First-Order Determinants of Capital Structure among Listed Manufacturing Companies in the United States of America
DOI:
https://doi.org/10.53819/81018102t4072Abstract
Capital structure plays a critical role which enables manufacturing firms address the dilemma of whether or not an optimal capital structure can be achieved. The capital structure of manufacturing firms is made up of a combination of internal financing and external financing of the firm. The decade since the onset of the global financial crisis has brought about significant structural changes in the manufacturing sector in USA. This study thus sought to assess the first-order determinants of capital structure among listed manufacturing companies in the United States of America through literature based study methodology. The study found that the manufacturing industry in USA is an industry that dominates companies listed on the New York Stock Exchange, it can be seen from the number of companies listed on NYSE increasing every period. The companies not only required to produce products, but also must be able to manage their capital structure. The study established that the first order determinants of capital structure for listed manufacturing firms in USA consist of financial situation, growth opportunities, size of the firm, product uniqueness, business risk, tax shields, dividend Policy. Furthermore, the first order determinants of capital structure consist of firm size, tangibility, growth opportunities, the non-debt tax shield, the bankruptcy risk, profitability and risk. The study concludes that listed manufacturing firms with the highest asset liquidity may increase debt capacity only when the bond covenants impose restrictions on the disposition of assets. The fact that a company possesses fixed assets to a large extent can be considered by its creditors as a guarantee that will allow them to recover their funds in the case of financial distress experienced by the borrower corporation. If a high-risk company is experiencing a decline in sales, the resulting profit will decrease due to the amount of the fixed costs. Because there is a decrease in profits, the company is not available enough funds to pay off the debt and interest so that it threatens the occurrence of bankruptcy.
Keywords: First order determinants, capital structure, listed manufacturing companies, USA.
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