Profits, Firm Size, Growth Opportunities and Capital Structure: An Empirical Test

Abstract

This study aims to answer three very basic questions regarding the capital structure of firms by testing the predictions made by the trade-off theory of capital structure. It employs a variety of data specification to test the relationship of financial leverage with profits, growth and firm size and takes help from existing literature for and against the trade-off model. It aims at testing the relatively aged literature, which widely disregarded the trade-off model with later studies that suggested that adequate data structure does report this theory to be empirically valid. The variety of specifications of data does lead the author to the general result that although most of the predictions of the trade-off model hold true empirically, the results of estimation on profits and leverage still hold that the model only had limited validity empirically.