Capital structure decisions: What Spanish CFOs think

Abstract

Purpose: The way business practice adjusts to the models proposed by financial theory has been under moderate yet constant scrutiny from the academic world. The purpose of this paper is to contribute to this line of research by showing CFOs’ perceptions of Spanish companies with regard to their capital structure decisions. Design/Methodology: The empirical approach is examined using information gathered through a survey answered by 140 CFOs of Spanish companies during 2011. Results are obtained from mean difference tests and ordered probit estimations. Findings: The results of the paper show that managers attach importance to establishing and monitoring a target debt ratio and the capacity to maintain additional debt in order to provide financial flexibility. In addition, CFOs prefer internal financing to external, using debt when internal funds do not allow investments to be funded. Originality/Value: On the whole, the results of this research show that trade-off and pecking order theories are not alternative views of the same problem, but represent complementary approaches of how companies define their capital structures.