Leverage determinants of Canadian listed firms: An analysis of firm specific factors and their impact on capital structure

Abstract: This paper introduces new evidence on the influence of firm specific determinants on capital structure of Canadian firms. Due to the similarities between the US and Canada, findings from the existing body of literature focused on US firms have been assumed to also hold in a Canadian context. However, the Canadian economy is differentiated from its US counterpart in part by its significantly smaller size and through the heavy representation of resource extraction firms on its stock exchange. This study attempts to explain whether previous research conducted on US firms is also applicable for Canadian firms. Cross-sectional and panel regression analyses are conducted to study the impact of four commonly identified firm specific determinants (profitability, firm size, asset tangibility and market-to-book ratio) on the leverage of Canadian firms listed on the Toronto Stock Exchange from 2000 to 2014. Results confirm similar relationships to those identified in the US, and statistical significance is observed for all variables excluding the market-to-book ratio. Additionally, no capital structure theory is found to completely explain these empirical findings. Further analysis separating mining firms finds a comparably low yet statistically significant relationship of asset tangibility on leverage. Specific accounting rules faced by mining firms, the attractiveness of equity financing for mining firms as well as an overrepresentation of small cap firms in Canada are all offered as plausible explanations for this observation, however, further quantitative analysis is warranted.