Capital Structure: Theory and Evidence
13 Pages Posted: 29 May 2015
Date Written: May 27, 2015
In this paper, we develop and test empirically a model of capital structure. We show analytically that the square of 1 minus the debt ratio (total debt divided by total assets) is positively associated with the inverse of total assets and negatively associated with the log of total assets divided by the square of total assets. Empirical results using U.S. company data from Compustat are consistent with the predictions of our model, even after controlling for other potential confounding variables.
Keywords: Capital Structure
JEL Classification: C21, C23, G32
Suggested Citation: Suggested Citation