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A two-part fractional regression model for the financial leverage decisions of micro, small, medium and large firms

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  • Joaquim J.S. Ramalho

    () (Department of Economics, University of Évora)

  • Jacinto Vidigal da Silva

    () (Department of Mangment, University of Évora)

Abstract

In this paper we examine the following two hypotheses which traditional theories of capital structure are relatively silent about: (i) the determinants of financial leverage decisions are different for micro, small, medium and large firms; and (ii) the factors that determine whether or not a firm issues debt are different from those that determine how much debt it issues. Using a binary choice model to explain the probability of a firm raising debt and a fractional regression model to explain the relative amount of debt issued, we find strong support for both hypotheses. Confirming recent empirical evidence, we find also that, although larger firms are more likely to use debt, conditional on having some debt firm size is negatively related to the proportion of debt used by firms.

Suggested Citation

  • Joaquim J.S. Ramalho & Jacinto Vidigal da Silva, 2006. "A two-part fractional regression model for the financial leverage decisions of micro, small, medium and large firms," Economics Working Papers 9_2006, University of Évora, Department of Economics (Portugal).
  • Handle: RePEc:evo:wpecon:9_2006
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    Keywords

    capital structure; financial leverage; zero leverage; micro firms; SMEs; fractional data; two-part model;

    JEL classification:

    • C51 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Model Construction and Estimation
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill

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