Arbeitspapier

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

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.

Language
Englisch

Bibliographic citation
Series: Bank of Canada Working Paper ; No. 2014-55

Classification
Wirtschaft
Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill
Methodological Issues: General
Subject
Financial markets
Econometric and statistical methods

Event
Geistige Schöpfung
(who)
Mueller, Michael
Event
Veröffentlichung
(who)
Bank of Canada
(where)
Ottawa
(when)
2014

DOI
doi:10.34989/swp-2014-55
Handle
Last update
10.03.2025, 11:41 AM CET

Data provider

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Object type

  • Arbeitspapier

Associated

  • Mueller, Michael
  • Bank of Canada

Time of origin

  • 2014

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