The Joint Determination of Leverage and Maturity
Simon Graduate School Working Paper No. FR 01-20
29 Pages Posted: 12 Nov 2001
Date Written: October 2001
We examine theories of leverage and debt maturity, focusing on the impact of a firm's investment opportunity set and regulatory environment in determining these policies. Using results on strategic complementarities, we identify sufficient conditions for the theory to have testable implications for reduced-form and structural-equation regression coefficients. Obtaining testable implications for structural-equation regression coefficients requires less from the theory but more from the data than the reduced-form specification since it requires an instrumental-variables approach. Thus, we highlight tradeoffs between theory and statistical methods. We provide tests using two decades of data for over 5,000 industrial firms.
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