This study examines the determinants of capital structure for 15 publicly traded Egyptian companies over 3 years from 2008-2010. Multiple regression analysis was used to analyze the relationship between debt ratio (dependent variable) and five independent variables: tangibility, liquidity, profitability, growth, and size. The results found a significant negative relationship between debt ratio and liquidity, as measured by quick ratio. No other significant relationships were found between debt ratio and the other independent variables. The study contributes to understanding capital structure determinants in the Egyptian market.

1. The Relationship between Capital Structure and
Firm’s Characteristics: An Empirical Study on
Egypt Stock Exchange
Abdulhadi Alsheikh
Supervised by
Prof.Dr. Hatem Altaee
Prof.Dr. Khaled AlJaefari
July 2011
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2. The Objective of the Research
The objective of the research is to provide
some features and determinants of the capital
structure through the previous studies of
capital structure and to examine these
determinants of capital structure on a sample
of 15 Egyptian companies, we will show what
the most determinate is in common with other
studies that done in middle east market and
other international markets
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3. Contributions to the Research:
• It would provide empirical evidence to
measure the determinants of capital structure
in a growing market like Egypt.
• This study contributes to the literature by
focusing only on three major sectors of the
economy (Industry, Telecommunications, and
Constructions )
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4. Limitations of the Research
• This paper studies examines the determinants of
capital structure for only three years, due to the
limited availability of data in Egypt stock exchange.
• Since the financial sectors have high leverage ratios
like financial firms (Banks, and insurance companies)
we exclude these companies from our research and
we rely on non financial sectors (Industry,
Telecommunications, and Constructions).
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5. Literature Review
Asadi & Ravari (2009) indicate a further empirical evidence of the theories of
capital structure and try to examine the factors that affect Debt ratios in
Islamic Republic of Iran. They used data from Tehran Stock Exchange (TSE)
for five years from 2003 to 2007.They analysis 1000 observations to
examine which capital structure theory can be strongly supported for
private and public companies, there were nine hypotheses which had
been developed to do the test of the relationship between debt ratios and
explanatory variables such as growth opportunity, profitability, tangibility
and size (measured by Sales). The results of OLS regression show that
there is a significant negative relationship between profitability and Debt
ratios. The relationship between growth opportunity and Debt ratios is
significantly positive and there is a significant negative relation between
tangibility and short-term debt and total debt ratios but for long-term
debt ratio the relation is positive. The relationship between size and
leverage ratios is different for private and public companies and it isn’t
significant. 5

6. Literature Review
Gaud, Jani, Hoesli & Bender (2003) showed that the determinants of the
capital structure were analyzed for a panel data consisted of 106 Swiss
companies listed in the Swiss stock exchange. The analysis was performed
for ten years (1991-2000). They used multiple regression in the analysis,
the variables: leverage as dependent variable (growth, size, profitability,
tangibles, operating risk which means that when leverage increase lead to
volatility of the net profit, firms that have high operating risk can lower
the volatility of the net profit by reducing the level of debt) as
independents variables. The results of the paper was : the size of
companies, the importance of tangible assets and business or operating
risk are positively correlated to leverage, while growth and profitability
are negatively associated with financial leverage. Based on the analysis
and results it suggested that both the pecking order theory and trade off
hypothesis were confirmed in explaining the capital structure of Swiss
companies.
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7. Literature Review
Modigliani and Miller (1958) was the first in to demonstrate algebraically the
effect of capital structure on firm value. It forms the basis for modern
thinking on capital structure, though it is generally viewed as a purely
theoretical result since it disregards many important factors in the capital
structure decision. The theorem states that, in a perfect market, how a
firm is financed is irrelevant to its value. This result provides the base with
which to examine real world reasons why capital structure is relevant,
that is, a company's value is affected by the capital structure it uses. Some
other reasons include bankruptcy cost, agency cost, and taxes This
analysis can then be extended to look at whether there is in fact an
optimal capital structure, the one which maximizes the value of the firm.
For example, Modigliani and Miller (1963) took taxation system under
consideration and they proposed that firms could achieve its optimal
capital structure by using more debt in their balance sheet. According to
Miller, the value of the firm depends on the relative height as a
percentage of each tax rate. 7

8. Hypotheses
First Hypothesis
H0: There is a significant negative or no relationship between debt ratio of
the firms and percentage of fixed assets to total assets.
H1: There is a significant positive relationship between debt ratio of the firms
and percentage of fixed to total asset.
Second Hypothesis
Ho: There is a significant positive or no relationship between debt ratio of the
firms and their quick ratio.
H1: There is a significant negative relationship between debt ratio of the
firms and their quick ratio.
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9. Hypotheses
Third Hypothesis
Ho: There is a significant negative or no relationship between debt ratio of
the firms and the size of the firms.
H1: There is a significant positive relationship between debt ratio of the firms
and the size of the firms.
Fourth Hypothesis
H0: There is a significant positive or no relationship between the debt ratio
of the firms and their growth of earnings.
H1: There is a significant negative relationship between the debt ratio of the
firms and their growth of earnings.
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10. Hypotheses
Fifth Hypothesis
H0: There is a significant positive or no relation between debt
ratio of the firms and their profitability.
H1: There is a significant negative relationship between debt
ratio of the firms and their profitability
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11. Research Methodology and Sampling
 This study depends on descriptive and analytical
methodology, it describes past studies that related
to, and analyzes the results of field research.
 We select our representative sample which
consists of 15 publicly traded Egyptian companies
over 3 years (2008-2010). We will use the regression
analysis model to study the relationship between
firm’s characteristics on Debt/Asset Ratio.
 Applying multiple regression model, SPSS
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12. Dependent and Independent Variables
• Debt ratio, as measured by debt to total assets
represents (dependent variable). For independent
variables, however, only five independent variables
are taken, and they are:
• Tangibility (Fixed assets / total assets)
• Liquidity(quick ratio)
• Profitability(Net Income / Total Asset) or ROA
• Growth (Log Total Assets)
• Size ( Log Sales)
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13. The general form of our model is
Where:
LG = Leverage
TG = Tangibility of assets
QR= Quick ratio
SZ = Size
GT = Growth
PF= Profitability
ε = The error term
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14. Results & Analysis
Table (1)
Model Summaryb
Adjusted R Std. Error of the
Model R R Square Square Estimate
1 .748a .560 .504 .141230
a. Predictors: (Constant), Growth, Profitability, Tangibility, Quick
Ratio, Sales
b. Dependent Variable: Debt Ratio
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15. Results & Analysis
Table (2)
Descriptive Statistics(2008-2010)
N Minimum Maximum Mean Std. Deviation
Debt Ratio 45 .029 .774 .33882 .200466
Tangibility 45 .264 .899 .59182 .184943
Profitability 45 .002 .335 .09669 .081486
Quick Ratio 45 .262 5.925 1.23438 .987667
Sales 45 1.531 4.465 3.48031 .656656
Growth 45 2.722 4.743 3.72669 .609438
Valid N (listwise) 45
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16. Results & Analysis
Table(3)
Coefficientsa
Unstandardized Standardized
Coefficients Coefficients
Model B Std. Error Beta t Sig.
1 (Constant) .188 .153 1.230 .226
Tangibility -.050 .155 -.047 -.326 .747
Quick Ratio -.071 .026 -.352 -2.719 .010
Profitability -.727 .327 -.296 -2.222 .032
Sales .189 .086 .620 2.210 .033
Growth -.086 .097 -.261 -.885 .381
a. Dependent Variable: Debt Ratio
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17. Conclusion
The findings show that there a negative
relationship between financial leverage and
tangibility of assets, liquidity, profitability, and
growth. Size of the firm appears to have a
positive relationship with the financial
leverage. However, only the relationships with
liquidity, profitability, and size of the firm are
statistically significant
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18. Thanks
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