Determinants of Financial Leverage: An Empirical Analysis of Textile and Apparel Firms

Abstract

This paper examines the determinants of capital structure for a sample of publicly traded textile and apparel firms for the period 1987-2000. To account for the unique business environment in which textile and apparel firms operate, we examine the impact of import competition, measured by real exchange rate and import penetration, in addition to the conventional variables such as profitability, firm size, tax effects considered in the literature. We find some inherent differences between textile firms and apparel firms. Import penetration lowers profitability of domestic textile firms which lowers their ability to borrow, while the effect of exchange rate remains statistically insignificant. Exchange rate plays a significant role in debt-equity decisions of apparel firms. In the apparel industry, which outsources much of its manufacturing, a stronger dollar lowers the cost of imports which in turn increases profits and cash flows, thereby reducing dependence on debt.