Last updated: September 9, 2019
Topic: Finance
Sample donated:



In 2008, a tremendous financial crisis hit the United States. The
well known saying that “when the US catches cold, the rest of the world
sneezes” justifies that what began as isolation instability in the US housing
market soon gripped not only the developed nations but also the developing and
emerging economies. This review summarizes 5 research papers that aim to study
injurious effects of the crisis on the capital structure of different firms in
different countries. 

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Mr. Fosberg in 2012 conducted a study on capital structure and financial
crisis for the purpose of analyzing the impact of financial crisis on the
capital structure of the firms. The analysis was able to discover that the
financial crisis caused very significant changes in the capital structure of
the firms during the crisis period but the same was reversed when the effect of
crisis started to diminish i.e. by the end of 2010.


The financial crisis impacted the global equity issuance market.
Overall there was a decline of 46.2% in the issue of new equity from 2007 to
2008. However, this decline was completely reversed in 2009 with equity
issuance rising from $471 billion in 2008 to $903 billion in 2009. In 2010, the
global equity issuance remained above the pre-crisis period, i.e. 2007 level.


The crisis also affected the financing mix of security issuers. The
Debt-Equity ratio increased from 7.57 to 9.01 indicating that in 2007 firms
issued 7.57 dollars of debt for every one dollar of equity raised which
increased to 9.01 dollars in 2008. In 2009 the Debt-Equity ratio decline to
6.77 and remained same in 2010. This indicates that during the crisis period
the debt increased by 5.5% in the firm’s capital structure and once the economy
was stable in 2009, the undesirable debt accumulation was reversed that had occurred
in previous two years. 70% of debt accumulation was reversed by the end of


Leeuwen in 2011 conducted a study on the effect of financial crisis on
the determinants of capital structure. The study discovered that the crisis had
an impact on each of the determinants that became more or less significant when
related to credit issuance.


The determinants of capital structure are: growth, profitability,
size of the firm and tangibility.


Size of the firm: During the
financial crisis, size played an important role in determining credit issuance.
As the banks had less credit, it was safer to lend to a large size firm as they
had higher credibility and thus less risk of default.

Hence, size was positively related to capital structure in the
times of crisis.


Growth: During the times of
decline, the importance of growth reduced in relation to capital structure
because there were less growth opportunities.

Hence, growth opportunities were less significant with respect to
capital structure in the times of decline.


Profitability: In the times
of crisis, importance of profitability increased with respect to determination
of capital structure because a more profitable firm is in a better position to
pay off its debts.

profitability played an important role in determining capital structure during


Tangibility: Due to lack of
liquidity with banks, they preferred issuing debt, which is secured by
collateral, which gives more certainty to the banks, thus there was a positive
relationship between tangibility and leverage.

tangibility played an important role in determination of capital structure in
the times of crisis.



Mr. Khodavandloo, Mr. Zakaria and Mr. Nassir in 2017 conducted a study on the impact
of financial crisis on the capital structure and firm performance of trading
and service sector firms in Malaysia using simple regression and
cross-sectional analyses. The study revealed that the financial leverage has a
strong negative impact on the firms’ performance, which heightened during the
crisis period.


The firms are classified as high leverage meaning that the firm
have higher debt component as compared to equity and low leverage indicating a
lower debt when compared to equity.  Both
type of firms showed a decline in their debt component during the time of
crisis but decrease in high leverage firm (88.57 point) was higher than that of
low leverage firm (11.54 point). Post crisis also firms were conservative in
funding via debts indicated by dropping debt-equity ratio. Analysis also
revealed that low leverage firms performed better than high leverage firms. The
difference between the performances increased during the crisis period and
reduced thereafter. The margin between the performance of low leverage and high
leverage firm are calculated as: before crisis- 11.7%; crisis- 6.5% and after


De Vries conducted a study on the impact of South African recession caused
by the financial crisis, 2008 on the capital structure of the South African
firms, using the panel data methodology. The analysis revealed that the crisis
had a strong negative impact on the firms and the financial managers very
efficiently adjusted their capital structures in response to the circumstances
they were exposed to.


The crisis of 2008 had a significant impact on the capital structures
of the South African firms due to which necessary capital adjustments had to be
considered to adapt to the new circumstances. There was a steep fall in the
credit extension by banks during the time of crisis. This is because during the
time of crisis more and more firms started to default on their loans and banks were
thus unwilling to part from their already reducing availability of credit.
During the recession, South African firms saw a decline in their debt capital
as indicated by falling debt equity ratio from 1.22 in 2006-07 to 1.11 in
2008-09. It was also discovered that the effects of the crisis were reversed by
the end of 2010. However it was not restored to the pre-crisis level but was
better than what it was during the worst of the crisis.


Brenda conducted a study on the impact of the financial crisis on the capital
structure of the Romanian firms, using the dynamic panel data model. The
analysis revealed that the crisis caused an increase in debt financing in the
capital structure of the firms. The capital structure of the firms in Romania was
influenced by profitability and market-to-book ratio.


The US crisis of 2008 had a significant influence on the capital
structure of the firms in Romania. The firms saw an average increase of 4.2% in
their debt ratio during 2008-2011. This was because the crisis caused a dearth
in the internal funds with the firms and forced them to resort to external


 Also, the results indicated
a negative correlation between profitability and debt ratio. This was because a
more profitable firm has high internal funding and thus a lower debt ratio.
There was a positive relation between market-to-book and debt equity opposing
market timing theory. In other words, the firms did not opt for equity
financing when their market value was high but chose debt financing.





The US financial crisis destabilized the world economy and had a drastic
effect on many countries. It had a negative impact on many firms’ capital
structure but as it is evident from the above review that most of the firms,
whether they were developed economies or emerging economies, were able to cope
with the consequences that came across them. Many companies were able to restore
their capital structures back to the pre-crisis level.














1.     Fosberg, R. H. (2012). Capital structure and the financial crisis.
Journal of Finance and Accountancy, 11, 1.


2.     Leeuwen, M.V. (2011). Financial crisis and capital structure. Retrieved


3.     Khodavandloo, M., Zakaria, Z., & Nassir, A. M. (2017). Capital
Structure and Firm Performance During Global Financial Crisis. International
Journal of Economics and Financial Issues, 7(4), 498-506.


4.     De Vries, A. (2013). Financial crisis and capital structure:
Perspectives from an emerging market economy. Corporate Ownership &
Control, 789.


5.     Brendea, G. (2013). The impact of the recent financial crisis on
the capital structure choices of the Romanian listed firms. Review of
Economic Studies and Research Virgil Madgearu, 6(2), 15.