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• W3123104940 abstract "ABSTRACTThe paper examines the capital structure decision of 3,432 US companies in the year 2006 and 2011. The paper employs quantile regression to explore the predictions of the trade-off and pecking order models. We find evidence of heterogeneity in the capital structure and the determinants of capital structure. We find the data more consistent with the trade-off theory than the pecking order theory in 2006 but find that only economic conditions matter in 2011.JEL: G32KEYWORDS: Quantile Regression and Capital Structure(ProQuest: ... denotes formulae omitted.)INTRODUCTIONEver since the groundbreaking work of Modigliani and Miller (1958) empirical capital structure research has been abundant. Yet a successful explanation of the wide variety of capital structures remains elusive. For example Frank and Goyal (2009) note there is a surprising lack of consensus even about many of the basic empirical facts. Most of the research focused on testing two competing theories. Since neither of the theories claimed to provide an explanation of the capital structure decision for all circumstances this state of affairs is perhaps understandable.This paper's contribution is twofold. First, Korajczyk and Levy (2003) show that economic conditions along with firm specific variables determine the capital structures. Thus we will examine the capital structure determinants for two very different years. The first year, 2006, was just before the recent US recession. A period some observers (the most well-known is Shiller (2005)) classified as a period of irrational exuberance. The second year, 2011, a period shortly after the recession, is a period characterized by low interest rates and considerable risk aversion. This allows us to study the capital structure decision in different economic environments. Second, it has been shown that the distribution of leverage ratios is highly skewed with considerable kurtosis. These observed statistical properties may result in an incomplete picture of the relationship between the leverage ratio and the firm specific variables when least square regressions are used. A better suited methodology under these circumstances is quantile regressions. Introduced by Koenker and Bassett (1978), quantile regressions allow us to examine the impact of capital structure determinants across the whole distribution rather than only at the mean of the distribution.The paper opens with a brief explanation of the two models of capital structure determination. The predictions of each model for the various determinants of capital structure are spelled out. The next section explains quantile regression. The following section describes our data source. Then the results are presented and discussed. The paper's conclusions are presented in the final section.LITERATURE REVIEWModigliani and Miller (1958) show that assuming away taxes, bankruptcy costs, agency costs and asymmetric information in an efficient market financial policy is irrelevant. Thus the trade-off theory focuses upon when these conditions are violated. The trade-off theory argues that firms weigh the benefits of taxes and certain incentive effects against the direct and indirect costs of bankruptcy. The optimal capital structure precisely balances the costs and benefits of additional debt.Corporate taxes in the Modigliani and Miller (1958) model provide a strong incentive for debt financing. Miller (1977) shows that personal taxes can mitigate or at least lessen this effect. De Angelo and Masulis (1980) developed a model in which the benefits of the tax deductibility of interest are greater for profitable firms. They argue higher levels of nondebt tax shields may render the deductibility of the interest payments superfluous and thus lower the tax benefit of debt. They posit a negative relationship between the size of nondebt tax shields and book leverage. Because the tax shields may affect the market value of the firm the impact on leverage, measured in market value, is ambiguous. …" @default.
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• W3123104940 date "2014-01-01" @default.
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• W3123104940 title "Using Quantile Regressions to Examine the Capital Structure Decision of Us Firms" @default.
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