One of the points made by critics of Modigliani and Miller's capital structure irrelevance propositions was that companies in various industries appear to use leverage as if there is some optimum range suitable for each industry group. While theory prescribes that the industry related capital structure pattern is caused by similar levels of business risk among firms in an industry, most prio empirical studies have either ignored or taken the relationship as given. The literature is full of other methodological anomalies. which could be the cause for observed inconsistent results. Inappropriate sample selection, use of broader industry classification, use of very small samples, coverage of shorter periods, use of a single measure of gearing, and the use of parametric tests to the preclusion of non-parametric tests without testing the data for normality, are but a few examples of methodological deficiencies in prior empirical research. This study examines the industry-related capital structure pattern in UK companies, and whether such a pattern persists over time. In doing so the study also attempt s to establish the extent to which business risk and technology exert inf1uence on industry related capital structure pattern. With hindsight, the study tries to avoid deficiencies observed in prior research by using eight different measures of gearing on a panel data of 570 UK firms for the 1985-2000 periods. The result of both parametric and non-parametric tests show significant evidence that industry-related capital structure pattern exist. Industry classification explains between I 0 and 34 percent of variation in gearing depending on the measure of gearing adopted. While at firm-level, business risk explains just below four percent of variations in firm gearing, at industry level, business risk explains up to 27% of that variation. The combination of business risk and technology explains up to 42% of variations in industry gearing. Throughout the 16-year period covered it is evident that gearing differences among industries are persistent over time regardless of the measure of gearing used. JEL classification codes: G32.
Capital structure, Industry influence, and Panel data.