Detecting Determinants of Capital Structure
45 Pages Posted: 28 Mar 2018 Last revised: 11 Feb 2021
Date Written: February 05, 2021
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: Suggested Citation