that once we control for other firms’ characteristics, new and younger firms are more likely to access more credit financing.

We include the return on assets (ROA) in all regressions as a proxy for profitability. This measure presents a negative influence in all four alternative dependent variables. This implies that more profitable firms tend to rely less on financing by third parties. The reason for this behavior could be explained by the POT of capital structure, according to which firms prefer to start covering their financing needs through the use of instruments that are less subject to asymmetric information problems. Since retained earnings is the least sensitive source of financing, more profitable firms (generating higher cash flow) may choose to postpone the use of debt financing until they exhaust internally generated funds; consequently, they tend to exhibit lower leverage ratios in their optimal financial structure.

The fact that firms’ profitability is negatively associated with leverage ratios, on the other hand, goes against the predictions of the STOT. Another reason for this could be that in the polish case, the existence of non-debt tax shields, tax breaks or various incentives (ie. Special Economic Zones<sup>14</sup> ) may reduce the attractiveness of debt financing in achieving tax advantage from interest deductibility. Alternatively, given that the Warsaw Stock Exchange was not opened until 1991, and that it remains small in regard to market capitalization, it is not surprising to find good grounds for the POT to be (more) at work. Firms are likely to rely on a sort of hierarchy model, exhausting first all sort of internally generated funds, and postponing equity issuance until all the available (expensive) bank credit has been used.

Another firm characteristic we include is the ratio of fixed to total assets. This ratio is commonly understood as a tangibility measure; that is, it expresses the collateral capacity of a given firm. As previously discussed, the STOT of capital structure predicts that firms with greater collateral value recognize a lower potential cost of financial distress and, consequently, find it optimal to choose a higher share of debt in their financial structure (demand side). Consistent with this view, we find that the ratio of fixed to total assets is positively related to the firms’ debt to asset ratio. Moreover, the higher this tangibility measure is, the greater the long-term debt to asset ratio firms report; and, somewhat conversely, the higher the tangibility ratio, the lower the share of short-term debt and trade credit share within the firm financial structure.

An alternative interpretation for this finding may be taken from a supply side consideration. This positive connection between tangibility (as well as size) and firms’ leverage ratios may simply imply that Polish firms that can offer better collateral, can more easily access to long-term financing; at the time that those with less collateral to offer can only rely on short-term debt.

> 14 Law on Special Economic Zones of 20 October 1994 creates the grounds for establishing and operating Special Economic Zones (SEZ). It provides the investors operating in the zones with various incentives and tax breaks. The most important ones remaining in force in 2001 include a partial or a complete exemption from corporate income tax of revenues coming from business operations carried out in a given zone and counting some part of investment expenses as an income-generating cost. There are two Special Economic Zones in Slaskie: Katowice and Częstochowa.

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