Structural Models of Capital Structure: A Framework for Model Evaluation and Testing

46 Pages Posted: 19 Mar 2012 Last revised: 14 Jan 2013

See all articles by Arthur G. Korteweg

Arthur G. Korteweg

University of Southern California - Marshall School of Business

Michael Lemmon

University of Utah - Department of Finance

Date Written: January 1, 2013

Abstract

Structural models of capital structure frequently have similar implications for the data that we observe, yet are typically not tested against alternative specifications. We examine the predictions of structural models, and develop a formal methodology for testing amongst alternatives. We show that our approach can provide a powerful yet simple decision-theoretic approach to model comparison, even for non-nested models. We show how our approach can highlight the dimensions on which various models fail, thus providing guidance to researchers for developing better models.

Keywords: capital structure, structural model, model testing

JEL Classification: C52, G32

Suggested Citation

Korteweg, Arthur G. and Lemmon, Michael, Structural Models of Capital Structure: A Framework for Model Evaluation and Testing (January 1, 2013). AFA 2013 San Diego Meetings Paper. Available at SSRN: https://ssrn.com/abstract=2023842 or http://dx.doi.org/10.2139/ssrn.2023842

Arthur G. Korteweg (Contact Author)

University of Southern California - Marshall School of Business ( email )

3670 Trousdale Parkway
Los Angeles, CA 90089
United States

HOME PAGE: http://www-bcf.usc.edu/~korteweg/

Michael Lemmon

University of Utah - Department of Finance ( email )

David Eccles School of Business
Salt Lake City, UT 84112
United States

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