Allan J Taub (1975) attempted to examine the factors influencing the firm's choice of a debt,equity ratio. The author dealt explicitly with the relationship between overall debt equity ratio of the firm and its choice of new financing. The variables were :
1. Difference between expected future return on the firm's capital
2. Pure rate of interest
3. Uncertainty of the future earning of the firm
4. Size of the firm
5. Tax Rate
6. Firm's period of solvency and the leverage as dependent variable.
He investigated the relationship between variables for a total of 89 randomly chosen firms for 10 years. The 10 year observations were from 1960-1969. Two statistics were used : the likelihood ratio and t-test. The empirical results show the differences between return to the firm and long term rate of interest and size had a positive influence on leverage. The uncertainty of the firm's earning had negative influence on leverage. Results for the remaining variables were less than satisfactory.
Greg Filbeck (1996) tests the herd migration theory proposed in a 1991 American Economic Review paper by Patel and Hendricks. The original authors found that 85% of the firms move their capital structure with the herd. The authors also test an alternative hypothesis, developed from the behavioral sciences literature that firms actually make financing decisions based on the financing decisions of the industry leader. According to Patel, financial players also mitigate in herds when firms increase their debt equity ratios. Firms must balance the benefits of reaching the optimal capital structure against the cost of leaving the herd. The authors believe that the firms are making capital structure decisions based on firm specific and time varying factors such as agency costs, bankruptcy costs. There may also be other factors accounting for the weak results. There may be other phenomena occurring in some industries that affect capital structure decisions such as M&A in 1980's. The other possibility is that the industry leader in an industry is wrongly specified.
1. Difference between expected future return on the firm's capital
2. Pure rate of interest
3. Uncertainty of the future earning of the firm
4. Size of the firm
5. Tax Rate
6. Firm's period of solvency and the leverage as dependent variable.
He investigated the relationship between variables for a total of 89 randomly chosen firms for 10 years. The 10 year observations were from 1960-1969. Two statistics were used : the likelihood ratio and t-test. The empirical results show the differences between return to the firm and long term rate of interest and size had a positive influence on leverage. The uncertainty of the firm's earning had negative influence on leverage. Results for the remaining variables were less than satisfactory.
Greg Filbeck (1996) tests the herd migration theory proposed in a 1991 American Economic Review paper by Patel and Hendricks. The original authors found that 85% of the firms move their capital structure with the herd. The authors also test an alternative hypothesis, developed from the behavioral sciences literature that firms actually make financing decisions based on the financing decisions of the industry leader. According to Patel, financial players also mitigate in herds when firms increase their debt equity ratios. Firms must balance the benefits of reaching the optimal capital structure against the cost of leaving the herd. The authors believe that the firms are making capital structure decisions based on firm specific and time varying factors such as agency costs, bankruptcy costs. There may also be other factors accounting for the weak results. There may be other phenomena occurring in some industries that affect capital structure decisions such as M&A in 1980's. The other possibility is that the industry leader in an industry is wrongly specified.
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