Observed Capital Structures

No two firms have identical capital structures. Nonetheless, there are some regular elements that we see when we start looking at actual capital structures. We discuss a few of these next.

The most striking thing we observe about capital structures, particularly in the United States, is that most corporations seem to have relatively low debt-equity ratios. In fact, most corporations use much less debt financing than equity financing. To illustrate, Table 17.7 presents median debt ratios and debt-equity ratios for various U.S. industries classified by SIC code (we discussed such codes in Chapter 3).

In Table 17.7, what is most striking is the wide variation across industries, ranging from essentially no debt for drug and computer companies to relatively heavy debt usage in the steel and department store industries. Notice that these last two industries are the only ones for which more debt is used than equity, and most of the other industries rely far more heavily on equity than debt. This is true even though many of the companies in these industries pay substantial taxes. Table 17.7 makes it clear that corporations have not, in general, issued debt up to the point that tax shelters have been completely used up, and we conclude that there must be limits to the amount of debt corporations can use. Take a look at our nearby Work the Web box for more on actual capital structures.

Because different industries have different operating characteristics in terms of, for example, EBIT volatility and asset types, there does appear to be some connection between these characteristics and capital structure. Our story involving tax savings and

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