How Does Asset Structure Correlate with Capital Structure? – Cross-Industry and Cross-Size Analysis of the EU Countries

Assets structure has been widely reported by corporate finance literature to significantly affect financial structure of firms. However, according to the capital structure theories and empirical research in the field, the direction of the relationship between assets tangibility and capital structure is not obvious. This study aims at verifying the significance and the direction of the way assets structure correlates with capital structure on a large sample of private firms across 9 EU countries. The correlation between several assets structure ratios and capital structure ratios is examined across countries, industries and size groups of firms in order to find out how the country-specific factors, the industry-specific factors and the factors related to firm size influence this relationship in the period 2000-2010. The data is provided by the BACH-ESD database published by the European Commission. Findings provide evidence that the firm size has relatively the weakest impact on the way assets structure correlate with capital structure. However, both the direction and the significance of the relationship are considerably influenced by country and industry specificity.