Tangibility and capital structure: The comparative study of four industries in the Greek economy

Abstract

Nowadays the increasing competition worldwide and more precisely in the European Union affects the Greek companies in a great rate. The necessity for a rearrangement of their capital structure is immense in order to respond to the difficulties that arise from the highly growing companies that are activated to the foreign market. Firms show a great interest in the factors affecting their debt-equity ratio and try to balance its equity and debt leverage by adopting various strategies. Tangibility, profitability firm’s size, firm’s growth and many others determinants affect the capital structure of companies. My study focus mainly on the tangibility of companies and examine four specific sectors by using a particular strategy that will permit the comparison of the leverage of the companies in order to estimate the policy that firms of each sector follow in order to finance their investments and improve their financial performance in the market. The sectors are the fish farming industry, the food industry, the information technology equipment sector and information technology. The hypothesis is that the aquaculture sector and the food production industry can be more leveraged because they own more tangible assets and so they can use these assets as a collateral to increase their debt capacity whereas IT equipment and information technology sector have a low tangibility, meaning they cannot resort to the debt issuance supported to the collateral value of their assets. The methodology is concentrated on the examination of the debt-equity ratio of the firms, the tangibility ratio and the fixed assets turnover ratio (as a relative tangible indicator) for each firm. Moreover, I use the profitability ratio and the firm size ratio in order for my sample to be more trustworthy. I apply the multiple regression model in order to see the effect of the independent variables to the leverage. Also, by including in my model binary variables I examine the differences of the sectors due to their leverage (using as an intercept the fish farming industry). The empirical results of my survey show that the sectors of food and fish farming industry maintain higher levels of tangibility (than information technology sectors), that is to say high debt-equity ratios as tangible assets act as a collateral for more leverage. On the other hand, the information technology companies have high debt-equity ratios but this is due to their profitability that provides them creditworthiness for more debt issuance. The use of dummies proves that food industry and fish industries have higher debt-equity ratios compared with the information technology sectors (higher negative difference from the intercept). Unfortunately, my model explains very little of the variability in the debt-equity ratio so the independent variables do not seem to have any significant effect in the variance of the dependent variable.