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Capital structure: The case of firms issuing debt

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  • Yushu Zhu

Abstract

This study reinvestigates the relationship between financial leverage and firm characteristics in a cross-sectional setting and a panel setting. Monte-Carlo simulation-based inference results confirm the finding of Barraclough (2007) that a cross-sectional multiple regression model sharing common divisors suffers from a latent spurious ratio problem. To avoid the spurious ratio problem, variables in changes instead of ratios are adopted in two panel models: a first-differenced fixed-effects panel model and a dynamic Generalized Method of Moments panel model. The two models respectively integrate fixed effects (e.g. the persistence nature of financial leverage) and endogeneity features of financial leverage decisions. Model results suggest past realization of debt explains most of the current debt level after controlling for endogeneity. We find no significant association between debt and firm characteristics. JEL Classification: G32, H20

Suggested Citation

  • Yushu Zhu, 2012. "Capital structure: The case of firms issuing debt," Australian Journal of Management, Australian School of Business, vol. 37(2), pages 283-295, August.
    • Handle: RePEc:sae:ausman:v:37:y:2012:i:2:p:283-295
    DOI: 10.1177/0312896211429159
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    2. Richard Kent & James Routledge & Karen McPherson, 2017. "Use of benchmarks in predicting earnings management?," Accounting and Finance, Accounting and Finance Association of Australia and New Zealand, vol. 57(1), pages 239-260, March.
    3. Kebin Deng & Zhong Ding & Yushu Zhu & Qing Zhou & Kathy Walsh, 2017. "Investment–cash flow sensitivity measures investment thirst, but not financial constraint," Accounting and Finance, Accounting and Finance Association of Australia and New Zealand, vol. 57(1), pages 165-197, March.
    4. Joye Khoo & Robert B. Durand & Subhrendu Rath, 2017. "Leverage adjustment after mergers and acquisitions," Accounting and Finance, Accounting and Finance Association of Australia and New Zealand, vol. 57, pages 185-210, April.
    5. Hussain, Inayat & Durand, Robert B. & Harris, Mark N., 2016. "Default resolution and access to fresh credit in an emerging market," Pacific-Basin Finance Journal, Elsevier, vol. 39(C), pages 256-274.
    6. David R Gallagher & Peter A Gardner & Camille H Schmidt & Terry S Walter, 2014. "Quality investing in an Australian context," Australian Journal of Management, Australian School of Business, vol. 39(4), pages 615-643, November.
    7. Yan Zhao & Zhiqiang Ye, 2019. "Capital Structure and Firm Growth in China," Applied Economics and Finance, Redfame publishing, vol. 6(6), pages 30-42, November.
    8. Kelvin Jui Keng Tan & Jia Min Lee & Robert W. Faff & Kathy Walsh, 2016. "Short-selling pressure and last-resort debt finance: evidence from 144A high-yield risk-adjusted debt," Accounting and Finance, Accounting and Finance Association of Australia and New Zealand, vol. 56(4), pages 1149-1185, December.
    9. 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; endogeneity; panel model; spurious ratio;
    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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