Strategic Factors Converging and Diverging to Incorporate Debt in the Structure of Capital of the Extraction, Construction and Transformation Sectors.

Author:Gaytan-Cortes, Juan


The absence of real policies, rules and models in businesses that enable them to generate their own capital structure led to this research, which entailed reviewing and analyzing the theories, empirical studies, existing hypotheses and all major postulates in order to determine the mathematical relationship between long-term debt and capital structure. This analysis offers a solid foundation for addressing the problem, questions and objectives we have laid out. Studies on the capital structure in Mexico are essential, and the lack of a robust model to explain Mexican organizations' financial decisions justifies this research, particularly as it concerns the extraction, construction and transformation sectors.


Since Modigliani and Miller (1958) published their article and laid out their proposal on capital structure, one of the most controversial topics addressed by financial literature has been the existence, or lack thereof, of a capital structure that is optimal for businesses, as well the way such a capital structure should be determined.

It has been 56 years since the publication of the seminal work that both gave rise to corporate finance as we know it and also led capital structures studies to catch so much attention from economy and financial areas. Nevertheless, despite the extensive research that has been conducted on capital structure theory, to this day, no conclusive answers have been drawn.

The theoretical models that have been developed in the few last years have, on a few occasions, attempted to validate and generalize the thesis that Modigliani and Miller (1958) are irrelevant; on other occasions, the models have attempted to justify Modigliani and Miller's thesis of maximum indebtedness (1963). From the convergence of both lines of research in the 60s emerged a renewed theory of the capital structure that postulated the existence of an optimal structure to the proposed problem.

In this research, the following theories were reviewed: Optimal Capital Structure, the Theory of the Fiscal Tax Base, the Theory of Asymmetric Information, the Theory of the Agency Costs, the Free Cash Flow Theory, and the Pecking Order Theory (POT); this last theory was formally proposed by Myers (1984)and was based on the preliminary work of Donaldson (1961).

The empirical studies that support all the above-mentioned theories were also reviewed, with special emphasis being placed on the studies done by Rajan and Zingales (1995) and Wald (1999), among others. These studies offered empirical evidence for G-7 countries. Some of the company's institutional factors were analyzed, including total assets (size of the firm), profit, sales (growth rate), and capital (risk).

In empirical studies and financial theories, knowledge has increased and evolved; however, the extensive research that has been carried out has failed to construct a model that encompasses all the factors considered capital structure determinants. Of the research that has been published, we can mention the work of Filbeck and Gorman (2000), Bradley and Chung (1993), Van el Der (1989), Kester (1986), and Harrel and Kim (1984).

Arias, Arias, Pelayo and Cobian (2009) argued that a specialized study on this matter must be conducted in Mexican companies in order to improve understanding of their debt-contracting decisions to design financial instruments that meet their financial needs and to facilitate and support their growth.

The empirical evidence suggests that, in addition to specific company factors, macroeconomic factors of each country are also important in the capital structure (Booth, Aivazian, Demirguc-Kunt, & Maksimovic, 2001; Antoniou, Guney, & Paudyal, 2008; Gaytan & Bonales, 2009; Dias, Thosiro, & Cruz, 2009, Dias & Toshiro, 2009). Nevertheless, most of the theoretical and empirical debate on the incorporation of debt in the capital structure has been carried out and considered by countries with good, developed capital markets and well-structured financial architecture (Zingales, 2000).

Macroeconomic Factors of Country and Capital Structure

Recent empirical evidence suggests that every country's specific factors are important aspects of the formation of capital structure in the companies of emerging markets. Booth, Aivazian, Demirguc-Kunt and Maksimovic (2001), Antoniou, Guney and Paudyal (2008), Gaytan and Bonales (2009), Dias, Thosiro and Cruz (2009) and Dias and Toshiro (2009) suggest that the specific factors involved in companies' long-term debt-contracting decisions are related to the economic environment and institutional mechanisms of each country, such as the financial sector, tax system, legal system and accounting practices.

Studies conducted on the main factors of the country, which are considered determining factors in the construction of businesses' capital structure, have found that the following factors, among others, have a significant impact: i) income tax rate, ii) inflation, iii) interest rate and iv) exchange rate. Therefore, in this research on the extraction, construction and transformation sectors, we considered these four macroeconomic factors of the country.

Microeconomic Factors of Companies

We have sought to identify the microeconomic factors of the companies that could be relevant to the formation of those companies' capital structures, to the end of proving and validating the theories that support them. Among the factors of the companies that can act as significant in the formation of this capital structure, the empirical studies carried out by Dias, Toshiro and Cruz (2009), Gaytan and Bonales (2009) and Dias and Toshiro (2009), found significant relationships when incorporating debt in the capital structure, in the following factors: i) total assets, ii) operation profit, iii) capital and iv) net sales. Therefore, in this research on the extraction, construction and transformation sectors, these four microeconomic factors of companies were considered.


The interest rate, operating profit, exchange rate, fiscal tax rate, and capital are negatively-related factors; on the other hand, inflation, total assets and net sales are factors that are positively related to incorporated, long-term debt in the capital structure used by the companies in the Mexican extraction, construction and transformation sectors.


The econometric model known as the panel data was chosen and used to calculate the mathematical relationship of the factors. The period from 2000 to 2012 was used as the factor sample. This model's technique combines temporary dimension and cross-section data. This model is also known as longitudinal joint, time series, cross-section data series, micro panel data, history analysis, and peer analysis (Gujarati, 2003).

The panel data technique can develop and test complex models. According to Carrascal, it is applicable to the following areas: a)...

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