The relationship between asset and capital structure: a compositional approach with panel vector autoregressive models

Miquel Carreras-Simó; Germà Coenders; Miquel Carreras-Simó; Germà Coenders

doi:10.3934/QFE.2021025

Quantitative Finance and Economics

2021, Volume 5, Issue 4: 571-590. doi: 10.3934/QFE.2021025

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Research article

The relationship between asset and capital structure: a compositional approach with panel vector autoregressive models

Miquel Carreras-Simó ¹,
Germà Coenders ^{2
,
,}

1.
Department of Business, University of Girona, Carrer Universitat de Girona 10, Girona, 17003, Spain
2.
Department of Economics, University of Girona, Carrer Universitat de Girona 10, Girona, 17003, Spain

Received: 28 April 2021 Accepted: 26 July 2021 Published: 30 July 2021
JEL Codes: C33, C49, G30, G32

The companies' investment and financing policies are dynamically interrelated and there is no general consensus about the direction of this relationship. There are theoretical arguments and empirical evidence supporting both possible directions, which makes panel vector autoregressive models an appropriate tool. However, the financial ratios normally used to assess this relationship empirically tend to be asymmetric, and to have extreme outliers and non-linear relationships. The aim of this article is to propose a methodological approach to address these issues by complementing panel vector autoregressive models with compositional data analysis. The usefulness of the proposed methodology is illustrated with real data of Spanish retail companies, while a reanalysis with standard financial ratios is inconclusive.
- compositional data analysis (CoDa),
- panel VAR models,
- accounting ratios,
- asset structure,
- capital structure,
- retail sector
Citation: Miquel Carreras-Simó, Germà Coenders. The relationship between asset and capital structure: a compositional approach with panel vector autoregressive models[J]. Quantitative Finance and Economics, 2021, 5(4): 571-590. doi: 10.3934/QFE.2021025

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Abstract

The companies' investment and financing policies are dynamically interrelated and there is no general consensus about the direction of this relationship. There are theoretical arguments and empirical evidence supporting both possible directions, which makes panel vector autoregressive models an appropriate tool. However, the financial ratios normally used to assess this relationship empirically tend to be asymmetric, and to have extreme outliers and non-linear relationships. The aim of this article is to propose a methodological approach to address these issues by complementing panel vector autoregressive models with compositional data analysis. The usefulness of the proposed methodology is illustrated with real data of Spanish retail companies, while a reanalysis with standard financial ratios is inconclusive.

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