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The study examines the impact of various firm variables on capital structure decisions in the US automotive industry using panel data from 86 firms over 2011–2022. It finds that firm profitability negatively influences total and short-term debt ratios, while other factors like sales growth, firm size, and tangibility have no significant impact. These insights offer guidance for financial risk management and strategic planning in the automotive industry.
Capital structure decisions are crucial determinants of a firm’s financial health, involving the mix of debt, equity, and hybrid securities. These decisions significantly impact a company’s performance and value, with firms striving to strike an optimal balance to reap benefits like lower cost of capital while managing risks such as agency costs and bankruptcy. In the automotive sector, where high capital requirements, cyclicality, and sustainability concerns prevail, capital structure choices hold particular significance. Despite existing research on capital structure decisions, there’s a notable gap in understanding the automotive industry’s specifics. This study aims to fill this gap by exploring how firm-specific variables like size, growth opportunities, profitability, and tangibility influence capital structure decisions within the automotive sector. By synthesizing existing literature and offering empirical evidence, the research seeks to enhance comprehension of capital structure determinants specific to the automotive industry. The study structure includes a review of literature, discussion on methodology and findings, and concludes with implications drawn from the research.
The literature on capital structure (CAPST) decisions and their determinants is extensive and can be divided into three main parts. Firstly, there’s a general discussion on CAPST decisions, followed by a focus on the automotive sector, and finally, a discussion on the determinants influencing these decisions.
Studies in the financial sector highlight ongoing challenges despite precautions taken. They often refer to theories such as the pecking-order theory and findings from various countries, like Portugal and Bangladesh, showing preferences for different financing options based on factors like firm size, growth prospects, and the impact of financial crises.
In the automotive sector, studies emphasize the role of factors like profitability, size, growth prospects, and tangibility in influencing CAPST decisions. Debt financing is commonly used due to tax advantages and lower costs of capital, with specific attention to the unique characteristics of the automotive industry.
Research also delves into regional differences, such as those found in ASEAN countries, where factors like profitability and size impact CAPST decisions differently across nations.
Moreover, studies explore how firm-specific and industry-specific factors influence CAPST decisions. Firm size, profitability, asset tangibility, and growth opportunities emerge as significant determinants across various industries and countries.
Furthermore, there’s a focus on the impact of macroeconomic factors, such as interest rates and inflation, on CAPST decisions, as well as the role of institutional environments and strategic investments.
Overall, these studies emphasize the multifaceted nature of CAPST decisions and the need to consider various factors, including firm-specific characteristics, industry dynamics, and macroeconomic conditions, to understand and predict these decisions accurately.
The study employs panel regression analysis to assess the impact of independent variables on dependent variables. Notably, results from observations with and without a COVID dummy variable are analyzed. The Hausman test is used to determine whether fixed or random effects are appropriate. Regression results (Table 6) show that firm sales growth, size, and tangibility ratio do not significantly affect debt variables (TD, SD, LD). However, profitability has a negative and significant impact on TD and SD consistently across different scenarios. This suggests that more profitable firms tend to rely less on debt, aligning with pecking-order theory and promoting cost control. Maintaining an optimal capital structure enhances decision-making and strategic planning, minimizing risks associated with unplanned debt funding. Moreover, firms with higher profitability may prioritize internal funding over external debt, potentially signaling limited growth opportunities to the market.
he research investigates factors influencing capital structure (capst) decisions in US automotive companies, focusing on variables like Sales Growth, Firm Size, Profitability, and Tangibility Ratio. Analysis suggests most assets are funded by debt, predominantly short-term, with varying behavior across the sample. Sales growth remains positive on average with balanced investment in assets and a prevalence of losses or breakeven scenarios. Fixed assets constitute a significant portion, with a consistent pattern. Regression analysis indicates Profitability negatively affects total and short-term debt, while other variables show no significant impact. The findings suggest a preference for total or short-term debt measurement in determining capital structure. Insights from the study can guide decision-making in financial practices, risk management, and strategic planning for automotive firms, though further research is recommended to confirm and explore additional factors’ influence.
Source:
Suzan Dsouza, Krishnamoorthy K, Umar Nawaz Kayani & Hassan Nasseredine (2024) Variables that sway the capital structure! Evidence from the US automotive industry, Cogent Social Sciences, 10:1, DOI: 10.1080/23311886.2023.2293309