Testing the pecking order theory and static trade-off theory of capital structure: Evidence from French listed firms

There are still many contradictions in the literature about the capital structure determinants, and therefore a definitive conclusion is far from easy. The aim of this paper was to add to the current research, by analyzing the effects of firm-level characteristics on leverage. The effects of firm size, profitability, asset tangibility, liquidity, growth opportunities, and non-debt tax shield on leverage have been analyzed by performing OLS regressions, on a sample of French public listed companies with 2654 firm-year observations, for the period 2011-2017. The results show that firm size and growth opportunities are positively related to total debt leverage, whereas profitability, liquidity, and asset tangibility are negatively related to total debt. Non-debt tax shields are insignificant for total debt leverage. The total debt leverage of French listed companies is best explained by the Pecking Order theory. Firm size, asset tangibility, and growth opportunities are positively related to long-term debt, whereas profitability is negatively related. Liquidity and non-debt tax shields are insignificant for long-term debt. The Static Trade-Off theory is better at explaining the long-term debt leverage. The results of the study indicate that both theories are not mutually exclusive, and that the explanatory power varies with the leverage definition used.