Capital Structure Decisions: Which Factors are Reliably Important?
Murray Z. Frank
University of Minnesota
Vidhan K. Goyal
Hong Kong University of Science & Technology (HKUST) - Department of Finance; Hong Kong University of Science & Technology (HKUST) - Department of Finance
October 10, 2007
This paper examines the relative importance of many factors in the leverage decisions of publicly traded American firms from 1950 to 2003. The most reliable factors are median industry leverage (+ effect on leverage), market-to-book ratio (-), tangibility (+), profits (-), log of assets (+), and expected inflation (+). Industry subsumes a number of smaller effects. The empirical evidence seems reasonably consistent with some versions of the tradeoff theory of capital structure.
Number of Pages in PDF File: 60
Keywords: Capital structure, pecking order, trade-off theory, market timing, multiple imputation
JEL Classification: G32
Date posted: July 24, 2004 ; Last revised: December 11, 2007