European capital structures and the macroeconomic, corporate and taxation environments
The objective of this thesis is to determine whether European firms exhibit firmspecific optimal capital structure solutions. If the capital structure of the firm is irrelevant then the finance manager should concentrate upon the maximisation of the returns from the firm's investment projects alone. Alternatively, if the capital structure is relevant then the finance manager should strive to attain the capital structure which minimises the cost of capital to the firm, and thus maximises the value of the firm. The firm is positioned within three environments: the macroeconomic environment, the taxation environment and the corporate environment, and it is with respect to these environmentst hat optin-ýisingb ehaviour may be measured.A variety of conventional and modem econometric techniques are employed to study the interaction of the capital structure with the environments within which it is placed to determine whether behaviouro f an optimising nature may be ascertainedT. o allow for as comprehensivea perspective as possible, the processes which determine capital structure policies are tested and modelled across average, marginal, dynamic and long-run time-frames, to enable operational capital structure policies to be distinguished from strategic capital structure policies of the firm. The conclusions suggest that there exists a behavioural dichotomy between larger and smaller firms, based upon differences in the sophistication of information systems present within the finance function of the firm. Larger firms engage in full-optimisation behaviour at the strategic level by targeting the long-run path of the capital structure ratio in relation to key taxation, macroeconomic, and corporate environment variables, endo-exogenousin teraction effects, and considerationo f the effects of the two-way causal interrelationship between the capital structure ratio and the corporate environment. Smaller firms engage in a form of bounded-optimisation behaviour at the strategic level, targeting the capital structure ratio upon the norm for the industry to which the firm belongs, upon the capital structure ratio of larger firms, or on the basis of some other targeting criterion. For both larger and smaller firms, departures from the long-run path of the capital structure ratio, determined by the strategic capital structure policy, are caused by operational capital structure policy adjustments. The operational capital structure policy of both larger and smaller firms is determined mainly by those exogenous factors which determine the explicit costs of finance, although endo-exogenousin teraction effects and the two-way causal interrelationship between the capital structure ratio and the corporate environment also exert an influence. Overall, the theoretical and empirical analyses of the European research provide very strong support for the existence of firm-specific optimal capital structure solutions.