The Spurious Ratio Problem and Its Correction: Empirical Tests of Capital Structure Theories
28 Pages Posted: 14 Dec 2010
Date Written: October 22, 2010
This paper proposes a probit model to test capital structure theories. It focuses on leverage increasing capital raisings and tests the various competing theories. It is shown that this approach does not have the spurious ratio problem documented by Barraclough (2007) that plague traditional capital structure tests. Results indicate that, contrary to stylized facts, leverage increasing firms tend to be more profitable and firms with high R&D expenditures tend not to use debt as a means of financing.
Keywords: Capital structure, Spurious ratio problem, Long-term debt
JEL Classification: G32, H20
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