COMPARISON OF CAPITAL STRUCTURE OF THE PROPERTY LISTED FIRMS WITH THE SELECTED INDUSTRIES IN THE STOCK EXCHANGE OF SINGAPORE (1992-2001)

Abstract

A comparison of capital structure of the listed firms of selected industry in the Stock Exchange of Singapore The study sought to determine the existence of industry effect on the capital choice across industry and across time; by controlling independent variables of other industry, to allow variation of each independent variable within each industry; lastly, to determine the existence of fixed year effect of the capital structure choice across industry. Two main competing theories on capital choice, namely trade¬ off theory and pecking order theory were reviewed. The theories provide the guide for the selection of independent variables and the model specifications. Lagged variables were centred by the averaged ratio across industry and all years. Regression results were compared to the prediction by theories. Three regression models were developed to test the relationship between the determinants and dependent variable. Additive model with fixed industry effect found statistically significant fixed industry effect on the capital choice except construction industry. Property firm found to be higher geared than that of other industry. Interactive model with multiplicative terms was used to determine any relationship with the independent variables within each industry. Fixed year model found significant relationship between debt ratio and fixed year effect for all years except three specific years. The findings confirmed each industry had their optimal financial leverage. Firms of different industry behaved differently towards their firm-specific variables. Firms debt level could be attributed to each specific year(accountable by macro-economic events of the year). Significant positive relationship was found between prime lending rates and the debt ratio. The results could be explained by trade-off theory, which predicts an optimal capital structure through the trade¬ off of the benefit of tax-shield against the cost of financial distress. These findings provided some insights how borrower and lender should take into consideration when making financial decisions.