Determinants of the Firm's Capital Structure

THIS paper is an empirical study attempting to ascertain those factors that influence the firm's choice of a debt-equity ratio. Baxter and Cragg (1970), have published an empirical study that is similar in nature to this one. However, this paper differs from theirs in several important respects. First, we deal explicitly with the relationship between the overall debtequity ratio of the firm and the firm's choice of new financing. Secondly, we include the notion that the risk premiums required on bonds issued may differ among firms or between years. Finally, we include as a variable the corporate tax rate for each year. In section I we present the statistical model. A description of the independent variables used in the empirical study is presented in section II. Section III contains the results of our study plus implications and conclusions.