Structural Models of Capital Structure: A Framework for Model Evaluation and Testing
46 Pages Posted: 19 Mar 2012 Last revised: 14 Jan 2013
Date Written: January 1, 2013
Structural models of capital structure frequently have similar implications for the data that we observe, yet are typically not tested against alternative specifications. We examine the predictions of structural models, and develop a formal methodology for testing amongst alternatives. We show that our approach can provide a powerful yet simple decision-theoretic approach to model comparison, even for non-nested models. We show how our approach can highlight the dimensions on which various models fail, thus providing guidance to researchers for developing better models.
Keywords: capital structure, structural model, model testing
JEL Classification: C52, G32
Suggested Citation: Suggested Citation