Non-Linear Impact of Growth Opportunity and Firm Size on the Capital Structure

Kim Sung Suk, Rita Juliana, Irwan Adi Ekaputra


One of the focuses on capital structure studies is to identify economic forces influencing corporate capital structure. We investigated the non-linear effects of the firm-specific factors to the leverage of the firm of the US-listed firms. In the partial-adjusted model, growth opportunity and the size of the firm had non-linear effects on the leverage of the firm. Growth opportunity showed quadratic effects on leverage with a negative linear term but a positive quadratic term. It meant if the growth opportunity of a firm reached a certain level, fund providers can relatively detect it and subsequently causes a decrease in asymmetric information. This detection of ample growth opportunity will increase the accessibility of external funding. Firm size also exhibits quadratic effects on leverage with a positive linear term but a negative quadratic term. In other words, if the firm size as a proxy of various omitted variables was imminent, the financial market has been applied the diversification discount that will decrease the accessibility of external funding.

JEL Classification: G32, D92



Firm Size; Growth Opportunity; Leverage; Non-linear

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