Were Modern Capital Structure Theories Valid in Belgium Before World War I?


  • They are grateful to an anonymous referee, Heitor Almeida, Fabio Braggion, Frans Buelens, Jo Danbolt, Marc Jegers, Rez Kabir, Steven Ongena, Ann Vanstraelen and Ilse Verschueren for helpful comments and suggestions. The paper has also benefited from presentations at the Financial History Workshop in Utrecht (2007), the FMA European meeting in Barcelona (2007), the EFMA meeting in Vienna (2007), the Corporate Finance Day in Louvain-la-Neuve (2007) and seminars at the University of Antwerp and the University of Stirling. Financial Support from the Flemish Fund for Scientific Research (Grant no. G.0013.02) is gratefully acknowledged. Any remaining errors are the authors' own.

* Address for correspondence: Marc Deloof, Department of Accounting and Finance, University of Antwerp, Prinsstraat 13, 2000 Antwerp, Belgium.
e-mail: marc.deloof@ua.ac.be


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.