Determinants of Capital Structure Choice: A Structural Equation Modeling Approach

Abstract

In their seminal research on the determinants of capital structure choice using structural equation modeling (SEM), Titman and Wessels (1988) obtain weak results and hence call for further investigation. We apply a multiple-indicators-multiple-causes (MIMIC) model, with refined indicators, to a pooled sample for the period 1988-2003 and find more convincing results than those obtained by Titman and Wessels. With the capital structure measured simultaneously by the ratios of long-term debt, short-term debt, and convertible debt to the market value of equity, our results show that growth is the most important determinant of capital structure choice, followed in order by profitability, collateral value, volatility, non-debt tax shields, and uniqueness. Moreover, we find that long-term debt is the most important proxy of capital structure, followed by short-term debt, and then convertible debt.