Capital Structure Determination in the Service Industry under COVID-19

Abstract

Background and Objectives: Designing a capital structure that is appropriate to the nature of a business is an important issue for corporate financial management. Previous research has not provided conclusive evidence on the implications of capital structure decisions, as it has been studied both in favor of the trade-off theory and in studies supporting the pecking order theory. The objectives of this study were to analyze the impacts of: (1) firm characteristics on the capital structure in the service industry from the Stock Exchange of Thailand, and (2) capital structure on profitability in the service industry from Stock Exchange of Thailand.

Methodology:  The sample for this study consisted of 99 companies in the service industry from the Stock Exchange of Thailand. The study collected data before and during the COVID-19 pandemic period.  After collection, the data were analyzed using the following: (1) descriptive statistics including minimum values, maximum values, and averages, (2) analyses were performed to check for preliminary statistical agreement to measure the amount of multicollinearity in a set of multiple regression variables, including the variance inflation factor (VIF), and (3) data were analyzed by inferential statistics to answer the hypotheses using multiple regression analysis.

Main results: Before the COVID-19 pandemic, growth rate and firm size had a positive impact on capital structure in the service industry according to the Stock Exchange of Thailand.  During the COVID-19 pandemic, it was found that tangible assets, growth rate, and firm size had a positive impact on capital structure in the service industry. In addition, the capital structure was found to have a negative impact on profitability in the service industry, both before and during the COVID-19 pandemic.

Discussion: Businesses in the service industry listed on the Stock Exchange of Thailand that had high amounts of tangible assets, high growth rates, and a large firm size, resulted in higher leverage. Both periods (before and during the COVID-19 pandemic) have shown that businesses with a high growth rate often have to rely on external sources of funding, because internal sources of funds may not be sufficient to carry out their operations. Moreover, larger firms are able to take on a large amount of debt and therefore have a higher chance of incurring debt.  However, businesses with a lower amount of debt result in higher profitability by emphasizing the use of internal funding sources, such as retained earnings.

Conclusion: The results of this study concluded that before and during the COVID-19 pandemic, companies under the Stock Exchange of Thailand were cautious about leveraging debt and emphasized maintaining the ownership structure in the corporate capital structure. This is consistent with the use of the pecking order theory in determining the capital structure, which encourages businesses to have a low amount of debt and increase capital with retained earnings. Emphasis is placed on maintaining the ownership structure in the capital structure.