Persistent Leverage in Portfolio Sorts: An Artifact of Measurement Error?

Michael Mueller

Staff Working Papers from Bank of Canada

Abstract: Studies such as Lemmon, Roberts and Zender (2008) demonstrate how stable firms’capital structures are over time, and raise the question of whether new theories of capital structure are needed to explain these phenomena. In this paper, I show that trade-off theory-based empirical proxies that are observed with error offer an alternative explanation for the persistence in portfolio-leverage levels. Measurement error noise equal to 80% of the cross-sectional variation in the market to book ratio, coupled with slight mismeasurement of other factors, matches simulated data moments to empirical moments. This suggests that unobserved investment opportunities play an important role in explaining leverage ratios.

Keywords: Financial markets; Econometric and statistical methods (search for similar items in EconPapers)
JEL-codes: C18 G32 (search for similar items in EconPapers)
Pages: 48 pages
Date: 2014
References: View references in EconPapers View complete reference list from CitEc
Citations:

Downloads: (external link)
https://www.bankofcanada.ca/wp-content/uploads/2014/12/wp2014-55.pdf

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:bca:bocawp:14-55

Access Statistics for this paper

More papers in Staff Working Papers from Bank of Canada 234 Wellington Street, Ottawa, Ontario, K1A 0G9, Canada. Contact information at EDIRC.
Bibliographic data for series maintained by ().