Empirical policy functions as benchmarks for evaluation of dynamic capital structure models
This paper presents a set of benchmark moments for evaluation or estimation of quantitative capital structure models. The moments are directly related to the models being studied: the main features of each models' empirical policy functions. The paper describe a general method for estimating these benchmarks and shows that they ‘capture’ a substantial part of the actual variation in firms actions in the data. Two versions of these benchmarks are presented: one dimensional ones and two dimensional ones. In both cases we express these as the total change in the control variable and the change relative to the change in the state variable. The empirical policy functions turn out to be smooth and mostly monotonous. Three key numbers that we suggest quantitative dynamic models have match closely are that within firms, for every 10% increase in debt relative to assets investment relative to assets declines 3.7%, debt issuance relative to market value decreases 1.1% and equity issuance relative to market value increases 0.5%.
|Date of creation:||01 Apr 2011|
|Date of revision:||01 Nov 2011|
|Contact details of provider:|| Postal: Ludwigstraße 33, D-80539 Munich, Germany|
Web page: https://mpra.ub.uni-muenchen.de
More information through EDIRC
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.:
- Ilya A. Strebulaev, 2004.
"Do Tests of Capital Structure Theory Mean What They Say?,"
Econometric Society 2004 North American Summer Meetings
646, Econometric Society.
- Ilya A. Strebulaev, 2007. "Do Tests of Capital Structure Theory Mean What They Say?," Journal of Finance, American Finance Association, vol. 62(4), pages 1747-1787, 08.
- Shyam-Sunder, Lakshmi & C. Myers, Stewart, 1999. "Testing static tradeoff against pecking order models of capital structure," Journal of Financial Economics, Elsevier, vol. 51(2), pages 219-244, February.
- Bayer, Christian, 2006. "Investment dynamics with fixed capital adjustment cost and capital market imperfections," Journal of Monetary Economics, Elsevier, vol. 53(8), pages 1909-1947, November.
- Murray Z. Frank & Vidhan K. Goyal, 2009.
"Capital Structure Decisions: Which Factors Are Reliably Important?,"
Financial Management Association International, vol. 38(1), pages 1-37, 03.
- Frank, Murray Z. & Goyal, Vidhan K., 2009. "Capital Structure Decisions: Which Factors are Reliably Important?," MPRA Paper 22525, University Library of Munich, Germany.
- Andrea Gamba & Alexander Triantis, 2008.
"The Value of Financial Flexibility,"
Journal of Finance,
American Finance Association, vol. 63(5), pages 2263-2296, October.
- Carlos A. Molina, 2005. "Are Firms Underleveraged? An Examination of the Effect of Leverage on Default Probabilities," Journal of Finance, American Finance Association, vol. 60(3), pages 1427-1459, 06.
- 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.
- Christopher A. Hennessy & Toni M. Whited, 2007. "How Costly Is External Financing? Evidence from a Structural Estimation," Journal of Finance, American Finance Association, vol. 62(4), pages 1705-1745, 08.
When requesting a correction, please mention this item's handle: RePEc:pra:mprapa:35509. 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: (Joachim Winter)
If references are entirely missing, you can add them using this form.