Assessment area: The Determinants of Capital Structure
Word limit: 2500 (words +/- 10%)
Deadline: 25th April 2016 (4.00 pm)
In this coursework you are asked to critically analyse the factors that influence a company’s capital structure decision using international data.
To accomplish this, follow the steps below
Select a number of listed, non-financial firms to perform the international analysis. Your sample must contain:
at least 50 non-financial companies listed on the London Stock Exchange, and,
at least 50 listed non-financial companies from another country of your choice.
Obtain the necessary financial information to calculate the following proxies, i.e.
Leverage (ratio of total debt to total assets);
Profitability (ratio of earnings before interest and tax to total assets);
Market-to-book ratio [(total assets – book value of equity + market value of equity) to total assets];
Size (logarithm of total sales);
Tangibility (ratio of property plant and equipment to total assets);
The data should cover five consecutive years, ending in 2015.
In order to compare determinants of capital structure across two countries, estimate one regression for each country, and one for the total sample (three regressions in total), using the following OLS regression model
Leveragei,t=α + β1Tangibilityi,t + β2 Market-to-Booki,t+ β3 Sizei,t + β4 Profitabilityi,t + εi,t
On the basis of the regression models estimated in step 3, evaluate the importance of each factor in terms of the impact on the capital structure decision. The evaluation should also include discussion on international differences, and/or similarities.
Critically discuss your results in terms of their consistency with the relevant literature.
Finally, suggest how the model presented in the third step could be modified, in order to explain better the capital structure decision. The recommendations should be based on the contemporary corporate finance theory and practice (not on econometrical methods).
It is highly recommended to obtain the list of firms and the data outlined in the second step of the requirements from one of the following databases: Datastream, Bloomberg, or Compustat. For more information on the databases please visit http://www2.hull.ac.uk/hubs/about-us.aspx
The raw data does not need to be included in the submission, however some basic information on the selected firms must be provided, for example the number of firms used, country selected.
The regression models must be estimated in STATA or Excel. Both programmes are available for use at the University owned computers.
Before you start planning your essay, please refer to the module website on canvas for further information on:
Coursework submission deadline;
Assessment criteria for coursework; and
Coursework submission procedures.
You should also refer to the Module Handbook for a list of references and the Journals (Sections 6 and 12) for general essential reading, which may be related to the assignment topic. However, you are strongly advised to also benefit from the range of references and resources available throughout the University Library.
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