Capital Structure Decisions: Which Factors Are Reliably Important?

• Published in: Financial Management (Wiley-Blackwell) Vol. 38; no. 1; pp. 1 - 37
• Main Authors: Frank, Murray Z., Goyal, Vidhan K.
• Format: Journal Article
• Language: English
• Published: Melbourne, Australia Blackwell Publishing Asia 01.04.2009; Blackwell Publishing; Blackwell Publishing Ltd
• Subjects: Anticipated inflation; Business structures; Capital structure; Corporate finance; Debt; Debt market; Decision making; Equity; Financial leverage; Financial management; Financing methods; Industrial market; Long term debt; Pecking order theory; Studies; U.S.A; United States > US
• ISSN: 0046-3892; 1755-053X
• DOI: 10.1111/j.1755-053X.2009.01026.x

This paper examines the relative importance of many factors in the capital structure decisions of publicly traded American firms from 1950 to 2003. The most reliable factors for explaining market leverage are: median industry leverage (+ effect on leverage), market-to-book assets ratio (-), tangibility (+), profits (-), log of assets (+), and expected inflation (+). In addition, we find that dividend-paying firms tend to have lower leverage. When considering book leverage, somewhat similar effects are found. However, for book leverage, the impact of firm size, the market-to-book ratio, and the effect of inflation are not reliable. The empirical evidence seems reasonably consistent with some versions of the trade-off theory of capital structure.