Corporate operating characteristics and capital structure: causality testing in heterogeneous panel data

This article adopts a new technique, developed by Hurlin (2004), to test for Granger causality between capital structure and corporate operating characteristics including time-invariant, firm-specific effects in heterogeneous panel data from five US industries over the period 1980 to 2002. Previous studies addressed the issue of whether corporate operating characteristics cause changes in capital structure while our study focuses on the causal linkages between capital structure and corporate operating characteristics. For robustness, we validated the results using the Mixed Fixed Random (MFR) technique developed by Nair-Reichert and Weinhold (2001). The results indicate that causality test is more revealing than correlation-based analyses. It is clear that capital structure theories are co-existent in different industries. The study provides ample evidence that simultaneity between corporate operating characteristics and capital structure is prevalent with differential results in different industries and forms of debt.