Advanced Search
MyIDEAS: Login to save this paper or follow this series

Nonlinear Modeling of Target Leverage with Latent Determinant Variables – New Evidence on the Trade-off Theory

Contents:

Author Info

  • Ralf Sabiwalsky
Registered author(s):

    Abstract

    The trade-off theory on capital structure is tested by modelling the capital structure target as the solution to a maximization problem. This solution maps asset volatility and loss given default to optimal leverage. By applying nonlinear structural equation modelling, these unobservable variables are estimated based on observable indicator variables, and simultaneously, the speed of adjustment towards this leverage target is estimated. Linear specifications of the leverage target suffer from overlap between the predictions of various theories on capital structure about the sign and significance of determinants. In contrast, the framework applied here allows for a direct test: results confirm the trade-off theory for small and medium-sized firms, but not for large firms.

    Download Info

    If you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
    File URL: http://sfb649.wiwi.hu-berlin.de/papers/pdf/SFB649DP2008-062.pdf
    Download Restriction: no

    Bibliographic Info

    Paper provided by Sonderforschungsbereich 649, Humboldt University, Berlin, Germany in its series SFB 649 Discussion Papers with number SFB649DP2008-062.

    as in new window
    Length: 43 pages
    Date of creation: Aug 2008
    Date of revision:
    Handle: RePEc:hum:wpaper:sfb649dp2008-062

    Contact details of provider:
    Postal: Spandauer Str. 1,10178 Berlin
    Phone: +49-30-2093-5708
    Fax: +49-30-2093-5617
    Email:
    Web page: http://sfb649.wiwi.hu-berlin.de
    More information through EDIRC

    Related research

    Keywords: Capital Structure; Nonlinear; Latent Variables; Trade-off Theory;

    Find related papers by JEL classification:

    This paper has been announced in the following NEP Reports:

    References

    References listed on IDEAS
    Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
    as in new window
    1. Graham, John R. & Harvey, Campbell R., 2001. "The theory and practice of corporate finance: evidence from the field," Journal of Financial Economics, Elsevier, Elsevier, vol. 60(2-3), pages 187-243, May.
    2. John R. Graham, 2000. "How Big Are the Tax Benefits of Debt?," Journal of Finance, American Finance Association, American Finance Association, vol. 55(5), pages 1901-1941, October.
    3. Eugene F. Fama, 2002. "Testing Trade-Off and Pecking Order Predictions About Dividends and Debt," Review of Financial Studies, Society for Financial Studies, Society for Financial Studies, vol. 15(1), pages 1-33, March.
    4. Michael L. Lemmon & Michael R. Roberts & Jaime F. Zender, 2008. "Back to the Beginning: Persistence and the Cross-Section of Corporate Capital Structure," Journal of Finance, American Finance Association, American Finance Association, vol. 63(4), pages 1575-1608, 08.
    5. Flannery, Mark J. & Rangan, Kasturi P., 2006. "Partial adjustment toward target capital structures," Journal of Financial Economics, Elsevier, Elsevier, vol. 79(3), pages 469-506, March.
    6. Antoniou, Antonios & Guney, Yilmaz & Paudyal, Krishna, 2008. "The Determinants of Capital Structure: Capital Market-Oriented versus Bank-Oriented Institutions," Journal of Financial and Quantitative Analysis, Cambridge University Press, Cambridge University Press, vol. 43(01), pages 59-92, March.
    7. Heitor Almeida & Thomas Philippon, 2007. "The Risk-Adjusted Cost of Financial Distress," Journal of Finance, American Finance Association, American Finance Association, vol. 62(6), pages 2557-2586, December.
    8. Raghuram G. Rajan & Luigi Zingales, 1994. "What Do We Know About Capital Structure? Some Evidence from International Data," NBER Working Papers 4875, National Bureau of Economic Research, Inc.
    9. Christian Habermann & Fabian Kindermann, 2007. "Multidimensional Spline Interpolation: Theory and Applications," Computational Economics, Society for Computational Economics, Society for Computational Economics, vol. 30(2), pages 153-169, September.
    10. Bassam Fattouh & Laurence Harris & Pasquale Scaramozzino, 2008. "Non-linearity in the determinants of capital structure: evidence from UK firms," Empirical Economics, Springer, Springer, vol. 34(3), pages 417-438, June.
    Full references (including those not matched with items on IDEAS)

    Citations

    Lists

    This item is not listed on Wikipedia, on a reading list or among the top items on IDEAS.

    Statistics

    Access and download statistics

    Corrections

    When requesting a correction, please mention this item's handle: RePEc:hum:wpaper:sfb649dp2008-062. See general information about how to correct material in RePEc.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (RDC-Team).

    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 references are entirely missing, you can add them using this form.

    If the full references list an item that is present in RePEc, but the system did not link 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 profile, as there may be some citations waiting for confirmation.

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