Monte Carlo Simulations and Capital Structure Research

International Review of Finance, Vol. 11, No. 1

49 Pages Posted: 25 Jan 2011

See all articles by Xin (Simba) Chang

Xin (Simba) Chang

Nanyang Business School, Nanyang Technological University

Sudipto Dasgupta

Chinese University of Hong Kong and CEPR

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Abstract

The evolution of the debt ratio under alternative types of managerial behavior can generate non-standard leverage processes. This creates problems for statistical inference in empirical capital structure research. We argue in this paper that when the data generating process is not standard, a useful way to evaluate the appropriateness of inferences and the empirical methodology is via Monte Carlo simulations that mimic the data generating process under alternative assumptions about managerial behavior. We illustrate with several examples.

Keywords: Capital Structure, Trade-off theory, Market Timing, Debt-equity choice, Look-ahead Bias

JEL Classification: G32

Suggested Citation

Chang, Xin and Dasgupta, Sudipto, Monte Carlo Simulations and Capital Structure Research. International Review of Finance, Vol. 11, No. 1. Available at SSRN: https://ssrn.com/abstract=1747422

Xin Chang

Nanyang Business School, Nanyang Technological University ( email )

S3-B1B-76 Nanyang Avenue
Singapore, 639798
Singapore

HOME PAGE: http://www.ntu.edu.sg/home/changxin

Sudipto Dasgupta (Contact Author)

Chinese University of Hong Kong and CEPR ( email )

CUHK, Cheng Yu Tung Building, Room 1224
Shatin, NT
Hong Kong
Hong Kong

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