Alan A. Bevan

Testing for inconsistencies in the estimation of UK capital structure determinants

This article analyses the determinants of the capital structure of 1054 UK companies from 1991 to 1997, and the extent to which the influence of these determinants are affected by time-invariant firm-specific heterogeneity. Comparing the results of pooled OLS and fixed effects panel estimation, significant differences in the results are found. While the OLS results are generally consistent with prior literature, the results of our fixed effects panel estimation contradict many of the traditional theories of the determinants of corporate financial structure. This suggests that results of traditional studies may be biased owing to a failure to control for firm-specific, time-invariant heterogeneity. The results of the fixed effects panel estimation find larger companies to have higher levels of both long-term and short-term debt than do smaller firms, profitability to be negatively correlated with the level of gearing, although profitable firms tend to have more short-term bank borrowing than less profitable firms, and tangibility to positively influence the level of short-term bank borrowing, as well as all long-term debt elements. However, the level of growth opportunities appears to have little influence on the level of gearing, other than short-term bank borrowing, where a significant negative relationship is observed.

Extending the economics of disorganization

Many of the states of the former Soviet Union have experienced a dramatic collapse of output during transition, which has not yet been reversed in a sustainable way. The economics of disorganization, proposed by Blanchard (1997) and tested empirically by Blanchard and Kremer (1997), reasons that this phenomenon can be explained by specificity of inputs and the breakdown of traditional domestic supply linkages. We replicate the Blanchard-Kremer study for Ukraine and Kazakhstan, and also find that longer and more complex domestic supply chains are associated with greater reductions in output. When we extend their analysis to incorporate measures of the complexity of the Commonwealth of Independent States (CIS) trade and non-CIS trade however, we find that complexity of non-CIS trade is the significant factor in explaining the output collapse. We therefore argue that the disintegration of the Council for Mutual Economic Assistance and the requirement of hard currency trade, are equally, if not more, significant in explaining the output declines experienced by Ukraine and Kazakhstan.