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Keywords:

  • capital structure;
  • corporate income tax;
  • investor protection;
  • bank relationships;
  • universal banks

Abstract:  This study investigates whether modern theories can explain capital structure in a historical environment which was characterized by poor investor protection, booming stock markets and strong banks, and in which taxes did not affect leverage. Our results, based on a unique, hand-collected sample of 556 firm-year observations for 129 listed companies in Belgium before World War I, are remarkably similar to findings for present-day samples. Leverage was positively related to asset tangibility, firm size and firm age, and it was negatively related to profitability and prior stock returns. Bank relationships were associated with lower leverage.