Previous studies that test the tradeoff theory commonly use one of the following debt ratio
measures to proxy for a firm's hypothesized optimal ratio: firm's time-series mean leverage,
moving average leverage based on a firm's historical debt ratios, industry median leverage,
and predicted leverage ratio based on cross-sectional regressions. We find that these
alternative proxies yield results that are significantly different from each other. Further,
regression results of models that use the optimum target leverage and the conclusions …

Objective: Optimal leverage is one of the anchors of capital structure studies. These studies
have used a wide range of debt ratios as the optimal ratio; however, the choice of the proxy
can influence the results of the studies. Method: This paper aims to scrutinize the best
optimal leverage between the firm's mean leverage, moving average leverage, industry
mean leverage and predicted leverage ratio based on regressions. Choice of the best proxy
is based on the speed of adjustment, financing decisions and firm's market value. Results …