An empirical study on the determinants of the capital structure of Thai firms : the role of stock market return

Abstract

This study investigates the role of stock market return in explaining capital structure of Thai firms, the relation between firm attributions and inert behavior in readjusting toward target capital structure, and the longevity of capital structure readjustment toward target capital structure. Our sample group comprises the data on non-fmancial firms listed on the Stock Exchange of Thailand. The period lasts from 1992 to 2002. The result of study reveals that studied firms fail to readjust capital structure toward target capital structure in response to changing market value of firm in both short term and long term. Moreover, it finds a positive association between return on firm asset and tendency of rebounding toward target capital structure and a negative relation between firm size and tendency of rebounding toward target capital structure which can be said that the large or less profitable firms clearly behave more inertly in readjusting capital structure toward target capital structure than the small and more profitable firms. In addition, it can be implied that the observed capital structure is determined mainly and primarily by change of market value of firm stock rather than by attempts at firm value maximization and firms put less significance on optimum capital structure in practice.