Abstract

http://ssrn.com/abstract=1632362
 
 

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Dynamic Capital Structure Adjustment and the Impact of Fractional Dependent Variables


Ralf Elsas


Ludwig-Maximilians-Universität München - Faculty of Business Administration (Munich School of Management)

David Florysiak


Ludwig-Maximilians-Universität München - Faculty of Business Administration (Munich School of Management)

August 29, 2013

Journal of Financial and Quantitative Analysis (JFQA), Forthcoming

Abstract:     
Researchers in empirical corporate finance often use bounded ratios (e.g. debt ratios) as dependent variables in their regressions. Using the example of estimating the speed of adjustment toward target leverage, we show by Monte Carlo and resampling experiments that commonly applied estimators yield severely biased estimates, as they ignore that debt ratios are fractional, i.e. bounded between 0 and 1. We propose a new unbiased estimator for adjustment speed in the presence of fractional dependent variables that also controls for unobserved heterogeneity and unbalanced panel data. This new estimator is suitable for corporate finance applications beyond capital structure research.

Number of Pages in PDF File: 66

Keywords: Fractional dependent variables, speed of adjustment, simulation, dynamic panel models, capital structure.

JEL Classification: C15, C23, C34, C52, G32

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Date posted: July 1, 2010 ; Last revised: September 6, 2013

Suggested Citation

Elsas, Ralf and Florysiak, David, Dynamic Capital Structure Adjustment and the Impact of Fractional Dependent Variables (August 29, 2013). Journal of Financial and Quantitative Analysis (JFQA), Forthcoming. Available at SSRN: http://ssrn.com/abstract=1632362 or http://dx.doi.org/10.2139/ssrn.1632362

Contact Information

Ralf Elsas (Contact Author)
Ludwig-Maximilians-Universität München - Faculty of Business Administration (Munich School of Management) ( email )
Kaulbachstr. 45
Munich, 80539
Germany
David Florysiak
Ludwig-Maximilians-Universität München - Faculty of Business Administration (Munich School of Management) ( email )
Kaulbachstr. 45
Munich, 80539
Germany
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