The Distributional Properties of the Debt to Equity Ratio: Some Implications for Empirical Research

25 Pages Posted: 24 May 2007

See all articles by Ali Ataullah

Ali Ataullah

Loughborough University - Business School

Andrew Higson

Loughborough University

Mark J. Tippett

Loughborough University - Business School; University of Exeter Business School

Abstract

The purpose here is to assess empirically the quasi-supply side model of the firm developed in the paper by Ashton et al. (2004) by testing the prediction of the model that the evolution of a firm's debt to equity ratio will be compatible with a non-linear (target adjustment) process whose underlying probability density function possesses no convergent moments. Using a thirty-two-year history of the debt to equity ratio for each of ninety 'mature' United Kingdom firms, a non-parametric estimation procedure shows that the debt to equity ratio evolves in terms of a process which is largely consistent with the predictions of this model. In particular, the evolution of the debt to equity ratio is compatible with a 'long (fat) tailed' density function with no convergent moments. This has the important implication, supported by our empirical analysis, that the linear dynamic models which characterize empirical work in this area will be mis-specified and will return inconsistent and temporally unstable estimates of the target adjustment process as a consequence.

Suggested Citation

Ataullah, Ali and Higson, Andrew and Tippett, Mark J., The Distributional Properties of the Debt to Equity Ratio: Some Implications for Empirical Research. Abacus, Vol. 43, No. 2, pp. 111-135, June 2007. Available at SSRN: https://ssrn.com/abstract=988566 or http://dx.doi.org/10.1111/j.1467-6281.2007.00222.x

Ali Ataullah

Loughborough University - Business School ( email )

Ashby Road
Loughborough
Nottingham NG1 4BU, LE11 3TU
Great Britain

Andrew Higson

Loughborough University ( email )

Ashby Road
Nottingham NG1 4BU
United Kingdom

Mark J. Tippett (Contact Author)

Loughborough University - Business School ( email )

Ashby Road
Loughborough
Nottingham NG1 4BU, LE11 3TU
Great Britain

University of Exeter Business School ( email )

Streatham Court
Xfi Building, Rennes Dr.
Exeter, EX4 4JH
United Kingdom

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