Determinants of long-term debt issuing decisions: An alternative approach

Yushu Zhu

Australian Journal of Management, 2013, vol. 38, issue 2, 429-439

Abstract: This paper proposes a probit model to test capital structure theories. Our model is designed to circumvent a methodological problem in traditional regression analysis stemming from the use of scaling (e.g., in the form of financial ratios) that has plagued capital structure studies for more than 100 years (Pearson, 1897). Without correction, this problem potentially yields a spurious relation between the dependent and explanatory variables. For example, a negative relationship between capital leverage and firm profitability is concluded in the literature, which is counter to what is observed in reality. Using a sample of leverage increasing cases resulting from public debt issuances in US markets between 1996 and 2006, our probit model results indicate that leverage increasing firms tend to be more profitable. Our finding is consistent with the fact that, in practice, more profitable firms usually have easier access to debt markets.

Keywords: Capital structure; long-term debt; spurious ratio problem (search for similar items in EconPapers)
JEL-codes: G32 H20 (search for similar items in EconPapers)
Date: 2013
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (2)

Downloads: (external link)
https://journals.sagepub.com/doi/10.1177/0312896212461640 (text/html)

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:sae:ausman:v:38:y:2013:i:2:p:429-439

DOI: 10.1177/0312896212461640

Access Statistics for this article

More articles in Australian Journal of Management from Australian School of Business
Bibliographic data for series maintained by SAGE Publications ().