Determinants of Capital Structure Policy - Analysis of Airline Industry

Abstract

This study aims to understand the determinants of capital structure policy of airline industry. It examines the relevance of different debt theories in the context of airline industry. Using a sample of 50 airline firms, the average leverage of airline firms was found to be 3.66. Three different measures of leverage were regressed upon variables representing size, cash flow, profitability, growth, investment opportunities, risk, liquidity and efficiency measures. This study documents positive relationship between leverage and profitability as predicted by the tradeoff theory. It also finds some evidence for signaling theory. Profitable firms signal higher cash flow generation capacity of the firm and uses higher leverage. The negative relationship between leverage and growth confirms the prediction of tradeoff theory.