2010-14: Macroeconomic Conditions and Capital Structure: Evidence from Taiwan (Working paper)

Abstract

Using the partial adjustment model with the financial constraint of over-leverage and under-leverage taken into account, this study investigates the impact of macroeconomic conditions and their interactions with firm-specific factors on the determination of capital structure in the context of the textile, plastics and electronics industries in Taiwan. The empirical results show that macroeconomic conditions have a positive effect on capital structure decisions for firms with the financial constraint of under-leverage relative to the target debt ratio. In addition, the interaction between macroeconomic conditions and firm-specific variables also affects capital structure decisions; however, this effect depends upon whether the firms are over-leveraged or under-leveraged relative to their target debt ratios. Further, we also find the variation in the rate of adjustment toward their target debt ratios that is dependent on whether the firms are over-leveraged or under-leveraged vis- à-vis their debt-ratio target. This finding on adjustment rate is consistent with Byoun (2008) but does not support Flannery and Rangan (2006).