A Contingent Approach to Corporate Liquidity and Leverage: Evidence from UK FTSE-100 Firms
DOI:
https://doi.org/10.37375/esj.v9i1.3991Keywords:
Corporate Liquidity, Capital Structure, Leverage, FTSE 100, Panel Data, Pecking-Order Theory (POT), Trade-Off Theory (TOT)Abstract
This study investigates the effect of corporate liquidity on capital structure decisions among 40 non-financial firms listed on the UK's FTSE 100 from 2011 to 2019. Using Panel Data Regression analysis across six models, the results demonstrate that UK corporate leverage policy is primarily sensitive to asset-based measures of debt but statistically insensitive to equity-based measures. Crucially, the findings reveal a mixed financing motive; while the CRatio exhibits a significant negative relation with asset-based leverage, supporting the POT, the QRatio shows a significant positive link, supporting the TOT. This seemingly contradictory evidence suggests that FTSE 100 managers adopt a contingent approach to capital structure, treating different types of liquid assets as having distinct funding capabilities. This conclusion contributes to the literature by demonstrating that a single theory is unable to fully explain the corporate financing decisions of large UK firms.
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