Universal Journal of Accounting and Finance 1(1): 19-28, 2013 http://www.hrpub.org DOI: 10.13189/ujaf.2013.010103 How Does Asset Structure Correlate with Capital Structure? – Cross-Industry and Cross-Size Analysis of the EU Countries Julia Koralun-Bereźnicka Faculty of Management, University of Gdańsk, Poland *Corresponding Author: jkb@wzr.ug.edu.pl Copyright © 2013 Horizon Research Publishing All rights reserved. Abstract Assets structure has been widely reported by corporate finance literature to significantly affect financial structure of firms. However, according to the capital structure theories and empirical research in the field, the direction of the relationship between assets tangibility and capital structure is not obvious. This study aims at verifying the significance and the direction of the way assets structure correlates with capital structure on a large sample of private firms across 9 EU countries. The correlation between several assets structure ratios and capital structure ratios is examined across countries, industries and size groups of firms in order to find out how the country-specific factors, the industry-specific factors and the factors related to firm size influence this relationship in the period 2000-2010. The data is provided by the BACH-ESD database published by the European Commission. Findings provide evidence that the firm size has relatively the weakest impact on the way assets structure correlate with capital structure. However, both the direction and the significance of the relationship are considerably influenced by country and industry specificity. Keywords Capital Structure, Assets Structure, Tangibility, European Union, Country Factor, Industry Factor, Size Effect 1. Introduction Corporate finance literature abounds in both theoretical and empirical research on capital structure determinants. Most of the hitherto analyses aim at examining the significance of factors believed to have impact on corporate financial decisions and thus at verifying certain capital structure theories. The approach adopted in this study is different in several ways. First, it only focuses on a single capital structure determinant, i.e. the asset structure, instead of examining a series of factors. Second, the significance of this factor is verified on a sample of private firms, unlike the majority of studies which use mainly public company data. Finally, the correlation between asset and capital structure is compared across countries, industries and size groups, which to the author’s knowledge, is the first attempt of this kind of in-depth analysis. The aim of the study is to verify the significance and identify the direction of the way assets structure correlate with capital structure depending on the country, industry and the firm size. In order to achieve this goal, the correlation between several assets structure ratios and capital structure ratios is examined for the whole data set, as well as in the three cross-sections: across individual countries, industries and size groups. It is supposed to reveal how the country-specific factors, the industry-specific factors and the factors related to firm size influence the relationship in question. Presumably, the asset-capital structure relationship may be susceptible to country specificity, industrial specificity, as well as firm specificity related to its size, which constitutes the hypothesis of the study. The main research questions therefore may be formulated as follows: How does asset structure correlate with capital structure? Does this relationship vary depending on the country, industry and firm size? The analysis covers a sample of private firms across 9 EU countries, 13 industries and 3 size groups in the period 2000-2010. 2. Review of Literature Corporate financial choices are affected by a number of factors. One of the more general classifications of these variables is based on the criterion of the economic character of factors, and therefore distinguishes the micro- and macro-economic determinants [1]. The asset structure (tangibility), which has been widely evidenced to significantly affect capital structure, belongs to the first group, and is one of the most frequently cited factors [2-5]. According to the financial literature, the asset structure plays an important role in determining the capital structure [6], although there is no consensus among authors on the direction of the relationship. Harris and Raviv [7] argue that the larger share of tangible assets increases the liquidation value of a company. This is due to the fact that tangible assets constitute collateral for the debt as they have higher value than the intangible assets in