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What Determines the Capital Structure of the Largest Brazilian Firms? An Empirical Analysis Using Panel Data

This paper sought to analyze some of the supposed determinants of capital structure of the largest Brazilian firms, in light of the Pecking Order theory and the Trade-Off theory, testing the empirical validity of these theories in the local scenario. The study is an adaptation of the paper developed by Gaud et al., (2005) in Switzerland, whose work served as a basis for the choice of some variables and of the econometric tests conducted, and uses the Panel Data methodology. Dynamic tests were carried out in addition to static tests, aiming to analyze the adjustment process of the capital structure over time, toward an assumed optimal target level. The tests were supplemented by analyses of variance. The results demonstrated that leverage is negatively related to the importance of tangible assets and to profitability, while it is positively related to business risk. They also demonstrated that foreign owned companies are more in debt than national firms. The analysis suggests that the Pecking Order theory is more consistent than the Trade-Off theory to explain the capital structure of the largest Brazilian firms. The dynamic analysis showed a slow adjustment process of the capital structure towards the target level, suggesting the existence of high adjustment costs and confirming the Pecking Order behavior of managers.