Contextualization of Findings

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positive relation between size and SOA, the opposite effect is found during the analyzed period, indicating that other factors were more determinant for observed increases in SOAs. Instead, the results indicate an increasing capital structure inertia tendency as firms grow in size, similarly to what was found by Drobetz and Wanzenried (2006).

Results related to the interaction term comprising the lagged leverage and the interest rate remain qualitatively equivalent to those presented in H4, and the indications hereof have already been elaborated on. However, this section’s findings related to the aforementioned interaction term allows for a fundamentally different deduction relative to H4. Specifically, even when accounting for firm heterogeneity and the appertaining effect such exerts on SOA, the interest rate interaction term solely remains significant for public firms. Consequently, such strengthens the validity of the findings related to the interest rate factor as, even when controlling for firm variables representing the heterogeneity of firms and the appertaining effect of such heterogeneity on SOA, public firms tend to differentiate themselves from their private counterparts by being sensitive to interest rate fluctuations. However, besides strengthening the validity related to the interest rate, the results likewise render it visible that firm heterogeneity indeed does seem to be additional determinants of the SOA for both public and firms.

Interestingly, results related to firm-specific variables indicate that it is solely the marginal effect, measured as either positively or negatively related to SOA, of profitability that differentiates public from private firms.

Consequently, when solely assessing the firm-specific variables exerted marginal effects on the SOA, measured as being either positive or negative, these tend to be similar regardless of ownership.

Resultingly, while this paper has shed light on ownership-induced differences between public and private firms, the investigation of H5 yields results that may in fact advocate for some similarities between the two ownership types related to the firm-specific variables’ effect on the SOA e.g., larger firms are exhibiting capital structure inertia tendencies regardless of ownership. On this basis, the results do support the confirmation of H5.

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typically significant for public firms, tending to amplify managerial discretion, and this opportunism may distort the financing behavior of public firms and, resultingly, lead to a tendency of being underlevered relative to private firms. Second, Brav (2009) suggests that the cheaper capital market access of public firms results in a capital structure policy reflecting more active adjustments compared to private firms in general. Third, as public firms enjoy more efficient capital market access, and thus lower readjustment costs, public firms may, relative to private firms, be more sensitive to interest rates and base adjustments on such interest rate fluctuations, reflecting that market timing tendencies should be more observable for public firms compared to the private counterparts (Bancel & Mittoo, 2004; Graham & Harvey, 2001). In light of these distinguishing ownership-related characteristics and dynamics being scarcely encapsulated both theoretically or empirically, it is doubtful that hitherto corporate finance theories and empirical findings are of equal significance regardless of ownership type.

While results related to H1 indicate that public firms tend to employ less leverage than their private counterparts, the causation remains unclear. Specifically, the results may either be caused by apparent anomalies within public (private) firms relative to private (public) firms or a combination of diverging capital structure policies. According to Morellec (2004), the typically significant ownership dispersion of public firms tends to distort the appertaining financing behavior of such firms, manifesting in a tendency to be underlevered relative to private firms. Contrarily, as suggested by Brav (2009), the tendency of private firms to employ more leverage relative to public firms may be explained by a level effect, specifically as information asymmetries increase for private firms and consequently resulting in a higher relative cost of equity for private firms. In turn, this increases private firms’ reliance on debt rather than equity instruments, which is harmonious with the pecking order theory (Myers & Majluf, 1984).

Alternatively, as the appreciation of control is peculiarly present among the owners of private firms, this may likewise distort the financing behavior of private firms such that debt is solely preferred for control-preservation purposes and not explained by traditional capital structure theories like the trade-off theory (Morellec, 2004).

Moreover, results related to H2 indicate that solely the employed leverage of public firms is sensitive to interest fluctuations, whereas the capital structure levels of private firms were not found to be significantly affected by interest rate fluctuations. These findings support Brav’s (2009) suggested sensitivity effect by providing evidence for the persistence of private firms’ capital structure, which stands in contrast to public firms, as public firms seem attentive to interest rate fluctuations, which may be harmonious with the opportunistic market timing theory (Bancel & Mittoo, 2004; Graham & Harvey, 2001). However,

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such market timing tendencies of public firms may be incoherent with the static trade-off theory, as lower interest rates reduce the present value of tax shields, and, as the benefits of debt are reduced, the inclination toward debt issuances should be reduced accordingly. Naturally, it is vital to stress the importance of both the relationship between the respective firms and the lenders (banks), and the general risk exposure of firms, as alterations to these factors may increase (reduce) the incentives for additional debt issuances or retirements (Maksimovic & Titman, 1981).

In the suggested confirmation of H3 and H4, the universality of the dynamic trade-off theory is nuanced.

Specifically, while the dynamic trade-off theory does factor in adjustment costs, the theory itself does not account for how such adjustment costs may be altered by ownership. Concretely, H3 suggests that private firms are seemingly facing higher adjustment costs, which in turn manifests in a capital structure characterized by an increasing level of inertia relative to public firms. The higher adjustment costs of private firms are harmonious with Brav’s (2009) suggested sensitivity effect, resulting in a capital structure policy with less active recapitalization activity. Contrarily, public firms’ improved capital market access allows for a capital policy characterized by a higher SOA. Furthermore, H4 suggests that SOA for private firms seems to be resistant to interest rate fluctuations, which may contradict the trade-off theory while supporting the pecking order theory (Myers, 1984; Myers & Majluf, 1984). Contrarily, the SOA of public firms seems to be sensitive to interest rate fluctuations, however, such that the interest rate is negatively related to the SOA. This, in turn, indicates that public firms are more likely to adjust at a faster speed toward the target capital structure as interest rates decrease, which may further underpin market timing tendencies of public firms. Overall, findings related to H4 indicate that, as interest rates levels increase, the adjustment behavior of public and private firms is, ceteris paribus, expected to converge.

The suggested confirmation of H5 stressed the importance of firm heterogeneity as explanatory for capital structure adjustments, while likewise showing that the influence of firm-characteristics on the SOA, measured as either positive or negative, seems to be less contingent on ownership. Specifically, for asset tangibility, size and growth, similar marginal effects on SOA were found regardless of ownership.

Contrastingly, findings related to profitability were contingent on ownership, finding a positive and insignificant effect for private and public firms, respectively. The positive effect of profitability on SOA for private firms’ may be harmonious with the trade-off theory (Myers, 1984), however, inharmonious with the prognostications of the pecking order theory and Brav’s (2009) suggested sensitivity effect.

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Summarizing, the support for the confirmation of H1-H5 renders it visible that prevalent corporate finance theories and empirical research on capital structure seem to not sufficiently embrace the unique dynamics induced by ownership. Specifically, in spite of empirical research on the capital structure policy of firms typically endorsing the essentiality of firm characteristics on employed leverage levels and adjustment activity, the vast majority of prevalent empiricism has not acknowledged the heterogeneity of firm ownership and the appertaining influence such exerts on the capital structure policy, as rendered visible by the above.