The Spurious Ratio Problem and Its Correction: Empirical Tests of Capital Structure Theories

28 Pages Posted: 14 Dec 2010

See all articles by Yushu Zhu

Yushu Zhu

University of Queensland - Business School

Date Written: October 22, 2010

Abstract

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

Suggested Citation

Zhu, Yushu, The Spurious Ratio Problem and Its Correction: Empirical Tests of Capital Structure Theories (October 22, 2010). Available at SSRN: https://ssrn.com/abstract=1724473 or http://dx.doi.org/10.2139/ssrn.1724473

Yushu Zhu (Contact Author)

University of Queensland - Business School ( email )

Blair Drive
Brisbane
Australia

HOME PAGE: http://https://www.business.uq.edu.au/staff/yushu-elizabeth-zhu

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