Erasmus Finance Seminars

Speaker(s)
Arthur Korteweg (Stanford)
Date
2012-01-24
Location
Rotterdam

Structural models of capital structure frequently have similar implications for the data that we observe, yet are typically not tested against alternative specifications. We examine the predictions of structural models, and develop a formal methodology for testing amongst alternatives. We show that our approach can provide a powerful yet simple decision-theoretic approach to model comparison, even for non-nested models. We show how our approach can highlight the dimensions on which various models fail, thus providing guidance to researchers for developing better models.