Regression Analysis of Macroeconomic Conditions and Capital Structures of Publicly Listed British Firm

LARRY SU, Elmina Homapour, Fabio Caraffini, Francisco Chiciana

Research output: Contribution to journalArticle (journal)peer-review

8 Citations (Scopus)
21 Downloads (Pure)


Using an unbalanced panel of 922 non-financial companies publicly listed on the London Stock Exchange during January 1995 and September 2014, this article tests the predictions of Pecking Order Theory (POT), Trade-off Theory (TOT) and Market Timing Theory (MTT) of capital structure through the lens of macroeconomic conditions. We find strong evidence that leverage is negatively associated with the business cycle but positively related to stock market performance, which is consistent with POT. In addition, leverage is negatively related to financial market risk, as predicted by TOT. Furthermore, leverage is positively related to credit supply, which is in line with both the POT and TOT. Finally, there is no evidence in support of MTT. The above results are robust with respect to the measurement of macroeconomic variables, the choice of estimation methods and the inclusion of a dummy variable to account for the effect of the 2008 financial crisis. An important implication is that, because firms tend to be highly levered during business cycle downturns, expansionary fiscal and monetary policies to encourage more business borrowings may not be effective after all.
Original languageEnglish
Article number1119
Pages (from-to)1-28
Issue number7
Early online date31 Mar 2022
Publication statusPublished - 31 Mar 2022


  • capital structure
  • macroeconomic conditions
  • firm-specific variables
  • pecking order theory
  • trade-off theory
  • market timing theory


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