The Effect of Neglecting the Slope Parameters Heterogeneity on Dynamic Models of Corporate Capital Structure

Quantitative Finance, Forthcoming

40 Pages Posted: 18 Aug 2012

See all articles by Maria Elena Bontempi

Maria Elena Bontempi

University of Bologna - Department of Economics

Roberto Golinelli

University of Bologna - Department of Economics

Date Written: 2011

Abstract

We present a parsimonious representation of debt-ratio dynamics which is able to nest the Trade-Off, Pecking-Order and Market-Timing theoretical models, at the same time avoiding the poolability of the slope parameters. The inference on firm heterogeneous speed of adjustment of effective towards target debt-ratio is based on a comparison of the unit root results from both individual-company and (this is a relative novelty in the case of micro-data) panel data. Results show that company behaviour is largely heterogeneous with regard to the theory underlying the historical data. Our proposed methodology may be usefully employed in order to identify sub-samples of companies behaving in an homogeneous manner, and can be extended to study the empirical capital structure models with more appropriate quantitative instruments. This would avoid the arbitrary a priori selections of sub-samples and the imposition of untested poolability assumptions as the empirical literature usually does.

Keywords: Dynamic models of corporate capital structure, Heterogeneity, Time series and panel data unit root tests, Nested models, Trade off, pecking order and market timing theories

JEL Classification: C12, G32, C22, C23

Suggested Citation

Bontempi, Maria Elena and Golinelli, Roberto, The Effect of Neglecting the Slope Parameters Heterogeneity on Dynamic Models of Corporate Capital Structure (2011). Quantitative Finance, Forthcoming, Available at SSRN: https://ssrn.com/abstract=2131576

Maria Elena Bontempi (Contact Author)

University of Bologna - Department of Economics ( email )

Strada Maggiore, 45
40125 Bologna, 40125
Italy
+39 051 2092600 (Phone)
+39 051 2092664 (Fax)

Roberto Golinelli

University of Bologna - Department of Economics ( email )

Strada Maggiore 45
Bologna, 40125
Italy
+39 051 209 2638 (Phone)
+39 051 209 2664 (Fax)

Here is the Coronavirus
related research on SSRN

Paper statistics

Downloads
64
Abstract Views
715
rank
382,874
PlumX Metrics