Abstract:
This study uses a structural model to analyze the co-determinants of
capital structure and stock returns. Applying a generalized method of moments
(GMM) model to a panel dataset for 100 nonfinancial firms for the period 2006–
10, our results indicate that both leverage and stock returns affect each other but
that the former has a dominant effect on the latter. The results illustrate that
profitability, growth, and liquidity are significant determinants of leverage and
stock returns. Profitability negatively affects leverage and positively affects stock
returns. Growth has a positive effect, while liquidity has a negative effect on
leverage and stock returns. Firm size does not have any significant effect on either
capital structure or stock returns.
