Table 2 Control variables, their proxies and proposed relationship with leverage
Variable | Notation | Measurement | Relationship with leverage | Relationship with adjustment rate | |
|---|---|---|---|---|---|
Firm level | Tax shield | TS | Ratio of tax paid and gross profit | + | + |
Bankruptcy risk | ZS | Altman’s Z score | +/− | + | |
Business risk | BR | Annual change in net profit | +/− | +/− | |
Non-debt tax shield | NDTS | Ratio of depreciation to total assets | − | ? | |
Agency cost | AGC | Ratio of operating expense over sales | + | ? | |
Growth | GR | Annual change in total assets | +/− | + | |
Current profitability | CP | Net profit scaled by total assets | +/− | + | |
Past profitability | PP | Retained earnings ratio | +/− | + | |
Liquidity | LIQ | Ratio of current assets to current liabilities | +/− | + | |
Tangibility | TANG | Ratio of net fixed assets to total assets | + | ? | |
Collateral value | CV | Ratio of gross fixed assets at cost to total assets | + | ? | |
Firm size | SIZE | Natural logarithm of firm’s assets | +/− | + | |
Industry level | Industry leverage | IL | Mean of industry leverage | + | + |
Industry profitability | IP | Mean of industry profit | ? | ? | |
Country level | Inflation rate | IR | Annual inflation rate based on consumer prices | + | + |
Exchange rate | ER | Yearly exchange rate of rmb to us dollar | ? | ? | |
Economic growth | EG | Annual per capita gdp rate | +/− | + | |
Capital formation | CF | Ratio of gross capital formation to gdp | ? | ? |