Determinants of capital structure: evidence from Turkish lodging companies

Purpose - The purpose of this paper is to investigate the factors affecting capital structure decisions of Istanbul Stock Exchange (ISE) lodging companies. Design/methodology/approach - A model based on the trade-off and pecking order theories is specified and implications of both theories are empirically tested. The model is estimated using a dynamic panel data approach for five ISE companies for the period of 1994-2006. Findings - The findings suggest that effective tax rates, tangibility of assets, and return on assets are related negatively to the debt ratio, while free cash flow, non-debt tax shields, growth opportunities, net commercial credit position, and firm size do not appear to be related to the debt ratio. Although the findings partially support the pecking order theory, neither the trade-off nor the pecking order theory exactly seem to explain the capital structure of Turkish lodging companies. Research limitations/implications - The data used in this paper are limited to five companies traded in the ISE, since the data on other companies are not available. A more detailed analysis would use data for other companies in the industry. Practical implications - The findings of the study clearly demonstrate the importance of capital structure decisions for financial sources.. Originality/value - Although the capital structure theory is extensively examined in the finance literature, there are fewer studies covering the tourism industry, particularly Turkey. The paper establishes the determinants of the capital structure of Turkish lodging companies. The research findings should help managers to make optimal capital structure decisions.