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

Ivo Welch

University of California, Los Angeles (UCLA); National Bureau of Economic Research (NBER)

Date Written: October 20, 2010

Abstract

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

Welch, Ivo, Common Problems in Capital Structure Research: The Financial-Debt-To-Asset Ratio, and Issuing Activity vs. Leverage Changes (October 20, 2010). AFA 2008 New Orleans Meetings Paper. Available at SSRN: https://ssrn.com/abstract=931675 or http://dx.doi.org/10.2139/ssrn.931675

Ivo Welch (Contact Author)

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