Developing an analytical model for the optimal capital structure of the building company

Abstract

The characteristics and accounting principles of the building industry is different from those of other industries, so few studies have discussed the capital structure of the building industry. In this paper, the grey system theory and Pearson correlation analysis are used to study the capital structure (debt ratio) of building companies and its relationship with the company's tax rate, non-debt tax shield, and operational risk, respectively. The results show that for building companies, non-debt tax shield has a positive correlation with the capital structure, whereas the operational risk has a very low correlation with the capital structure. The aforementioned results are different from those of previous researches on other industries. This paper also builds an analytical model for the optimal capital structure of building companies, which can serve as an evaluation tool when governments and lending institutions need to evaluate the financial stability of a building company.