Why Capital Structure Matters: Evidence from the Banking Sector in Luxembourg

Abstract

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The study explores the main determinants of capital structure in the banking sector in Luxembourg and examines the relationship between them. The hypothesis tested is whether the ratio of total liabilities to total assets, which denotes the capital structure of the bank, depends on its asset structure, size, profitability, and growth rate that we call as its determinants. The research methodology is based on panel data analysis that takes into account both the time series and cross-sectional data. Then regression analysis is carried out on the collected data of the banking sector in Luxembourg. Descriptive statistics is also carried out on the sample. The paper includes 50 banks operating in Luxembourg and data is collected for a period of 7 years (2009-2015). The statistical evidence from Luxembourg showed that profitability, tax, growth, bank’s size, and asset structure are very important variables influencing bank’s capital structure. However, there was no supporting evidence regarding the effect of risk on the leverage of banks in Luxembourg.

Keywords: Capital Structure, Luxembourg, Profitability, Bank, Debt Ratio, Panel Data

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