Determinants of capital structure: an empirical study on the European technology industry in a dynamic panel difference-GMM analysis

Abstract: This paper investigates the determinants of capital structure for 146 publicly traded technology companies in 14 different European countries over the 2009 to 2021 period. The study aims to test the relationship between firm leverage and its determinants suggested by both traditional corporate finance theory as well as previous findings. A dynamic fixed effect difference-generalized method of the moment technique is used to investigate the determinants while also controlling for macroeconomic effects. The result finds a significant negative relationship between the leverage ratio and profitability as well as between leverage ratio and liquidity providing evidence towards the pecking order theory. The result also finds that leverage is positively associated with firm size but not with asset tangibility which is possibly reflected by the relative uniqueness of the technology industry in Europe. The study does not find evidence for the existence of a financial distress cost associated with leverage according to the trade-off theory. Finally, the result shows persistence in the leverage ratio and dividends are significantly positively related to higher leverage.