Abstract
This paper investigates the influence of relevant factors in determining capital structure with their respective extent. Excluding financial firms, all publicly traded American firms for the period of 1950-2005 are considered as the sample firms. Five fundamental factors that may explain leverage are growth opportunities, tangible assets, firm profit, firm size, and inflation. I use simple linear regression, BIC, and AIC, to identify the reliably consistent influential factors and a model. Using total leverage to market value of asset (TLMA) as my main model for the entire estimation period (1950-2005), I find that tangibility and firm size are significantly and positively related to leverage. The growth opportunities is also positively related to leverage but statistically insignificant. But firm profit has a significant negative relationship with leverage confirming the implication of the pecking order hypothesis.Keywords: static trade-off theory, pecking order theory, market timing theory, signaling theory, agency cost theoryJEL Classifications: G1, G3, G10, G20, G32DOI: https://doi.org/10.32479/ijefi.8663
Highlights
Capital structure decision means deciding the proportion of debt and equity capital in determining the amount of funding for a corporation
Dong et al (2012) show the evidence that financially sound firms issue equity when the share price is higher than the intrinsic value which is consistent with market timing theory
The tangibility coefficient 0.092 in all years data represent that if I increase the amount of tangible asset by 1 unit the debt ratio measured by Total debt/Market assets (TLMA) is expected to increase by 0.092 unit
Summary
Capital structure decision means deciding the proportion of debt and equity capital in determining the amount of funding for a corporation. Different theories might explain leverage decisions from different dimensions based on the underlying empirical findings. I relate my empirical findings of influential factors in explaining leverage with the capital structure theories to determine whether the implication of my findings support or contradict a particular theory. The central focus of this research is based on total leverage to market value of assets to measure leverage but this paper considers four models of leverage.
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