IDEAS home Printed from https://ideas.repec.org/a/wsi/rpbfmp/v22y2019i02ns0219091519500139.html
   My bibliography  Save this article

The Joint Determinants of Capital Structure and Stock Rate of Return: A LISREL Model Approach

Author

Listed:
  • Hong-Yi Chen

    (National Chengchi University, Wenshan District, Taipei City, Taiwan)

  • Cheng Few Lee

    (Rutgers University, New Brunswick, NJ, USA)

  • Tzu Tai

    (Mezocliq LLC, New York, NY, USA)

Abstract

We develop a simultaneous determination model of capital structure and stock returns. Specifically, we incorporate the managerial investment autonomy theory into the structural equation modeling with confirmatory factor analysis to jointly determine the capital structure and stock return. Besides attributes introduced in previous studies, we introduce indicators affecting a firm’s financing decision, such as managerial entrenchment, macroeconomic factors, government financial policy, and pricing factors. Empirical results show that stock returns, asset structure, growth, industry classification, uniqueness, volatility, financial rating, profitability, government financial policy, and managerial entrenchment are major factors of the capital structure.

Suggested Citation

  • Hong-Yi Chen & Cheng Few Lee & Tzu Tai, 2019. "The Joint Determinants of Capital Structure and Stock Rate of Return: A LISREL Model Approach," Review of Pacific Basin Financial Markets and Policies (RPBFMP), World Scientific Publishing Co. Pte. Ltd., vol. 22(02), pages 1-51, June.
    • Handle: RePEc:wsi:rpbfmp:v:22:y:2019:i:02:n:s0219091519500139
    DOI: 10.1142/S0219091519500139
    as

    Download full text from publisher

    File URL: http://www.worldscientific.com/doi/abs/10.1142/S0219091519500139
    Download Restriction: Access to full text is restricted to subscribers
    File URL: https://libkey.io/10.1142/S0219091519500139?utm_source=ideas
    LibKey link: if access is restricted and if your library uses this service, LibKey will redirect you to where you can use your library subscription to access this item
    ---><---

    As the access to this document is restricted, you may want to look for a different version below or search for a different version of it.

    Other versions of this item:

    References listed on IDEAS

    as
    1. Fama, Eugene F & French, Kenneth R, 1992. "The Cross-Section of Expected Stock Returns," Journal of Finance, American Finance Association, vol. 47(2), pages 427-465, June.
    2. Arvind Krishnamurthy & Annette Vissing-Jorgensen, 2012. "The Aggregate Demand for Treasury Debt," Journal of Political Economy, University of Chicago Press, vol. 120(2), pages 233-267.
    3. MacKie-Mason, Jeffrey K, 1990. "Do Taxes Affect Corporate Financing Decisions?," Journal of Finance, American Finance Association, vol. 45(5), pages 1471-1493, December.
    4. Stewart C. Myers & Nicholas S. Majluf, 1984. "Corporate Financing and Investment Decisions When Firms Have InformationThat Investors Do Not Have," NBER Working Papers 1396, National Bureau of Economic Research, Inc.
    5. Myers, Stewart C. & Majluf, Nicholas S., 1984. "Corporate financing and investment decisions when firms have information that investors do not have," Journal of Financial Economics, Elsevier, vol. 13(2), pages 187-221, June.
    6. Mark T. Leary & Michael R. Roberts, 2014. "Do Peer Firms Affect Corporate Financial Policy?," Journal of Finance, American Finance Association, vol. 69(1), pages 139-178, February.
    7. Ivo Welch, 2004. "Capital Structure and Stock Returns," Journal of Political Economy, University of Chicago Press, vol. 112(1), pages 106-131, February.
    8. Wilbur John Coleman II & Christian T. Lundblad & Ravi Bansal, 2011. "Endogenous Liquidity Supply," 2011 Meeting Papers 1200, Society for Economic Dynamics.
    9. Rampini, Adriano A. & Viswanathan, S., 2013. "Collateral and capital structure," Journal of Financial Economics, Elsevier, vol. 109(2), pages 466-492.
    10. Murray Z. Frank & Vidhan K. Goyal, 2009. "Capital Structure Decisions: Which Factors Are Reliably Important?," Financial Management, Financial Management Association International, vol. 38(1), pages 1-37, March.
    11. Robin Greenwood & Samuel Hanson & Jeremy C. Stein, 2010. "A Gap‐Filling Theory of Corporate Debt Maturity Choice," Journal of Finance, American Finance Association, vol. 65(3), pages 993-1028, June.
    12. Eugene F. Fama, 2002. "Testing Trade-Off and Pecking Order Predictions About Dividends and Debt," The Review of Financial Studies, Society for Financial Studies, vol. 15(1), pages 1-33, March.
    13. Berger, Philip G & Ofek, Eli & Yermack, David L, 1997. "Managerial Entrenchment and Capital Structure Decisions," Journal of Finance, American Finance Association, vol. 52(4), pages 1411-1438, September.
    14. Jensen, Michael C. & Meckling, William H., 1976. "Theory of the firm: Managerial behavior, agency costs and ownership structure," Journal of Financial Economics, Elsevier, vol. 3(4), pages 305-360, October.
    15. Robin Greenwood & Dimitri Vayanos, 2014. "Bond Supply and Excess Bond Returns," The Review of Financial Studies, Society for Financial Studies, vol. 27(3), pages 663-713.
    16. McDonald, Robert L., 1983. "Government debt and private leverage : An extension of the Miller theorem," Journal of Public Economics, Elsevier, vol. 22(3), pages 303-325, December.
    17. Stulz, ReneM., 1990. "Managerial discretion and optimal financing policies," Journal of Financial Economics, Elsevier, vol. 26(1), pages 3-27, July.
    18. Leland, Hayne E, 1994. "Corporate Debt Value, Bond Covenants, and Optimal Capital Structure," Journal of Finance, American Finance Association, vol. 49(4), pages 1213-1252, September.
    19. Sanford J. Grossman & Oliver D. Hart, 1982. "Corporate Financial Structure and Managerial Incentives," NBER Chapters, in: The Economics of Information and Uncertainty, pages 107-140, National Bureau of Economic Research, Inc.
    20. Jensen, Michael C, 1986. "Agency Costs of Free Cash Flow, Corporate Finance, and Takeovers," American Economic Review, American Economic Association, vol. 76(2), pages 323-329, May.
    21. Pastor, Lubos & Stambaugh, Robert F., 2003. "Liquidity Risk and Expected Stock Returns," Journal of Political Economy, University of Chicago Press, vol. 111(3), pages 642-685, June.
    22. Edward I. Altman, 1968. "Financial Ratios, Discriminant Analysis And The Prediction Of Corporate Bankruptcy," Journal of Finance, American Finance Association, vol. 23(4), pages 589-609, September.
    23. Rajan, Raghuram G & Zingales, Luigi, 1995. "What Do We Know about Capital Structure? Some Evidence from International Data," Journal of Finance, American Finance Association, vol. 50(5), pages 1421-1460, December.
    24. repec:cup:jfinqa:v:46:y:2011:i:06:p:1581-1627_00 is not listed on IDEAS
    25. Leland, Hayne E & Toft, Klaus Bjerre, 1996. "Optimal Capital Structure, Endogenous Bankruptcy, and the Term Structure of Credit Spreads," Journal of Finance, American Finance Association, vol. 51(3), pages 987-1019, July.
    26. Edward I. Altman, 1968. "The Prediction Of Corporate Bankruptcy: A Discriminant Analysis," Journal of Finance, American Finance Association, vol. 23(1), pages 193-194, March.
    27. Yang, Chau-Chen & Lee, Cheng-few & Gu, Yan-Xiang & Lee, Yen-Wen, 2010. "Co-determination of capital structure and stock returns--A LISREL approach: An empirical test of Taiwan stock markets," The Quarterly Review of Economics and Finance, Elsevier, vol. 50(2), pages 222-233, May.
    28. Mark T. Leary & Michael R. Roberts, 2005. "Do Firms Rebalance Their Capital Structures?," Journal of Finance, American Finance Association, vol. 60(6), pages 2575-2619, December.
    29. Bhagat, Sanjai & Bolton, Brian & Subramanian, Ajay, 2011. "Manager Characteristics and Capital Structure: Theory and Evidence," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 46(6), pages 1581-1627, December.
    30. Lin, Leming & Flannery, Mark J., 2013. "Do personal taxes affect capital structure? Evidence from the 2003 tax cut," Journal of Financial Economics, Elsevier, vol. 109(2), pages 549-565.
    31. Dirk Jenter & Katharina Lewellen & Jerold B. Warner, 2011. "Security Issue Timing: What Do Managers Know, and When Do They Know It?," Journal of Finance, American Finance Association, vol. 66(2), pages 413-443, April.
    32. Myers, Stewart C., 1977. "Determinants of corporate borrowing," Journal of Financial Economics, Elsevier, vol. 5(2), pages 147-175, November.
    33. Chang, Chingfu & Lee, Alice C. & Lee, Cheng F., 2009. "Determinants of capital structure choice: A structural equation modeling approach," The Quarterly Review of Economics and Finance, Elsevier, vol. 49(2), pages 197-213, May.
    34. Titman, Sheridan & Wessels, Roberto, 1988. " The Determinants of Capital Structure Choice," Journal of Finance, American Finance Association, vol. 43(1), pages 1-19, March.
    35. Amy Dittmar & Anjan Thakor, 2007. "Why Do Firms Issue Equity?," Journal of Finance, American Finance Association, vol. 62(1), pages 1-54, February.
    36. DeAngelo, Harry & Masulis, Ronald W., 1980. "Optimal capital structure under corporate and personal taxation," Journal of Financial Economics, Elsevier, vol. 8(1), pages 3-29, March.
    37. Dirk Jenter, 2005. "Market Timing and Managerial Portfolio Decisions," Journal of Finance, American Finance Association, vol. 60(4), pages 1903-1949, August.
    38. Graham, John R. & Leary, Mark T. & Roberts, Michael R., 2015. "A century of capital structure: The leveraging of corporate America," Journal of Financial Economics, Elsevier, vol. 118(3), pages 658-683.
    39. Hae Won (Henny) Jung & Ajay Subramanian, 2014. "Capital Structure under Heterogeneous Beliefs," Review of Finance, European Finance Association, vol. 18(5), pages 1617-1681.
    40. John R. Graham, 2000. "How Big Are the Tax Benefits of Debt?," Journal of Finance, American Finance Association, vol. 55(5), pages 1901-1941, October.
    41. Malcolm Baker & Jeffrey Wurgler, 2002. "Market Timing and Capital Structure," Journal of Finance, American Finance Association, vol. 57(1), pages 1-32, February.
    42. Alan Bevan & Jo Danbolt, 2002. "Capital structure and its determinants in the UK - a decompositional analysis," Applied Financial Economics, Taylor & Francis Journals, vol. 12(3), pages 159-170.
    43. Fischer, Edwin O & Heinkel, Robert & Zechner, Josef, 1989. " Dynamic Capital Structure Choice: Theory and Tests," Journal of Finance, American Finance Association, vol. 44(1), pages 19-40, March.
    44. Marsh, Paul, 1982. "The Choice between Equity and Debt: An Empirical Study," Journal of Finance, American Finance Association, vol. 37(1), pages 121-144, March.
    45. Miller, Merton H, 1977. "Debt and Taxes," Journal of Finance, American Finance Association, vol. 32(2), pages 261-275, May.
    46. Parrino, Robert & Weisbach, Michael S., 1999. "Measuring investment distortions arising from stockholder-bondholder conflicts," Journal of Financial Economics, Elsevier, vol. 53(1), pages 3-42, July.
    47. Chevalier, Judith A, 1995. "Do LBO Supermarkets Charge More? An Empirical Analysis of the Effects of LBOs on Supermarket Pricing," Journal of Finance, American Finance Association, vol. 50(4), pages 1095-1112, September.
    48. Robin Greenwood & Dimitri Vayanos, 2010. "Price Pressure in the Government Bond Market," American Economic Review, American Economic Association, vol. 100(2), pages 585-590, May.
    49. Bart M. Lambrecht & Stewart C. Myers, 2012. "A Lintner Model of Payout and Managerial Rents," Journal of Finance, American Finance Association, vol. 67(5), pages 1761-1810, October.
    50. Phillips, Gordon M., 1995. "Increased debt and industry product markets An empirical analysis," Journal of Financial Economics, Elsevier, vol. 37(2), pages 189-238, February.
    51. Stulz, ReneM. & Johnson, Herb, 1985. "An analysis of secured debt," Journal of Financial Economics, Elsevier, vol. 14(4), pages 501-521, December.
    Full references (including those not matched with items on IDEAS)

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Mai, Nhat Chi, 2012. "Market timing, taxes and capital structure: evidence from Vietnam," OSF Preprints t3mvs, Center for Open Science.
    2. Shoaib Ali & Attiya Yasmin Javid, 2015. "Relationship between Credit Rating, Capital Structure and Earning Management Behaviour: Evidence from Pakistani Listed Firms," PIDE-Working Papers 2015:121, Pakistan Institute of Development Economics.
    3. Feld, Lars P. & Heckemeyer, Jost H. & Overesch, Michael, 2013. "Capital structure choice and company taxation: A meta-study," Journal of Banking & Finance, Elsevier, vol. 37(8), pages 2850-2866.
    4. Bontempi, Maria Elena & Bottazzi, Laura & Golinelli, Roberto, 2020. "A multilevel index of heterogeneous short-term and long-term debt dynamics," Journal of Corporate Finance, Elsevier, vol. 64(C).
    5. Antonczyk, Ron Christian & Salzmann, Astrid Juliane, 2014. "Overconfidence and optimism: The effect of national culture on capital structure," Research in International Business and Finance, Elsevier, vol. 31(C), pages 132-151.
    6. Xu, Jin, 2012. "Profitability and capital structure: Evidence from import penetration," Journal of Financial Economics, Elsevier, vol. 106(2), pages 427-446.
    7. Im, Hyun Joong & Kang, Ya & Shon, Janghoon, 2020. "How does uncertainty influence target capital structure?," Journal of Corporate Finance, Elsevier, vol. 64(C).
    8. Huang, Guihai & Song, Frank M., 2006. "The determinants of capital structure: Evidence from China," China Economic Review, Elsevier, vol. 17(1), pages 14-36.
    9. Viet Anh Dang, 2011. "Testing Capital Structure Theories Using Error Correction Models: Evidence From The Uk, France And Germany," Post-Print hal-00732527, HAL.
    10. Dang, Viet Anh & Kim, Minjoo & Shin, Yongcheol, 2014. "Asymmetric adjustment toward optimal capital structure: Evidence from a crisis," International Review of Financial Analysis, Elsevier, vol. 33(C), pages 226-242.
    11. Rana El Bahsh & Ali Alattar & Aziz N. Yusuf, 2018. "Firm, Industry and Country Level Determinants of Capital Structure: Evidence from Jordan," International Journal of Economics and Financial Issues, Econjournals, vol. 8(2), pages 175-190.
    12. Harford, Jarrad & Klasa, Sandy & Walcott, Nathan, 2009. "Do firms have leverage targets? Evidence from acquisitions," Journal of Financial Economics, Elsevier, vol. 93(1), pages 1-14, July.
    13. Li, Larry & Islam, Silvia Z., 2019. "Firm and industry specific determinants of capital structure: Evidence from the Australian market," International Review of Economics & Finance, Elsevier, vol. 59(C), pages 425-437.
    14. Amini, Shahram & Elmore, Ryan & Öztekin, Özde & Strauss, Jack, 2021. "Can machines learn capital structure dynamics?," Journal of Corporate Finance, Elsevier, vol. 70(C).
    15. Hang, Markus & Geyer-Klingeberg, Jerome & Rathgeber, Andreas W. & Stöckl, Stefan, 2018. "Measurement matters—A meta-study of the determinants of corporate capital structure," The Quarterly Review of Economics and Finance, Elsevier, vol. 68(C), pages 211-225.
    16. Faisal Seraj Alnori & Ali Mohsen Shaddady, 2019. "Corporate Debt Choice and Board Size: The Case of Oil Exporting Economy," Journal of Applied Finance & Banking, SCIENPRESS Ltd, vol. 9(5), pages 1-6.
    17. Temimi, Akram & Zeitun, Rami & Mimouni, Karim, 2016. "How does the tax status of a country impact capital structure? Evidence from the GCC region," Journal of Multinational Financial Management, Elsevier, vol. 37, pages 71-89.
    18. Alves, Paulo & Couto, Eduardo Barbosa & Francisco, Paulo Morais, 2015. "Board of directors’ composition and capital structure," Research in International Business and Finance, Elsevier, vol. 35(C), pages 1-32.
    19. Islam, Silvia Z. & Khandaker, Sarod, 2015. "Firm leverage decisions: Does industry matter?," The North American Journal of Economics and Finance, Elsevier, vol. 31(C), pages 94-107.
    20. Dang, Viet Anh, 2013. "An empirical analysis of zero-leverage firms: New evidence from the UK," International Review of Financial Analysis, Elsevier, vol. 30(C), pages 189-202.

    More about this item

    Keywords

    LISREL; structural equation modeling (SEM); confirmatory factor analysis (CFA); capital structure;
    All these keywords.

    JEL classification:

    • C01 - Mathematical and Quantitative Methods - - General - - - Econometrics
    • C1 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:wsi:rpbfmp:v:22:y:2019:i:02:n:s0219091519500139. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Tai Tone Lim (email available below). General contact details of provider: http://www.worldscinet.com/rpbfmp/rpbfmp.shtml .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.