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Do tests of capital structure theory mean what they say (2007)
| Venue: | Journal of Finance |
| Citations: | 152 - 11 self |
BibTeX
@ARTICLE{Strebulaev07dotests,
author = {Ilya A. Strebulaev},
title = {Do tests of capital structure theory mean what they say},
journal = {Journal of Finance},
year = {2007},
pages = {1747--1787}
}
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Abstract
In the presence of frictions, firms adjust their capital structure infrequently. As a consequence, in a dynamic economy the leverage of most firms is likely to differ from the “optimum ” leverage at the time of readjustment. This paper explores the empirical implications of this observation. I use a calibrated dynamic trade-off model to simulate firms ’ capital structure paths. The results of standard cross-sectional tests on these data are consistent with those reported in the empirical literature. In particular, the standard interpretation of some test results leads to the rejection of the underlying model. Taken together, the results suggest a rethinking of the way capital structure tests are conducted. RECENT EMPIRICAL RESEARCH IN CAPITAL STRUCTURE focuses on regularities in the cross section of leverage to discriminate between various theories of financing policy. In this research, book and market leverage are related to profitabil-ity, book-to-market, and firm size. Changes in market leverage are largely ex-plained by changes in equity value. Past book-to-market ratios predict current
Keyphrases
capital structure theory market leverage empirical literature underlying model various theory firm size recent empirical research capital structure way capital structure test test result equity value standard cross-sectional test cross section standard interpretation dynamic economy capital structure financing policy empirical implication book-to-market ratio firm capital structure path optimum leverage calibrated dynamic trade-off model
