Capital stracture

make factors that affect structure extract 5. 1. 1 gainfulness and variation of profitability Profitability is one of the most tested read characteristics In empirical research regarding companies choice of capital structure. The trade- attain surmise predicts that gamey profitability is associated with increased debt levels and the reason for this Is twofold.First, companies achieving high profitability halt less(prenominal) risk of infection of fiscal distress and nonstarter, so the live of debt Is let down. Second, high profitability means that companies plunder achieve high utilization of the rice beer tax shield by change magnitude the touchstone supplement and hence the promised involution payments each period. Similarly, Increased debt entrust give ear as a adolescently factor for managers when indigent cash flow likely Increase with Increased profitability.However, as dynamic trade- off guess predicts adjustment appeals leave alone prevent companie s from adjusting the capital structure outright and the unlikelihood of companies being at their refinancing points at the time of measurement causes the prediction of the tack allegations betwixt leverage and profitability to be negative due to the static personality of the determinant analysis. Retained sugar ar the favored financing according to the pecking order supposition which contradicts the predictions made by tradeoff theory.Higher profitability should enable the company to bear on to a greater extent earnings which is the preferable root word of funding, and as such, the amount of leverage infallible by the company should decrease. Empirically, profitability is systematically found to be negatively associate to leverage, as predicted by both theories. and so the following hypothesis is made 5. 1. addition Tangibility (Asset in place) The thought female genitalia asset tangibility as a determinant is that tangible assets provide more(prenominal) security for potential investors as assets piece of tail serve as collateral.This entrust digest the risk for debt holders and ultimately reduce the woo of debt for the companies and they will be able to depart with higher leverage ratios without Incurring higher financial distress monetary take accounts. Accordingly, the trade-off theory predicts that companies In which tangible assets accounts for a outsized part of the asset structure should complicate big debt levels than companies with a relatively larger amount of Intangible assets. Furthermore, collateralized debt makes It difficult for Investors to dispense asset substitution as the debt holders hold collateral In specific assets.Therefore berth costs should be lower in the midst of shareholders and debt holders, and companies should use more debt relative to the amount of tangible assets they own. The pecking order theory makes the opposite word prediction as It suggest that tangibility will generate less instruction asymmetries between potential Investors and shareholders, and hence the cost of issuing equity will fall, resulting in lower levels of used to predict that the cost of debt will fall as they will now be able to have alliterated debt.So unless the cost of equity falls beneath the cost of debt, the pecking order theory implies that companies will use the cheapest sources of funding, debt would still be the favored funding to equity, at least for keep back amounts of debt. Therefore the prediction of the pecking order theory might non be as unambiguous as some researchers argue. base on predictions of these theories and the agreeable findings in precedent empirical research the following consanguinity between asset tangibility and leverage is expected. 5. 1. Growth Opportunity Growth opportunities calls for a similar reasoning as antecedently used to explain the predictions of asset tangibility effect on leverage, although with opposing conclusions. The beginning notion of the relationship between harvest-tide opportunities and leverage is made by Myers, who states that the line of shareholders making suboptimum investment decisions is more unrelenting when a company has more suppuration opportunities as potential investors cannot value or decide which egression opportunities the company should follow.The value of a companys growth opportunities are most likely only valuable to the person company, or at least less liable to other companies, in which role the costs of financial distress and bankruptcy will be higher for companies with many an(prenominal) growth opportunities. With this consideration the trade-off theory suggests a negative relationship between growth opportunities and leverage.Similarly, with many investment opportunities the earnings before taxes is assumed to be lower in which case companies will not be able to fully implement the interest tax shields associated with high amounts of leverage. Furthermore, companies having more i nvestment opportunities likely value financial legibility highly, which withal reduce the optimal leverage ratio. Contrasting this prediction is erst again the pecking order theory, as it predicts a positive relationship between debt and growth opportunities.The argumentation behind is that growth opportunities involves higher information asymmetries as shareholder are not willing to reveal practically information about their investment opportunities, and attached that investment opportunities requires investment outlays and thus change magnitude a companys financing deficit, companies will payoff debt financing and preferable worth-term financing when they set about finance deficits. The empirical results show consistent behavior of the relationship between leverage and growth opportunities and it is expected that this behavior is also present for Danish companies.