The Analysis of Capital Structure of Selected Firms of Singapore

Capital structure decisions are among the most essential and vital decisions for any company because of their impact on value and cost of the firm. The main intent of this study is to find out the determinants of the capital structure of IT firms in Singapore traded on the Singapore Stock Exchange (SGX). In order to find the relationship between capital structure and its likely determinants from the list of the following independent variables: Tangibility, Size, Profitability, Growth Opportunities, Non Debt Tax Shield and Liquidity, Multi-linear regression have been used. Multi-linear regression resulted in auto correlation of residuals. Thus, in order to factor in and eliminate the auto correlation of residuals in the panel data considered, Vector Auto Regression (VAR) was used. It has been found that the capital structure which is measured as debt to equity ratio (Leverage) is a function of past Leverage and past Growth Opportunity. Leverage is negatively related to Growth Opportunity and positively related to past Leverage. In addition, it can also be seen that size of a firm, profitability and Non Debt Tax Shield for a firm also has an indirect impact on the capital structure by affecting the growth opportunity, measured as price to book ratio per share, of a firm directly.