Determinants of Capital Structure: An Expanded Assessment with Todd Mitton (BYU) and Robert Schonlau (Colorado State)
Journal of Financial and Quantitative Analysis. 2023;58(6):2446-2488. doi:10.1017/S0022109022001405
Using a standardized methodology, we empirically evaluate 56 determinants of capital structure proposed in the literature in terms of economic significance, statistical significance, identification, and intertemporal stability. We present a unified capital structure framework in which each proposed determinant represents a constraint on shareholder value maximization in interactions with related parties. We find that truly robust and economically important determinants of debt ratios are relatively few in number. However, the evidence as a whole shows that the strongest determinants are those related to shareholder interactions with prospective equityholders and debtholders.
Fixed Cost Coverage Ratio: Operating Leverage, Risk and Cost of Capital with Adam Kolasinski (Texas A&M)
I introduce the fixed cost coverage ratio (FCCR) as a new measure of operating leverage. By employing a straightforward regression to separate fixed costs from total costs, this measure overcomes the issues of noise and infrequent updates found in previous measures. Using this new measure, I show that operating leverage significantly impacts the credit market. Specifically, a one standard deviation increase in the FCCR corresponds to a 7\% increase in the likelihood of a credit rating decrease and credit spreads increase by up to five basis points. Additionally, the FCCR predicts stock returns as a higher FCCR is associated with higher stock returns. This is statistically significant when the industry fixed effects are included in the regression, implying that the within-industry variation in the FCCR explains the stock returns. To link the operating leverage and stock return, I examine the association between the FCCR and the risk loadings. The FCCR is positively correlated with market beta, size beta, growth beta, profitability beta, and investment beta, but shows no association with the momentum beta.
Leverage and CEO Risk-Taking Incentives: Another Perspective
Fixed Cost Coverage Ratio
Operating Leverage vs. Financial Leverage: Similarities and Differences
How Does Operating Leverage Explain the Cross-Section of Equity Returns?
Information Acquisition Behaviors of Non-Financial Firms with Boone Bowles (Texas A&M), and Brad Cannon (Binghamton)