Detecting Determinants of Capital Structure

45 Pages Posted: 28 Mar 2018 Last revised: 11 Feb 2021

See all articles by Christian Riis Flor

Christian Riis Flor

University of Southern Denmark

Kirstine Boye Petersen

University of Southern Denmark

Date Written: February 05, 2021

Abstract

Using a dynamic capital structure model with investments we show that interdependence between profitability and assets creates challenges for empirical studies. Our model reveals that initial leverage explains variation in leverage, but only if the interdependence between the determinants are not accounted for. It also generates a seemingly persistent leverage effect even though we do not include mean reversion or similar elements. We suggest a simple method to address some of the interdependence between determinants. Our empirical analysis shows that profitability, market-to-book, and industry median leverage are important capital structure determinants, but initial leverage is not.

Keywords: Dynamic Structural Model, Determinant Interdependence, Initial Leverage, Capital Structure, Investments

JEL Classification: G30, G32

Suggested Citation

Flor, Christian Riis and Petersen, Kirstine Boye, Detecting Determinants of Capital Structure (February 05, 2021). Available at SSRN: https://ssrn.com/abstract=3147628 or http://dx.doi.org/10.2139/ssrn.3147628

Christian Riis Flor (Contact Author)

University of Southern Denmark ( email )

Campusvej 55
Odense DK-5230
Denmark
+45 6550 3384 (Phone)
+45 6593 0726 (Fax)

Kirstine Boye Petersen

University of Southern Denmark ( email )

Campusvej 55
DK-5230 Odense, 5000
Denmark

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