Capital Structure Decisions: Which Factors Are Reliably Important?


  • We thank Werner Antweiler, the late Michael Barclay, Bill Christie (the Editor), Sudipto Dasgupta, John Graham, Keith Head, Kai Li, William Lim, Michael Lemmon, Ernst Maug, Vojislav Maksimovic, Ron Masulis, Jay Ritter, Sheridan Titman, Ivo Welch, Jeff Wurgler; seminar participants at Tulane University and Queen's University; participants at the 2004 American Finance Association Meetings and the 2004 NTU International Conference; and especially our anonymous referees for helpful comments. Murray Z. Frank thanks Piper Jaffray for financial support. Vidhan K. Goyal thanks the Research Grants Council of Hong Kong (Project number: HKUST6489/06H) for financial support.


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.