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The purpose of this paper is to investigate the relationship between a firm’s capital structure (i.e., leverage) and its operating environment, taking into account firm (i.e., efficiency, asset structure, profitability, size, age and risk) and industry effects. For a sample of Greek pharmaceutical, cosmetic and detergent (PCD) enterprises, firm efficiency was estimated using bootstrapped data envelopment analysis (DEA), and a leverage model was produced using ordinary least squares (OLS) regression. The findings confirm the significance of firm efficiency (i.e., the franchise-value hypothesis over the efficiency-risk hypothesis) and asset structure on leverage. Efficiency and overall and short-term leverage have a significant negative relationship, indicating that more efficient firms tend to choose a relatively low debt ratio. Pharma firms are more affected since they are less efficient than cosmetics and detergents firms. Furthermore, asset structure and short- and long- term leverage have a significant negative and positive relationship, respectively, indicating that the firms with more tangible assets have less short-term debt and more long-term debt in their capital structure. Cosmetic and detergent firms, which have slightly more tangible assets than pharma firms, appear to be able to substitute high-cost, short-term debt with the low-cost, long-term debt by using such assets as collateral.

Efficiency and Determinants of Capital Structure in the Greek Pharmaceutical, Cosmetic and Detergent Industries