ABSTRACT
This chapter looks at the capital structure of European firms before and after the crisis comparing the evolutions in both East and West. It overviews the major theories of capital structure and the estimation method. The chapter presents the time dynamics in a couple of financial sector indicators and firms' capital structure. Then, firm-level data from nine Central and Eastern European countries and from five core European Union countries is used to show the trends in capital structure and to provide evidence for how well the different capital structure theories work in practice. Hence, firms are balancing the benefits and costs of debt financing. This is the argument laid out in trade-off theory. The pecking order theory also has several empirically testable predictions. Hence, the capital structure is related to historic market values and is an outcome of attempts to time the equity market. Firm-level data are from the Amadeus database provided by Bureau van Dijk.
