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Determinants of long-term debt issuing decisions: An alternative approach

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  • Yushu Zhu

Abstract

This paper proposes a probit model to test capital structure theories. Our model is designed to circumvent a methodological problem in traditional regression analysis stemming from the use of scaling (e.g., in the form of financial ratios) that has plagued capital structure studies for more than 100 years (Pearson, 1897). Without correction, this problem potentially yields a spurious relation between the dependent and explanatory variables. For example, a negative relationship between capital leverage and firm profitability is concluded in the literature, which is counter to what is observed in reality. Using a sample of leverage increasing cases resulting from public debt issuances in US markets between 1996 and 2006, our probit model results indicate that leverage increasing firms tend to be more profitable. Our finding is consistent with the fact that, in practice, more profitable firms usually have easier access to debt markets.

Suggested Citation

  • Yushu Zhu, 2013. "Determinants of long-term debt issuing decisions: An alternative approach," Australian Journal of Management, Australian School of Business, vol. 38(2), pages 429-439, August.
    • Handle: RePEc:sae:ausman:v:38:y:2013:i:2:p:429-439
    DOI: 10.1177/0312896212461640
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    Cited by:

    1. Xiaoyan Chen, 2017. "Improved corporate governance and Chinese seasoned equity offering announcement effects," Accounting and Finance, Accounting and Finance Association of Australia and New Zealand, vol. 57(2), pages 401-428, June.
    2. Linnenluecke, Martina K. & Chen, Xiaoyan & Ling, Xin & Smith, Tom & Zhu, Yushu, 2016. "Emerging trends in Asia-Pacific finance research: A review of recent influential publications and a research agenda," Pacific-Basin Finance Journal, Elsevier, vol. 36(C), pages 66-76.

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    More about this item

    Keywords

    Capital structure; long-term debt; spurious ratio problem;
    All these keywords.

    JEL classification:

    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill
    • H20 - Public Economics - - Taxation, Subsidies, and Revenue - - - General

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