The Relationship of Headquarters Country and Industry Classification to Financial Structure

The concept of an optimal capital structure has been a subject of interest and controversy in the finance discipline. While the question is not yet resolved, several conclusions have found wide, if not total, acceptance. First, the tax subsidy on interest makes debt less expensive than equity, even if one holds risk constant. Second, the level of financial leverage a firm can bear is a function of its business risk. Third, beyond some degree of financial leverage, the expected costs of bankruptcy lower the value of the firm. Studies of U.S. manufacturing firms have used industry classification as a proxy for business risk. Schwartz and Aronson (S&A) first examined the effect of industry classification on the ratio of common equity to total assets [8]. Using one-way analysis of variance, they found capital structure varied within industries less than between industries and concluded