Common Problems in Capital Structure Research: The Financial-Debt-To-Asset Ratio, and Issuing Activity vs. Leverage Changes
18 Pages Posted: 20 Sep 2006 Last revised: 22 Oct 2010
Date Written: October 20, 2010
This paper points out two common problems in capital structure research. First, although it is not clear whether they should be considered debt, non-financial liabilities should never be considered as equity. Yet, the common financial-debt-to-asset ratio (FD/AT) measure of leverage commits exactly this mistake. Thus, research that explains increases in FD/AT explains, at least in parts, decreases in non-financial liabilities. Future research should avoid FD/AT altogether. Second, equity issuing activity should not be viewed as equivalent to capital structure changes. Empirically, the correlation between the two is weak. The capital structure and capital issuing literature are distinct.
Keywords: capital structure
JEL Classification: G32
Suggested Citation: Suggested Citation