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The Joint Determinants of Capital Structure and Stock Rate of Return: A LISREL Model Approach

Author

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  • Hong-Yi Chen

    (National Chengchi University, Wenshan District, Taipei City, Taiwan)

  • Cheng Few Lee

    (Rutgers University, New Brunswick, NJ, USA)

  • Tzu Tai

    (Mezocliq LLC, New York, NY, USA)

Abstract

We develop a simultaneous determination model of capital structure and stock returns. Specifically, we incorporate the managerial investment autonomy theory into the structural equation modeling with confirmatory factor analysis to jointly determine the capital structure and stock return. Besides attributes introduced in previous studies, we introduce indicators affecting a firm’s financing decision, such as managerial entrenchment, macroeconomic factors, government financial policy, and pricing factors. Empirical results show that stock returns, asset structure, growth, industry classification, uniqueness, volatility, financial rating, profitability, government financial policy, and managerial entrenchment are major factors of the capital structure.

Suggested Citation

  • Hong-Yi Chen & Cheng Few Lee & Tzu Tai, 2019. "The Joint Determinants of Capital Structure and Stock Rate of Return: A LISREL Model Approach," Review of Pacific Basin Financial Markets and Policies (RPBFMP), World Scientific Publishing Co. Pte. Ltd., vol. 22(02), pages 1-51, June.
    • Handle: RePEc:wsi:rpbfmp:v:22:y:2019:i:02:n:s0219091519500139
    DOI: 10.1142/S0219091519500139
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    More about this item

    Keywords

    LISREL; structural equation modeling (SEM); confirmatory factor analysis (CFA); capital structure;
    All these keywords.

    JEL classification:

    • C01 - Mathematical and Quantitative Methods - - General - - - Econometrics
    • C1 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill

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