Impact of financial crisis on capital structure of European firms

World economies experienced a major financial and banking crisis during the first decade of 21st century. This study examines the impact of this financial crisis on capital structure decision of UK industrial firms. Our results show that firms first increase their leverage ratios from pre-crisis (2006 and 2007) to crisis (2008 and 2009) years and then decrease it in the post-crisis (2010 and 2011) years. Firms use both debt and equity to manage their capital structure however, they rely more heavily on short term debt rather than long term debt during the crisis years. Our results also reveal that firm with lower than industrial average capital structure ratio in the pre-crisis years gradually increase their leverage during crisis and post-crisis years. However, firms with higher than industrial average capital structure ratios in the pre-crisis years steadily decrease their leverage by improving their equity levels.