Size is one of the most widely accepted determinants in research of capital structure. Relationship between size and leverage is mixed. Researchers who focus on bankruptcy cost (static trade-off theory), they justify the positive relationship between size and financial leverage like this: as large firms are more diversified, have low transaction costs for issuing new equity, and probability of bankruptcy for large firms is less than smaller firms therefore size positively relate to leverage.
4. GROWTH
The relationship between growth opportunities and the debt ratio is also quite conflicting. The Trade-off theory predicts that firms with more growth opportunities will have less debt as there is less need for the disciplining role of debt. Firms that have growth opportunities would prefer to retain debt capacity as they might need to borrow in the future. Further, growth opportunities are capital assets that add value to a firm but cannot be collateralised and do not generate current taxable income
Age of the firm is a standard measure of reputation in capital structure models. As a firm continues longer in business, it establishes itself as an ongoing business and therefore increases its capacity to take on more debt; hence age is positively related to debt. Before granting a loan, banks tend to evaluate the creditworthiness of entrepreneurs as these are generally believed to pin high hopes on very risky projects promising high profitability rates. If the investment is profitable, shareholders will collect a significant share of the earnings, but if the project fails, then the creditors have to bear the consequences
Numerous empirical studies have explored the impact of tax-shield on corporate financing decisions in the major industrial countries. Some are concerned directly with tax policy, for example: there are other alternative tax shields such as depreciation, research and development expenses, investment deductions, etc., that could substitute the fiscal role of debt.
