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Can machines learn capital structure dynamics?

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  • Amini, Shahram
  • Elmore, Ryan
  • Öztekin, Özde
  • Strauss, Jack

Abstract

Yes, they can! Machine learning models predict leverage better than linear models and identify a broader set of leverage determinants. They boost the out-of-sample R2 from 36% to 56% over OLS and LASSO. The best performing model (random forests) selects market-to-book, industry median leverage, cash and equivalents, Z-Score, profitability, stock returns, and firm size as reliable predictors of market leverage. More precise target estimation yields a 10%–33% faster speed of adjustment and improves prediction of financing actions relative to linear models. Machine learning identifies uncertainty, cash flow, and macroeconomic considerations among primary drivers of leverage adjustments.

Suggested Citation

  • Amini, Shahram & Elmore, Ryan & Öztekin, Özde & Strauss, Jack, 2021. "Can machines learn capital structure dynamics?," Journal of Corporate Finance, Elsevier, vol. 70(C).
    • Handle: RePEc:eee:corfin:v:70:y:2021:i:c:s0929119921001954
    DOI: 10.1016/j.jcorpfin.2021.102073
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    3. Hoang, Daniel & Wiegratz, Kevin, 2022. "Machine learning methods in finance: Recent applications and prospects," Working Paper Series in Economics 158, Karlsruhe Institute of Technology (KIT), Department of Economics and Management.
    4. Helmut Wasserbacher & Martin Spindler, 2024. "Credit Ratings: Heterogeneous Effect on Capital Structure," Papers 2406.18936, arXiv.org.
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    6. Chowdhury, Md Shahedur R. & Damianov, Damian S., 2024. "Uncertainty and bubbles in cryptocurrencies: Evidence from newly developed uncertainty indices," International Review of Financial Analysis, Elsevier, vol. 91(C).
    7. Mestiri, Sami, 2024. "Financial applications of machine learning using R software," MPRA Paper 119998, University Library of Munich, Germany.
    8. Evangelos Liaras & Michail Nerantzidis & Antonios Alexandridis, 2024. "Machine learning in accounting and finance research: a literature review," Review of Quantitative Finance and Accounting, Springer, vol. 63(4), pages 1431-1471, November.
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    More about this item

    Keywords

    Machine learning; Target leverage; Speed of leverage adjustment; Financing actions;
    All these keywords.

    JEL classification:

    • G17 - Financial Economics - - General Financial Markets - - - Financial Forecasting and Simulation
    • G30 - Financial Economics - - Corporate Finance and Governance - - - General
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill
    • C10 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - General
    • C50 - Mathematical and Quantitative Methods - - Econometric Modeling - - - General

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