During the past decades, explanation of capital structures through firm-specific performance variables has increasingly drawn the attention of researchers (for example Kester, 1986; Friend and Lang,1988; Titman & Wessels,1988; Rajan and Zingales,1995: Wald,1999: Ozkan,2001; Zou & Xiao, 2006). In fact, the researchers have attempted to explain how selected firm-specific performance variables - often drawn from the context of annual reports - have affected the outgrowths of various capital structures. The resulting capital structures have often been used to make either comparisons between the two sets of companies or explaining the changes of capital structure over time. However, a focus on the processes of these researches reveals that for the studies of capital structures different methods were applied. In addition to this, the choice of variables was not methodologically reasoned. As a consequence, explanations of the outgrowth of the capital structures appeared being highly ambiguous and paradoxical.
This study examines the problem attached to the choices and definitions of variables. It has the intension to demonstrate that rules applied for the selection, definitions, and measurements of the variables are the main causes to the ambiguous and paradoxical results of the past research on capital structure. By reviewing a number of prior empirical researches, this study reveals some inconsistency arising from the failure to apply a common rule in definitions, selections and measurement of the variables.
capital structures, theoretical inconsistency, empirical ambiguity