Capital Structure Decisions
Capital Structure Decisions: Which Factors are Reliably Important?
Murray Z. Frank1 and Vidhan K. Goyal2
First draft: March 14, 2003. Current draft: December 20, 2003.
ABSTRACT This paper examines the relative importance of 38 factors in the leverage decisions of publicly traded U.S. firms from 1950 to 2000. The most reliable factors are median industry leverage (+ effect on leverage), market-to-book ratio (-), collateral (+), bankruptcy risk as measured by Altman’s Z-Score (-), dividend-paying (-), log of sales (+), and expected inflation (+). These seven factors all have the sign predicted by the trade-off theory. The pecking order and market timing theories are not as helpful in predicting the importance and the signs of the reliable factors. For large, mature, dividend-paying firms, leverage is negatively related to profits. This relationship is not reliably important in the broader population of firms. JEL classification: G32 Keywords: Capital structure, pecking order, trade-off theory, market timing, multiple imputation.
1 Faculty of Commerce, University of British Columbia, Vancouver BC, Canada V6T 1Z2. Phone: 604-8228480, Fax: 604-822-8477, E-mail: Murray.Frank@sauder.ubc.ca. Thanks to Werner Antweiler and Kai Li for helpful comments. We alone are responsible for any errors. Murray Frank thanks the BI Ghert Family Foundation and the SSHRC for financial support. 2 Department of Finance, Hong Kong University of Science and Technology, Clear Water Bay, Kowloon, Hong Kong. Phone: +852 2358-7678, Fax: +852 2358-1749, E-mail: goyal@ust.hk.
I. Introduction
What factors determine the capital structure decisions made by publicly traded U.S. firms? Despite decades of intensive research, there is a surprising lack of consensus even about many of the basic empirical facts. This is unfortunate for financial theory since disagreement over basic facts implies disagreement about desirable features for theories. This is also unfortunate for empirical research in
Murray Z. Frank1 and Vidhan K. Goyal2
First draft: March 14, 2003. Current draft: December 20, 2003.
ABSTRACT This paper examines the relative importance of 38 factors in the leverage decisions of publicly traded U.S. firms from 1950 to 2000. The most reliable factors are median industry leverage (+ effect on leverage), market-to-book ratio (-), collateral (+), bankruptcy risk as measured by Altman’s Z-Score (-), dividend-paying (-), log of sales (+), and expected inflation (+). These seven factors all have the sign predicted by the trade-off theory. The pecking order and market timing theories are not as helpful in predicting the importance and the signs of the reliable factors. For large, mature, dividend-paying firms, leverage is negatively related to profits. This relationship is not reliably important in the broader population of firms. JEL classification: G32 Keywords: Capital structure, pecking order, trade-off theory, market timing, multiple imputation.
1 Faculty of Commerce, University of British Columbia, Vancouver BC, Canada V6T 1Z2. Phone: 604-8228480, Fax: 604-822-8477, E-mail: Murray.Frank@sauder.ubc.ca. Thanks to Werner Antweiler and Kai Li for helpful comments. We alone are responsible for any errors. Murray Frank thanks the BI Ghert Family Foundation and the SSHRC for financial support. 2 Department of Finance, Hong Kong University of Science and Technology, Clear Water Bay, Kowloon, Hong Kong. Phone: +852 2358-7678, Fax: +852 2358-1749, E-mail: goyal@ust.hk.
I. Introduction
What factors determine the capital structure decisions made by publicly traded U.S. firms? Despite decades of intensive research, there is a surprising lack of consensus even about many of the basic empirical facts. This is unfortunate for financial theory since disagreement over basic facts implies disagreement about desirable features for theories. This is also unfortunate for empirical research in
References: 22 Enders, W., 2004 23 Miller, M.H., 1977