Abstract

http://ssrn.com/abstract=931675
 
 

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Common Problems in Capital Structure Research: The Financial-Debt-To-Asset Ratio, and Issuing Activity vs. Leverage Changes


Ivo Welch


University of California, Los Angeles (UCLA); National Bureau of Economic Research (NBER)

October 20, 2010

AFA 2008 New Orleans Meetings Paper

Abstract:     
This paper points out two common problems in capital structure research. First, although it is not clear whether they should be considered debt, non-financial liabilities should never be considered as equity. Yet, the common financial-debt-to-asset ratio (FD/AT) measure of leverage commits exactly this mistake. Thus, research that explains increases in FD/AT explains, at least in parts, decreases in non-financial liabilities. Future research should avoid FD/AT altogether. Second, equity issuing activity should not be viewed as equivalent to capital structure changes. Empirically, the correlation between the two is weak. The capital structure and capital issuing literature are distinct.

Number of Pages in PDF File: 18

Keywords: capital structure

JEL Classification: G32

working papers series


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Date posted: September 20, 2006 ; Last revised: October 22, 2010

Suggested Citation

Welch, Ivo, Common Problems in Capital Structure Research: The Financial-Debt-To-Asset Ratio, and Issuing Activity vs. Leverage Changes (October 20, 2010). AFA 2008 New Orleans Meetings Paper. Available at SSRN: http://ssrn.com/abstract=931675 or http://dx.doi.org/10.2139/ssrn.931675

Contact Information

Ivo Welch (Contact Author)
University of California, Los Angeles (UCLA) ( email )
405 Hilgard Avenue
Box 951361
Los Angeles, CA 90095
United States
National Bureau of Economic Research (NBER)
1050 Massachusetts Avenue
Cambridge, MA 02138
United States
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