The determinants of Dutch capital structure choice

Abstract

This paper uses the structural equation modeling (SEM) technique to empirically test the determinants of capital structure choice for Dutch firms. We include major factors identified by capital structure theories and construct proxies for these factors with consideration of specific institutional settings in the Netherlands. We also carefully rescale the observed variables in order to conform with the linear structure of the model and the multivariate normality assumption. Our empirical results shed many important insights on Dutch firms’ financing behavior. In particular, we identified important factors that have so far been ignored in the literature for the Dutch capital structure choice. Furthermore our results provide evidence supporting the “static trade-off" hypothesis. While the “pecking-order" behavior is observed for Dutch firms, our results cast doubt on the rationale of asymmetric information behind the “pecking-order" hypothesis. We also point out that the static cross-section evidence is not sufficient to conclude whether or not the management of Dutch firms is entrenched. Models based on the dynamic behavior of firms’ capital structure choice are called for such tests.