A Comparison of Capital Structure: The Use of Debt in Investor Owned and Not-For-Profit Hospitals

Jason Turner, Kevin Broom, Michael Elliott, Jen-Fu Lee

Abstract


According to the Trade-off Theory of Capital Structure, firms optimize their value by balancing the marginal benefits of debt with marginal costs of debt. This paper focuses on the differential use of debt financing among investor owned (IO) and not-for-profit (NFP) hospitals while controlling for important financial performance characteristics shown to influence leverage. Contrary to an earlier investigation based on a relatively small sample, the findings from this large, multi-year sample indicate NFP and IO hospitals structure their capital differently and marginal benefits and costs of debt are differentially influenced by profitability, risk, growth, and size.  Investor-owned hospitals use significantly and substantially more debt than their NFP peers.  The capital structure of NFP hospitals is not as sensitive to risk but more sensitive to profitability. Growth and size also have distinctly different relationships to the use of debt.  As NFP hospitals grow, and asset bases get larger, the institutions use more debt.  The IO hospitals use less debt as they experience growth and their size increases.


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