Capital Structure / Leverage (DER)
Proxy: Debt to Equity Ratio (DER)
Definition & Description
The Debt to Equity Ratio (DER) measures the proportion of a company's financing that comes from debt compared to equity. It directly reflects capital structure and financial risk profile.
How to Use (Panel Data)
Almost universally present in accounting and finance research, often as an independent or control variable reflecting systematic risk and fixed interest burden.
Full Explanation Article
Modigliani-Miller and Pecking Order Theory are closely related. A high DER indicates aggressive debt-financed growth, amplifying tax shields but increasing default risk.
Creditors prefer a low DER, while shareholders might tolerate a higher DER if the Return on Assets exceeds the cost of debt.
Related Reference Journals
- [1]Modigliani, F., & Miller, M. H. (1958). The Cost of Capital, Corporation Finance and the Theory of Investment.
- [2]Myers, S. C., & Majluf, N. S. (1984). Corporate financing and investment decisions when firms have information that investors do not have.
Research Ideas
The Effect of Debt to Equity Ratio and Profitability on Firm Value (Tobin's Q).
Does Earnings Management Occur in Firms with High Leverage (DER)?
Frequently Asked Questions (FAQ)
What is the difference between this proxy and regular accounting variables?
For detailed information about this proxy, please refer to the article above. NgepetData can automatically extract the required data from your PDF Annual Report.
Where does the data come from to calculate this proxy?
For detailed information about this proxy, please refer to the article above. NgepetData can automatically extract the required data from your PDF Annual Report.
Can this proxy be used for all industry sectors?
For detailed information about this proxy, please refer to the article above. NgepetData can automatically extract the required data from your PDF Annual Report.