Dynamic Capital Structure Adjustment and the Impact of Fractional Dependent Variables

66 Pages Posted: 1 Jul 2010 Last revised: 6 Sep 2013

Ralf Elsas

Ludwig Maximilian University of Munich - Faculty of Business Administration (Munich School of Management)

David Florysiak

Ludwig Maximilian University of Munich - Faculty of Business Administration (Munich School of Management)

Date Written: August 29, 2013

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.

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

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

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: https://ssrn.com/abstract=1632362 or http://dx.doi.org/10.2139/ssrn.1632362

Ralf Elsas (Contact Author)

Ludwig Maximilian University of Munich - Faculty of Business Administration (Munich School of Management) ( email )

Kaulbachstr. 45
Munich, 80539
Germany

David Florysiak

Ludwig Maximilian University of Munich - Faculty of Business Administration (Munich School of Management) ( email )

Kaulbachstr. 45
Munich, 80539
Germany

HOME PAGE: http://www.florysiak.com

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