Capital Structure Decisions - 19256 Words

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. ï ¬ rms 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 inï ¬â€šation (+). 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†¦show more content†¦To address this serious concern the effect of conditioning on ï ¬ rm circumstances is studied. We do ï ¬ nd reliable empirical patterns.3 From a set of 38 factors that have been used in the literature, seven have reliable relationships to corporate leverage. Firms that compete in industries in which the median ï ¬ rm has high leverage tend also to have high leverag e. Firms that have high levels of sales tend to have high leverage. Firms that have more collateral tend to have more leverage. When inï ¬â€šation is expected to be high ï ¬ rms tend to have high leverage. Firms that have a high risk of bankruptcy, as measured by Altman’s Z-score, have low leverage. Firms that pay dividends tend to have lower leverage than do ï ¬ rms that do not pay dividends. Finally ï ¬ rms that have a high market-to-book ratio tend to have low levels of leverage. These seven factors account for more than 30% of the variation in leverage, while then remaining 31 factors only add a further 6%. These seven factors have very consistent sign and statistical signiï ¬ cance across many alternative treatments of the data. The remaining factors are not nearly as consistent. All seven of the reliable factors have signs that are predicted by the trade-off theory of leverage. Market timing theory makes correct predictions for the market-to-book and inï ¬â€ša tion variables. However it does not make any predictions for theShow MoreRelatedFactors That Influence the Capital Structure Decision of the Firm9372 Words   |  38 PagesABSTRACT The capital structure decisions are influenced by various factors. Different researchers obtained different conclusions on what the important determinants of capital structure are. The main objective of this study is to ascertain the factors that significantly influence capital structure decisions. The factors tested are: The firm’s age, size, growth, tangibility, profitability, business risk and non-debt tax shield. From my analysis all these factors were found to be significant but atRead MoreMaking Capital Budgeting and Capital Structure Decisions9919 Words   |  40 PagesPrepared for The Journal of Applied Corporate Finance Vol. 15, No. 1, 2002 How do CFOs make capital budgeting and capital structure decisions?1 John R. Graham Associate Professor of Finance, Fuqua School of Business, Duke University, Durham, NC 27708 USA Campbell R. Harvey Professor of Finance, Fuqua School of Business, Duke University, Durham, NC 27708 USA National Bureau of Economic Research, Cambridge, MA 02912 USA March 8, 2002 1A longer and more detailed version of this paper is publishedRead MoreThe Capital Structure Decision Of Firms With Powerful Ceos801 Words   |  4 PagesMethodology This study looks for evidence that the capital structure decision of firms with powerful CEOs has a negative effect of corporate performance. Ho: CEO power and Leverage have no effect on performance. 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(Shumadine 2008) Summarize the Modigliani-Miller (1958) capital structure irrelevance propositions and the concept of debt tax shields. â€Å"Capital structure of a company is the way a company finances its assets.† (E Finance Management 2015) â€Å"The Modigliani-Miller theory states value of the firm is not dependent on the choice of capital structure or financing decision of the firm. If a company has high growth prospect, its market value is higher and hence its stockRead MoreThe Cost of Capital and Vlauation of a Two County Firm by Michael Adler868 Words   |  3 PagesThe Cost of Capital and Valuation of a Two-County Firm by Michael Adler†, attempts to extend the theory of valuation and the cost of capital when operating in a multinational corporation. In finance, financing decisions have a great importance due to the optimal capital structure, which can be created through the proper mix of finance. 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