JOINT DETERMINATION OF RATE OF RETURN AND CAPITAL STRUCTURE: AN ECONOMETRIC ANALYSIS

THE BOOK RATE-OF-RETURN-ON-EQUITY REFLECTS CORPORATE FINANCING CHOICES MADE IN LIGHT OF UNDERLYING OPERATING PROFIT AND RISK CHARACTERISTICS. A FRUITFUL APPROACH IS TO STUDY THE RELATIONSHIP BETWEEN THESE CHARACTERISTICS AND THE CAPITAL-STRUCTURE DECISION. AN INDUSTRY'S AVERAGE BOOK RATE OF RET...

Full description

Saved in:
Bibliographic Details
Published in:The Journal of finance (New York) 1977-06, Vol.32 (3), p.811-821
Main Authors: Carleton, Willard T., Silberman, Irwin H.
Format: Article
Language:English
Subjects:
Capital investments
Capital structure
Econometrics
Equity
Finance
Financial investments
Financial leverage
Financial market structures
Financial services industries
Investment return rates
Rates of return
Return on capital
Citations: Items that this one cites
Items that cite this one
Online Access:Get full text
Tags: Add Tag
No Tags, Be the first to tag this record!
Description
Summary:THE BOOK RATE-OF-RETURN-ON-EQUITY REFLECTS CORPORATE FINANCING CHOICES MADE IN LIGHT OF UNDERLYING OPERATING PROFIT AND RISK CHARACTERISTICS. A FRUITFUL APPROACH IS TO STUDY THE RELATIONSHIP BETWEEN THESE CHARACTERISTICS AND THE CAPITAL-STRUCTURE DECISION. AN INDUSTRY'S AVERAGE BOOK RATE OF RETURN, EXPRESSED AS THE RATIO OF EARNINGS BEFORE INTEREST AND TAXES TO TOTAL INVESTED CAPITAL, IS AN INCREASING FUNCTION OF THE VARIABILITY OF THAT RETURN. THE HIGHER THE VARIABILITY IS IN RATE OF RETURN ON INVESTED CAPITAL, THE LOWER WILL BE THE DEGREE OF FINANCIAL LEVERAGE ADOPTED. THE FINDINGS ARE GENERATED FROM A MODEL WHICH RECOGNIZES THAT RATE OF RETURN AND LEVERAGE ARE JOINTLY DETERMINED IN THE SENSE OF A SYSTEM OF SIMULTANEOUS EQUATIONS. TABLES.
ISSN:0022-1082
1540-6261
DOI:10.1111/j.1540-6261.1977.tb01990.x