According to Rajan and Zingales, debt ratios of individual companies depend on:
I.size: large firms have higher debt ratios;
II.tangible assets: firms with high ratios of fixed assets to total assets have higher debt ratios;
III.profitability: more profitable firms have lower debt ratios;
IV.market to book: firms with higher ratios of market-to-book value have lower debt ratios;
V.market structure: firms with monopoly power have higher debt ratios
A)I and II only
B)I, II, and III only
C)I, II, III, and IV only
D)I, II, III, IV, and V

Question

Quizplus · Accepted Answer

Rajan and Zingales argue that debt ratios depend on several factors: larger firms tend to have higher debt ratios due to their more stable cash flows and easier access to capital markets; firms with more tangible assets have higher debt ratios because these assets can serve as collateral; more profitable firms often have lower debt ratios as they rely less on external financing; and firms with higher market-to-book ratios, indicating growth opportunities, tend to have lower debt ratios as they prefer equity to avoid the risk of financial distress. Market structure or monopoly power is not explicitly mentioned by Rajan and Zingales as a determinant of debt ratios in their framework.

According to Rajan and Zingales, Debt Ratios of Individual Companies