Microsoft Word 2007 ichrie conference Proceedings Final-Final 06-06-07. doc

Table 3 
The Results of Three-Stage Least Squares Analyses
Eq 1: INT’L 
Eq 2: LEV 
Eq 3: ROA 
Coef. 
S.E. 
Coef. 
S.E. Coef. 
S.E. 
INTL 
-0.128 0.144 -0.005 0.038 
INTL2
-0.420*** 
0.038 
0.027 
0.027 
LEV 1.696*** 
0.393 
-0.103 
0.071 
LEV2 -3.081*** 
0.283 
-0.136** 
0.063 
INTL*LEV
0.199** 
0.090 
SIZE -0.030 
0.038 
-0.041** 
0.017 
0.008 
0.005 
RISK 0.053 
0.039 
0.042** 
0.019 
-0.015** 
0.006 
Q
-0.015 
0.027 
0.060*** 
0.010 
PPE
0.437*** 
0.082 
INTG 
-1.147*** 
0.249 
Intercept 0.397* 
0.223 
0.401*** 
0.094 
0.034 
0.039 
System weighted R2 
0.8097 
The significance of the square leverage term suggests the existence of optimal leverage at which 
profitability is maximized. This result is consistent with conventional capital structure theories, which states that in a 
world with “friction” such as tax and interest, there exists an optimal leverage, at which benefits and costs of 
carrying debt are balanced. That is, when a firm starts to use debt, it enjoys tax shelter created by the interest paid to 
the debt and improves its profitability. However, as the firm continues to increase its leverage, the debt obligation 
would eventually exceed the firm’s debt serving ability and result in high default risk. The costs of high default risk 
then would outweigh the benefits of tax benefits. Consequently, managers who have invested interest in the firm 
would try to maintain an optimal leverage that balances the benefits and costs. 

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