Corporate capital structure in the United Kingdom: determinants and adjustment

Working papers set out research in progress by our staff, with the aim of encouraging comments and debate.
Published on 17 August 2004

Working paper No. 226 
By Philip Bunn and Garry Young

In this paper three contributions are made. First, empirical support is provided for the ‘trade-off’ model of corporate capital structure where companies borrow to take advantage of the tax benefits of debt, which they set against possible costs of overindebtedness. Second, it is shown empirically how companies adjust their balance sheets when borrowing is out of equilibrium, through adjustments to dividend payments, new equity issues and to a lesser extent capital investment. Third, these factors are incorporated within an aggregate model that quantifies the process and speed of balance sheet adjustment in the economy as a whole.

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