Capital Structure Decisions
Murray Z. Frank
University of Minnesota
Vidhan K. Goyal
Hong Kong University of Science & Technology - Department of Finance
AFA 2004 San Diego Meetings
This paper examines the relative importance of 39 factors in the leverage decisions of publicly traded U.S. firms. The pecking order and market timing theories do not provide good descriptions of the data. The evidence is generally consistent with tax/bankruptcy tradeoff theory and with stakeholder co-investment theory. The most reliable factors are median industry leverage (+ effect on leverage), bankruptcy risk as measured by Altman's Z-Score (- effect on leverage), firm size as measured by the log of sales (+), dividend- paying (-), intangibles (+), market-to-book ratio (-), and collateral (+). Somewhat less reliable effects are the variance of own stock returns (-), net operating loss carry forwards (-), financially constrained (-), profitability (-), change in total corporate assets (+), the top corporate income tax rate (+), and the Treasury bill rate (+). Using Markov Chain Monte Carlo multiple imputation to correct for missing-data-bias we find that the effect of profits and net operating loss carry forwards are not robust.
Number of Pages in PDF File: 56
Keywords: Capital structure, pecking order theory, tradeoff theory, stakeholder co-investment
JEL Classification: G32
Date posted: May 28, 2003
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