One of the most contentious issues in the theory of capital structure has been whether there is an optimal choice for an individual firm. Since 1970s, it has been generally agreed that firm’s optimal capital structure could be achieved by trading off the benefits of debt and various costs of debt. However, most of existing theoretical and emperical researchs are based on the estimations of linear models on the hypothesis that the sensitivities of leverage to capital structure determinants are identical distributed across firms and over time. Obviously, this assumption is very restrictive. So it may not be accurate to draw conclusion based on the classic linear method.

Therefore, a nonlinear model is expected to be built. Here, we shall focus on three aspects:

1) how to test the nonlinearity?

2) what is the nonlinear effects?

3) how to develop the model rather than using a nonlinear regression method?

Welcome to discuss.

By Geroge Gu