The Determinants of Corporate Leverage: A Panel Data Analysis

Widespread increases in corporate leverage occurred over the 1980s in Australia. There was also considerable variation in leverage across firms. This paper uses a sample of 209 firms, observed annually between 1973 and 1991, to explore both cross-sectional and time variation in financial structure. The paper begins with a survey of the literature on corporate financial structure. This leads to a model that incorporates the major determinants of leverage. The empirical model takes into account the influence of both firm-specific and time-specific effects. The dynamics of leverage are also tentatively explored. The results suggest that a number of firm-related factors influence the relative costs of debt, the level of demand for and the availability of funds. Most important among these are firm size, growth, collateral and cash flow. A number of macro-economic variables are also found to influence leverage. Most important among these are real asset prices which play a significant role in the post-financial deregulation period.