Capital structure determinants and the new High-Tech firms: The critical distinction between fixed and random effects through a static panel data investigation

The aim of our research is to study the association between observed leverage and a set of explanatory variables, using panel data analysis to establish the determinants of a time varying optimal capital structure from new high-tech firms over the period 1998-2002, and to explore whether the main theories of firm financing (Trade-Off Theory and Pecking Order Theory) can explain the capital structure of these firms. We consider the static models, introducing the critical distinction between fixed and random effects. This is the first time the scope of studying the determinants of the capital structure has been extended to new high-tech firms with the use of many techniques of panel data. Considering the results of the most powerful estimation (WG) as our reference, the empirical evidences obtained are stable and similar to those documented in the previous empirical researches. Confirming the pecking order model but contradicting the trade-off model, we find that more profitable firms use less leverage. We also find that large companies tend to use more debt than smaller companies, and that firms which have high operating risk can lower the volatility of the net profit by reducing the level of debt. Leverage is also closely related to tangibility of assets and to the ratio of non-debt tax shield.