Capital Structure Decisions

56 Pages Posted: 28 May 2003

See all articles by Murray Z. Frank

Murray Z. Frank

University of Minnesota

Vidhan K. Goyal

Hong Kong University of Science & Technology (HKUST) - Department of Finance

Date Written: April 2003


This paper examines the relative importance of 39 factors in the leverage decisions of publicly traded U.S. firms. The pecking order and market timing theories do not provide good descriptions of the data. The evidence is generally consistent with tax/bankruptcy tradeoff theory and with stakeholder co-investment theory. The most reliable factors are median industry leverage (+ effect on leverage), bankruptcy risk as measured by Altman's Z-Score (- effect on leverage), firm size as measured by the log of sales (+), dividend- paying (-), intangibles (+), market-to-book ratio (-), and collateral (+). Somewhat less reliable effects are the variance of own stock returns (-), net operating loss carry forwards (-), financially constrained (-), profitability (-), change in total corporate assets (+), the top corporate income tax rate (+), and the Treasury bill rate (+). Using Markov Chain Monte Carlo multiple imputation to correct for missing-data-bias we find that the effect of profits and net operating loss carry forwards are not robust.

Keywords: Capital structure, pecking order theory, tradeoff theory, stakeholder co-investment

JEL Classification: G32

Suggested Citation

Frank, Murray Z. and Goyal, Vidhan K., Capital Structure Decisions (April 2003). AFA 2004 San Diego Meetings. Available at SSRN: or

Murray Z. Frank

University of Minnesota ( email )

Carlson School of Management
321 19th Avenue South
Minneapolis, MN 55455
United States
612-625-5678 (Phone)

Vidhan K. Goyal (Contact Author)

Hong Kong University of Science & Technology (HKUST) - Department of Finance ( email )

Clear Water Bay, Kowloon
Hong Kong
852-2358-7678 (Phone)
852-2358-1749 (Fax)


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