A Two-Part Fractional Regression Model for the Capital Structure Decisions of Micro, Small, Medium and Large Firms

Abstract

In this paper we examine the following two hypotheses which traditional theories of capital structure are relatively silent about: (i) the determinants of financial leverage decisions are different for micro, small, medium and large firms; and (ii) the factors that determine whether or not a firm issues debt are different from those that determine how much debt it issues. Using a binary choice model to explain the probability of a firm raising debt and a fractional regression model to explain the relative amount of debt issued, we find strong support for both hypotheses. Confirming recent empirical evidence, we find also that, although larger firms are more likely to use debt, conditional on having some debt firm size is negatively related to the proportion of debt used by firms.

Keywords: Capital Structure, Financial Leverage, Zero Leverage, Micro Firms, SMEs, Fractional Data, Two-Part Model

JEL Classification: G32, C51