What Are the Determinants of the Capital Structure ? Evidence from Switzerland

Abstract

We test leverage predictions of the trade-off and pecking order models using Swiss data. At an aggregate level, leverage of Swiss firms is comparatively low, but the results depend crucially on the exact definition of leverage. Confirming the pecking order model but contradicting the trade-off model, more profitable firms use less leverage. Firms with more investment opportunities apply less leverage, which supports both the trade-off model and a complex version of the pecking or-der model. Leverage is also closely related to tangibility of assets and the volatility of a firm's earnings. Estimating a dynamic panel model with adjustment costs, we find that Swiss firms tend to maintain target leverage ratios, but the results with respect to the speed of adjustment again depend on the definition of leverage. Our results are robust to several alternative estimation techniques.