Capital Structure and Corporate Financing Decisions: Theory, Evidence, and Practice

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JWBT436-c12 JWBT436-Baker February 11, 2011 9:21 Printer Name: Hamilton

216 Capital Structure Choice

some of the firm-specific factors that encourage or deter firms from taking on

more debt.

FIRM CHARACTERISTICS AND

CAPITAL STRUCTURE

Complex interactions exist between industry and firm attributes and shape the

capital structure decision of firms. MacKay and Phillips (2005, p. 1435) posit that

the relative position of the firm within the industry, such as “the similarity of a

firm’s capital-labor ratio to the industry median, the actions of industry peers, and

its status as an entrant, incumbent, or exiting firm” have important implications

for capital structure. They confirm Maksimovic and Zechner’s (1991) finding that

within competitive industries, firms that diverge from the median industry capital-

to-labor ratio use more debt relative to firms whose capital-to-labor ratios are more

in line with industry medians. Fries, Miller, and Perraudin (1997) find that firms

increase their leverage after entering an industry. Besides the position of firms

vis-

`

a-vis their peers, other factors such as the nature of assets under governance

determine both the availability and use of different forms of financing.

MacKay (2003) finds that firm-specific factors, such as flexibility on the produc-

tion and investment side, have significant implications for the financial structure

of firms. He reports that firms able to adjust their production aspects, such as fac-

tor intensity or product level or mix, without much ...