li, S.Z. Islam International Review of Economics and Finance 59 (2019) 425–437

captures a large proportion of the variations in the industry dummy variables, further confirming our argument that industry-specific
factors do possess explanatory power in determination of capital structure in Australia.
The regression results from Panels A and B of Table 5 show that several industry-specific factors, such as Beta, GDP contribution,
competition and Tobin's Q are directly related to book and market leverage ratios in Australia. As observed, most industry-specific
factors fail to provide significant and consistent results across all regressions. For example, Beta is significant in only two out of 11
coefficients; Competition is significant in only one out of ten coefficients. However, Tobin's Q shows its significant impact on leverage
ratio in eight out of ten regressions. Additionally, GDP contribution has established a consistently and statistically significant impact on
the two leverage ratios across all regressions, suggesting that firms in economically significant industries (for example; mining in-
dustries) are associated with relatively high leverage ratios. This result also confirms that firms in economically significant industries are
in favour in terms of credit allocation and government support. In addition, Tobin's Q, the proxy of firms' market performance, es-
tablishes reasonably consistent and positive impact of leverage ratio, although we fail to observe significant findings in all regressions.
The finding indicates that firms are more likely to increase their debt levels if they operate within an industry with good market
performance.

Table 5
Direct impact of industry-specific variables on leverage ratios.

Panel A BLEV BLEV BLEV BLEV BLEV BLEV

GM_Growth
3.726
3.532
3.334
2.818
2.879

(-0.99) (-1.13) (-1.11) (-1.03) (-0.86)
GM_Profitmargin 3.887 3.923
(0.53) (0.57)
Beta 276.6 272.3 222.9 228.8 416.5* 357.8
(1.22) (1.29) (1.19) (1.27) (2.24) (2.09)
GDPcontribution 23.21*** 23.29*** 24.25*** 24.12*** 23.16*** 23.10***
(7.59) (8.27) (11.07) (11.46) (8.88) (8.94)
PE
4.190
3.712
2.581
(-0.55) (-0.64) (-0.49)
TQ 95.29* 92.67* 99.69* 90.03**
(1.99) (2.40) (2.81) (3.16)
Competition
0.00967
0.0101
0.0113
0.0135
(-0.52) (-0.59) (-0.68) (-0.87)
HT
11.33
(-0.11)
_cons
362.9
362.0
329.3
352.4
378.1*
318.7
(-1.34) (-1.41) (-1.36) (-1.53) (-2.19) (-2.03)
N 18 18 18 18 18 18
adj. R-sq 0.927 0.934 0.938 0.942 0.909 0.911
F 27.95 35.45 44.01 56.34 57.73 87.73
df_m 8 7 6 5 3 2
df_r 9 10 11 12 14 15

Panel B MLEV MLEV MLEV MLEV MLEV MLEV

GM_Growth
0.229
0.235
0.244
0.218

(-0.90) (-1.16) (-1.24) (-1.17)
GM_Profitmargin 0.278 0.283
(0.56) (0.62)
Beta 22.01 22.13 18.94 17.34 11.57
(1.42) (1.53) (1.44) (1.39) (1.00)
GDPcontribution 1.944*** 1.942*** 2.005*** 2.035*** 2.031*** 2.113***
(9.36) (10.14) (12.76) (14.09) (13.87) (17.42)
PE 0.0224
(0.04)
TQ 3.135 3.216 4.078** 3.879* 3.894* 4.622**
(0.97) (1.28) (2.00) (1.98) (1.96) (2.50)
Competition
0.00178
0.00176
0.00176
0.00178
0.00203
0.00257**
(-1.39) (-1.56) (-1.61) (-1.67) (-1.92) (-2.84)
HT
2.048
2.236
3.096
(-0.28) (-0.40) (-0.58)
_cons
13.72
13.67
11.12
9.628
2.130 10.21
(-0.74) (-0.78) (-0.67) (-0.61) (-0.14) (1.28)
N 18 18 18 18 18 18
adj. R-sq 0.951 0.956 0.959 0.961 0.960 0.960
F 42.51 53.97 66.63 84.53 102.4 136.3
df_m 8 7 6 5 4 3
df_r 9 10 11 12 13 14

This table presents the WLS regression results of coefficients of firm-specific variables against industry specific variables from Eq (3). That is this table show direct impact
of industry specific variables on firm leverage ratios. The weights are the inverse standard errors of the corresponding firm-specific coefficients estimated in Eq. (2). The
significant coefficients are printed in italic with t-statistics in parentheses. ***, ** and * Sign indicates statistical significance at the 1%, 5% and 10% level, respectively.
The number of observations is 18, which are the industries that have all industry-specific variables available. Adj-R2 is the value of Adj-R-sq for the regression.

433
 Table 6

L. Li, S.Z. Islam

Indirect impact of industry-specific variables on leverage ratios.
Panel A MLEV

M/B M/B M/B M/B TANG TANG TANG Profit Profit Profit Profit Size Size Size Size

Growth
0.00144
0.00114
0.00107
0.000785
0.00747*
0.00739*
0.00758**
0.00236
0.00206
0.00192
0.000683
0.000679
0.000836
0.000900
(-1.25) (-1.31) (-1.24) (-1.01) (-3.05) (-3.17) (-3.30) (-0.48) (-0.56) (-0.58) (-1.19) (-1.25) (-1.92) (-2.15)
Profit margin 0.00151 0.00156 0.00178
0.00914
0.00937
0.00965
0.00846 0.000134
(0.86) (0.92) (0.40) (-1.16) (-1.31) (-1.50) (-1.43) (0.13)
Beta 0.115 0.107 0.0893 0.0914* 0.361* 0.342* 0.394** 0.0330 0.0264 0.0545 0.0532 0.0552 0.0671*
(2.11) (2.17) (1.98) (2.06) (2.68) (2.82) (3.81) (0.13) (0.12) (1.67) (1.80) (1.95) (2.90)
GDP Contribution 0.000740 0.000830 0.00119* 0.00114* 0.000977 0.00135 0.00537 0.00547 0.00567* 0.00515*
0.000636
0.000608
0.000640
0.000654
(1.00) (1.22) (2.16) (2.10) (0.51) (0.85) (1.54) (1.73) (2.23) (2.23) (-1.46) (-1.71) (-1.90) (-1.98)
PE
0.00218
0.00165
0.00108
0.0106*
0.0100*
0.0106*
0.000894 0.000482 0.000521
(-1.11) (-1.14) (-0.83) (-2.32) (-2.41) (-2.60) (-0.10) (0.44) (0.52)
TQ 0.0310* 0.0283* 0.0307** 0.0260** 0.0858* 0.0886** 0.0902** 0.0692 0.0658 0.0677 0.0630
0.00662
0.00638
0.00405
0.00513
(2.61) (2.97) (3.38) (3.71) (3.18) (3.55) (3.67) (1.26) (1.60) (1.88) (1.85) (-0.95) (-1.00) (-0.93) (-1.28)
Competition 0.00000988 0.00000918 0.00000845* 0.00000713 0.0000301* 0.0000296* 0.0000308* 0.0000314 0.0000304 0.0000294 0.0000290
0.0000221
0.0000225
0.0000176
(2.08) (2.15) (2.03) (1.88) (2.69) (2.78) (2.96) (1.48) (1.72) (1.97) (2.00) (-0.80) (-0.86) (-0.75)
HT
0.0119
0.182*
0.183*
0.202**
0.0655
0.0574
0.0559
0.0417 0.0222 0.0221 0.0171 0.0169
(-0.42) (-2.84) (-2.99) (-3.56) (-0.52) (-0.62) (-0.64) (-0.51) (1.35) (1.42) (1.45) (1.47)
_cons
0.292**
0.288***
0.277***
0.282***
0.455*
0.443*
0.478**
0.469
0.467
0.440**
0.429**
0.00742
0.00668
0.00516
0.0259
(-4.67) (-4.87) (-4.81) (-5.00) (-2.93) (-3.04) (-3.46) (-1.62) (-1.71) (-3.29) (-3.33) (-0.19) (-0.18) (-0.15) (-1.19)
N 18 18 18 18 18 18 18 18 18 18 18 18 18 18 18
adj. R-sq 0.618 0.650 0.654 0.663 0.600 0.633 0.642 0.013 0.111 0.191 0.236 0.302 0.371 0.413 0.434
F 4.441 5.500 6.361 7.701 4.181 5.191 6.089 1.029 1.304 1.668 2.049 1.919 2.430 2.990 3.606
df_m 8 7 6 5 8 7 6 8 7 6 5 8 7 6 5
df_r 9 10 11 12 9 10 11 9 10 11 12 9 10 11 12

Panel B BLEV
434

M/B M/B M/B M/B TANG TANG TANG Profit Profit Profit Profit Size Size Size Size

Growth
0.00187
0.00163
0.00126
0.00118
0.0102*
0.0095*
0.0093*
0.00502
0.00485
0.0024
0.00032
0.00031
(-1.77) (-1.73) (-1.50) (-1.41) (-2.52) (-2.63) (-2.64) (-0.55) (-0.61) (-0.37) (-0.60) (-0.61)
Profit margin 0.00367* 0.00393* 0.00367* 0.00285* 0.00593 0.00559
0.0327*
0.0330*
0.034*
0.033* 0.000340
(2.24) (2.57) (2.47) (2.27) (0.78) (0.77) (-2.21) (-2.65) (-2.88) (-3.01) (0.35)
Beta 0.105 0.109 0.0852 0.0593 0.329 0.274 0.211 0.0219 0.0270 0.0232 0.0167

International Review of Economics and Finance 59 (2019) 425–437

(2.03) (2.22) (2.08) (1.84) (1.42) (1.43) (1.24) (0.05) (0.89) (0.86) (0.69)
GDP contribution
0.00076
0.00081
0.00072 0.00188 0.00213 0.00342 0.00972 0.00990 0.0104 0.00973
0.00057
0.00049
0.000475
0.000360
(-1.02) (-1.12) (-1.02) (0.55) (0.66) (1.27) (1.40) (1.83) (2.01) (2.08) (-1.35) (-1.44) (-1.44) (-1.29)
PE
0.00298
0.00229
0.00161
0.00111
0.0168
0.0150*
0.0138
0.00919
0.00901 0.00124 0.00133 0.00165 0.00156
(-1.58) (-1.61) (-1.34) (-1.01) (-2.13) (-2.25) (-2.16) (-0.53) (-0.56) (1.17) (1.35) (2.04) (2.00)
TQ 0.00658 0.238*** 0.235*** 0.245*** 0.185 0.186 0.147 0.143*
0.00803
0.00741
0.00882
0.00755
(0.58) (5.05) (5.24) (5.81) (1.75) (1.88) (2.14) (2.19) (-1.23) (-1.23) (-1.63) (-1.52)
Competition 0.000004 0.00004 0.00001 0.000038 0.000037 0.00003 0.00003
0.00002
0.00002
0.000003
0.000003
(0.97) (0.91) (0.47) (0.94) (1.11) (0.99) (1.00) (-0.92) (-1.00) (-1.35) (-1.92)
HT 0.0325 0.0410 0.0472* 0.0545*
0.180
0.160
0.164
0.507*
0.505*
0.425*
0.411* 0.0512** 0.0510** 0.0552*** 0.0554***
(1.26) (2.00) (2.46) (3.05) (-1.68) (-1.69) (-1.76) (-2.17) (-2.33) (-2.67) (-2.76) (3.42) (3.57) (4.55) (4.67)
_cons
0.0938
0.0961
0.0616
0.0497
0.442
0.360
0.322
0.698
0.676*
0.732*
0.718* 0.0125 0.0150 0.0208 0.0396*
(-1.56) (-1.66) (-1.43) (-1.19) (-1.64) (-1.81) (-1.70) (-1.25) (-2.32) (-2.75) (-2.83) (0.34) (0.43) (0.64) (2.26)
N 18 18 18 18 18 18 18 18 18 18 18 18 18 18 18
adj. R-sq 0.454 0.490 0.498 0.497 0.729 0.750 0.759 0.239 0.315 0.358 0.404 0.539 0.579 0.603 0.620
F 2.766 3.334 3.816 4.355 6.706 8.273 9.916 1.669 2.119 2.578 3.305 3.480 4.343 5.307 6.558
df_m 8 7 6 5 8 7 6 8 7 6 5 8 7 6 5
df_r 9 10 11 12 9 10 11 9 10 11 12 9 10 11 12

This table presents the WLS regression results of coefficients of firm-specific variables against industry specific variables from Eq (4). It shows the indirect impact of industry specific variables on firm leverage ratios.
L. Li, S.Z. Islam International Review of Economics and Finance 59 (2019) 425–437

Turning to the indirect impact of industry-specific factors on the determination of capital structure of Australian firms, the empirical
findings are presented in Panels A and B of Table 6. The proposition put forward in this study is that industry-specific factors can in-
fluence the variation of firm-specific determinants of corporate leverage in Australia. As observed, the industry-specific variables are
employed as independent variables, and the results of this analysis are presented in Table 6.
The overall empirical findings suggest that industry-specific factors do have an impact on the role of firm-specific determinants of
capital structure, whilst, however, being subject to the choice of leverage ratios. As observed in Panels A of Table 6, we find that ratios
measuring firm market performance tend to have more explanatory power if the market leverage ratio is employed as a dependent
variable in equation (2). It is observed that average market performance (Tobin's Q) of industries has a significant positive impact on the
estimated coefficient of market-to-book ratio and asset tangibility, supporting the notion that firms in industries with good market
performance tend to have greater growth opportunities and better asset quality (Frank & Goyal, 2009). Additionally, firms in industries
with high business risk (Beta) are associated with higher asset tangibility, while firms in high technology industries (HT) tend to
maintain relatively lower levels of tangible assets as compared to firms in other industries. Average industry P/E and industry growth
rate are negatively associated with asset tangibility, implying that firms in industries with a higher proportion of fixed assets are
relatively more capital intensive, which leads to higher operating costs, lower operating profits, and greater variability in profitability
for these firms. This means that a negative relationship between asset tangibility and P/E and growth rate is observed.
On the other hand, we find that accounting ratios are significant determinants in explaining capital structure decisions if book
leverage ratio is employed as a dependent variable in equation (2). As observed in Panel B of Table 6, we find that Tobins’Q of industry
still have a significant positive impact on asset tangibility, but it has lost its explanatory power on market to book ratio. However, we
find that the industrial average profit margin has a significant positive impact on the estimated coefficient of market-to-book ratio,
suggesting that firms in industries with high profit margins will have greater growth opportunities in the future. In addition, industrial
average profit margin is negatively associated with the estimated coefficient of profitability, a finding that is inconsistent with the
existing literature, and which suggests that firms in Australia have a high level of fixed costs. Firms in high technology industries (HT)
are negatively related to the estimated coefficient of profitability as well. In short, the empirical evidence presented in Tables 5 and 6
indicates that industry-specific factors do play an important role in capital structure determination, as well as influencing the way firm-
specific variable impact on firm's choice of capital structure (Fan et al., 2012; Frank & Goyal, 2009).

5. Conclusion

Capital structure theories suggest various determinants of capital structure, such as the pecking order theory, the agency theory, the
trade-off theory and the market timing theory, as discussed above. Numerous attempts have been made in the past to empirically
investigate to what extent firm-specific factors influence capital structure of firms operating within a specific country. Recently, more
country comparison studies have been conducted, with researchers employing country-specific factors to explain sample firms’ capital
structure choice. In this study, we have examined whether industry-specific factors have a significant impact on the determination of
corporate capital structure in an Australian context.
We find that the influence of some firm-specific variables, such as firm size and profitability, on sample firms' capital structure is
significant, which is consistent with the literature. Meanwhile, we also observe that the relationship between sample firm's leverage
ratio and firm-specific variables does vary across industries, a finding that is inconsistent with the literature. We argue that industry-
specific factors can both directly and indirectly affect a firm's capital structure choice. In terms of direct impacts, we find that GDP
contribution significantly influences corporate capital structure. Turning to indirect impacts, our findings highlight the importance of
Tobin's Q, and industry average growth to the firm-specific determinants of capital structure choice in Australia. Other industry-specific
variables fail to provide consistent and significant results. The findings further suggest that firms tend to be more leveraged if they
operate in economically significant industries. Hence, we conclude that industry-specific factors are important in terms of corporate
capital structure formation.
However, the primary focus of this study is to investigate the effect of cross-industry differences on corporate financial choices,
which may have implications for the literature on how industry factors affect firm performance across various industries. We realise that
most capital structure studies, including this one, focus on publicly listed companies, while studies on capital structure determinants of
SMEs are very limited. Therefore, a comprehensive study on the determinants of SMEs' financial choices will greatly enrich the liter-
ature. In addition, the relationship between firms-specific factors and capital structure is well documented. However, manager/owner-
specific variables, such as age, race, education, and professional background, deserve to attract more attention from researchers, which
provides an interesting avenue for future research.

Acknowledgement

The authors would like to thank conference participants at the 2015 Financial Markets and Corporate Governance Conference in
Fremantle, Western Australia, and seminar participants at RMIT University. We thank Professors Tom Smith, Imad Moosa, Richard
Heaney and Sudipto Dasgupta for their useful comments to improve the paper. In addition, we would like to thank Dr. Michael Gangemi
at RMIT University for peer reviewing and editing our paper to correct any grammatical errors. Any remaining errors are the re-
sponsibility of the authors.

435
L. Li, S.Z. Islam International Review of Economics and Finance 59 (2019) 425–437

Appendix A. Supplementary data

Supplementary data to this article can be found online at https://doi.org/10.1016/j.iref.2018.10.007.

References

Ahktar, S. (2005). The determinants of capital structure for australian multinational and domestic corporations. Australian Journal of Management, 30(2), 321–341.
Baker, M., & Wurgler, J. (2002). Market timing and capital structure. The Journal of Finance, 57, 1–30.
Bancel, F., & Mittoo, U. (2004). Cross-country determinants of capital structure choice: A survey of European firms. Financial Management, 33, 103–132.
Bevan, A., & Danbolt, J. (2002). Capital structure and its determinants in the United Kingdom – a decompositional analysis. Applied Financial Economics, 12, 159–170.
Bevan, A., & Danbolt, J. (2004). Testing for inconsistencies in the estimation of UK capital structure determinants. Applied Financial Economics, 14, 55–66.
Bhabra, H. S., Liu, T., & Tirtiroglu, D. (2008). Capital structure choice in a nascent market: Evidence from listed firms in China. Financial Management, 37, 341–364.
Bie, & Haan. (2007). Market timing and capital structure: Evidence for Dutch firms. De Economist, 155, 183–206.
Bikker, J., & Haaf, K. (2002). Measures of competition and concentration in the banking industry: A review of the literature, research series supervision no. 27. Amsterdam: De
Nederlandsche Bank.
Booth, L., Aivazian, V., Demirguc-Kunt, A., & Maksimovic, V. (2001). Capital structure in developing countries. The Journal of Finance, 56, 87–130.
Brooks, R., Faff, R., & McKenzie, M. (1998). Time-varying beta risk of australian industry portfolios: A comparison of modelling techniques. Australian Journal of
Management, 23(1), 1–22.
Bunkanwanicha, P., Gupta, J., & Rokhim, R. (2008). Debt and entrenchment: Evidence from Thailand and Indonesia. European Journal of Operational Research, 185(3),
1578–1595.
Carlson, E., & Fargher, N. (2007). Note on audit fee premiums to client size and industry specialization authors. Accounting and Finance, 43(3), 423–446.
Cassar, G., & Holmes, S. (2003). Capital structure and financing of SMEs: Australian evidence. Accounting and Finance, 43, 123–147.
Chang, C., Chen, X., & Liao, G. (2014). What are the reliably important determinants of capital structure in China? Pacific-Basin Finance Journal, 13, 87–113.
Chen, J. J. (2004). Determinants of capital structure of Chinese-listed companies. Journal of Business Research, 57, 1341–1351.
Davidson, S., & Heaney, R. (2012). Effective tax rates and the political cost hypothesis: A Re-evaluation of australian evidence. Australian Tax Forum, 27, 79–106.
De Jong, A., Kabir, R., & Nguyen, T. T. (2008). Capital structure around the world: The roles of firm- and country-specific determinants. Journal of Banking & Finance,
32, 1954–1969.
Delcoure, N. (2007). The determinants of capital structure in transitional economies. International Review of Economics & Finance, 16(3), 400–415.
Fama, E., & French, K. R. (1992). The cross-section of expected stock returns. The Journal of Finance, 47(2), 427–465.
Fama, E., & French, K. R. (2000). Forecasting profitability and earnings. Journal of Business, 73, 161–175.
Fama, E., & French, K. R. (2002). Testing trade-off and pecking order predictions about dividends and debt. Review of Financial Studies, 15, 1–33.
Fan, J., Titman, S., & Twite, G. (2012). An international comparison of capital structure and debt maturity choices. Journal of Financial and Quantitative Analysis, 47(1),
23–56.
Faulkender, M. (2005). Hedging or market timing? Selecting the interest rate exposure of corporate debt. The Journal of Finance, 2, 931–962.
Flannery, M., & Rangan, K. (2006). Partial adjustment towards target capital structures. Journal of Financial Economics, 79, 469–506.
Frank, M. Z., & Goyal, V. K. (2009). Capital structure decisions: Which factors are reliably important? Financial Management, 38(1), 1–37.
Goyenko, R., Holden, C. W., & Trzcinka, C. (2009). Do liquidity measures measure liquidity? Journal of Financial Economics, 92, 153–181.
Hall, G., Hutchinson, P., & Michaelas, N. (2004). Determinants of the capital structures of european SMEs. Journal of Business Finance & Accounting, 31, 711–728.
Hall, G., Hutchinson, P., & Michaelas, N. (2010). Industry effects on the determinants of unquoted SME's capital structure. International Journal of the Economics of
Business, 7(3), 297–312.
Harris, M., & Raviv, A. (1991). The theory of capital structure. The Journal of Finance, 46, 297–355.
Hawawini, G., Subramanian, V., & Verdin, P. (2003). Is performance driven by industry-or firm-specific factors? A new look at the evidence. Strategic Management
Journal, 21(1), 1–16.
Hovakimian, A. (2006). Are observed capital structures determined by equity market timing? Journal of Financial and Quantitative Analysis, 41, 221–243.
Hovakimian, A., Hovakimian, G., & Tehranian, H. (2004). Determinants of target capital structure: The case of dual debt and equity issues. Journal of Financial
Economics, 71, 517–540.
Hovey, M., Li, L., & Naughton, T. (2003). The relationship between valuation and ownership of listed firms in China, corporate governance. International Review, 11(2),
112–122.
Huang, R., & Ritter, J. R. (2009). Testing theories of capital structure and estimating the speed of adjustment. Journal of Financial and Quantitative Analysis, 44(2),
237–271.
Islam, S. Z., & Khandaker, S. (2015). Firm leverage decision: Does industry matter? The North American Journal of Economics and Finance, 31, 94–107.
Istaitieh, A., & Rodriguez-Fernandez, J. (2006). Factor-product markets and firm's capital structure: A literature review. Review of Financial Economics, 15(1), 49–75.
Jensen, M. (1986). Agency costs of free cash flow, corporate finance and takeovers. The American Economic Review, 76, 323–339.
Jensen, M., & Meckling, W. (1976). Theory of the firm: Managerial behaviour, agency costs and ownership structure. Journal of Financial Economics, 3, 305–360.
Jimenez, G., Lopez, J., & Saurina, J. (2013). How does competition affect bank risk-taking? Journal of Financial Stability, 9, 185–195.
Kayhan, A., & Titman, S. (2007). Firms' histories and their capital structures. Journal of Financial Economics, 83, 1–32.
Kima, D. H., Lin, S. H., & Chen, T. K. (2016). Financial structure, firm size and industry growth. International Review of Economics & Finance, 41, 23–39.
Leary, M. T., & Roberts, M. R. (2005). Do firms rebalance their capital structures? The Journal of Finance, 60, 2575–2619.
Lemmon, M. L., Roberts, M. R., & Zender, J. F. (2008). Back to the beginning: Persistence and the cross-section of corporate capital structure. The Journal of Finance, 63,
1575–1608.
Lewellen, W., & Badrinath, S. G. (1997). On the measurement of Tobin's Q. Journal of Financial Economics, 44(1), 77–122.
Lindsey, P. A., Roulet, P. A., & Romanach, S. S. (2007). Economic and conservation significance of the trophy hunting industry in sub-saharan africa. Biological
Conservation, 134, 455–469.
Li, K., Yue, H., & Zhao, L. K. (2009). Ownership, institutions, and capital structure: Evidence from China. Journal of Comparative Economics, 37, 471–490.
MacKay, P., & Philips, G. M. (2005). How does industry affect firm financial structure. Review of Financial Studies, 18(4), 1433–1466.
Marsh, P. (1982). The choice between equity and debt. Journal of Finance, 37, 121–144.
McDougall, P., Covin, J., Robinson, R., & Herron, L. (1994). The effects of industry growth and strategic breadth on new venture performance and strategy content.
Strategic Management Journal, 15, 534–535.
Miao, J. J. (2005). Optimal capital structure and industry dynamics. The Journal of Finance, 60(6), 2621–2659.
Modigliani, F., & Miller, M. (1958). The cost of capital, corporation finance and the theory of investment. The American Economic Review, 48, 261–297.
Moosa, I., & Li, L. (2012). Firm-specific factors as determinants of capital structure: Evidence from Indonesia. Review of Pacific Basin Financial Markets and Policies, 15(2),
1–17.
Myers, S. (1984). The capital structure puzzle. The Journal of Finance, 39, 575–592.
Myers, S., & Majluf, N. S. (1984). Corporate financing and investment decisions when firms have information that investors do not have. Journal of Financial Economics,
133, 187–221.
Ozdagli, A. K. (2009). Financial leverage, corporate investment, and stock returns. available at: http://www.bos.frb.org/economic/wp/index/htm.
Property Council of Australia (PCA). (2014). The economic significance of the victorian property and construction industry. available at: http://www.parliament.vic.
gov.au/images/stories/committees/edic/local_economic_initiatives/.

436
L. Li, S.Z. Islam International Review of Economics and Finance 59 (2019) 425–437

Psillaki, M., & Daskalakis, D. (2009). Are the determinants of capital structure country or firm specific? Small Business Economics, 33(3), 319–333.
Puri, M. (1996). Commercial banks in investment banking conflict of interest or certification role? Journal of Financial Economics, 40, 373–401.
Rajan, R., & Zingales, L. (1995). What do we know about capital structure: Some evidence from international data. The Journal of Finance, 51, 1421–1460.
Ross, S. A., Westerfield, R. W., & Jaffe, J. (2008). Corporate finance (8th ed.). New York: McGraw-Hill Irwin.
Scott, J. H. (1977). Bankruptcy, secured debt, and optimal capital structure. Journal of Finance, 32, 1–20.
Scott, D. F., JR., & Martin, J. D. (1975). Industry influence on financial structure. Financial Management, 4(1), 67–73.
Shen, G. (2008). The determinants of capital structure in Chinese listed companies. PhD Thesis. University of Ballarat.
Smith, D. J., Chen, J. G., & Anderson, H. D. (2015). The influence of firm financial position and industry characteristics on capital structure adjustment. Accounting and
Finance, 55(4), 1135–1169.
Titman, S., & Wessels, R. (1988). The determinants of capital structure. The Journal of Finance, 43, 1–19.
Verbeek, M. (2004). A guide to modern econometrics. England: John Wiley & Sons.
Wahlen, J. M., Baginski, S. P., & Bradshaw, M. T. (2011). Financial reporting, financial statement analysis and valuation (7th ed.). Thomson South-Western.
Welch, I. (2004). Capital structure and stock returns. Journal of Political Economy, 112, 106–131.

437