Please use this identifier to cite or link to this item: http://hdl.handle.net/10419/25305
Authors: 
Sabiwalsky, Ralf
Year of Publication: 
2008
Series/Report no.: 
SFB 649 discussion paper 2008,062
Abstract: 
The trade-off theory on capital structure is tested by modelling the capital structure target as the solution to a maximization problem. This solution maps asset volatility and loss given default to optimal leverage. By applying nonlinear structural equation modelling, these unobservable variables are estimated based on observable indicator variables, and simultaneously, the speed of adjustment towards this leverage target is estimated. Linear specifications of the leverage target suffer from overlap between the predictions of various theories on capital structure about the sign and significance of determinants. In contrast, the framework applied here allows for a direct test: results confirm the trade-off theory for small and medium-sized firms, but not for large firms.
Subjects: 
Capital structure
nonlinear
latent variables
trade-off theory
JEL: 
G32
G33
C61
Document Type: 
Working Paper

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