Structural Equation Modeling - Rivera

MATHEMATICS RESEARCH DEVELOPMENTS
STRUCTURAL EQUATION
MODELING (SEM)
CONCEPTS, APPLICATIONS
AND MISCONCEPTIONS
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MATHEMATICS RESEARCH
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MATHEMATICS RESEARCH DEVELOPMENTS
STRUCTURAL EQUATION
MODELING (SEM)
CONCEPTS, APPLICATIONS
AND MISCONCEPTIONS
LARRY RIVERA
EDITOR
New York
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Library of Congress Cataloging-in-Publication Data

Structural equation modeling (SEM) : concepts, applications, and misconceptions / Larry Rivera,
editor.
pages cm. -- (Mathematics research developments)
Includes index.
ISBN: (eBook)
1. Structural equation modeling. 2. Multivariate analysis. I. Rivera, Larry (Mathematician)
QA278.3.S78 2015
519.5'35--dc23
2015016704
Published by Nova Science Publishers, Inc. † New York

CONTENTS
Preface vii
Chapter 1 The Determinants of Capital Structure Choice for
Chinese Listed Companies Based on Structural
Equation Modeling Approach 1
Xin-Dan Li, Xiang-Nan Feng,
Bin Lu and Xin-Yuan Song
Chapter 2 An Examination of Predictors and Outcomes Related
to School Climate Using Latent Class Analysis 35
Christine DiStefano, Elizabeth Leighton,
Mihaela Ene and Diane M. Monrad
Chapter 3 Assessing Mediation in Simple and Complex Moels 69
Thomas Ledermann and Siegfried Macho
Index 103
PREFACE
Structural equation modeling (SEM) is a general, cross-sectional statistical

modeling technique. The chapters in this book propose a Bayesian approach
based on SEM; an examination of predictors and outcomes related to school
climate using latent class analysis and the testing of specific effects and
contrasts in three types of mediation models followed by a discussion on the
common types of mediation models and their different types of effects.
Chapter 1 – This chapter proposes a Bayesian approach based on
structural equation modeling (SEM) to empirically test the determinants of
capital structure choice for the Chinese listed companies. The chapter
investigates major unobservable theoretical attributes identified by capital
structure theories and constructs proxies for these attributes considering
specific institutional settings in China. The findings suggest that some firm-
specific factors relevant to explaining capital structure in developed economies
are also related to the Chinese economy. Unique determinants of capital
structure choice for Chinese listed companies are also identified, which are
closely related to the special micro and macroeconomic situations in China.
Chapter 2 – A favorable school climate provides the structure within
which students, teachers, administrators, and parents function cooperatively
and constructively. Measures of school climate, however, have received only
passing interest from policy makers as critical elements in accountability
reporting. This study used a state-wide dataset of climate ratings from 610
elementary schools and considered multidimensional information from both
teachers and students to produce latent classes of school climate. Two
variables, school size and a school‟s poverty index, were used as covariates
when creating latent classes. In addition, two measures of school performance
were examined as distal outcomes. The study identified four classes, where
viii Larry Rivera
classes were distinguished based upon school climate scores. Differences in

outcome variables and covariates were observed across the classes. The
information may be used by school personnel in examinations of malleable
factors related to school performance.
Chapter 3 – This chapter addresses the testing of specific effects and
contrasts in three types of mediation models: models with up to four
simultaneous (parallel) mediators, models with two sequential mediators, and
single-mediator models with two initial variables. The authors use the delta
method and provide equations to calculate standard errors for simple and total
indirect effects, total effects, and specific contrasts in each type of model.
They also demonstrate how bootstrap interval estimates of specific effects and
contrasts can be obtained using phantom models and how indirect effects
involving different initial variables can be compared in a scale-free fashion.
Testing contrasts, the authors show how common requirements for complete
mediation can be made stronger. Limitations of both, statistics using standard
errors based on normal theory and bootstrapping to test mediation, along with
new methods are discussed. The methods are illustrated using publicly
available datasets. Supplementary material available online includes Amos,
OpenMx, and Mplus files to estimate the models and an Excel spreadsheet to
calculate the effects.
In: Structural Equation Modeling (SEM) ISBN: 978-1-63482-892-5
Editor: Larry Rivera © 2015 Nova Science Publishers, Inc.
Chapter 1
THE DETERMINANTS OF CAPITAL

STRUCTURE CHOICE FOR CHINESE LISTED
COMPANIES BASED ON STRUCTURAL
EQUATION MODELING APPROACH
Xin-Dan Li1, Xiang-Nan Feng2, Bin Lu3

and Xin-Yuan Song2,
1
School of Management and Engineering, Nanjing University, China
2
Department of Statistics, the Chinese University of Hong Kong, China
3
School of Finance, Nanjing University of Finance and Economics, China
ABSTRACT
This chapter proposes a Bayesian approach based on structural equation
modeling (SEM) to empirically test the determinants of capital structure
choice for the Chinese listed companies. The chapter investigates major
unobservable theoretical attributes identified by capital structure theories
and constructs proxies for these attributes considering specific
institutional settings in China. The findings suggest that some firm-
specific factors relevant to explaining capital structure in developed
economies are also related to the Chinese economy. Unique determinants
of capital structure choice for Chinese listed companies are also

Corresponding author: Xin-Yuan Song is Associate Professor, Department of Statistics, the
Chinese University of Hong Kong, Hong Kong, China, xysong@sta.cuhk.edu.hk.
2 Xin-Dan Li, Xiang-Nan Feng, Bin Lu et al.
identified, which are closely related to the special micro and

macroeconomic situations in China.
Keywords: capital structure; chinese listed companies; structural equation

modeling
1. INTRODUCTION
As one of the most important areas in corporate finance, capital structure
analysis has attracted significant attention in the literature. Modigliani and
Miller (1958) proposed an M-M theory stating that the capital structure does
not affect firms‟ value in the perfect capital market, which is a very restrictive
assumption. Since then, many efforts have been made to relax the assumptions
of the M-M theory. The development of agency theory (Jensen and Mecking,
1976), coupled with thorough research of bankruptcy costs, suggested that
corporations act as if there is a unique, optimal capital structure. The main
competing theories in explaining firms‟ capital structure choice are the static
trade-off hypothesis (Kraus and Litzenberger, 1973) and the pecking order
hypothesis (Myers and Majluf, 1984). Static trade-off models assume the
optimal capital structure does exist, while the pecking order hypothesis states
that there is no well-defined target debt ratio based on the information
asymmetry. Diverse signaling models have also been proposed to address the
asymmetric information problems (Ross, 1977).
Over the past several decades, numerous research have been conducted to
investigate the determinants of capital structure choice. Bradley et al. (1984)
adopted cross-sectional, firm-specific data to test for the existence of an
optimal capital structure by considering some influential factors. Titman and
Wessels (1988) analyzed the impact of unobservable attributes on the choice
of corporate leverages based on a factor-analytic technique. Homaifar et al.
(1994) applied a general autoregressive distributed lag model to the US data to
estimate the long-run steady state determinants of firms‟ capital structure.
Rajan and Zingales (1995) compared the capital structure decisions across G-7
countries. Wald (1999) examined the factors correlated with the capital
structure in France, Germany, Japan, the United Kingdom, and the United
States. Ozkan (2001) investigated the determinants of capital structure choice
for 390 companies in UK and the role of the adjustment process. Drobetz and
Wanzenriedb (2006) studied 90 Swiss firms‟ data from 1991 to 2001 to
analyze the impact of firm-specific characteristics and macroeconomic factors
The Determinants of Capital Structure Choice for Chinese … 3
on firms‟ speed of adjustment to the target debt ratio. Feidakis and Rovolis
(2007) examined whether there are any robust determinants that affect the
capital structure of the large listed construction firms in the European Union.
Chang et al. (2009) applied a Multiple Indicators and Multiple Causes
(MIMIC) model, with refined indicators, to a pooled sample for the period
1988 to 2003 and found more convincing results than those obtained by
Titman and Wessels (1988). Kayo and Kimura (2011) proposed the use of
hierarchical linear model and random effect model for analyzing the influence
of time-, firm-, industry-, and country-level determinants of capital structure.
Öztekin (2014) analyzed a large sample of firms drawn from 37 countries to
examine the international determinants of capital structure.
Although the major research of the determinants of capital structure
choice have been focused on the developed economies, the works are
becoming noticeable in developing countries and transitional economies in
recent years. Booth et al. (2001) analyzed capital structure choices of firms in
ten developing countries. Deesomsak et al. (2004) investigated the
determinants of capital structure of firms operating in four Asia Paciﬁc
countries. Agarwal and Mohtadi (2004) studied the effect of financial market
development on the financing choice of firms in developing countries using a
dynamic panel approach with aggregate firm level data. Fattouh et al. (2005)
examined the capital structure of listed firms in South Korea from 1992 to
2001. Nivorozhkin (2005) presented evidence on the actual and target capital
structures of firms in five EU accession countries of Central and Eastern
Europe and the former Soviet Union. De Haas and Peeters (2006) examined
the capital structure dynamics of firms in Central and Eastern Europe (CEE).
Nguyen and Ramachandran (2006) identified the determinants influencing the
capital structure of small and medium size enterprises (SMEs) in Vietnam.
Manos et al. (2007) investigated the effect of group affiliation on firm‟s capital
structure decision with data from the Indian economy. Delcoure (2007) also
considered the capital structure determinants in emerging CEE economies to
test whether the traditional theories are still useful. Kim and Berger (2008)
studied the determinants of the capital structure of large companies
headquartered in the United States and the Republic of Korea. Fan et al.
(2012) investigated the influence of the institutional environment on capital
structure and debt maturity choices for firms located in 39 developed and
developing countries. Öztekin and Flannery (2012) showed that certain
associations between institutional arrangements and leverage adjustment
speeds are consistent with dynamic trade-off theory of capital structure choice
with a dynamic panel data set spans 37 developed and developing counties.
China is now the largest developing economy in the world which rapidly
expanding capital market attracts many international investors. As a transition
economy, however, China has distinct institutional features. Therefore, it is
interesting to test whether the capital structure determinants of Chinese firms
differ from those in the western countries. Consequently, studying the effect of
Chinese unique institutional features on its listed companies‟ financing is of
great importance.
This study mainly extends the available empirical works in two ways.
Firstly, we investigate more attributes that have been tested for the firms in
developed countries but not yet for those in China. Secondly, the attributes
identified as the determinants of firms‟ capital structure choice are often not
directly observable; instead they are reflected by multiple indicators.
Therefore, the structural equation modeling (SEM) technique is adopted to
analyze the interrelationships among the latent attributes. Compared to an
ordinary regression analysis, the SEM approach has the following appealing
features. First, through grouping multiple indicators into a few latent
attributes, the SEM reduces the model dimension significantly. Second, based
on the condensed information, the SEM provides clearer and simpler model
interpretation. Finally, by assigning data-driven weights (factor loadings) to
highly correlated predictors via factor analysis, the SEM avoids the
multicollinearity problem encountered in the ordinary regression analysis (see
Section 5.3).
The rest of the chapter is organized as follows. Section 2 presents a brief
discussion of the specific institutional settings in China. Section 3 discusses
the attributes that are identified as the determinants of firms‟ capital structure
choice. Section 4 describes the data set and the methodology. Section 5
presents the empirical results. Section 6 concludes the major findings.
2. CHINESE INSTITUTIONAL SETTINGS

Chinese firms face some complications to achieve the optimum capital
structure under the market inefficiency and institutional constraints. For
example, Chinese banks cannot adequately provide resources to firms,
especially where government‟s credit demand crowds out the private sector, or
where the microeconomic environment is too risky for issuing long-term
loans. Particular macroeconomic conditions in China will also affect the
financing activities of the companies.
Many researchers have made cross-sectional comparisons among

countries and industries around the world. Booth et al. (2001), as pioneers
working on the capital structure in emerging markets, concluded that, to
forecast a firm‟s leverage, it is more important to know the firm‟s country than
the firm‟s characteristics. Lööf (2004) indicated that there are large and
unexpected cross-country differences in the determinants of the optimal capital
structure.
To better understand the background and empirical results of this study,
we present a brief discussion on the institutional settings in China pertaining to
firms‟ capital structure choice.
Financial institutions: Although Chinese listed firms have been reformed

into the joint-stock system for recent years, the government still controls the
majority shares through state-owned institutions such as state investment
companies, state holding companies, and state asset management agencies.
These firms are usually guaranteed by the Chinese government while
financing, and thus favored by the Chinese banks.
Most highly developed debt markets are associated with high private
sector debt ratios, which is not the case in China. The equity market in China
is more developed than the debt market, which provides more options for
corporate financing. Although the stock market is relatively developed, the
overall Chinese financial sector is still under the strong grip of the state. The
state monopoly of the financial sector has hindered the development of the
Chinese capital market and the growth of non-state financial institutions, in
particular the bond market. The access of Chinese firms to long-term debt
provided by state-owned banks has also been strictly controlled by the
government and thus the default risk of the loans is high. In such situations,
bankruptcy, even if enforced, may not be very efficient.
Capital market: There are three unique features of the Chinese capital
market that affect the capital structure choice for Chinese listed companies.
First, the capital market is not multi-layered. A complete capital market
consists of at least three components: the stock market, the bond market, and
the long-term mortgage market. Until now, the stock market is still
developing, while the long-term mortgage market is absent, and the bond
market is very small due to strict restrictive regulations. Such limitation forces
the listed companies to use bank loans instead of issuing corporate bonds.
Second, the ownership structure is complicated. The transformation of state-
owned shares and corporate shares into tradable shares has been carried out
since the release of “The Announcement on Reform of The Shareholder
Structure of Listed Companies” by the China Securities Regulatory

Commission (CSRC) in 2005. However, tradable shares only account for
32.23% of the capital market till April 2008 due to the time-lag effect. Hence,
the current ownership structure is still centralized, moreover in a transient
state. Third, information disclosure of the listed firms is irregular. Activities
such as providing false corporate statements, concealing important information
for insider trading, and non-timely information disclosure are very common.
Tax policy: In China, the central government controls local governments‟
tax policies. According to the Acting Regulations on Corporate Income Tax
launched on December 13, 1993, Chinese corporate tax rate is 33%. However,
to stimulate the development of the Chinese economy, the government
provides preferential tax rate for some regions. For example, the favorable tax
rate is 15% in five special economic zones, 32 economic and technology
development zones, 13 free trade zones, and 52 high-tech development zones.
On October 11, 2000, the Ministry of Finance announced the cancellation
of tax rebates to the listed firms after December 31, 2001. The new rule
expressly subjects the listed companies to the 33% corporate income tax rate.
Consequently, the actual tax rate for firms that had received tax rebates
increased from 15% to 33%, which greatly increases the tax advantage of debt.
Based on the special background, we expect that the tax policy has some effect
on capital structure choice for Chinese listed firms.
Law system: Chinese legal and institutional framework is still immature
and incomplete. For example, the company law is ambiguous about the debt
holders‟ rights. It is seriously flawed in granting shareholders and government
agencies too much power in bankruptcy procedures, while giving no control
rights in liquidation to debt holders.
3. THE FIRM-SPECIFIC FACTORS

Considering the above unique institutional settings in China and the extant
literatures (Harris and Raviv, 1991), we focus on the following attributes in
this study: assets structure, non-debt tax shields, growth, size, profitability,
assets liquidity, ownership structure, uniqueness, operation risk, signal, and tax
shields. The proxies (indicators) which represent the attributes from different
aspects will also be discussed accordingly.
A. Capital Structure Measurements
The choice of the corporate capital structure measures is controversial.

Due to the lack of a uniform definition of capital structure, there are so many
debt ratios can be adopted. As Rajan and Zingales (1995) pointed out, it
depends on the objective of the analysis to choose the definition of capital
structure. Some authors (e.g., Rajan and Zingales, 1995; Titman and Wessels,
1988) use the total debt, an inclusive measure of debt. Others (e.g., Chen,
2004; Huang and Song, 2006) only consider long-term debt. In this study, we
define the capital structure via the following three measures. The first measure
is simply the ratio of total debt over total assets (TDR). It is the broadest
definition of leverage and includes both long-term and short-term debt. The
second one is the ratio of long-term debt over total assets (LDR). The last one
is the ratio of short-term debt over total assets (SDR). According to Bevan and
Danbolt (2002), focusing on long-term debt when analyzing firms that
incorporate a large percentage of short-term debt will yield limited explanatory
power. In China, short-term debt plays an important role in corporate
financing. Therefore, the application of the broader measures of capital
structure is reasonable and necessary.
In addition, it is not clear whether leverage should be computed as the
ratio of book or market values of debt and equity. According to Graham and
Harvey (2001), application of book values is reasonable because financial
managers use mainly book values in decision making. Fama and French
(2002) argued that most theoretical predictions apply to book values.
Additionally, In China, there is still small proportion of circulated shares and
their market values are often unavailable. Therefore, in this chapter, the main
results are based on book values.
B. Assets Structure
Assets of a firm include tangible and intangible assets, both of which are
important factors relevant to the capital structure. However, the effects of
tangible and intangible assets on the capital structure are diverse. A firm with
more tangible assets is expected to possess a larger collateral value, and is
capable to access more debt. This relation is not obvious for intangible assets.
Previous empirical studies argued that the ratio of fixed to total assets is
an essential determinant of leverage (Titman and Wessels, 1988; Rajan and
Zingales, 1995; Fama and French, 2002). The trade-off theory argues that the
revaluation of assets is less when a company goes bankrupt, which reveals a
positive relationship between tangible assets and leverage. The pecking order
theory (Myers and Majluf, 1984) demonstrates that firms with assets to be
collateral may tend to issue more debt to take advantage of the information
asymmetry. Indicators of assets structure include the ratio of intangible assets
to total assets (INTG) and the ratio of inventory plus fixed assets to total assets
(TANG).
C. Non-Debt Tax Shields
Although some evidence (Homaifar, et al., 1994; Kim and Berger, 2008)
showed that non-debt tax shields are weakly related to firms‟ capital structure
choice, many works support the importance of the non-debt tax shields.
DeAngelo and Masulis (1980) presented that non-debt tax shields are
substitutes for the tax benefits of debt financing. Following studies (e.g., Wald,
1999; Ozkan, 2001; Korajczyk and Levy, 2003; Sogorb-Mira, 2005) argued
that a firm possessing larger non-debt tax shields is expected to use less debt.
Delcoure (2007) further found strong relations between the total, long-term,
and short-term debt ratio and non-debt tax shields. Indicators of non-debt tax
shields include the depreciation over total assets (DEPR) and a direct estimate
of non-debt tax shields over total assets (NDTS).
D. Growth Opportunity
The trade-off hypothesis of capital structure suggests that high-growth

firms tend to have larger bankruptcy costs and will use less debt. According to
the pecking order hypothesis (Myers and Majluf, 1984), information
asymmetry that outside investors have minor information about the quality of
the firms‟ investment projects demands extra premium for debt. However,
information asymmetry also motivates firms to turn to debt as a positive signal
of growth opportunities. The agency cost theories (Jensen and Meckling,
1976) argue that firms with high growth opportunities are more likely to have
high agency costs of debt due to the higher debt prices. Indicators of growth
opportunity include the percentage change in total assets (TAPC) and the
percentage change in prime operating revenue (PORPC).
E. Size
Based on the trade-off model, large firms are expected to have a high debt
capacity and be able to reduce transaction costs associated with long-term debt
issuance. Rajan and Zingales (1995) further argued that larger firms tend to
disclose more information than smaller ones, which makes it easier for larger
firms to have access to loans. However, pecking-order hypothesis suggests that
the complexity of the large firms increases the cost of information asymmetry,
and thus makes their debt financing more difficult. Indicators of size include
the natural logarithm of total assets (LTA) and the natural logarithm of prime
operating revenue (LPOR).
F. Profitability
From the pecking order theory (Myers and Majluf, 1984), internal
financing is favored by firms compared with debt financing. It can be expected
that profitable firms tend to have more retained earnings, and thus will use less
debt financing. Alternatively, tax effects predicted by the trade-off model
suggest that profitable firms should borrow more, given that they have greater
needs to shield income from corporate tax. On the other hand, the agency cost
theory describes that an increase in the debt ratio of profitable companies
signals the quality of financial management. Therefore, managers will attempt
to reduce the agency cost of the equity by increasing the company‟s debt ratio.
We use return on equity (ROE), return on assets (ROA), earnings per share
(EPS), sales gross profit rate (NGR), and net profit margin on sales (NSR) as
the indicators of profitability.
G. Liquidity
The pecking order theory pointed out that managers can manipulate liquid
assets in favor of shareholders against the interest of debt holders, which
increases the agency costs of debt. However, if firms generate substantial free
cash flows, shareholders would be motivated to cooperate with banks or
lending institutions for monitoring management spending by undertaking more

debt. Consequently, debt functions as an instrument that reduces the agency
cost caused by managers. In this study, liquidity ratio (LR) and quick ratio
(QR) are selected to measure the liquidity.
H. Ownership Structure
The shares structure of Chinese listed firms is officially classified into

state-owned shares, legal-person shares, and tradable shares. The role of state
ownership in the Chinese reform process is still controversial.
State-owned shares: A firm with substantial state ownership is more likely

to have a higher debt ratio than other firms for three reasons. First, the
financial sector in China is characterized by a bank-based system, where state-
owned commercial banks (SOCBs) play an important role. It is evident that
SOCBs‟ policies favor the state business sector much, as compared to the
private business sector, notably in terms of interest rates, banking procedures,
and collateral requirements. Second, the segregated voting and cash flow
rights related to high level of state ownership leads to acute agency problems
between owners and managers (Berkman et al., 2002). As mentioned before,
those agency problems can be alleviated by the high level of indebtedness.
Third, representatives of state ownership may discourage issuing seasoned
equity for fear of diluting state control as government shareholders often
cannot afford to subscribe new rights offerings (Xu and Wang, 1999).
Corporate shares: The agency cost theory argues that large institutional
shareholders should have enhanced incentives and capabilities to monitor
managerial behavior closely and therefore should have less demand for the
disciplinary function of debt.
Tradable shares: Tradable shares are direct substitution for debt. It is self-
evident that tradable shares ratio should be negatively correlated with
leverage.
In this study, we examine the effect of the ratios of state-owned shares,
corporate shares, and circulated shares on corporate financing decisions.
Indicators of ownership structure include the ratios of state-owned shares
(STATEP), corporate shares (CORPP), and circulated shares (CIRA) over
issued and outstanding shares.
I. Uniqueness
Titman (1984) suggested that a firm with unique products might require
its customers, suppliers and workers to undertake investments that lose value if
the firm goes into liquidation. Under this setting, lower leverage commits the
firm to a liquidation policy that takes into account the effects on its customers,
suppliers and workers. Further, customers, suppliers and workers may not be
willing to deal with a highly levered firm. For these reasons, uniqueness is
expected to be negatively associated with debt ratios. Considering the
limitation of the data, we select operating expenses ratio (OER) as the
indicator of uniqueness.
J. Operational Risk
Business risk is a proxy for the probability of financial and bankruptcy

distress and is generally expected to be negatively related to leverage (Bradley
et al., 1984; MacKie-Mason, 1990; Fama and French, 2002). According to the
trade-off theory, higher earnings volatility increases the probability of
financial distress, and consequently decreases firms‟ debt ratio conditional on
the high bankruptcy cost. According to the pecking order theory, firms with
very unstable cash flows would find that debt financing is too risky, and thus
prefer equity financing. The standard deviation of prime operating revenue
ratio (SDPOR) is used as an indicator of operational risk.
K. Signal
Dividend payout ratio (DIV) is selected as the indicator of signal. Mazur

(2007) found it is a useful discriminator in their analysis. Dividend payments
decrease the amount of internal funds and increase the need for external
financing. However, the agency cost theory argues that both debt and dividend
payouts can be used to control managerial perquisite consumption that arises
from excessive free cash flow. From this perspective, debt and dividend
payouts function as substitutions, and a negative relationship between them
can be expected.
Table 1. Measurement of Variables (Firm-specific Factors and Indicators)
Firm-
specific Accounting Indicator Measurement
Factors
Capital Total Debt Ratio (TDR) Ratio of Total Debt to Total
Structure Assets
( ) Long-term Debt Ratio Ratio of Long-term Debt to Total
(LDR) Assets
Short-term Debt Ratio Ratio of Short-term Debt to Total
(SDR) Assets
Assets Tangible Assets (TANG) (Fixed Assets + Inventory)/ Total
Structure assets
( 1 ) Intangible Assets (INTG) Intangible Assets/Total Assets
Non-debt Depreciation (DEPR) Depreciation/Total Assets
Tax Shields Non-debt Tax Shields (Prime Operating Revenue -
( 2 ) (NDTS) Interest Payments - Income
Tax)/Total Assets
Growth ( 3 ) Percentage Change in (Ending Balance of Total Asset –
Total Asset (TAPC) Beginning Balance of Total
Asset)/ Beginning Balance of
Total Asset
Percentage Change in (Ending Balance of Prime
Prime Operating Revenue Operating Revenue – Beginning
(PORPC) Balance of Prime Operating
Revenue)/Beginning Balance of
Prime Operating Revenue
Size ( 4 ) LTA Natural logarithm of Total Assets
LPOR Natural logarithm of Prime
Operating Revenue
Profitability ROE Net Profit/(Total Assets - Total
( 5 ) Debt)
ROA Net Profit/Total Assets
Net Profit Margin on Net Profit/Prime Operating
Sales (NSR） Revenue
Sales Gross Profit Sale Revenue/(Sale Revenue –
Rate(NGR) Cost of Sales)
EPS Net Profit/Issued and Outstanding
Shares
Firm-
specific Accounting Indicator Measurement
Factors
Liquidity Liquidity Ratio (LR) Current Assets / Current
( 6 ) Liabilities
Quick Ratio(QR) (Current Assets - Inventory)/
Current Liabilities
Ownership STATEP State Shares/ Issued and
Structure Outstanding Shares
( 7 ) CORPP Legal Persons Shares/ Issued and
Outstanding Shares
CIRA Circulation Shares/ Issued and
Outstanding Shares
Uniqueness Operating Expenses Ratio Operating Expenses/Prime
( x1 ) (OER) Operating Revenue
Operation Prime Operating Revenue Standard Deviation of Prime
Risk ( x2 ) Ratio (SDPOR) Operating Revenue / Average of
Prime Operating Revenue
Signal ( x3 ) Dividend Payout Ratio Dividends Per Share/Earnings Per
(DPR) Share
Tax Shields Income Tax Rate (ITR) Income Tax/Total Profit
( x4 )
L. Tax Shields
Modigliani and Miller (1963) indicated that the optimal leverage ratio of
firms is determined by the trade-off between the tax shield benefit of debt and
the higher bankruptcy costs implied by the higher degree of corporate
indebtedness. Some following studies fail to find plausible or significant tax
effects on financing behaviors, which is partially explained by the theory that
the debt-equity ratio is the cumulative result of the separate decisions during a
period (Mackie-Mason, 1990). The indicator of tax shields is the income tax
rate (ITR). The above-mentioned indicators and variables are listed in Table 1.
4. DATA AND METHODOLOGY

4.1. Data
In this study, the data were collected from the annual reports of Chinese
public-listed companies on Shanghai and Shenzhen stock exchanges over the
period 1998-2006, provided by the Wind Database. The year 2006 was chosen
because a new accounting system for business enterprises became operational
on January 1, 2007. To avoid some confounding effects, all listed companies
were required to date back to the period before 2006. In addition, we imposed
several criteria to obtain our data set: (1) all firms were set up before 1998 and
not in the financial industry. (2) We excluded the listed firms that were
suspended or withdrawn from the stock market. (3) We disregarded firms that
did not have a complete record on the variables required in our analysis. In
total, we procured 852 firms for the analysis, of which 489 were in
manufacturing and the rest in non-manufacturing that reflected the current
situation of industry of China. The distribution of industrial sectors is listed in
Table 2.
4.2. Methodology
In Section 3, we discussed a number of attributes and their indicators that

may theoretically affect firms‟ capital structure choice. Unfortunately, the
developed theories do not specify the functional forms describing how the
attributes relate to the indicators and debt ratios. The ordinary least squares
(OLS) method, a basic approach taken in previous empirical studies, has been
used to analyze regression equations with proxies for unobservable theoretical
attributes. However, the application of the OLS method in these studies may
encounter problems, such as multicollinearity among the explanatory variables
and the measurement errors in measuring the latent attributes. In addition, as
highlighted by Titman and Wessels (1988), additional problems exist in the
regression analysis with proxies for latent attributes. First, the lack of unique
representation of attributes may lead researchers to select variables based on
statistical goodness-of-fit criteria, and thus biasing the economic
interpretation. Second, the regression analysis introduces an errors-in-variables
problem due to the imperfect representation of proxy variables for attributes of
interest.
In this study, the structural equation modeling (SEM) technique is used to

overcome the abovementioned problems. Though the relevant theoretical
attributes are not directly observable, we can observe a number of proxies
(indicators) that measure the unobservable attributes in different aspects. In the
first stage, a measurement model relates observed indicators to latent
attributes. The second stage assumes a structural model to explore the effects
of latent attributes (firm-specific factors) on three debt ratios. Specifically, the
measurement model is defined as follows:
y     ， (1)
where y is a q × 1 vector of observable indicators;  is an m × 1 vector of

latent attributes, which is assumed to follow a multivariate normal distribution
N(0,  ); is a q × m matrix of factor loadings; and is a q × 1 vector of
measurement errors, which is independent of  , and distributed as N(0,  )
with a diagonal covariance matrix  . As shown in Section 3 and Table 1, we
have identified seven firm-specific factors (attributes) with 18 proxies
(indicators). Thus, y is an 18 × 1 vector of indicators,  is a 7 × 1 vector of
latent factors, and is an 18 × 7 matrix of factor loadings. Through the
measurement model (1), SEM simultaneously accommodates highly correlated
explanatory variables (proxies) without encountering multicollinearity, and
measures latent attributes through proxies with different weights (factor
loadings), reflecting different contributions of proxies in measuring the latent
attributes. Compared to the use of individual indicators or simple arithmetic
mean of multiple indicators, this data-driven-based weighted average
procedure incorporates different characteristics of latent attributes, along with
their importance, thereby reflecting the attributes more accurately and
completely.
The structural model is defined as follows:
   X     , (2)
where is a p × 1 vector of endogenous variables; X is a n × 1 vector of

covariates; B and Γ are p × n and p × m matrices of regression coefficients,
respectively; and is a p × 1 vector of error terms, which is independent of  ,
and distributed as N(0,   ) with a diagonal covariance matrix   . As shown
in Section 3 and Table 1, we have identified three leverage measures of capital

structure (Total Debt Ratio, Long-term Debt Ratio, and Short-term Debt
Ratio), and four covariates (Uniqueness, Operation risk, Signal, and Tax
shields). Thus, in our study, is a 3 × 1 vector of observed response variables,
X is a 4 × 1 vector of covariates, and B and Γ are 3 × 4 and 3 × 7 matrices of
regression coefficients, respectively.
It is well known that the SEM defined by (1) and (2) is not identified
without imposing identification conditions. To achieve the identifiability, we
follow the common practice in SEM literature (e.g., Lu et al., 2012; Song and
Lee, 2012; Song et al., 2014) to fix appropriate elements of at pre-assigned
values, which can be decided on the basis of substantive theories. As discussed
in Section 3, each latent factor (attribute) is clearly measured by several
indicators (proxies); for example, „Assets Structure ( 1 )‟ is measured by two
indicators: „Tangible Assets (TANG)‟ and „Intangible Assets (INTG)‟ (see
Table 1). Therefore, a non-overlapping structure of (see Table 3) is used for
achieving a clear interpretation of firm-specific factors. As shown in Table 3,
for Assets Structure 1 , the first loading factor corresponds to TANG is fixed
at 1.0 to specify the scale of 1 , and the second loading factor corresponds to
INTG, 2,1 , remains free and needs to be estimated. The rest of elements in
the first and second rows are fixed at zero, indicating that TANG and INTG
are irrelevant to other attributes. The factor loadings of other latent attributes
have similar patterns.
In contrast to the measurement model, the structural model is totally
unrestricted. It estimates the impact of latent attributes on each of the different
financial leverages associated with capital structure. Furthermore, some
covariates (see x1 to x4 in Table 1) are incorporated in the structural model to
account for their direct effects on the interesting financial leverages. This is
different from the theory of Titman and Wessels (1988) that estimated the
effects of these covariates in measurement model.
In this study, we use the Bayesian method to perform the analysis. A
sampling-based Bayesian method is proposed for the following reasons. First,
it enables the use of authentic prior information to achieve better results.
Second, the Bayesian method does not rely on large-sample asymptotic theory,
thereby producing more reliable results even with small sample sizes. Finally,
with the rapid development of modern statistical computing techniques, the
Bayesian method is highly efficient and feasible for the analysis with latent
variables.
Table 2. The Industry Distribution Characteristic of Chinese listed Firms
The Proportion
No. of
Industry Classification of the
Firms
Total Sample
Communication and Cultural 6 0.70
Mining and Quarrying 8 0.94
Construction 11 1.29
Transportation and Warehousing 16 1.88
Agriculture/Forestry/Husbandry/Fishing 16 1.88
Social Services 25 2.93
Production of Electric,Coal,Gas and Water
29 3.40
Supplying
Information Technology 54 6.34
Real Estate 59 6.92
Comprehensive 64 7.51
Wholesale and Retail 75 8.80
Manufacturing 489 57.39
Total 852 100
Table 3. The Structure of the Measurement Equation
1 2 3 4 5 6 7
TANG 1 0 0 0 0 0 0
INTG  2,1 0 0 0 0 0 0
DEPR 0 1 0 0 0 0 0
NDTS 0 4, 2 0 0 0 0 0
PORPC 0 0 1 0 0 0 0
TAPC 0 0 6 , 3 0 0 0 0
LTA 0 0 0 1 0 0 0
LPOR 0 0 0 8, 4 0 0 0
ROA 0 0 0 0 1 0 0
ROE 0 0 0 0 10,5 0 0
NSR 0 0 0 0 11,5 0 0
NGR 0 0 0 0 12,5 0 0
EPS 0 0 0 0 13,5 0 0
Table 3. (Continued)
1 2 3 4 5 6 7
LR 0 0 0 0 0 1 0
QR 0 0 0 0 15, 6 0
STATEP 0 0 0 0 0 0 1
CORPP 0 0 0 0 0 0 17, 7
CIRA 0 0 0 0 0 0 18,7
5. EMPIRICAL ANALYSIS
The descriptive statistics of the debt ratios and indicators are reported in
Table 4. The debt ratios and indicators were averaged from 1998 through 2006
to reduce the noise. As it takes time for firms to move toward the target level,
we adopted the average of debt levels to reduce the effect of this adjusting
process.
Table 4. Descriptive Statistics of the Data
Variable Mean Median Maximum Minimum Std Dev

TDR 0.504 0.481 5.526 0.086 0.301
LDR 0.068 0.045 2.769 -0.011 0.118
SDR 0.436 0.412 3.350 0.039 0.243
TANG 0.542 0.506 15.210 0.122 0.611
INTG 0.038 0.025 0.753 0.000 0.046
DEPR 0.141 0.114 1.455 0.001 0.114
NDTS 0.544 0.433 4.955 -0.647 0.432
PORPC 0.357 0.182 44.418 -0.360 1.714
TAPC 0.180 0.152 5.291 -0.194 0.237
LTA 11.801 11.720 15.082 9.140 0.835
LPOR 11.010 11.006 14.769 4.101 1.222
ROA 0.050 0.052 0.202 -0.211 0.046
ROE -0.029 0.057 0.635 -19.515 0.775
NSR -0.162 0.048 5.510 -96.103 3.521
NGR 0.248 0.220 0.922 -0.393 0.131
EPS 0.142 0.145 1.263 -1.452 0.228
LR 1.642 1.413 13.523 0.304 1.060
QR 1.204 0.979 12.337 0.167 0.949
Variable Mean Median Maximum Minimum Std Dev

STATEP 0.350 0.372 0.814 0.000 0.219
CORPP 0.192 0.135 0.750 0.000 0.193
CIRA 0.394 0.379 1.000 0.092 0.122
OER 0.063 0.044 0.557 -0.019 0.067
SDPOR 0.513 0.472 1.758 0.063 0.266
DPR 0.249 0.205 2.067 -0.199 0.236
ITR 0.193 0.169 13.477 -1.731 0.489
5.1. The Characteristics of Capital Structure of Chinese Listed

Companies
Table 5 shows the characteristics of leverages for Chinese companies.

Different measures of leverage for Chinese listed companies have two notable
characteristics. First, the debt ratios exhibit increasing trend, but still lower
than the level of developed countries. For example, in 1998-2001, the mean of
total debt ratios was about 45%. Since 2002, the total debt ratios continued to
increase, in 2005 and 2006 to a value of nearly 60%, while the same ratio in
Japan is around 70%. Second, the short-term debt ratios were high and
increasing in China, which demonstrates that Chinese firms mainly use short-
term debt. It is evident that in 1998-2002 the long-term debt ratios were only
about 7% in China compared with the mean of 41% in the G-7 countries and
22% in other developing countries. Numerous studies in China argue that this
low amount of long-term debt reflects the fact that Chinese listed companies
are raising long-term capital via equity instead of debt. It is noticeable from
the last column of Table 5 that the ratio of equity financing is high, though it
had been decreasing. Besides the constraints of the debt financing, capital
gains resulting from secondary shares trading are substantially high, usually
about six to eight times the IPO prices1, which also makes the equity financing
favorable.
Another possible reason for the low debt level in China is the difference
between the management incentives of Chinese firm managers and those of
firm managers in developed countries. Managers in developed countries care
more about the upside profits of firms because they are rewarded substantially
by the profits. In China, however, managers, especially those serving in state-
owned companies, tend to be more concerned about downside risks because
they might receive administrative sanctions if the firms are not managed well.
1
China Securities Regulatory Commission.
This makes the Chinese managers of state-owned firms more risk-averse than
their western counterparts, which may partially explain the low debt level.
To verify this finding, we performed a formal test described as follows.
Given that the data in developed countries are difficult to obtain and the
management incentive system in Chinese private firms is relatively similar to
that in the developed world, we divided our samples into two groups: state-
owned firms and private firms. A two-sample t-test was performed to
determine whether the average debt levels of the two types of firms differ. We
find (i) no significant difference between the long-term debt ratios (LDR) in
the two types of firms; and (ii) the total and short-term debt ratios in private
firms are significantly (at 1% level) higher than those in state-owned firms.
This result may be explained by the industry difference between state-owned
and private firms as well as provide evidence for the statement that the
managers of state-owned firms are more risk-averse.
5.2. Empirical Estimation Results
In this section, we present the empirical results. The parameter estimates

of the measurement model are reported in Table 6. Most of the factor loadings
are highly significant, suggesting that the identified indicators are highly
associated with the corresponding theoretical attributes. The estimates of
regression coefficients in the structural model are reported in Table 7,
reflecting the impacts of the theoretical attributes and covariates on the
financial leverages. The results are summarized as follows.
Table 5. The Characteristic of Leverage for Chinese Listed Firms
Year TDR (%) SDR (%) LDR (%) STER (%)

1998 43.82 37.44 6.39 54.70
1999 44.56 38.38 6.17 54.15
2000 43.81 37.97 5.84 54.17
2001 45.80 39.94 5.84 51.88
2002 49.64 42.32 7.31 48.49
2003 51.62 44.13 7.48 45.83
2004 54.64 47.27 7.33 41.96
2005 58.97 51.66 7.29 37.81
2006 59.95 52.43 7.48 36.90
Note: STER stands for the ratio of equity to total assets
Firstly, the most significant determinants of the capital structure choice

are the growth opportunity (  3 ), profitability (  5 ), and liquidity (  6 ). The
growth opportunity ( 3 ) has a positive effect on debt levels at the 1% level,
regardless whether it is measured by short-term, long-term or total debt ratios.
The result is in line with the signaling model which predicts that the firms with
the best earnings and growth prospects will employ the highest leverage. This
is because the high growth opportunity represents the firm can produce more
valuable goods, which makes companies less likely to fall into bankruptcy
(Ross, 1977).
The effects of profitability (  5 ) on debt measures (TDR, LDR, and SDR)
are all negative, indicating higher profitability of a firm leads to more benign
internal financing. This finding agrees with the traditional pecking order
theory.
Liquidity ( 6 ) has negative effects on total and short-term debt ratios at
the 1% significant level and on long-term debt ratio at the 5% significant level,
which confirms the pecking order theory. Managers of listed companies can
finance their investment projects by manipulating the liquid assets at the
expense of their creditors‟ benefits, which increases the agency costs of debt.
Assets structure ( 1 ) has a positive effect on long-term debt ratio at the
1% significant level. Therefore, the ratio of tangible assets is positively related
to the long-term debt ratio, which is consistent with both the pecking order
hypothesis and the trade-off theory. This result confirms the situation in China
that most long-term loans must be guaranteed by the long-term fixed assets.
Non-debt tax shields ( 2 ) positively influence at the 1% level both total
debt and short-term debt ratios. This result agrees with the findings by Bradley
et al. (1984).
Size ( 4 ) has negative effects on total and short-term debt ratios at the
1% level, but has no significant effect on long-term debt ratio. This result
confirms the pecking order theory, based on which the information asymmetry
is expected to be lower for larger firms. Thus, larger firms should be more
capable of issuing informational sensitive securities. In China, however, there
might be another reasonable explanation for this relation, which is the fact that
larger firms have better access to the capital market for equity finance because
of their reputation in the market.
Table 6. Measurement Equation: Factor Loading for Independent Variables
Variable
TANG INTG DEPR NDTS TAPC PORPC LTA LPOR ROE
1 1.654 1 2.434 1 -0.110 1 1.155 1
- (4.504) - (7.356) - (-1.142) - (39.406) -
*** *** ***
ROA NSR NGR EPS LR QR STATEP CORPP CIRA
3.883 1.073 1.031 3.749 1 1.003 1 -0.962 -0.148
(9.062) (5.726) (5.585) (9.040) - (75.131) - (-22.542) (-2.792)
*** *** *** *** *** *** ***
Residual Variance
TANG INTG DEPR NDTS TAPC PORPC LTA LPOR ROE
0.976 0.882 0.977 0.603 0.817 0.989 0.286 0.075 0.937
(20.423) (16.032) (20.247) (11.884) (19.599) (20.769) (17.177) (9.653) (20.723)
*** *** *** *** *** *** *** *** ***
ROA NSR NGR EPS LR QR STATEP CORPP CIRA
0.143 0.926 0.930 0.201 0.066 0.065 0.165 0.238 0.972
(10.007) (20.594) (20.662) (12.656) (12.548) (12.440) (5.626) (7.869) (20.309)
*** *** *** *** *** *** *** *** ***
Note: t statistics are listed in parenthesis. *** stand for statistically significant at the 1%.
Table 7. Estimates of Structural Coefficients
Debt Attributes
Measures 1 2 3 4 5 6 7 x1 x2 x3 x4
TDR 0.540 2.684 3.251 -1.003 -4.419 -0.937 0.348 0.019 0.147 0.027 -0.011
(0.701) (4.397) (9.096) (-4.197) (-6.826) (-6.771) (2.499) (0.675) (5.416) (0.912) (-0.411)
*** *** *** *** *** ** ***
LDR 3.491 -1.002 3.410 0.154 -3.397 -0.528 0.465 -0.039 0.107 0.081 -0.007
(4.173) (- (7.283) (0.495) (-5.072) (-2.602) (2.850) (-1.166) (3.156) (2.287) (-0.201)
*** 1.161) *** *** ** *** *** **
SDR -1.023 3.804 2.368 -1.315 -3.818 -0.903 0.205 0.043 0.130 -0.006 -0.010
(-1.370) (6.593) (6.576) (-6.516) (-6.646) (-6.624) (2.638) (1.627) (5.076) (- (-0.424)
*** *** *** *** *** *** *** 0.204)
Note: t statistics are in parenthesis. ***, **, * stand for statistically significant at the 1%, 5%, 10%.
Ownership structure ( 7 ) has significantly positive effects on all

leverages. Specifically, the state-owned shares ratio positively influences all
leverages, whereas corporation shares and tradable shares ratios negatively
influence all leverages. This result is consistent with our preceding argument
and the actual situation in China.
Uniqueness ( x1 ) is not a significant variable. This result contradicts the
trade-off theory and the explanation by Titman and Wessels (1988). The
insignificant association between the amount of selling expenses and the debt
ratio can be explained by the fact that Chinese firms are less likely to take into
account their stakeholders‟ interests.
For operational risk ( x2 ), the estimated effects of earnings volatility on
leverages are not negative and close to zero. Firms may ignore the volatility of
earnings if the risk and costs of entering liquidation are low. This may occur if
ownership is concentrated (Deesomsak et al., 2004), as is the case in China. In
such a situation, coupled with the particular micro policy characteristics in
China, the bankruptcy judgment, even if enforced, may not be very effective.
In fact, many companies, especially state-owned ones, often obtain substantial
help from the government. For example, during the recent financial crisis
(2008-2012), the Chinese government made effort to rejuvenate the economy
and launched a huge stimulus package. This indicates that the effect of
financial distress on Chinese firms is minor compared with firms in developed
countries. Therefore, it is rational for Chinese firms to assign less weight to
risks of bankruptcy when they make their decisions on the capital structure.
For signal ( x3 ), we find that dividend payout ratio has no significant
effects on short-term and total debt ratios but has a positive effect on the long-
term debt ratio. The above findings support the asymmetric information theory
which argues that a high dividend payout ratio implies that the firm is in a
good financial situation, making debt financing more accessible. The dividend
payout ratio in China is only 25% on average (see Table 4), and the
information passed by the low ratio would be displayed in a long period.
Therefore, dividend payout ratio does not significantly influence short-term
leverage.
Tax shields ( x4 ) are weakly related to the leverages. This result does not
confirm extant capital structure theories, but is consistent with the analysis of
the Chinese tax system in previous studies. Income tax rate is generally low
because of the tax preferential policies, which leads to the insignificance of tax
shields effect.
The Determinants of Capital Structure Choice for Chinese Listed … 25
5.3. Model Assessment and Robustness
Under the Bayesian framework, a commonly used statistic for model

assessment is the partial posterior predictive (PPP) p-value (Bayarri and
Berger, 2000). The model fitting is good if the PPP p-value is close to 0.5. In
this analysis, the PPP p-value of the proposed SEM is 0.456, indicating the
good fitting.
To check the robustness of the proposed SEM and the obtained results, we
conducted a regression analysis using proxies directly with the OLS method.
The parameter estimates are produced with SAS and presented in Table 8. We
find that except for firm size and ownership structure, the relationships
between debt ratios and the proxies are consistent with those between the debt
ratios and the relevant attributes identified by the SEM. The inconsistent
results in firm size and ownership structure may be caused by the
multicollinearity problem. To verify this, the CI2 value is 54.90 for LTA and
LPOR, and 19.56 for STATEP, CORPP, and CIRA, implying high
multicollinearity. The empty cells in Table 8 indicate that the corresponding
proxies are deleted by automatic variable selection procedure in SAS, which
shows that some useful proxies of the latent attributes are not included in the
OLS regression model due to multicollinearity or statistical insignificance.
5.4. Multisample Analysis
In China, state-owned firms and private firms have very different

characteristics in terms of accessing capital and industry distribution.
Therefore, determining whether the result based on the whole samples still
holds for the two types of firms is of interest. Therefore, we divided the data
set into two groups: state-owned firms (SF) and private firms (PF). The SF
group is made up of 538 firms, whereas the PF group comprises 314 firms. For
each group, we re-conducted the empirical analysis using the proposed SEM.
The following results were obtained. The factor loadings are almost identical
in the two groups, implying similar weighting systems in measuring the latent
attributes. To save space, the estimates of factor loadings are not presented.
However, the effects of the determinants on capital structure choice exhibit
diverse patterns in the two groups (see Table 9). The relationships between
2
The condition index (CI) is used to measure multicollinearity. If CI is larger than 15, there is a
possible problem with collinearity between variables. For details please refer to Belsley et al.
(1980).
three debt ratios and growth ( 3 ), profitability ( 5 ), and liquidity (  6 ) are

irrelevant to the types of companies. The ownership structure (  7 ) has no
significant impact because the corresponding information has been
incorporated in the type of companies. The relationships that are relevant to
the type of companies are given below.
Assets structure ( 1 ) has no significant impact on the total and short-term
debt ratios in both groups. This is similar to the result obtained in Section 5.2.
However, its impact on long-term debt ratio is positive in the SF group but
negative in the PF group. This difference may stem from the large
manufacturing industry structure in China. The majority of manufacturing
enterprises are state-owned, and they have higher proportions of tangible
assets with longer operating lives. Therefore, they have more collateral assets
for long-term debt financing.
Table 8. Estimates of Regression Coefficients
Variables TDR LDR SDR

TANG
INTG 0.265 (10.37)**
DEPR 0.248 (11.52)*** 0.201 (35.95)***
NDTS 0.052 (5.26)** -0.035 (15.00)*** 0.061 (6.18)**
PORPC
TAPC 0.165 (20.81)*** 0.093 (29.93)*** 0.073 (7.17)***
LTA 0.021 (16.53)* -0.063 (11.12)***
LPOR 0.023 (5.76)** 0.065 (15.00)***
ROA -2.149 (41.40)*** -2.133 (64.21)***
ROE
NSR -0.005 (4.65)** -0.006 (10.96)***
NGR 0.136 (5.84)**
EPS -0.352 (26.30)*** -0.128 (45.31)*** -0.272 (27.84)***
LR -0.078 (96.98)*** -0.007 (3.14)* -0.040 (4.74)**
QR -0.035 (2.88)*
STATEP -0.210 (11.51)*** -0.195 (17.88)***
CORPP -0.171 (5.71)** -0.151 (7.92)***
CIRA
OER
SDPOR 0.174 (29.42)*** 0.052 (12.65)*** 0.142 (32.50)***
DPR
ITR
Note: F statistics are in parenthesis. ***, **, * stand for statistically significant at the
1%, 5%, 10%.
Table 9. Estimates of Structural Coefficients for State-owned and Private Firms
Types of Attributes
Leverages 1 3 4 7
Company 2 5 6 x1 x2 x3 x4
State- TDR 0.024 1.800 1.509 -0.484 -2.113 -0.595 0.073 0.062 0.118 -0.033 0.074
owned (0.046) (5.458) (5.224) (-3.663) (-6.395) (-4.876) (0.937) (3.023) (5.599) (-1.686) (1.180)
*** *** *** *** *** *** *** *
LDR 0.771 -1.359 0.987 0.333 -0.783 -0.280 0.068 -0.051 0.107 0.035 0.095
(1.700) (-3.769) (4.366) (2.219) (-2.220) (-2.229) (0.820) (-2.003) (2.759) (1.483) (1.260)
* *** *** ** ** ** ** *** **
SDR -0.344 2.883 0.831 -0.760 -2.233 -0.601 0.057 0.102 0.112 -0.057 0.045
(-0.469) (6.846) (3.538) (-5.279) (-5.985) (-3.950) (0.670) (4.357) (4.724) (-2.522) (0.627)
*** *** *** *** *** *** *** **
Private TDR 0.046 1.766 5.226 -0.599 -6.567 -0.589 0.164 0.047 0.086 0.134 -0.024
(1.334) (1.693) (9.291) (-1.563) (-6.120) (-2.516) (0.339) (0.806) (1.378) (1.626) (-
* *** *** ** * 0.652)
LDR -2.911 5.703 4.713 -0.619 -2.773 -0.058 -0.834 0.044 0.113 0.138 -0.023
(-1.734) (5.558) (4.216) (-1.030) (-2.114) (-0.166) (-1.361) (0.592) (1.362) (1.311) (-
* *** *** ** 0.458)
SDR 2.122 -0.581 4.177 -0.440 -6.774 -0.700 0.607 0.036 0.052 0.099 -0.019
(1.597) (-0.593) (7.342) (-1.368) (-7.500) (-3.696) (1.504) (0.724) (0.958) (1.364) (-
*** *** *** 0.596)
Note: t statistics are in parenthesis. ***, **, * stand for statistically significant at the 1%, 5%, 10%.
The effects of non-debt tax shields ( 2 ) on long-term debt ratio of the two
groups have reverse directions. The negative impact on state-owned firms is in
accordance with the findings in many studies (e.g., Wald, 1999; Ozkan, 2001;
Korajczyk and Levy, 2003; Sogorb-Mira, 2005). The positive impact on
private firms is also reasonable and confirmed (e.g., Bradley et al., 1984;
Delcoure, 2007). We also noticed that the relationship between non-debt tax
shield and short-term debt ratio is positively significant in SF but insignificant
in PF.
Firm size ( 4 ) has no significant impact on debt ratios for private firms,
which can be attributed to their small size. The relationships between firm size
and total and short-term debt ratios for state-owned firms are the same as those
in Section 5.2. Notably, firm size has a positive impact on long-term debt ratio
for the state-owned firms, which supports the asymmetric information theory.
While in the previous analysis, this positive impact is insignificant.
Government policies that support large state-owned companies to use debt also
contribute to the positive relationship.
The effects of uniqueness(x1) on debt ratios are significant in the SF group
but insignificant in the PF group because most of the companies in
monopolistic industries are state-owned. Furthermore, uniqueness in state-
owned firms is positively related to total and short-term debt ratios, and
negatively related to long-term debt ratio. This result confirms Titman and
Wessels (1988), which states that monopolistic companies can easily obtain
short-term loans.
The effects of operational risk (x2) on debt ratios are positively significant
in the SF group but insignificant in the PF group. This confirms our
explanation in Section 5.2, where we stated that the size of state-owned
companies is usually very large. If these companies go bankrupt, huge social
costs will be generated. Thus, the government usually implements effective
measures to help these companies survive bankruptcy. Consequently, state-
owned banks are more willing to provide loans to state-owned companies even
though the operational risk of these companies may be high.
Dividend payout ratio (x3) has negative effects on total and short-term
debt ratios in state-owned firms. This means that if the state-owned firms are
in good financial standing, they will have enough retained surplus to sustain
their operations. For the private firms, however, dividend payout ratio is
positively related to total debt ratio, indicating that dividends are used as a
signal of good financial condition to investors. With positive signals, private
firms can easily access debt financing.
Finally, similar to the preceding result, tax shields (x4) have no impact on
debt ratios in both groups. In conclusion, with the effects of unique Chinese
institutional settings and industry difference between Chinese private and
state-owned firms, some similarities and differences in the influential patterns
of the determinants on capital structure choice are identified.
CONCLUSION
China has special characteristics including the imperfect capital market
and banking system, poorly specified property rights and laws, and
institutional uncertainty. In this chapter, we employed a structural equation
model with Bayesian approach to analyze the determinants of capital structure
choice for Chinese listed companies. We find a remarkable difference between
the capital structure of firms in China and developed countries, which lies in
the Chinese firms‟ low overall debt levels with a small portion of the long-
term debt. Three possible reasons have been identified. First, constraints of
debt financing in China, especially for the long-term loans, are rather
restrictive. Second, Chinese listed companies use equity more frequently than
debt in raising long-term investment capital. Third, compare with their
counterparts in developed countries, Chinese firm managers are more risk-
averse, and tend to take less debt.
The results of this empirical study show that some insights from modern
finance theories are applicable to China, especially the pecking order theory.
However, there are also some unique patterns of the determinants of capital
structure choice for Chinese listed firms. First, the most influential attributes
of the capital structure choice are growth opportunities, profitability, and
liquidity. Profitability and liquidity of the firms have negative impacts on the
three debt ratios. This supports the pecking order theory. Growth has positive
impacts on debt ratios, which verifies the agency theory. Second, asset
structure has no significant effect on total debt ratio, but has significantly
positive effect on long-term debt ratio, which agrees with the pecking order
theory. Third, leverages, as measured by short-term debt and total debt ratios,
increase with non-debt tax shield. Fourth, firm size has negative impacts on
short-term debt and total debt ratios, which agrees with the pecking order
theory. Fifth, the ownership structure significantly affects the firms‟ capital
structure choice. This unique pattern is consistent with the special
characteristics of China. Sixth, leverages increase with operational risk, which
is inconsistent with the pecking order theory. This unique feature is related to
the institutional settings and government policies in China. Seventh, the

association between firms‟ signal and leverage confirms the asymmetric
information theory. Finally, the insignificant effects of uniqueness and tax
shields on the capital structure choice contradict the extant theories, but are
consistent with the Chinese special reality.
The same analysis was also conducted for Chinese state-owned and
private firms, respectively. Some different patterns for the two groups of firms
have been identified. First, the effects of assets structure on the long-term debt
are opposite for the two groups mainly because of the industry difference.
Second, the impacts of non-debt tax shield on long-term debt for the two
groups are diverse, both of which are meaningful. Third, firm size is not a
significant determinant of debt ratios for private firms, but an important factor
that affects debt ratios of state-owned firms. Forth, uniqueness and operational
risk are also only related to the capital structure choice for state-owned firms.
Finally, dividend acts as a positive signal for the private firms to better access
the external loans, while the state-owned firms that have profitable projects do
not favor outside debts.
In summary, although western capital structure theories do not completely
explain the determinants of capital structure choice for Chinese listed
companies, the attributes identified by those theories are of highly useful.
ACKNOWLEDGMENT
The research was supported by the NSFC 11471277, and 4053087 from
the Direct Grant of the Chinese University of Hong Kong.
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Chapter 2
AN EXAMINATION OF PREDICTORS
AND OUTCOMES RELATED TO SCHOOL
CLIMATE USING LATENT CLASS ANALYSIS
Christine DiStefano, Elizabeth Leighton,

Mihaela Ene and Diane M. Monrad
University of South Carolina, US
ABSTRACT
A favorable school climate provides the structure within which students,
teachers, administrators, and parents function cooperatively and
constructively. Measures of school climate, however, have received only
passing interest from policy makers as critical elements in accountability
reporting. This study used a state-wide dataset of climate ratings from
610 elementary schools and considered multidimensional information
from both teachers and students to produce latent classes of school
climate. Two variables, school size and a school’s poverty index, were
used as covariates when creating latent classes. In addition, two measures
of school performance were examined as distal outcomes. The study
identified four classes, where classes were distinguished based upon
school climate scores. Differences in outcome variables and covariates
were observed across the classes. The information may be used by school

Correspondence: 138 Wardlaw Hall, Columbia, SC 29208, distefan@mailbox.sc.edu, 803-777-
4362
36 Christine DiStefano, Elizabeth Leighton, Mihaela Ene et al.
personnel in examinations of malleable factors related to school

performance.
INTRODUCTION
Declining aptitude test results during the 1970s and 1980s, combined with
unflattering international comparisons, led legislators across the United States
to enact far reaching educational accountability measures for public schools.
Perhaps the most controversial, No Child Left Behind (NCLB) Act of 2001,
set a goal for all children to demonstrate achievement at least equal to their
grade level by the year 2014. While the merits of NCLB and other high stakes
accountability systems have been heatedly argued, there is no doubt that in
every state there has been an intense focus on academic performance of both
the students and the school.
Along with a focus on academic performance, the “school report card” or
“school profile” has become ubiquitous in the accountability movement.
Report cards, required under the provisions of NCLB, most typically include
mandated information on student achievement, teacher qualifications,
attendance, and other variables that provide descriptive information about the
school and its programs.
All the states have some form of a school-level reporting system
accessible over the world-wide web, providing a dizzying array of information
and data. Student attendance (and dropout data for secondary schools), student
behavior indices (e.g., incidents of tardiness, cutting class, and disruptive or
criminal acts), and teacher qualifications are customarily reported. Measures
of school climate, however, have received only passing interest from policy
makers as critical elements in accountability reporting.
Too often, the importance of school climate as a critical contextual factor
in which teachers teach and students learn has tended to fade into the
background, a casualty of other "priorities." And yet, among the preconditions
for school success, few rival the motivation to teach and the motivation to
learn: Do students wish to attend school and engage in learning activities? Do
teachers want to return to the same school next year? Do parents desire to
become involved with their child's school programs? The answers to these
questions very often hinge on the levels of support, challenge, collaboration,
and partnership provided to them by the school: in short, its climate.
An Examination of Predictors and Outcomes … 37
Defining School Climate
Every school may be thought of as having a distinct personality or

climate. A favorable school climate provides the structure within which
students, teachers, administrators, and parents function cooperatively and
constructively. Hoy and Miskel (1982) defined school climate as a school‟s
personality, and its importance has intrigued researchers for approximately 50
years (Anderson, 1982). Edmunds (1982) and Lezotte (1990) were prominent
in linking climate directly to school effectiveness more than 35 years ago.
According to Perkins (2006), school climate is the learning environment
created through the interaction of human relationships, physical setting, and
psychological atmosphere.
School climate is typically thought to involve four distinct parts (Allen,
Thompson, Hoadley, Engelking, & Drapeaux, 1997; Sackney, 1988): ecology,
milieu, social system, and culture. Ecology comprises physical and material
features of schools, such as age of the building and cleanliness. The milieu
involves the personnel (e.g., administrators, teachers, parents, staff, students,
etc.) involved with a school. A social system is described as the “rules” which
a school uses to interact with members. Finally, school culture consists of
shared norms, values, and beliefs of the members. The two related topics of
climate and culture are delineated by Allen et al. (1997) where …“culture
establishes normative behavior for the members of organizations, and climate
is the perceptions of those norms” (p.1). Together, students, teachers,
administration, parents, and the broader community all contribute to the school
climate (National School Climate Center [NSCC], Center for Social and
Emotional Education [CSEE], & National Center for Learning and Citizenship
at Education Commission of the States, 2008).
The construct of school climate is generally characterized as
multidimensional and representative of shared perceptions of behavior
including customs, goals, values, relationships, teaching practices, and
structures within the school (Ashforth, 1985; Cohen, 2009; CSEE, 2010; Hoy,
1990; Van Houtte, 2005). Most studies include four primary components when
measuring school climate: (1) safety of students and staff, (2) school culture
and relationships, (3) elements of teaching and learning, and (4) the
institutional environment (Cohen, 2009; CSEE, 2010; Tagiuri, 1968).
Research Involving School Climate. Demographic variables such as
ethnicity and socioeconomic status of students are other components that
influence school climate and achievement (Chen & Weikart, 2008). Several
researchers have identified a relationship between school climate and school
effectiveness. Specifically, positive school climate has been found to correlate

with higher rates of academic achievement including standardized test scores,
as well as increased classroom engagement, student participation, and
motivation to learn (CSEE, 2010; Chen & Weikart, 2008; DiStefano, Monrad,
May, McGuinness, & Dickenson, 2007; Edmunds, 1982; Greenberg, 2004;
Lee & Burkham, 1996; Lezotte, 1990; NSCC et al., 2008; Roney, Coleman, &
Schlictin, 2007; Sebring, Allensworth, Bryk, Easton, & Luppescu, 2006;
Stewart, 2007). Positive school climate has also been linked to indicators of
school success reported for accountability purposes including academic
achievement, annual yearly progress (AYP) measures, and school report card
information (Greenberg, 2004; Lee & Burkham, 1996; Macneil, Prater, &
Busch, 2009; DiStefano et al., 2007; Monrad, May, DiStefano, Smith, Gay,
Mindrila, Gareau, & Rawls, 2008; Tubbs & Garner, 2008).
In addition to impacting learning outcomes, a supportive school climate
has been associated with positive psychological and behavioral student
outcomes. Supportive school climate has been linked to reductions in
behavioral conduct problems, instances of bullying, rates of depression and
substance use, self-esteem, absenteeism, and dropout rates (Brand, Felner,
Shim, Seitsinger, & Dumas, 2003; Bryk & Thum, 1989; Christle, Jolivette, &
Nelson, 2007; CSEE, 2010; Gottfredson, Gottfredson, Payne, & Gottfredson,
2005; Loukas & Murphy, 2007; NCSS et al., 2008; Rumberger, 1995; Way,
Reddy, & Rhodes, 2007). Fostering a positive school climate provides students
a behavioral model for how society operates and provides examples of
appropriate conduct outside of the school walls (NSCC et al., 2008).
Patterns of climate variables have also been related to trust (Hoy, Tarter,
& Kottkamp, 1991). When trust is high, educators are more likely to
experiment with new practices and work together with parents to advance
improvements (Bryk & Schneider, 2002). Trust matters because effective
school leadership depends upon the competence and cooperation of a school
team; important school goals cannot be developed and accomplished by a
single person (Tschannen-Moran, 2004). Trust levels between students and
staff also influence student behavior and educational outcomes (Virtanen,
Kivimaki, Luopa, Vahtera, Elovainio, Jokela, & Pietikainen, 2009). Research
indicates that, for teachers, some of the most important aspects of the school
climate include the freedom to disclose stress to administrators, student
behavior, and collaborative relationships with parents (Grayson & Alvarez,
2008). Teacher benefits of a positive working environment include increased
job satisfaction (Grayson & Alvarez, 2008; Ma & MacMillan, 1999; Tubbs &
Garner, 2008), increased retention and attendance, and better home-school
relationships (Brown & Medway, 2007). Teacher and staff perceptions were
pivotal in measuring school climate in early research, however, there has been
an increasing interest in examining students‟ perceptions of school climate
(e.g., Koth, Bradshaw, & Leaf, 2008; Way, Reddy, & Rhodes, 2007).
Previous research suggested the existence of a relationship between school
climate and school poverty level, with higher levels of poverty being
associated with a less positive school climate (Bernstein, 1992; “School
Climate, Discipline, and Safety”, 2013). In addition, many researchers have
noted the negative impact of poverty on educational outcomes such as
academic achievement (Sirin, 2005; Malecki & Demaray, 2006; Monrad et al.,
2008; Hopson & Lee, 2011), behavior problems (Hopson & Lee, 2011),
dropout rates (Cataldi, Laird, & Kewal-Ramani, 2009), and graduation rates
(Monrad et al., 2008). More specifically, these studies suggested that higher
levels of poverty are associated with lower grades and overall GPA, lower
scores on standardized tests, lower graduation rates, as well as higher rates of
problem behavior and dropout rates. Furthermore, results showed a strong
negative relationship between school poverty and school absolute value which
is the basis for determining school absolute rating (Monrad et al., 2008).
Larger Scale Studies of School Climate. Most studies involving school
climate administer a survey to participants at a smaller level, such as one
school or one district, and identify factors of climate that are important to
consider. See Sackney (1998) for a comprehensive review of factors identified
with previous school climate studies. School climate, as a factor to increase
student achievement, has been receiving increased attention in the school
improvement literature. The Consortium on Chicago School Research (CCSR)
used information from principals, teachers, and students across over 200
schools to identify “five essential supports for school improvement” (Sebring
et al., 2006). The CCSR found the important factors to be: leadership,
professional capacity (e.g., knowledge, skills, and disposition of faculty),
parent-community ties, climate, and instruction. To gain a greater
understanding of the impact of the five supports on school achievement, the
CCSR examined the relationship between the five factors and student
achievement as measured by a standardized test. The findings showed that
schools strong in most (e.g., 3 to 5) essential areas were up to 10 times likely
to make gains in both reading and mathematics standardized test scores on the
Iowa Test of Basic Skills (grades 3-8). Sebring et al. (2006) also found that
improvements in the essential supports also led to improved achievement.
An earlier study of elementary schools in Chicago also highlighted the
importance of positive school climate characterized by mutual trust and
respect. According to Bryk and Schneider (2002), schools with a high degree
of “relational trust” between administrators, teachers, and parents are far more
likely to make the kinds of changes needed to improve student achievement
than schools where relationships are poor. Bryk and Schneider compared 100
schools that made the greatest improvement on achievement tests (reading and
mathematics) between 1991 and 1996 with 100 schools that made little or no
improvement. They discovered that schools with high levels of trust at the
beginning of reform efforts had a 1 in 2 chance of making significant
improvements in reading and math achievement, while schools with low levels
of trust had a 1 in 7 chance of making achievement gains. Among the schools
with initially low levels of trust, only those schools where trust was
strengthened over the course of reform efforts showed achievement gains. No
school that continued to have low levels of relational trust improved student
achievement levels to any appreciable degree.
There have been few studies that have investigated school climate on a
state or national level. Using exploratory factor analysis (EFA) techniques
with the California School Climate and Safety Survey and 7,524 students in
grades 6 to 12, Furlong et al., (2005) identified two broad categories of
climate: school climate (support from teachers, enforcement of school rules)
and school safety (perceptions of safety and gang activity). However, EFA
techniques were conducted within each dimension separately rather than
across the survey.
Also, Greenberg (2004) used a national dataset for 4th, 8th, and 12th graders
to determine how NAEP mathematics scores were affected by school climate.
Using EFA, three components of school climate were identified: student
behavior, parental involvement, and school morale. Further, regression
analyses showed that NAEP mathematics scores were increased as climate
scores increased, even when school characteristics (e.g., poverty, urbanicity,
type of school, school size) were controlled.. While this study provided an
investigation of the relationship between student achievement and school
climate, only mathematics was studied.
The studies by Greenberg (2004), Furlong et al. (2005), and Sebring et al.
(2006) recognize the dimensional nature of school climate and its relationship
to achievement. Compared with other barriers which cannot be controlled by
schools, such as high child poverty, previous work has supported the notion
that school climate is not a fixed school condition and that climate can be
changed (Greenberg, 2004), potentially affecting accountability ratings.
Considering the benefits, both socially and academically, of a positive school
climate, it would be of interest for states or districts to group schools based
upon the level of school climate and to intervene for those schools suffering
from negative climate.
South Carolina is currently one of only a few states in the country that
includes climate data from surveys of students, teachers, and/or parents on
their school report cards. South Carolina‟s report card was developed in
response to requirements of the state‟s Education Accountability Act of 1998
(SC Code of Laws, Section 2, Chapter 18, Title 59). The specific variables and
data elements were selected by the General Assembly‟s Education Oversight
Committee working in collaboration with the State Department of Education
and the State Board of Education. The inclusion of school climate data from
“evaluations of the school by parents, teachers, and students” in the school,
district, and state report cards is a specific requirement of the state‟s
accountability legislation (SC Code of Law, 59-18-900 (D)). School climate
data in South Carolina is collected annually from questionnaires administered
to parents, teachers, and students.
Using a state-wide database of both teacher and student responses, cluster
analysis was used to identify groups of schools related to climate (DiStefano et
al., 2007). These groups were replicated over a two-year period. The authors
identified four categories of schools, where schools differed in the degree to
which they had positive school climate. In addition, schools were differentially
related to report card outcomes, where schools with the most positive average
climate ratings also showed the most positive report card factors, such as
higher standardized test scores, lower teacher turnover, higher student
attendance, and higher AYP scores. Also, schools within each cluster had
varying levels of poverty, showing that low-poverty schools do not necessarily
have poor school climate.
Other cluster analysis studies supported some of these findings and also,
showed that the relationship between school climate cluster membership and
student achievement is consistent across core content areas such as English,
mathematics, history, and science (Bergren, 2014; Smith, 2005). In addition to
supporting the relationship between school climate group membership and
school performance, researchers also used cluster analysis to examine the
moderating effects of school climate on school interventions. Specifically,
findings showed differential effects of a violence prevention intervention by
school climate type, with the intervention having a more positive effect on
student behavior in schools with conducive climate than in schools with
average or distressed climate (Dymnicki & the Multisite Violence Prevention
Project, 2013). Whereas these findings were able to provide evidence of
climate groups and relations among school climate and report card outcomes
or school-level interventions, an older grouping method was used. Instead of

cluster analysis, a newer methodology, mixture modeling, may be employed to
create groups of cases, while controlling for covariates and examining
relations with outcome variables in the same analysis.
Mindrila, DiStefano, Monrad, and Ene (2014) also examined the relation
between four latent classes of climate and school absolute ratings while
controlling for poverty. The study found that classes with more positive
climate generally showed lower levels of poverty. In addition, more positive
school climate was positively related to a school‟s absolute rating. While this
study is similar to the current study, only teacher ratings were used; no data
concerning students‟ view of school climate were included in the analyses.
Further, only one covariate (poverty level) and one outcome (school absolute
rating) were used.
Therefore, the purpose of this study is to identify latent classes of school
climate at the elementary school level, based on teachers‟ and students‟
perception of school climate. Elementary level was chosen because there were
the most schools at this level, and it was thought the higher number of schools
this would produce the most stable typology. Covariates such as school size
and a school‟s poverty level were included to recognize their influence when
creating classes of school climate; outcome variables from school report cards
were used to examine relations between classes.
Latent Class Analysis
Cluster analysis refers to a set of classification procedures used to uncover

homogeneous groups underlying a data set where the number of groups is not
known a priori (Aldenderfer & Blashfield, 1984; Blashfield & Aldenderfer,
1988; Everitt, 1980). This method has been very popular in the social sciences
as a methodology to create groups; however, it is not without criticism. For
example, few fit indices are available with cluster analysis to help researchers
identify an optimal solution (e.g., DiStefano & Kamphaus, 2006). In addition,
cluster solutions may be sensitive not only to the clustering algorithm used to
group cases, but also to the ordering of the cases within the dataset (Blashfield
& Aldenderfer, 1988).
An alternative approach to grouping cases via cluster analysis is to use
latent class clustering methods (e.g., Bacher, 2000; Bensmail, Celeux, Raftery,
& Robert, 1997; Clogg, 1995; Collins & Lanza, 2010; Everitt, 1993; Heinen,
1996; Muthén & Muthén, 2000, 2007; Vermunt & Magidson, 2002). Latent
class cluster analysis has been called other names in the literature, such as
finite mixture modeling (Pastor & Gagne, 2013; McLachlan & Peel, 2000),
model-based clustering (e.g., Banfield & Raftery, 1993), and mixture
likelihood approach to clustering (Everitt, 1993). Latent class clustering
encompasses a broad family of methods that use the same general model,
including latent class analysis, latent profile analysis, mixed-mode clustering,
and latent transition analysis. Although the latent class methods have been
available for many years (e.g., Gibson, 1959; Lazarsfeld & Henry, 1968), the
techniques are enjoying increased popularity through improved computer
capabilities and available software (Vermunt & Magidson, 2002). While there
are similarities between latent class cluster analysis and cluster analysis, there
are also distinctions between the two methods.
As with cluster analysis, latent class cluster (LCC) analysis has a similar
overarching goal: to classify cases into groups where members within a group
are similar to each other and different from individuals in other groups
(Vermunt & Magidson, 2002). Similarly, cases are thought to belong to one of
K groups underlying the dataset where the number of groups is unknown a
priori. The goal is to uncover the total number of classes (termed K)
underlying the dataset, where each class (noted as k) may be thought of as a
sub-population which is discrete and mutually exclusive (Clogg, 1995;
Heinen, 1996).
Given that k different classes underlie a population, individuals within a
certain class have the same probability distribution with respect to the
categorical latent variable. However, while each case is grouped into only one
class, k, the LCC model recognizes that there may be uncertainty in the
classification. Therefore, each case is given a probability value of belonging to
each of the K groups. Values for the weights range between 0 and 1 per class
and sum to 1 across the set of classes.
The use of latent class clustering models has additional advantages over
traditional clustering methods. One advantage is that LCC models use fit
indices which help researchers select a model and report how well the model
performs to fit the data. Another advantage is that LCC allows researchers to
select parameters of specific interest to be included in the model estimation or
to restrict parameters that are not of interest to estimate. The former is referred
to as freeing parameters, the latter as fixing parameters. Model parameters
may be fixed or freed in line with assumptions, model characteristics, or
relationships among variables. Third, covariates and outcomes may be
included in the same model. This allows LCC to incorporate important
covariates which may affect the creation of the latent classes and to examine
classes on important outcomes to see if the groups display distinct

relationships.
LCC subsumes both latent class analysis and latent profile analysis. Both
methods have the same objective, but differ in the level of the observed
variables used to group cases into classes. Measured variables are categorical
within latent class analysis and on a continuous metric with latent profile
analysis (Muthén & Muthén, 2000). As the analyses to be conducted will use
latent profile analysis, discussion is restricted to this technique.
With latent profile analysis, the distribution for each of the k groups can
be defined by the class mean vector and variance-covariance matrix (μk, Σk).
The μk vector represents the class-specific centroid and the Σk matrix
represents the homogeneity of the observed variables within class (i.e.,
indicator variances – represented on the diagonal of Σk); the relationships
between variables beyond what is accounted for by the latent variable are
represented on the off-diagonal elements of Σk (i.e., indicator covariances).
Besides the probability of class membership, these means and variance-
covariance elements are the parameters which will be estimated in an LCC
analysis. With LCC, researchers can relax restrictions to determine which
parameters should be estimated (i.e., freed) or constrained (i.e., fixed).
Imposing different model restrictions allows the evaluation of different
solutions to evaluate which model provides optimal fit to the data in terms of
parsimony, fit indices, and interpretability (Collins & Lanza, 2010). To select
an appropriate model, it is recommended that researchers test different models
by imposing different restrictions on the variance-covariance matrix.
When fitting LCCs, researchers need to know how many latent classes are
optimal. With latent class clustering, the most common way to uncover the
number of underlying groups is to test the fit of various models with
increasing numbers of latent classes (Nylund, Asparouhov, & Muthén, 2007).
In other words, within a certain model specification (e.g., conditional
independence model), a range of class solutions are run and interpreted (e.g., 2
– 6 classes). As classes are added, model fit tends to improve, and one may
define the optimal solution by looking for the most parsimonious model. For
each model, the number of classes extracted may be increased until a solution
does not converge (DiStefano & Kamphaus, 2006; Vermunt & Magidson,
2002). Researchers can evaluate and compare converged solutions to
determine which model best fits the data.
LCC uses model fit criteria to help choose the optimal solution (Clogg,
1995; Vermunt & Magidson, 2002). It is noted, however, that the fit criteria
are largely heuristic in nature. The model log likelihood value may be thought
of as a global fit index, providing information about the overall fit of the
model to the data. Relative fit indices are useful to use when comparing
alternative models to determine which model illustrates a better fit to the data.
Indices in this class may be used to compare models which differ in the
number of groups requested and/or the model specifications. When comparing
models, there is a need to balance information from fit indices and also the
principle of parsimony. Parsimony suggests selecting the solution with the
minimum number of classes possible while achieving an acceptable model fit.
Additional fit indices may be used to compare competing models to select a
model.
The Akaike Information Criteria (AIC) and the Bayesian Information
Criteria (BIC) offer comparative evidence to evaluate different solutions
(Muthén, 2001; Vermunt & Magidson, 2002). The AIC and BIC are
"parsimony criteria" used to compare different model solutions (i.e., different
numbers of groups underlying the data) in order to determine which model fits
the data best. For these indices, the more parameters that are estimated, the
higher the value of AIC/BIC. In addition for adjusting for the number of
parameters, BIC adjusts for the sample size (N), yielding larger values as
sample size increases, all other factors held constant. With AIC and BIC,
comparatively lower values indicate better fitting models (Pastor et al., 2013).
Other LCC-based fit indices measure the degree of uncertainness in the
classifications. These methods require that individuals are grouped to
determine how well the model works to classify cases. Posterior probabilities
denote the probability of class membership and are computed using both the
model characteristics across the set of K classes and a case‟s pattern of
observed scores (see Vermunt & Magidson, 2002 for more details). Under
mixture modeling, cases may associate with more than one group through the
mixing weight, and can have fractional group membership across all groups.
To judge model uncertainty, cases are typically assigned to the one group with
which it has the highest posterior probability of association. This type of group
classification is termed modal assignment (e.g., Pastor & Gagné, 2013). At the
individual level, the higher probability value, the greater confidence one may
have concerning a case's class assignment. A better fitting solution will have
higher classification rates (i.e., fewer cases which are difficult to classify) for
each class, interpreted as a greater certainty of the classification. Perfect
classification would be illustrated by probability values of 1 for each class.
Entropy is a measure of uncertainness or randomness in the classification
procedure, and provides a summary of the information presented in a
classification table with one index (Pastor et al., 2007). Within LCC analyses,
entropy values indicate how well the model predicts class memberships
(Akaike, 1977). Values range from 0 to 1, where entropy values closer to 1
illustrate better prediction (Vermunt & Magdison, 2002). Entropy is computed
as the maximum of the probability density distribution underlying the latent
class cluster model (Akaike, 1977) and is calculated using the posterior
probability information, as well as the number of classes K modeled and
sample size N.
As suggested by latent class researchers (Collins & Lanza, 2010; Muthén,
2001; Muthén & Muthén, 2000, 2007; Vermunt & Magdison, 2002), each
class solution can be evaluated using multiple criteria. Finally, an optimal
solution can be “named” through interpreting patterns of high and low
parameter estimates within each class to ensure that each latent class has
substantive meaning (Muthén & Muthén, 2000) and matches to theory. It is
noted that while interpretability relies on the judgment of the researcher rather
than fit indices, it is still a very important component. This is similar to factor
analysis, where a researcher evaluates the sensibility of the solutions when
deciding between different numbers of factors (Crocker & Algina, 1986).
When both covariates and outcomes are available, a three-step procedure
is recommended (Asparouhov & Muthén, 2014; Vermunt, 2010). Generally,
identifying the model is the first, and most important, step in the mixture
modeling process. This involves identifying the optimal number of classes
using the procedures described above. First, the models are estimated where
no covariate or outcomes are included. These are called unconditional models,
as they are not ”conditional” or dependent upon additional auxiliary variables.
This information is used to estimate different class models. Based on this
information, the preferred model may be chosen. Second, using modal class
assignment, cases are assigned to latent classes. Modal assignment information
provides classification information to include with the auxiliary variables (i.e.,
covariates and outcomes). Third, fixed values are obtained from the latent
classification procedures in step 1 (i.e., log odds of the classification
probabilities; Asparouhov & Muthén, 2014). Fixing measurement
relationships between the latent class variable and the most likely class
variable helps to account for the imprecision in the classification and produces
correct estimates and standard errors for the relationships of class membership
with other variables (Asparouhov & Muthén, 2014). Upon completion of these
three steps, auxiliary information may be included without influencing the
measurement of the latent classes. After performing these three steps,
covariates and distal outcomes may be incorporated. Covariates may help to
predict class membership and may be added into the model using the set
number of classes, k, found in the first step. Finally, the distal outcome
variables related to the latent class variable and/or indicators may be included
in the last step. Outcome variables (e.g., standardized test scores) may be
assessed to determine if latent groups provide differences with regard to
performance and accountability measures.
METHODS
Schools and Participants
As mentioned, a unique feature of the current study was the availability of

a statewide data set with a large number of responses. The current study used
data collected from the 2013 climate survey administration and contained
approximately 54,750 responses from students in elementary grades 3-6 and
18,370 responses from teachers working in elementary schools. A total of 660
elementary schools from across the state of South Carolina were included in
the database. Survey responses from students and teachers were included for
analysis to provide average information about ratings of a school‟s climate.
Instrumentation
Students and parents at selected grades (typically grades 5, 8 and 11) as

well as all teachers at each school are asked to complete a survey at the end of
each academic year to assess characteristics about a school‟s learning
environment, parent-school relationships, and social and physical factors
related to the school. Three items from each survey (one from each main
section noted below) are included on the report card. However, the surveys
consist of many items, and relationships among these items may illuminate
differences between schools with differing climate perspectives. Two forms
were used to create climate groups: student and teacher forms. The student
survey consisted of 43-items and includes questions from three areas:
Learning Environment, measuring students‟ perceptions about the learning
context (18 items); Social and Physical Environment measuring students‟
thoughts about building cleanliness, appearance of the grounds, classroom
management/ behavior, school safety, and relationships with other
teachers/students (17 items); and Home and School Relations measuring the
relationship between schools and parents (8 items). Students respond to each
item using a 4-point Likert scale ranging from 1=Disagree; 2=Mostly

Disagree; 3=Mostly Agree; to 4=Agree.
There are 53 items included on the teacher climate survey. While the
items differ, the three scales hypothesized for the students are also
hypothesized for teachers. There are 26 items included on the Learning
Environment scale, 16 items on the Social and Physical Environment scale,
and 11 items on the Home and School Relations scale. Teachers responded to
each item using the same 4-point Likert scale: 1=Disagree; 2=Mostly
Disagree; 3=Mostly Agree; 4=Agree.
Before analyses, each dataset was examined. Duplicate cases were
removed from each dataset, as well as cases having more than 25% of the
responses missing within each scale. For cases with 25% or less missing data
on each section of the survey, missing item responses were imputed. Missing
item data were replaced with the average of the individual‟s responses for
other items on the same scale, thereby maximizing sample sizes for analyses.
PRELIMINARY ANALYSES
Statistical analyses of the imputed teacher and student data sets began
with confirmatory factor analysis (CFA). This multivariate statistical
procedure aims to determine how well the survey items measure the climate
constructs. This procedure is appropriate to use when researchers hold prior
knowledge of the underlying latent structure of an instrument (Benson, 1998;
Byrne, 1998; Hoyle & Panter, 1993). CFA was appropriate as it was preceded
by exploratory factor analysis (EFA), which yielded the same factor structure
across two consecutive years (2006 and 2007) and CFA for teachers, students,
and parents (Monrad et al., 2008) with additional independent samples (survey
data collected in 2008, 2009, and 2010).
For each data set, the factor structure derived from exploratory procedures
was used to specify the measurement model in CFA. The confirmatory factor
analyses conducted in this study included only the teacher items present in the
optimal exploratory factor solutions (53 teacher items and 43 student items).
Subsequent item analysis showed that CFA results of the current study
replicated closely the prior EFA solutions. CFAs of the teacher, student, and
parent data sets were conducted using the CALIS procedure provided in the
SAS 9.2 statistical software package. Parameters and model fit indices were
estimated using the Maximum Likelihood procedure. This estimator is
frequently used in CFA studies with (distributionally) normally distributed
categorical data that represents underlying continuous constructs and with at

least 4 ordered categories (Finney & DiStefano, 2013). Results from multiple
ad-hoc fit indices were used to arrive at the optimal final solution. The series
of analyses identified six factors underlying the teacher dataset and four
factors underlying the student dataset.
For the teacher survey, a six-factor solution was determined to be the most
interpretable. This six factor solution was identified within each of the three
organizational levels (elementary, middle, and high school; Monrad et al.,
2008). For teachers, the first factor, Working Conditions/Leadership, describes
the administrative leadership, perceptions of inclusion of teachers, and
enforcement of work-related policies. This factor included items such as: “The
school administration provides effective instructional leadership” and “The
school administration communicates clear instructional goals for the school.”
Home-School Relationship describes the relationship between parents and their
involvement with school activities. Example items include: “I am satisfied
with the home-school relations” and “Parents attend school meetings and other
school events.” The third factor, Instructional Focus, measures an
understanding of instructional standards and high expectations for students to
meet those standards. The Resources factor assesses teachers‟ views of the
availability of textbooks and classroom materials needed for teaching. Sample
items on this fourth factor included: “Our school has sufficient computers for
instructional use.” and “I have sufficient space in my classroom to meet the
educational needs of my students.” The Physical Environment factor measures
teachers‟ views of the physical environment of the schools and were closely
associated with building cleanliness and maintenance. Finally, the sixth factor,
Safety, expressed teachers‟ perceived safety during the school day and while
going to and coming from school.
A four-factor solution was thought to be optimal for the student survey;
again, this structure was identified within each organizational level (Monrad et
al., 2008). These factors have been named: Learning Environment, Social-
Physical Environment, Home-School Relationship, and Safety. The Learning
Environment factor is defined by items such as: “My classes are interesting
and fun”, “My teachers spend enough time helping me learn”, and “I am
satisfied with the learning environment in my school.” Positive student
responses to these items suggest the existence of a nurturing learning
environment in which the student feels supported by teachers and engaged in
learning. The second factor, Social-Physical Environment, is similar to the
Physical Environment factor for teachers, with items relating to building
cleanliness and maintenance. The third dimension, Home-School Relationship,
is primarily associated with parent involvement with the school and student
learning. The Safety factor for students is comparable to that outlined for
teachers: the perception of security both at school and coming to and going
from school.
CFA Factor Scores. Each CFA run was followed by the computation of
factor scores using a least squares regression approach (Thurstone, 1935).
Regression factor scores predict the location of each survey participant on the
distribution of each of the climate factors, and may be used for subsequent
statistical analysis. They are standardized scale scores developed from the
factor structure and based upon the weights assigned to individual items.
Values generally range from a low of -3 to a high of 3, representing three
standard deviations from the mean, where values near zero represent an
average performance. With respect to climate, positive factor scores depict
above average ratings whereas negative scores describe a climate rating that is
below average. To identify climate characteristics within each school, as well
as to compare these characteristics across schools, factor scores were
aggregated at the school level for the latent class clustering analysis. Resulting
analyses, thus, included students‟ and teachers‟ perceptions of their school‟s
climate across multiple domains. This procedure provided a school average
estimate for each climate dimension, and it allowed researchers to determine
where each school is located on every teacher and student factor. These
10factor scores across student and teacher solutions were used to create latent
classes of school climate. Thus, we recognize latent profile analysis was used
as the variables used to create the classes were continuous in nature.
COVARIATES AND OUTCOMES

As noted, LCC can incorporate covariates and outcomes using a three-step
procedure (Asparouhov & Muthén, 2014). The covariates and outcomes used
are described below.
Covariates. Two variables, school size and school poverty index, were
used as covariates. These variables were included because they may have an
effect on a school‟s overall climate, and could impact the number of classes if
the variables are not included in the estimation of latent classes. A poverty
composite score was used to estimate the effect of school poverty levels on the
school climate classification. This index is provided by the South Carolina
State Department of Education and is based on the proportion of students
receiving Medicaid and/or reduced meal plans. Its values range from 0 to 100,
where higher values indicate higher levels of poverty.
Outcomes. School climate data was compared to the school report card
information. Specifically, the school Absolute index and the school‟s
composite score or “grade” used for federal accountability purposes were
included as outcomes. For elementary schools, the Absolute index provides a
measure of a school‟s performance on standardized tests and attendance (e.g.,
http://www.eoc.sc.gov/Information%20for%20Educators/Accountability%20
Manuals/2012/Ratings%20for%20School%20Districts%2011-12.pdf).
Beginning in 2012, South Carolina applied for, and received, a waiver
for several of the requirements for the Elementary and Secondary Education
Act (ESEA). This “ESEA waiver” allowed for more flexibility in reporting for
federal accountability purposes. As such, schools now receive a composite
score calculated based on student performance on state standardized tests. This
composite score takes into account both students who meet the pre-defined
proficiency goal, as well as students who do not meet the proficiency goal but
show improvement in test scores from the previous school year (SC
Department of Education, 2013). Schools are then assigned a letter grade
based on this composite score where scores 90-100 = “A”, 80-89.9 = “B”, 70-
79.9= “C”, 60-69.9 = “D”, and below 60 = “F” (SC Department of Education,
2013).
Statistical Methods
To conduct analyses, the software package Mplus (v. 7.3) was used
(Muthén & Muthén, 1998-2014). Within the current software version, Mplus
includes automated procedures for the three-step approach when mixture
models consist of a single latent class variable and auxiliary information
consisting of either covariates or outcomes. In this study, however, the model
included both covariates and distal outcomes, so it was necessary to perform
the three-step method manually. In addition, cases which were missing
covariates, outcomes, or school-level climate scores for more than four scales
were eliminated from the analyses.
First, a series of unconditional models, that is, models which did not
include covariates or outcomes, were fit. Here, it is typical practice to start
with a one-class model and then successively increase the number of classes
by one to find the optimal number of classes. Fit statistics were collected for
each model and compared to the previous model (i.e., the model with one less
class) to identify the optimal number of groups underlying the dataset.

Because there is no one single index which can be used to assess model fit, we
considered multiple fit indices.
As a measure of global fit, the Log Likelihood value of the model was
examined. To examine relative fit, both the AIC and the BIC values were
compared across models, where the model with the lowest BIC was preferred
(e.g., Nylund et al., 2007; Pastor & Gagné, 2013). In addition, entropy values
and classification probabilities were examined, where higher values show
greater ease in classifying schools to a given class.
After the preferred model was chosen, modal assignment was used to
assign schools to latent classes of climate. Third, we included fixed values
accounting for measurement error in class assignment. All values were
included in the output from the unconditional model. Upon completion of the
three-step procedures, auxiliary information (i.e., covariates and outcomes)
was then included without influencing the measurement of the latent classes.
Finally, the covariates and outcomes were examined for statistically significant
differences across pairwise class comparisons.
RESULTS
After examination of the preliminary dataset, 40 cases were deleted due to
missing data. Overall, the analyzed sample included 52,436 student responses
and 17,843 teacher responses from 610 elementary schools. These schools had
complete profiles of cases among the set of 10 factor scores as well as
information on covariates and outcomes. Across schools, the average Absolute
index was 3.20, average school size was 513 students, the average ESEA
waiver composite score was 83.13, and the average poverty index was 75.56.
Latent Class Results
As the first step of the procedures, the latent profile analyses ignored
covariate and outcome information and concentrated on finding the optimal
class solution. To begin, two latent classes were extracted and successive
classes were added to the solution until no additional solutions could be
extracted due to nonconvergence problems (Nylund et al., 2007; Vermunt &
Magidson, 2002). Based on this process, two to a maximum of five class
solutions were extracted. Fit indices were examined to help identify the
optimal number of classes. Table 1 presents fit information for the two through
five class solutions examined.
Table 1. Model Fit Indices for Latent Profile Analyses
Classes Free LL AIC BIC Entropy LMR

Parameters p-
value
Unconditional Models
2 31 67 -74 62 .899 .0003
3 42 565 -1046 -861 .865 .0451
4 53 829 -1552 -1315 .909 .1052
5 64 996 -1864 -1581 .881 .7312
Four Class Solutions*
4A: All σ2
equal; 53 829 -1552 -1315 .909
σ=0
4B: Free σ2
within class, σ 83 1345 -2524 -2157 .922
= 0**
4C: Free Σk
within class 104 2737 -5265 -4806 .759
Notes: LL = Log-likelihood value, LMR = Lo-Mendell-Rubin hypothesis test; * = μk
freely estimated within each class. **= Model 4B was chosen for the three-step
procedure.
As shown in Table 1, the four-class solution had the highest Entropy

value, along with low AIC and BIC values. The five-class solution did have
lower BIC and AIC values; however, it had a lower entropy value, showing
higher amounts of classification error. In addition, Mplus offers the Lo-
Mendell-Rubin (LMR) hypothesis test to help decide if the tested solution (k
classes) fits acceptably or if an additional class (k + 1) is necessary. Analysts
can use the accompanying p-value to help decide if the additional class is
needed (via a small p-value). From the information across the solutions, the
LMR test suggested that four classes were adequate to describe the elementary
school climate.
After determining that four classes were acceptable, different models were
tested. The baseline model, Model 4A, constrained variances of the variables
used to group cases (i.e., factor scores) to be equal across all four classes and
set covariance terms to zero. Model 4B allowed variance terms to vary across
classes, and covariance terms to be estimated, but constrained to be equal
across the set of classes. The last model tested, Model 4C, allowed all variance
and covariance terms to vary freely within class. For all models, vectors of
mean scores (i.e., centroid values) were uniquely estimated within each class.
Fit indices, as well as the interpretability of the class solution, were examined
for each model.
As shown at the bottom of Table 1, Model 4B produced the highest
entropy level and the lowest AIC value. Model 4C yielded lower information
fit criteria, but showed low entropy and was hard to interpret. The difficulty in
interpreting solutions with correlated variables has been recognized previously
(Muthén, 2002). Based on the information, the baseline model, Model 4B was
used for the three-step procedure as it illustrated acceptable fit, interpretability,
and match to prior research with state-wide datasets using both cluster analysis
(DiStefano et al., 2007) and latent profile analysis (Mindrila et al., 2010).
Model 4B was used for the remaining steps in the procedure. Probability
information was used to assign schools to classes. Subsequently, class
probabilities were constrained while the influence of covariates and distal
outcomes were included. Estimated parameter values for the classes are
provided in Table 2 and a representation of the class centroids is provided in
Graph 1.
Class one (n=129, 21% of elementary school sample) was named “Poor
Climate” based on the mean profile of the student and teacher factor scores.
There were relatively few classification problems, with an average prior
probability of .974. The Poor Climate group had the lowest scores of the set of
classes, with negative teacher and student scores. Here, teacher scores were
lower than student scores, showing greater levels of dissatisfaction with the
school environment. Average teacher scores also reported higher levels of
variability than average student scores.
Class two (n=186, 30% of elementary schools) was termed “Average
Climate”. Again, class average prior probability values were high, .949. All of
the mean values for this class were positive, but close to zero. This group also
had low variability, with small variances reported for both teacher and student
parameters.
Table 2. Average Latent Profiles of School Climate Variables, by Class (N = 610 Elementary Schools)
Class 1 Class 2 Class 3 Class 4

Poor Average Average Teacher/ Positive
Climate Climate Positive Climate
Student Climate
n (%) 129 (21.1%) 186 (30.3%) 155 (25.3%) 140 (23.2%)
Classification Probability 0.968 0.958 0.943 0.962
Student Factor Scores
Learning Environment 0.136 (0.030) 0.182 (0.011) 0.383 (0.007) 0.403 (0.022)
Social-Physical Environment -0.108 0.052) 0.018 (0.017) 0.308 (0.013) 0.392 (0.037)
Home-School Relations 0.089 (0.022) 0.141 (0.007) 0.328 (0.005) 0.368 (0.015)
Safety -0.983 (0.054) 0.011 (0.011) 0.264 (0.010) 0.325 (0.023)
Teacher Factor Scores
Working Conditions/ Leadership -0.404 (0.187) 0.133 (0.044) 0.088 (0.071) 0.447 (0.015)
Home-School Relations -0.418 (0.106) 0.103 (0.058) 0.158 (0.068) 0.536 (0.026)
Instructional Focus -0.292 (0.124) 0.117 (0.016) 0.117 (0.023) 0.346 (0.008)
Resources -0.338 (0.115) 0.099 (0.035) 0.040 (0.057) 0.362 (0.017)
Physical Environment -0.333 (0.221) 0.080 (0.074) 0.022 (0.120) 0.370 (0.021)
Safety -0.408 (0.158) 0.109 (0.028) 0.092 (0.032) 0.322 (0.008)
Note: Variances shown in parentheses.
Figure 1. Profile Plots of Class Centroids, Latent Profile Analysis.
Class three (n=155, 25% of sample) also appeared to be a group of schools

with average climate scores. However, what distinguished this group was that
students were more positive than the teachers. Average scores here were
positive and above zero, while teacher factor scores were positive and close to
zero. Additionally, students showed low variability in their responses. This
class was named “Average Teacher/High Student”. Regarding classification,
the average prior probability value was .952, showing relatively few
classification problems.
The final class, class four (n=140, 23% of sample), was named “Positive
Climate”. This group reported the highest teacher and student average factor
scores. Again, the classification probability was high at .959. Variability was
also low across the set of parameters, showing little discrepancy in average
scores.
Influence of Covariates and Outcome Variables
Covariates. Descriptive statistics for the covariates and outcome variables

included in the study by latent class are presented in Table 3. Relationships
show a differential pattern related to school climate.
Table 3. Descriptive Statistics by Latent Class
Covariates Outcome variables

School size Poverty index Absolute index ESEA Composite
Latent class n M SD M SD M SD M SD
Poor Climate 129 454 202.84 88.57 12.97 2.81 0.38 69.36 20.59
Average Climate 186 521 216.09 78.92 17.23 3.12 0.36 82.06 16.03
Average Teacher/ 155 521 195.47 73.15 19.82 3.32 0.35 87.56 12.87
Positive Student
Positive Climate 140 548 220.86 61.80 20.15 3.51 0.32 92.34 7.87
Note: ESEA = this score, used for federal accountability purposes, represents a composite of student performance on SC state
standardized tests; this score is based on students who meet a pre-defined proficiency goal or who show growth in test scores from
the previous school year.
Table 4. ESEA Waiver School Grade Distribution between Latent Classes
School grade
A B C D F
n % within n % within n % within n % within n % within
Latent class class class class class class
Poor Climate 23 17.8% 25 19.4% 24 18.6% 16 12.4% 41 31.8%
Average Climate 71 38.2% 60 32.3% 19 10.2% 19 10.2% 17 9.1%
Average Teacher/ 81 52.3% 48 31.0% 13 8.4% 2 1.3% 11 7.1%
Positive Student
Positive Climate 98 70.0% 33 23.6% 6 4.3% 3 2.1% 0 0.0%
Note. The ESEA composite score or index can be converted into a letter grade as follows: scores 90-100 = “A”, scores 80-89.9 = “B”,
scores of 70-79.9= “C”, scores 60-69.9 = “D”, and scores below 60 = “F”.
For example, schools belonging to the Poor Climate class (class 1) were
associated with the highest poverty index, smallest school size, and lowest
Absolute index and ESEA composite score. Conversely, schools belonging to
the Positive Climate group (class 4) have the lowest poverty index, largest
school size, and highest Absolute index and ESEA composite score.
Considering the influence of the covariates on the latent classes, analyses
were conducted, where classes are compared to a referent class; here, the
Positive Climate (class 4) was used as the comparison. Compared to the most
Positive Climate class (class 4), there was a significant effect of poverty on
Poor Climate (class 1) and Average Climate (class 2) groups, where these
classes were more likely to have higher poverty. School size was also
significant; however, coefficients were close to zero and odds ratios
(comparing each class to the referent group) were 1, showing no great impact
of school size on school climate. The Average Teacher/High Student Climate
class did not report significantly different effects on poverty or school size as
compared to the Positive Climate class.
Outcomes. Table 3 provides information about the relationship between
class membership and performance indicators. Results indicated that schools
with the poorest climate, as defined by negative, below average factor scores,
did worst on achievement outcomes; schools in successively more favorable
climate groups showed progressively higher achievement outcomes. One
feature of the ESEA waiver composite score is that it can be converted into a
letter grade for each school.
Table 4 highlights the school “grade” distribution between the identified
latent classes. As climate profiles become more positive, the proportion of
schools receiving a school grade of an “A” increases, while the proportion of
schools receiving an “F” decreases. For example, approximately 32% of
schools belonging to the Poor Climate class received a school grade of an “F”,
while 70% of schools belonging to the Positive Climate class received an “A.”
DISCUSSION
The current study used a state-wide sample of climate ratings from 610
elementary schools. Survey results from teachers and students were aggregated
to the school level to identify the number of underlying latent classes and
estimate the impact of a categorical school climate variable on school absolute
ratings and composite scores based on student achievement ESEA, while
taking into account the effect of school size and poverty on the classification
process. Results showed a strong relationship between school poverty and

school climate latent profile memberships. Specifically, schools with lower
poverty were assigned to latent profiles with more positive school climate.
This was also observed with previous research that only included teacher
ratings of school climate (Mindrila et al., 2014). The previous findings can be
extended to models where both student and teacher ratings are used to create
latent classes.
Latent profiles were also described using poverty, school size, and school
performance information. Results showed that schools assigned to profiles
with poor school climate generally have higher poverty indices and smaller
school sizes. The average poverty index gradually decreases for latent profiles
with more positive school climate. Alternatively, school size is positively
related to climate. While the direct cause is unknown, one hypothesis is that
the recent tendency within the state is to construct new, larger schools when
possible. Thus, more affluent areas of the state may have larger elementary
schools instead of conducting repairs to older, smaller buildings. In contrast,
the average absolute rating value and ESEA index showed the lowest value
with the Poor Climate class. Values gradually increased for profiles with more
positive climate.
Using the poverty index and the school size as covariates allowed for
controlling the effects of these variables on the classification of schools
according to student and teacher climate ratings, and to estimate the impact of
the resulting school climate classification on school performance. Results
showed that school climate latent profile membership has a significant impact
on performance. Specifically, as schools are assigned to groups with more
positive school climate the probability of having higher performance measures
is significantly higher.
Our work with the school climate surveys and other non-survey report
card indicators over the past several years has led to a better understanding of
their relationship to both school achievement and to poverty. We have begun
to think of poverty, not only as an indicator of parental income, but also as: a)
the attitudes of parents, students, and teachers about schooling, b) the
perceived and real levels of support for and focus on the learning environment,
and c) the attendance rates and other indicators of time-on-task afforded to
students. Schools with large concentrations of poor students often have fewer
highly qualified teachers and administrators, higher teacher turnover, lower
student attendance, higher student suspensions, and parents less likely to be
actively participating in and supportive of the school and its learners. The
clarification of this constellation of relationships is an essential step in
developing the goals, strategies, and programs necessary to effectively address

educational improvement. It is for these reasons that we have focused upon
variables that could be addressed by school communities.
SCHOLARLY SIGNIFICANCE
Wang, Haertel, and Walberg (1997) conducted a meta-analysis using a
database consisting of 11,000 statistical findings and determined that
instruction and climate affect learning as much as student characteristics. Their
work supports “the idea that climate is a real factor in the lives of learners and
that it is measurable, malleable and material to those that work and learn in
schools” (Freiberg, 1999, p. 17). There is a compelling body of literature
providing support for the importance of school climate. Compared to other
barriers which are not within the locus of control of schools, such as high child
poverty and low state funding, negative school climate factors can be
improved. Although there is a growing literature dealing with the assessment
of school climate, efforts to systematically improve it have been limited.
Changing school climate “requires explicit, targeted, and aligned change
efforts at the leverage points” (McGuigan, 2008, p. 112). Results from this
study may be used to foster such efforts by providing greater insight about
how climate may impact selected accountability outcomes.
While some obstacles, such as poverty, are not easily surmountable,
school climate can be improved with limited expenses. Therefore, training on
changing the school climate should be provided at the school level for teachers
and administrators. These efforts should be stronger in high poverty areas, as
poverty has a negative impact on both school climate and school performance.
Therefore, with an increased focus on accountability and academic
improvement nationwide, the current research provides support for an
increased attention to school climate as a critical dimension for school leaders
to focus school improvement efforts. By evaluating the practices at the school-
level to determine which are promoting positive school climate, schools may
also see improvement in achievement outcomes.
The current work provides a framework for evaluating school climate data
as well as providing direction for the potential application of school climate
data for use in school improvement. For example, an extension of the current
work includes utilizing the climate data to develop multi-year school climate
profiles that could provide low-performing schools with a practical tool to use
in identifying critical areas for school improvement. Assessment and
evaluation efforts could be tailored to identify school climate needs and

measure implementation of targeted strategies to improve climate and
achievement outcomes. The current school climate research provides a starting
point to begin narrowing the gap between research, policy, and the practice of
implementing and evaluating approaches that includes school climate as one
important facet of school improvement.
LIMITATIONS OF THE STUDY AND CONCLUSION

This study represents an analysis of relationships among climate factors
and measures of performance, while controlling for poverty and school size. A
large data sample was used; however, the outcome measures are specific to
South Carolina‟s curriculum and accountability standards. Thus, the findings
may or may not generalize to educational systems in other locations.
Furthermore, this was an associative study of archival cross-section data, not
an experimental study designed to measure the impact of an intervention. The
large statewide sample is a unique characteristic of this study: most
investigations do not have access to such a large sample across organizational
levels.
Understanding school climate and its relation to school performance can
benefit school-community leaders and policy makers as they seek to improve
student learning. For teachers, a better school climate can help foster a positive
working environment by reducing absenteeism and stress, lowering teacher
turnover rates, and increasing job satisfaction. For students and parents, the
crucial importance of attendance and engagement in a supportive learning
environment is validated. For researchers, the analyses can point the way
toward structuring future studies into the relationship among student learning
and the concerns of teachers, parents, administrators and other stakeholders in
the community.
In summary, school climate provides a critical backdrop for efforts to
improve schools. Within the context of a poor school environment, even the
most well-documented reform strategy is unlikely to succeed. The current
school climate research provides a starting point to begin narrowing the gap
between research, policy, and the practice of implementing and evaluating
approaches that includes school climate as one important facet of school
improvement.
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Chapter 3
ASSESSING MEDIATION IN SIMPLE

AND COMPLEX MODELS
Thomas Ledermann1,* and Siegfried Macho2

1
University of Basel
2
University of Fribourg, Switzerland
ABSTRACT
This chapter addresses the testing of specific effects and contrasts in three
types of mediation models: models with up to four simultaneous
(parallel) mediators, models with two sequential mediators, and single-
mediator models with two initial variables. We use the delta method and
provide equations to calculate standard errors for simple and total indirect
effects, total effects, and specific contrasts in each type of model. We also
demonstrate how bootstrap interval estimates of specific effects and
contrasts can be obtained using phantom models and how indirect effects
involving different initial variables can be compared in a scale-free
fashion. Testing contrasts, we show how common requirements for
complete mediation can be made stronger. Limitations of both, statistics
using standard errors based on normal theory and bootstrapping to test
mediation, along with new methods are discussed. The methods are
illustrated using publicly available datasets. Supplementary material
*
Corresponding author: Thomas Ledermann, thomas.ledermann@unibas.ch.
70 Thomas Ledermann and Siegfried Macho
available online includes Amos, OpenMx, and Mplus files to estimate the
models and an Excel spreadsheet to calculate the effects.
Keywords: mediation, specific effects, contrasts, delta method, bootstrapping,

phantom models
The assessment of mediational processes is of great importance in the

social and behavioral sciences if researchers are to understand the mechanism
through which an effect unfolds. Mediation is said to occur when the effect of
an initial variable on an outcome variable is transmitted through one or more
third variables, called mediator or intervening variables (Baron & Kenny,
1986; James & Brett, 1984; MacKinnon, 2008).
The analysis of models involving multiple mediators along with the
comparison of effects in mediation models has attracted researchers over the
last two decades. The testing of specific effects, such as an indirect effect, and
contrasts in such models can be accomplished by means of the z-statistic or the
bootstrap method (Efron, 1979), which both have their own strengths and
weaknesses.
The purpose of this chapter is to addresses the testing of specific effects
and contrasts in simple and complex mediation models. Using the delta
method, we provide equations to calculate standard errors (SE) for specific
effects and contrasts in mediation models with up to four simultaneous
(parallel) mediators, models with two sequential mediators, and models with
two initial variables and demonstrate how bootstrap interval estimates can be
obtained using phantom models (Macho & Ledermann, 2011). We also show
how contrasts among mediation effects involving different initial variables can
be assessed in a scale-free fashion. To ease the estimation of the models and
testing of effects Amos (Arbuckle, 1995–2012), OpenMx (Boker et al., 2011),
and Mplus (Muthén & Muthén, 1998-2012) files and an Excel spreadsheet
calculating SEs, z and p values, and normal confidence intervals for all types
of effects as well as specific contrasts are available at
http://thomasledermann.com/mscm/.
In what follows, we discuss common types of mediation models and
different types of effects that can be assessed in each. We then address the
assessment of mediation and focus on the distinction between partial and
complete mediation. Finally, we review the use of the z-statistic and the
bootstrap method to test mediating effects and contrasts. To illustrate the
assessment of mediation in complex models, publicly available data sets are
used.
Assessing Mediation … 71
COMMON TYPES OF MEDIATION MODELS

The most basic form of a mediation model is shown in Figure 1A. This
model consists of three random variables: the independent variable X, the
mediator M, and the outcome Y. In this simple mediation model, there are
three direct effects, a, b, and c′. The effect of X on Y can be apportioned into a
direct effect represented by c′ and an indirect effect through M, which is the
product ab. The sum of these two effects is the total effect. This simple
mediation model can be extended in various ways. Here, we focus on three
common extensions.
The first extension is a mediation model with multiple intervening
variables that simultaneously mediate the effect of the initial variable on the
outcome variable. The coaction of two simultaneous mediators has been
studied, for example, by Fosco and Grych (2008) who demonstrated that the
effect of parental conflicts on children‟s internalizing problems is mediated
simultaneously by children‟s appraisals of threat and self-blame. A model with
three simultaneous mediators is presented in Figure 1B. In this model, there
are three simple indirect effects, a1b1, a2b2, and a3b3, sometimes called specific
indirect effects. The sum of them is the total indirect effect (i.e., a1b1 + a2b2 +
a3b3). The total effect that X exerts on Y is the total indirect effect plus the
direct effect c′ (i.e., a1b1 + a2b2 + a3b3 + c′). We echo Preacher and Hayes
(2008) and suggest the inclusion of covariances between the residuals of the
mediators, because constraining a substantial residual covariance to zero may
result in serious model misspecification and in biased estimates of the SEs of
the b paths.
Another extension of the simple mediation model is a model with multiple
mediators that act in series. In this type of models, the effect of an initial
variable on an outcome variable is mediated through a chain of two or more
sequential mediators. For example, Perkinson-Gloor, Lemola, and Grob (2013)
found that sleep duration influences daytime tiredness, which, in turn, affects
behavioral persistence, which, ultimately, predicts academic achievement. A
mediation model with two sequential mediators is given in Figure 1C. In this
model, X and Y are linked by two simple indirect effects, a1b1 and a2b2, a
three-path indirect effect, a1b12b2, a term used by Taylor, MacKinnon, and
Tein (2008), and the direct effect c′. The total indirect effect of X on Y that
goes through both mediators is the sum of all indirect effects (i.e., a1b12b2 +
a1b1 + a2b2). The total effect of X on Y is again the total indirect effect plus the
direct effect c′ (i.e., a1b12b2 + a1b1 + a2b2 + c′).
Figures
1 r1
Model A
M
a b r2
1
X c′ Y
Model B 1 r3
M3
a3
1 r2
M2 b3
a2
1 r1 b2
a1 M1 b1 1 r4
X c′ Y
1 r1 1 r2
Model C b12
M1 M2
a1 b b2 r3
a2 1
b1
X c′ Y
Model D
X1 c′1
a1 1 r1 1 r2
b
M Y
a2 c′2
X2
Figure 1. Model A: Simple mediation model. Model B: Mediation model with three
simultaneous mediators. Model C: Mediation model with two sequential mediators.
Model D: Mediation model with two initial variables.
A third extension is a simple mediation models with multiple initial

variables that affect a mediator, which, in turn, affects an outcome. For
example, Klainin (2009) hypothesized that both family stress and occupational
stress affect physical health, which in turn affects psychological stress. A
mediation model with two initial variables is presented in Figure 1D. In this
model, there are two simple indirect effects, a1b and a2b, sharing the direct
effect b, two direct effects c′, c′1 and c′2, and two total effects, a1b + c′1 and a2b
+ c′2. We next address the assessment of mediation and the testing of specific
effects and contrasts in these types of mediation models.
ASSESSING MEDIATION
For a good understanding of the mediation process all direct effects and
indirect effects in a model should be estimated and tested (e.g., Ledermann &
Macho, 2009).
Direct and Indirect Effects
There are two reasons to test the direct effects separately (Judd & Kenny,
2010). First, for mediation to occur all direct effects that constitute an indirect
effect have to be substantial because it makes no sense to speak of mediation if
not all direct effects that make up an indirect effect are substantial. Second,
mediation can be inconsistent (Maassen & Bakker, 2001; MacKinnon, Krull,
& Lockwood, 2000). Inconsistent mediation, also called suppression, occurs
when an indirect effect and the respective direct effect c′ have opposite signs.
To assess whether consistent mediation (i.e., the indirect effect and the
respective direct effect c′ are of the same sign) or inconsistent mediation has
occurred one need to know the sign of the direct effects.
Contrasts
In addition to the information whether consistent or inconsistent mediation

occurs, the knowledge of the relative importance of a specific mediator can
further refine the understanding of the pathways through which an initial
variable exerts an effect on an outcome. In any mediation model with a direct
effect c′, each simple indirect effect and total indirect effect can be compared
with the respective direct effect c′.3 In a model with multiple mediators, we
3
In mediation models with a direct effect c′, a quantity commonly reported is the relative
proportion of the indirect effect in the total effect. For the simple mediation model this is
ab/(ab + c′). However, it has been found that the accuracy of this ratio is poor unless the
sample size is at least 500 (MacKinnon, Warsi, & Dwyer, 1995). Additionally, this ratio can
may wish to know whether two indirect effects differ in magnitude. For
example, a researcher might find that the effect of sleep problems on school
achievement is stronger through tiredness than through negative mood.
In mediation models, very often the effects being compared have the same
initial and outcome variable and so the same metric (e.g., contrasting an
indirect effect with the respective direct effect c′ or two indirect effects in a
model with multiple sequential mediators). In this case, the effects are
quantified by the same units of measurement (e.g., Cheung, 2007; MacKinnon,
2000; Preacher & Hayes, 2008) and, so, the comparison of the effects is
independent whether the variables are standardized or unstandardized.
Sometimes the effects being compared do not have the same initial or
outcome variable. In such situations, one can use either unstandardized or
standardized estimates that are likely to produce different results. Consider a
simple model where an outcome Y is regressed on X1 and X2. If we want to
know whether an increase in X1 by one unit has the same effect on Y than an
increase by one unit in X2 we use unstandardized estimates. This practice
presupposes that the unit of measurement of both predictors is meaningful in
itself and in comparison to each other. 4 For instance, in a study on the
influence of time spent with family and close friends on people‟s satisfaction,
we might be interested in whether satisfaction is more influenced by hours
spent with family vs. hours spent with close friends and so use the
unstandardized predictors with hours as unit of measurement.
When the predictors have different scales the unit of measurement for
each predictor has to be chosen in such a way that the comparison makes most
sense on a practical level. For example, a researcher may want to know
whether weight loss is more influenced by the reduction of calories consumed
or sport work and find that reducing the consumption of food energy by one
kilocalorie a week has a bigger effect on weight loss than increasing sport
work by one hour. Measuring food energy in calories, it is most likely that
increasing sport work by one hour has a bigger influence on weight loss than
reducing food energy by one calorie.
If in models with multiple initial (or outcome) variables the units of
measurement of the variables have no definitive meaning, a comparison of
effects makes most sense if done in an independent fashion of the units of
measurement (e.g., Raykov, Brennan, Reinhardt, & Horowitz, 2008). This can
be large when the total effect is very small and can be greater than one when inconsistent
mediation occurs.
4
In models with one outcome, the outcome‟s unit of measurement has no influence on the
comparison of the effects.
be achieved by dividing each predictor by the respective standard deviation.

This practice allows then to determine whether a change of one standard
deviation in one predictor produces the same change in the outcome than a
change of one standard deviation in another predictor.
This strategy of standardizing the variables, however, is inappropriate in
those cases where the parameter estimates are based on data other than the
data used to standardize the variables because the standardization would have
to be done on the data used by the program to obtain correct parameter
estimates. This problem concerns all popular resampling methods, including
bootstrapping that we discuss below. Using resampling methods, a proper
solution to standardize predictors is to implement a latent variable for each
predictor with the variance set to 1 and a direct path from the latent variable to
the predictor (e.g., Cheung, 2009; Jöreskog & Sörbom, Du Toit, & Du Toit,
1996). Figure 2 shows how a mediation model with two initial variables, one
mediator, and one outcome variable looks like after implementing the latent
variables for the initial variables. In this model, the unstandardized coefficients
of l1 and l2 represent the standard deviation of the predictors X1 and X2.5
Partial and Complete Mediation
A distinction often made in mediation analysis, is the one between

complete and partial mediation (e.g., Kenny, Kashy, & Bolger, 1998). Partial
mediation is said to occur when the indirect effect and the respective direct
effect c′ are nonzero and both effects are of the same sign. Complete (full or
perfect) mediation is said to occur when the indirect effect is nonzero and the
direct effect c′ is zero. Although this distinction has been found to be useful in
theory testing, it can be misleading when the decision about the type of
mediation relies upon significance tests (Hayes & Preacher, 2014; Preacher &
Kelley, 2011; Rucker, Preacher, Tormala, & Pitty, 2011; Wood, Goodman,
Beckmann, & Cook, 2008). For example, Kenny and Judd (2014) could
demonstrate that the statistical power of an indirect effect is often greater than
the power of the direct effect between an initial variable and an outcome. A
common misunderstanding pointed out by Rucker et al. (2011) is that
5
Lau and Cheung (2012) and Raykov et al. (2008) provide details to estimate and test
standardized effects using a SEM software program, such as OpenMx, LISREL (Jöreskog &
Sörbom, 2006), or RAMONA (Browne & Mels, 2005), that allow researchers to specify the
models on the level of the matrices. For users of Mplus or lavaan (Rosseel, 2012), Cheung
(2009) showed how standardized effects can be estimated in simple mediation models.
complete mediation suggests that the process by which an initial variable

affects an outcome is completely explained and, so, there is no need to test for
other mediating variables.
Stronger assumptions about complete mediation can be made by
contrasting the indirect effect with the respective direct effect c′ and requiring
that the indirect is bigger in size than the direct effect c′. If these two effects do
not differ one could set them equal, which results in that both effects are either
not statistically significant (i.e., no mediation), or significant (i.e., partial
mediation). Another important criterion for complete mediation often used by
researcher is the assumption that the absolute value of the standardized direct
effect c′ is smaller than .10. The case where the indirect effect and the direct
effect c′ do not differ statistically and the absolute value of the standardized
direct effect c′ is smaller than .10 and not statistically significant, may be
considered as weak complete mediation until further research will shed more
light into the mechanism. However, it is noteworthy that the comparison of
effects relies upon statistical tests that are sensitive to sample size. Next, we
describe how indirect effects, total effects, and specific contrasts can be
probed by using the z-statistic or bootstrapping.
TESTING METHODS
Indirect effects are most often tested by either the z-statistic or Efron‟s
(1979) bootstrap method. We describe both methods that can also be used to
test direct effects, total effects, and contrasts among effects.
X1
l1
s2 = 1
Xl1
c′1
a1 1 r1 1 r2
b
M Y
a2 c′2
Xl2
l2 s2 = 1
X2
Figure 2. Mediation model with standardized initial variables.

The Z Statistic
The z-statistic is a prominent method to test effects in mediation models.

A z-score can be obtained by dividing the effect being tested through its SE.
That is, for the indirect effect ab in Model 1A, z equals . This
statistical test is known as the product-of-coefficients approach or Sobel test.
For complex functions (effects) involving multiple direct effects, SEs can be
obtained by applying the good old multivariate delta method based on the
Taylor series (e.g., Bishop, Fienberg, & Holland, 1975; MacKinnon, 2000;
Rao, 1973; Raykov & Marcoulides, 2004). Using the first-order Taylor series
expansion, the delta method provides a general approach for computing
asymptotic variances for functions of estimated model parameters, such as
indirect effects (see Bollen, 1987; Sobel, 1982, 1986). The square roots of
these variances represent approximate standard errors of the effects. The first-
order version of the delta method has been used by MacKinnon (2000),
Preacher and Hayes (2008), and Taylor et al. (2008) to test indirect and total
effects and some contrasts in models with multiple mediators. In Appendix A,
we provide details on how the variance of a complex effect can be derived
using the first-order delta method and present equations to test all indirect and
total effects and the aforementioned contrasts in models with up to four
simultaneous or two sequential mediators and mediation models with two
initial variables.
Bootstrapping
The bootstrap method has been widely advocated for testing indirect
effects (e.g., Bollen & Stine, 1990; Preacher & Hayes, 2008; Shrout & Bolger,
2002) as well as contrasts among effects (Williams & MacKinnon, 2008). In
several popular SEM software packages, including Amos and EQS (Bentler,
2000-2008), the built-in bootstrap procedure for testing effects is limited to
direct effects, total indirect effects, and total effects. As we have seen, in
complex mediation models, simple indirect effects are often part of a total
indirect.
To test specific effects and contrasts using a SEM software program with
limited capabilities to do so the phantom model approach can be used (Macho
& Ledermann, 2011). This method provides a flexible means that stands out
due to its ease of use in obtaining both point and bootstrap interval estimates
for specific effects and contrasts in structural equation models and multiple
group analysis. It can be used with all software packages that report point
estimates of total effects, have bootstrap functions, and allow for latent
variables and parameter constraints. Phantom models are set up along and
estimated simultaneously with the main model. For each effect that cannot be
classified as direct, total indirect, and total effect, a phantom model is to build
whose structure represents the effect being estimated. Further details are given
in Appendix B. For more applications see Ledermann, Macho, and Kenny
(2011) and Perera (2013).
Choice of the Method
The decision of which method to use should be based on the data and
variables being analyzed. The z-statistic for testing contrasts and indirect
effects works well in large samples (i.e., in the high hundreds) and if the data
are normally distributed. Using maximum likelihood (ML) estimation the z-
statistic can be applied if data are available in raw form or in form of the
variances-covariance matrix and if they are incomplete. Though bootstrapping
dominates these days the testing of mediation effects, it is not without
limitations. The ordinary nonparametric bootstrap method requires access to
raw data whose empirical distribution function is assumed to be a good
representation of the population distribution function. Although the
nonparametric bootstrap method makes no assumption about the distribution
in the population it is likely to fail to provide consistent estimates when the
original sample has an extreme distribution and outliers and when there are
many missing values. Dichotomous variables in combination with a small
sample are also likely to lead to estimation problems or inconsistent results.
Depending on the distribution of the data, the missing values, and the types of
variables, bootstrapping can require fairly large sample sizes with extreme
distributions, many missing values, and dichotomous variables all require
larger samples (see Chernick, 2008). Indeed, in small samples of 20 to 80
cases, bootstrap confidence intervals can be inconsistent (Efron & Tibshirani,
1993). Koopman, Howe, Hollenbeck, and Sin (2015) evaluated the bootstrap
method for small samples and note that even for moderate effect sizes samples
of 100 cases were required. The use of bootstrapping can further be
cumbersome when standardized effects should be analyzed because the
standardization would need to be done separately for each bootstrap sample. In
addition, some programs, including Amos, require complete data to perform
bootstrap analysis but parametric bootstrapping may be used in lieu of the
ordinary bootstrapping with incomplete data. Finally, as all resampling

techniques, the bootstrap method violates Gleser‟s “first law of applied
statistics” that two people using the same data and the same method should
always obtain the same results.
In conclusion, the z-statistic may be preferred when the bootstrap method
fails or leads to inconsistent estimates or when there are many missing values.
If the sample size is large either the bootstrap or the z-statistic may be chosen
because the conclusion would be almost identical (e.g., Cheung, 2007;
Williams & MacKinnon, 2008). If the sample size is medium the bootstrap
method has more statistical power than methods based on normal theory (e.g.,
MacKinnon, Lockwood, & Williams, 2004) and, so, is often preferred to test
both indirect effects and contrasts.
There are alternative methods to test mediation effects. One is Bayesian
analysis (see Kline, 2013, and Kruschke, Aguinis, & Joo, 2012, for a brief
introduction), which has been strongly recommended for small samples (e.g.,
less than 100 cases) and multilevel data (Enders, Fairchild, & MacKinnon,
2013; Koopman et al., 2015; Yuan & MacKinnon, 2009). Another method is
robust analysis based on median regression, which has most recently been
demonstrated to be useful when data are non-normal, including heavy-tailed
and skewed data (Yuan & MacKinnon, 2014).
ILLUSTRATIONS
We illustrate the assessment of mediation for a model with three
simultaneous mediators, a model with two sequential mediators, and a single-
mediator model with two initial variables using publicly available datasets. For
illustrative purpose, we used both the z-statistic and the bootstrap method to
test specific effects and contrasts. The bootstrap estimates presented here are
based on 5,000 bootstrap samples. To determine whether an effect is
statistically significant, we followed Cheung‟s recommendation (2007) and
reported the bias-corrected (BC) bootstrap confidence intervals for the
unstandardized effects. Cases with missing data were excluded prior to the
analysis. We analyzed the data using the Amos software program.
Mediation Model with Three Simultaneous Mediators
The data for the model with three simultaneous mediators (Figure 1B)
were taken from the study Quality of American Life conducted by Campbell
and Converse (1978). The purpose of this study was to investigate the
perceived quality of life of Americans 18 years of age and older. Here, we
used interview data from 1350 persons who provided complete data on the
selected variables. We used satisfaction with oneself as a person (X) to predict
satisfaction with the life (Y) through the simultaneous mediators satisfaction
with the job (M1), satisfaction with marriage (M2), and degree to which
respondents enjoy their life (M3). The satisfaction measures could range from
1 (completely dissatisfied) to 7 (completely satisfied) and the enjoyment of life
measure could range from 1 (rarely) to 4 (all the time). Due to the large sample
size we report 99 percent confidence intervals.
The effect estimates, the standard errors (estimated by Amos and
Equations A2, A4, A11, A15, and A17 for the variances), and the normal and
BC bootstrap confidence intervals of the effects are presented in Table 1
(phantom models were set up to obtain point and interval estimates for a1b1,
a2b2, a3b3, a1b1 – c′, a2b2 – c′, a3b3 – c′, a1b1 + a2b2 + a3b3 – c′, a1b1 – a2b2, a1b1
– a3b3, and a2b2 – a3b3). We found that all six direct effects that make up an
indirect effect were positive and statistically significant. The direct effect c′
was positive and significant too, which suggests that self-satisfaction had an
effect on life satisfaction over and above the effects of the three mediators. For
the indirect effects, all three simple indirect effects and the total indirect effect
were statistically significant indicating that the effect from satisfaction with
oneself on satisfaction with the life was simultaneously mediated through job
satisfaction, marriage satisfaction, and enjoyment of life. The total effect was
also positive and significant. The finding that all indirect effects as well as the
direct effect c′ had the same sign and were statistically significant indicates
that partial mediation occurred. Contrasting the three simple indirect effects
and the total indirect effect with the direct effect c′, we found that c′ was
significantly stronger than any indirect effect. Among the three indirect
effects, those through enjoyment of life and marital satisfaction were
significantly stronger than the one through job satisfaction.
Table 1. Testing mediation of satisfaction with oneself on satisfaction with the life through the simultaneous
mediators satisfaction with job, satisfaction with marriage, and enjoyment of life
z-statistic Bootstrapping
Effect Estimate
SE z p 99% CI BC 99% CI
Direct effects
self sat  job sat (a1) 0.362 0.034 10.795 <.001 [0.275, 0.448] [0.264, 0.461]
self sat  mar sat (a2) 0.318 0.028 11.342 <.001 [0.246, 0.390] [0.233, 0.408]
self sat  enjoy (a3) 0.201 0.013 15.182 <.001 [0.167, 0.235] [0.163, 0.237]
job sat  life sat (b1) 0.110 0.017 6.288 <.001 [0.065, 0.155] [0.056, 0.169]
mar sat  life sat (b2) 0.206 0.021 9.698 <.001 [0.151, 0.261] [0.126, 0.287]
enjoy  life sat (b3) 0.395 0.045 8.736 <.001 [0.279, 0.511] [0.268, 0.521]
self sat  life sat (c′) 0.375 0.024 15.763 <.001 [0.314, 0.436] [0.286, 0.458]
Indirect effects and total effect
a1b1 0.040 0.007 5.433 <.001 [0.021, 0.058] [0.020, 0.067]
a2b2 0.065 0.009 7.371 <.001 [0.043, 0.088] [0.038, 0.099]
a3b3 0.079 0.010 7.572 <.001 [0.052, 0.106] [0.052, 0.112]
a1b1 + a2b2 + a3b3 0.184 0.015 12.501 <.001 [0.146, 0.222] [0.137, 0.236]
a1b1 + a2b2 + a3b3 + c′ 0.559 0.023 23.922 <.001 [0.499, 0.619] [0.482, 0.625]
Contrasts
a1b1 – c′ -0.335 0.026 12.885 <.001 [-0.402, -0.268] [-0.428, -0.239]
a2b2 – c′ -0.309 0.026 11.689 <.001 [-0.377, -0.241] [-0.406, -0.204]
a3b3 – c′ -0.295 0.028 10.464 <.001 [-0.368, -0.223] [-0.392, -0.195]
Table 1. (Continued)
Effect Estimate
a1b1 + a2b2 + a3b3 – c′ -0.190 0.032 5.963 <.001 [-0.273, -0.108] [-0.310, -0.071]
a1b1 – a2b2 -0.026 0.012 2.224 .026 [-0.056, 0.004] [-0.065, 0.013]
a1b1 – a3b3 -0.040 0.013 3.024 .002 [-0.073, -0.006] [-0.078, -0.003]
a2b2 – a3b3 -0.014 0.014 0.970 .332 [-0.050 0.023] [-0.057, 0.030]
Note: SE = standard error; BC CI = bias-corrected confidence interval. The formula used to compute normal 99% CI is estimate 
2.58 SE.
Table 2. Testing mediation of satisfaction with payment on satisfaction with the life through the sequential
mediators satisfaction with job and satisfaction with family life
Effect Estimate
SE z P 95% CI BC 95% CI
Direct effects
pay sat  job sat (a1) 0.244 0.028 8.658 <.001 [0.189, 0.299] [0.181, 0.308]
pay sat  fam sat (a2) 0.057 0.030 1.908 .056 [-0.002, 0.116] [-0.004, 0.118]
job sat  fam sat (b12) 0.194 0.040 4.858 <.001 [0.116, 0.272] [0.109, 0.282]
job sat  life sat (b1) 0.403 0.050 8.062 <.001 [0.305, 0.501] [0.305, 0.511]
fam sat  life sat (b2) 0.437 0.049 8.989 <.001 [0.342, 0.533] [0.342, 0.532]
pay sat  life sat (c′) 0.104 0.037 2.808 .005 [0.031, 0.177] [0.026, 0.183]
Indirect effects and total effect
a1 b1 0.098 0.017 5.900 <.001 [0.066, 0.131] [0.064, 0.139]
a2 b2 0.025 0.013 1.867 .062 [-0.001, 0.051] [-0.001, 0.055]
a1b12b2 0.021 0.005 3.832 <.001 [0.010, 0.031] [0.011, 0.035]
a1b12b2 + a1b1 + a2b2 0.144 0.022 6.478 <.001 [0.101, 0.188] [0.099, 0.193]
a1b12b2 + a1b1 + a2b2 + c′ 0.248 0.040 6.271 <.001 [0.171, 0.326] [0.156, 0.338]
Contrasts
a1b1 – c′ -0.006 0.044 0.131 .896 [-0.092, .080] [-0.096, .085]
a2b2 – c′ -0.079 0.040 1.994 .046 [-0.157, -.001] [-0.161, .005]
a1b12b2 – c′ -0.083 0.038 2.216 .027 [-0.157, -.010] [-0.164, .004]
a1b12b2 + a1b1 + a2b2 – c′ 0.040 0.047 0.859 .390 [-0.051, .131] [-0.051, .135]
Note: SE = standard error; BC CI = bias-corrected confidence interval. The formula used to compute normal 95% CI is estimate 
1.96 SE.
In sum, the effect of satisfaction with oneself on satisfaction with the life
seemed partially transmitted through the simultaneous mediators job
satisfaction, marriage satisfaction, and enjoyment of life. In addition, evidence
indicated that the direct effect of self-satisfaction on life satisfaction was
stronger than the indirect effects through the three mediators and that the
mediators enjoyment of life and martial satisfaction seemed to be more
important than the mediator job satisfaction for the association between
satisfaction with oneself and satisfaction with the life.
Mediation Model with Two Sequential Mediators
The data for the model with two sequential mediators (Figure 1C) are part
of the Quality of Employment Survey conducted by Quinn and Graham
(1977). The aim of this survey was to investigate the working conditions in
American labor force by workers aged 16 or older. There were 640 people
who provided complete data for the variables used in this example. We used
the variable satisfaction with payment (X) to predict satisfaction with the life
(Y) through the mediators satisfaction with the job (M1) and satisfaction with
family life (M2) that act in turn. The answers for payment, job, and family
satisfaction could range from 1 to 4, the answers for life satisfaction from 1 to
3, with higher scores indicating greater satisfaction. Table 2 presents the effect
estimates, the standard errors (estimated by Amos and Equations A2, A6, A7,
A13, A15, A19 and A20 for the variances), and the normal and BC bootstrap
confidence limits (phantom models were set up to obtain point and interval
estimates for a1b1, a2b2, a1b12b2, a1b1 – c′, a2b2 – c′, a1b12b2 – c′, and a1b12b2 +
a1b1 + a2b2 – c′). All direct effects constituting the indirect effects were
positive and statistically significant with the exception of the effect from
satisfaction with payment on family life satisfaction (a2), which was not
significant. These direct effects make up two positive simple indirect effects
(a1b1 and a2b2) and a positive three-path indirect effect (a1b12b2). Because a2
was trivial the focus here is on a1b1 and a1b12b2. These two indirect effects
were both statistically significant, which indicates that the effect from
satisfaction with payment on life satisfaction was mediated by both the effect
through the sequential mediators job and family satisfaction (a1b12b2) and the
effect through job satisfaction (a1b1). Also, the total indirect effect and the
total effect were significant. The direct effect c′ was positive and statistically
significant, which means that the mediators accounted partially for the effect
of satisfaction with payment on life satisfaction. For the comparisons of the
Assessing Mediation 85
indirect effects with the direct effect c′, we found that the total indirect effect
(a1b12b2 + a1b1 + a2b2) and the simple indirect effect through job satisfaction
(a1b1) were equally strong as c′. However, c′ was significantly stronger than
the simple indirect effect through family satisfaction (a2b2) and the three-path
indirect effect a1b12b2. In sum, these results revealed that the effect of
satisfaction with payment on satisfaction with the life was partially mediated
by job satisfaction and satisfaction with family life. The simple mediating
effect through job satisfaction and the total mediating effect were as important
as the direct effect from satisfaction with payment on satisfaction with the life.
Mediation Model with Two Initial Variables
For the model with two initial variables (Figure 1D), we used cross-
sectional data collected in 2000 that are part of the study Marital Instability
Over the Life Course conducted by Booth, Johnson, Amato, and Rogers
(2010). For the variables used in this example, 711 people provided complete
data. As X1 and X2 we used respondent‟s income and partner‟s income,
respectively, to predict the degree of happiness (Y) through self-esteem (M).
Income can take the values: 0, 2.5, 7.5, 12.5, 17.5, 22.5, 27.5, 35.0, 45.0, 55.0,
65.0, 75.0, 85.0, 95.0, and 105.0 (unit of measurement is $1,000). Self-esteem
was measured by six items (1= strongly agree, 4 = strongly disagree;
Cronbach‟s alpha = .806) that were combined to a composite score with higher
scores indicating higher self-esteem. The answers for degree of happiness
could range from 1 to 3 with higher scores reflecting greater happiness. Here,
we used the unstandardized effects because the initial variables, respondent‟s
and partner‟s income, were measured by the same scale and the unit of
measurement of this scale was meaningful. This is a common practice in
dyadic research where dyad members typically provide information on the
same variables (Kenny & Ledermann, 2010). The effect estimates, the
standard errors (estimated by Amos and Equations A2, A8, A14, A15, A22,
and A23 for the variances), and the normal and BC bootstrap confidence
intervals of the effects are given in Table 3 (phantom models were set up to
obtain point and interval estimates for a1b + a2b, a1b + c′1 + a2b + c′2, a1b – c′1,
a2b – c′2, a1b – a2b, and a1b + c′1 – (a2b + c′2). We found that a1, a2, and b were
positive and statistically significant. These direct effects constitute two
positive simple indirect effects (a1b and a2b) that were statistically significant.
Table 3. Testing mediation of respondent’s and partner’s income on degree of happiness through the
mediator self esteem
Effect Estimate
Direct effects
R‟s income  self-esteem (a1) 0.0182 0.0040 4.5834 <.0001 [0.0104, 0.0260] [0.0110, 0.0260]
P‟s income  self-esteem (a2) 0.0148 0.0040 3.6765 .0002 [0.0069, 0.0227] [0.0071, 0.0228]
self-esteem  happiness (b) 0.0909 0.0081 11.2685 <.0001 [0.0751, 0.1067] [0.0741, 0.1076]
R‟s income  happiness (c'1) 0.0016 0.0009 1.8154 .0695 [-0.0001, 0.0033] [-0.0002, 0.0033]
P‟s income  happiness (c'2) 0.0016 0.0009 1.7874 .0739 [-0.0002, 0.0033] [-0.0002, 0.0034]
Indirect and total effects
a1b 0.0017 0.0004 4.2456 .0001 [0.0009, 0.0024] [0.0010, 0.0025]
a2b 0.0013 0.0004 3.4952 .0005 [0.0006, 0.0021] [0.0007, 0.0022]
a1b + c'1 0.0032 0.0009 3.4818 .0005 [0.0014, 0.0050] [0.0014, 0.0050]
a2b + c'2 0.0029 0.0009 3.0938 .0020 [0.0011, 0.0048] [0.0010, 0.0048]
a1b + a2b 0.0030 0.0007 4.5547 <.0001 [0.0017, 0.0043] [0.0019, 0.0045]
a1b + c'1 + a2b + c'2 0.0061 0.0018 3.3604 .0008 [0.0026, 0.0097] [0.0029, 0.0092]
Contrasts
a1b – c'1 0.0001 0.0010 0.0845 .9327 [-0.0018, 0.0020] [-0.0018, 0.0021]
a2b – c'2 -0.0002 0.0010 0.2228 .8237 [-0.0021, 0.0017] [-0.0022, 0.0018]
a1b – a2b 0.0003 0.0004 0.7575 .4487 [-0.0005, 0.0011] [-0.0005, 0.0011]
a1b + c'1 – (a2b + c'2) 0.0003 0.0010 0.3060 .7596 [-0.0017, 0.0024] [-0.0016, 0.0023]
Note: SE = standard error; BC CI = bias-corrected confidence interval. The formula used to compute normal 95% CI is estimate  1.96
SE.
The two total effects, their sum, and the sum of the two indirect effects
were all positive and statistically significant. The two direct effects c′ were not
significant. The fact that both indirect effects were not significantly stronger
than the respective direct effects c′ does not support complete mediation. The
finding that the two indirect effects and the two total effects were equal in size
indicated that a person‟s degree of happiness seemed to be affected to the
same extent by one‟s own income and that of the partner. That is, an increase
of the partner‟s income by one unit would have had the same effect on a
person‟s degree of happiness as an increase of his or her own income.
In sum, results suggested that the effect of both one‟s own income and the
partner‟s income on his or her happiness was mediated by his or her self-
esteem. Moreover, partner‟s income affected the degree of happiness to the
same extent as one‟s own income.
DISCUSSION
The assessment of specific indirect effects and contrasts of effects, as
discussed in this chapter, offers much promise for a good understanding of the
mechanism through which one or multiple initial variables affect an outcome.
Specifically, the information whether a specific indirect effect is stronger than,
weaker than, or equal in strength to its respective direct effect c′ or whether in
a model with multiple mediators one indirect effect is stronger or weaker than
another indirect effect can (a) help to foster a better understanding of the
significance of the mediators in a model and (b) provide insights that allow a
researcher to draw firm conclusions about where it is appropriate to intervene.
Moreover, comparing the indirect effect with the respective direct effect c′ and
requiring for complete mediation that the indirect effect is bigger in size than
the respective direct effect c′ adds to the requirements for complete mediation
that proponents of the distinction between partial and complete mediation may
find useful.
Mediation analysis has been criticized because mediation implies a causal
mechanism that often remains uncertain (Bullock, Green, & Ha, 2010) due to
the existence of statistically equivalent models (e.g., Lee & Hershberger, 1990;
MacCallum, Wegener, Uchiono, & Fabrigar, 1993). This problem of causal
inference is alleviated, if theoretical considerations preclude alternative
models or if experimental designs provide strong evidence for the underlying
mediational process (e.g., Spencer, Zanna, & Fong, 2005). A method widely
discussed to reduce the number of statistically equivalent models and to detect
model misspecification is the use of instrumental variables (e.g., Foster, &

McLanahan, 1996; Joffe, Small, Have, Brunelli, & Feldman, 2008;
MacKinnon & Pirlott, 2015; Pearl, 2014; Reardon, Unlu, Zhu, & Bloom,
2014; Shrout & Bolger, 2002). Another method recommended by Imai, Keele,
and Tingley (2010) is sensitivity analysis
In conclusion, mediation models are often used to shed some light into the
process through which an initial variable exerts an effect on an outcome. The
testing of specific effects and contrast can provide important insights into the
causal pathways and contribute to a refinement of the theories underlying a
model. Specific effects and contrasts can be tested by means of the z-statistic
or the phantom model method, which provides a flexible means for testing and
contrasting specific effects in recursive and non-recursive structural equation
models, including multilevel models (Preacher, Zyphur, & Zhang, 2010).
APPENDIX A. THE MULTIVARIATE

DELTA METHOD
Bollen (1987, 1989) and Sobel (1982, 1988) give details on how first
order (approximate) standard errors of indirect and total effects can be derived
using the multivariate delta method (and maximum likelihood or generalized
least squares). For a function f of parameter estimates (e.g., ) the
asymptotic variance can be obtained by:
, (A1)
where is the column vector of the partial derivatives of the function

with respect to its parameters ,6 is the variance-covariance matrix of
the estimates, and superscript T denotes the transpose. The square root of
represents the estimate of the approximate standard error of the
function . Next, we give the asymptotic variances of the indirect and total
effects and specific contrasts in models with up to four simultaneous or two
sequential mediators and models with two initial variables. For the sake of
6
The partial derivative of a function (e.g., ab – c′) with respect to one of its parameters (e.g., a) is
the ordinary derivative of the function with respect to that parameter with all other
parameters considered as constants.
simplicity, the hats above the parameter estimates are dropped in the
remainder of this section. We note that in mediation models, the a parameters
are independent from the b and c′ parameters. Consequently, the covariances
between the a parameters and the b and c′ parameters are zero.
Indirect Effects
Using the first order delta method, Sobel (1982) derived a formula to
calculate the asymptotic variance for simple indirect effects. For the effect ab
this is
Var(ab)  a 2 sb2  b 2 s a2 , (A2)
where a and b are estimated parameters, sa2 and sb2 are estimated variances of
a and b, respectively. This equation can be used to test any simple indirect
effect in the models of Figure 1.
Mediation models with multiple simultaneous mediators (Figure 1B). The

asymptotic variances for the indirect effects a1b1 + a2b2, a1b1 + a2b2 + a3b3,
and a1b1 + a2b2 + a3b3 + a4b4 are (see Preacher & Hayes, 2008, p. 882)
Var(a1b1  a 2 b 2 )  a12 sb21  a 22 sb22  b12 s a21  b22 s a22  2a1 a 2 sb1b 2  2b1b2 s a1a 2 , (A3)
Var(a1b1  a 2 b2  a3 b3 )  a12 sb21  a 22 sb22  a32 sb23  b12 s a21  b22 s a22  b32 s a23
 2a1 a 2 sb1b 2  2a1 a3 sb1b3  2a 2 a3 sb 2b 3
 2b1b2 s a1a 2  2b1b3 s a1a 3  2b2 b3 s a 2 a 3 , (A4)
and
Var(a1b1  a2b2  a3b3  a4b4 )  a12 sb21  a22 sb22  a32 sb23  a42 sb24  b12 sa21  b22 sa22
 b32 sa23  b42 sa24  2a1a2 sb1b 2  2a1a3sb1b3  2a1a4 sb1b 4  2a2a3sb 2b3 , (A5)
 2a2a4 sb 2b 4  2a3a4 sb3b 4  2b1b2 sa1a 2  2b1b3sa1a 3  2b1b4 sa1a 4
c  2b2b3sa 2 a 3  2b2b4 sa 2 a 4  2b3b4 sa 3a 4
where sa1a2, sa1a3, … sb3b4 are the covariance between the estimated parameters.
Mediation models with two sequential mediators (Figure 1C). The

asymptotic variance for the three-path indirect effect a1b12b2 (see Taylor et al.,
2008, p. 245) and the total indirect effect a1b12b2 + a1b1 + a2b2 are
Var(a1b12b2 )  a12 b122 sb22  a12 b22 sb212  b122 b22 s a21
(A6)
and
Var(a1b12b2  a1b1  a2 b2 )  a12 sb21  a22 sb22  b12 sa21  b22 sa22  a12b122 sb22
 a12b22 sb212  b122 b22 sa21  2a12b12 sb1b 2  2a1b22 sa 2b12  2a1a2b12 sb22 .(A7)
 2b1b12b2 sa21  2a1a2 sb1b 2
Mediation models with two initial variables (Figure 1D). The asymptotic
variance for the sum of the indirect effects a1b and a2b is
 
Var(a1b  a2b)  a1  a2  sb2  b 2 sa21  sa22  2b 2 sa1a 2 .
2
(A8)
Total Effects
Simple mediation model and models with multiple mediators (Figure 1A-
1C). The asymptotic variances for the total effects ab + c′, a1b1 + a2b2 + c′,
a1b1 + a2b2 + a3b3 + c′, a1b1 + a2b2 + a3b3 + a4b4 + c′, and a1b12b2 + a1b1 + a2b2
+ c′ are
Var(ab  c' )  a 2 sb2  b 2 sa2  2asbc'  sc2' , (A9)
Var(a1b1  a2b2  c' )  a12 sb21  a22 sb22  b12 sa21  b22 sa22
 2a1a2 sb1b 2  2b1b2 sa1a 2  2a1sb1c '  2a2 sb 2c '  sc2' , (A10)
Var(a1b1  a2b2  a3b3  c' )  a12 sb21  a22 sb22  a32 sb23  b12 sa21  b22 sa22
 b32 sa23  2a1a2 sb1b 2  2a1a3 sb1b3  2a2 a3 sb 2b3  2b1b2 sa1a 2 , (A11)
 2b1b3 sa1a 3  2b2b3 sa 2 a 3  2a1 sb1c '  2a2 sb 2c '  2a3 sb 3c '  sc2'
Var(a1b1  a2 b2  a3b3  a4b4  c' )  a12 sb21  a22 sb22  a32 sb23  a42 sb24
 b12 sa21  b22 sa22  b32 sa23  b42 sa24  2a1a2 sb1b 2  2a1a3 sb1b3
, (A12)
 2a1a4 sb1b 4  2a2 a3 sb 2b3  2a2 a4 sb 2b 4  2a3 a4 sb 3b 4
 2b1b2 sa1a 2  2b1b3 sa1a 3  2b1b4 sa1a 4  2b2b3 sa 2 a 3  2b2b4 sa 2 a 4
 2b3b4 sa 3a 4  2a1sb1c '  2a2 sb 2c '  2a3 sb3c '  2a4 sb 4c '  sc2'
and
Var(a1b12b2  a1b1  a2 b2  c' )  a12 sb21  a22 sb22  b12 sa21  b22 sa22
 a12 b122 sb22  a12 b22 sb212  b122 b22 s a21  2a12 b12 sb1b 2  2a1b22 s a 2b12 . (A13)
 2a1a2 b12 sb22  2b1b12b2 sa21  2a1a2 sb1b 2  2a1 sb1c '
 2a2 sb 2 c '  2a1b12 sb 2 c '  sc2'
Mediation model with two initial variables (Figure 1D). The asymptotic
variance for the sum of the two total effects (i.e., a1b + c′1 + a2b + c′2) is
Var (a1b  c'1  a2b  c'2 )  a12 sb2  a22 sb2  b 2 sa21  b 2 sa22  2b 2 sa1a 2  2a1a2 sb2 . (A14)
 2a1sbc'1  2a2 sbc'1  2a1sbc'2  2a2 sbc'2  2sc '1c '2  sc2'1  sc2'2
Contrasts
Simple mediation model (Figure 1A). The asymptotic variances for the
contrasts ab – c′ (see MacKinnon, 2000, p. 151) is
Var(ab  c' )  a 2 sb2  b 2 sa2  2asbc'  sc2' . (A15)
Contrasting the indirect effects with c′ in models up to four simultaneous

mediators (Figure 1B). The asymptotic variances for a1b1 + a2b2 – c′, a1b1 +
a2b2 + a3b3 – c′, a1b1 + a2b2 + a3b3 + a4b4 – c′ are
Var(a1b1  a2 b2  c' )  a12 sb21  a22 sb22  b12 s a21  b22 sa22
, (A16)
 2a1a2 sb1b 2  2b1b2 sa1a 2  2a1 sb1c '  2a2 sb 2 c '  sc2'
Var(a1b1  a2b2  a3b3  c' )  a12 sb21  a22 sb22  a32 sb23  b12 sa21  b22 sa22  b32 sa23
 2a1a2 sb1b 2  2a1a3 sb1b3  2a2 a3 sb 2b3  2b1b2 sa1a 2 , (A17)
 2b1b3 sa1a 3  2b2b3 sa 2 a 3
 2a1sb1c '  2a2 sb 2c '  2a3 sb 3c '  sc2'
and
Var(a1b1  a2 b2  a3b3  a4 b4  c' )  a12 sb21  a22 sb22  a32 sb23

 a42 sb24  b12 s a21  b22 sa22  b32 sa23  b42 sa24
 2a1a2 sb1b 2  2a1a3 sb1b 3  2a1a4 sb1b 4  2a2 a3 sb 2b 3
 2 a 2 a 4 s b 2 b 4  2a 3 a 4 s b 3 b 4 . (A18)
 2b1b2 sa1a 2  2b1b3 sa1a 3  2b1b4 sa1a 4  2b2 b3 s a 2 a 3

 2b2b4 sa 2 a 4  2b3b4 s a 3a 4
 2a1 sb1c '  2a2 sb 2 c '  2a3 sb 3c '  2a4 sb 4c '  sc2'
Contrasting the indirect effects with c′ in models with two sequential

mediators (Figure 1C). The asymptotic variances for a1b12b2 – c′ and a1b12b2 +
a1b1 + a2b2 – c′ are
Var (a1b12b2  c' )  a12b22 sb212  a12b122 sb22  b122 b22 sa21  2a1b12 sb 2c '  sc2' , (A19)
and
Vara1b12b2  a1b2  a 2 b2  c'  a12 s b21  a 22 s b22  b12 s a21  b22 s a22
 a12 b122 s b22  a12 b22 s b212  b122 b22 s a21 . (A20)
 2a b s
2
1 12 b1b 2  2a b s 2
1 2 a 2b12  2a1 a b s 2
2 12 b 2  2b b b s 2
1 12 2 a1
 2a1 a 2 s b1b 2  2a1 s b1c '  2a 2 s b 2 c '  2a1b12 s b 2 c '  s c2'
Contrasting two simple indirect effects (Figure 1B and 1D). The

asymptotic variance for the contrasts a1b1 – a2b2 (see Preacher & Hayes, 2008,
p. 884) and a1b – a2b are
Vara1b1  a2b2   a12 sb21  a22 sb22  b12 sa21  b22 sa22  2a1a2 sb1b 2  2b1b2 sa1a 2 (A21)
and

Var(a1b  a2 b)  a1  a 2  sb2  b 2 s a21  s a22  2b 2 sa1a 2 .
2
 (A22)
Contrasting two total effects in models with two initial variables (Figure
1D). The asymptotic variance for the contrast a1b + c′1 – (a2b + c′2) is
Vara1b  c'1 (a2 b  c' 2 )   a1  a2  sb2  b 2 sa21  b 2 sa22

2
. (A23)
 2b s a1a 2  2a1  a2 sbc'1  2a1  a2 sbc'2  2sc '1c '2  sc2'1  sc2'2
2
APPENDIX B. PHANTOM MODELS

Figure B1 shows the phantom models for assessing the simple indirect
effect a1b1 and the three-path indirect effect a1b12b2. To identify the models
each path coefficient in the phantom model is set equal to the coefficient of the
corresponding path in the main model (e.g., a1 in Model B1B is equated to a1
in Model 1B). In addition, the variance of the initial phantom variable Pin is set
to 1 and the mean to zero while the intercepts of the other phantom variables
(e.g., P1, and Pout) are fixed to zero.
To obtain the point estimate of a specific effect represented by a phantom
model the total effect is estimated between the phantom model‟s initial
variable and its final outcome variable. In the models of Figure B1, the total
effects between Pin and Pout equal a1b1 and a1b12b2, respectively. To test a
Model A
a1 b1
Pin P1 Pout
Model B
a1 P1 b12 b2
Pin P2 Pout
Figure B1.Phantom models for assessing indirect effects. Model A: Simple indirect
effect a1b1. Model B: Three-path indirect effect a1b12b2.
specific effect, the bootstrap confidence limit of the phantom model‟s total
effect is estimated. We note that in contrast to the equations for the standard
errors, phantom models do not depend whether the residual covariances in the
main model are constrained or freely estimated.
Phantom models for assessing specific contrasts are shown in Figure B2
and B3. The models of Figure B2 are designed to assess the difference
between a specific indirect effect and the direct effect c′. Model B2A contrasts
Model A
P1
a1 b1
Pin c′ -1 Pout
P2
Model B
P3
a3 b3
P2
a2 b2
a1 P1 b1
Pin Pout
c′ -1
P4
Model C
P1 b12
P2
a1 b2
c′ -1
Pin P3 Pout
Model D
P1 b12
P2
a1 P3 b2
a1 b1
a2 P4 b2
Pin c′ -1 Pout
P5
Figure B2. Phantom models for assessing contrasts involving the direct effect c′.
Model A: Contrast ab – c′. Model B: Contrast a1b1 + a2b2 + a3b3 – c′. Model C:
Contrast a1b12b2 – c′. Model D: Contrast a1b12b2 + a1b12b2 + a2b2 – c′.
the simple indirect effect a1b1 with c′. Model B2B tests a1b1 + a2b2 + a3b3 – c′,
Model B2C a1b12b2 – c′, and Model B2D a1b1b2 + a1b1 + a2b2 – c′. For
mediation models containing fewer or more simultaneous mediators the
phantom model B2B can readily be adapted: Excluding a phantom variable,
say P3, with the connecting paths a3 and b3 yields a phantom model with two
simultaneous mediators; adding a new phantom variable, say P4, connected by
the paths a4 and b4 results in a phantom model with four simultaneous
mediators. The models of Figure B3 enable the comparison of two simple
indirect effects and two total effects: Model B3A tests a1b1 – a2b2, Model B3B
b(a1 – a2), and Model B3C a1b + c′1 – (a2b + c′2).
Model A
a1 b1
Pin P1 Pout
a2 -1
b2
P2 P3
Model B
a1 b
Pin P1 Pout
a2 -1
P2 b
P3
Model C
a1 P1 b
Pin c′1 Pout
a2 c′2 -1
b
P2 P3
Figure B3.Phantom model for contrasting simple indirect effects and total effects.
Model A: Contrast a1b1 – a2b2. Model B: Contrast a1b – a2b. Model C: Contrast a1b +
c′1 – (a2b + c′2).
Estimating a model with two initial variables, a researcher may also wish
to assess the sum of the two indirect effects and the sum of the two total
effects. This can be achieved by changing in Model B3B and B3C the path P3
 Pout from -1 to 1. The total effects are then b(a1 + a2) and a1b + c′1 + a2b +
c′2, respectively.
AUTHOR NOTE
The research used three data sets: Quality of American Life 1978; the
Quality of Employment Survey 1977; and Marital Instability Over the Life
Course: A six-Wave Panel Study, 1980, 1983, 1988, 1992-1994, 1997, 2000.
The data collected by Angus Campbell and Philip Converse; Robert Quinn and
Staines Graham; and Alan Booth, David Johnson, Paul Amato, and Stacy
Rogers were made available through Ann Arbor, MI: Inter-university
Consortium for Political and Social Research.
Supplementary material is available at http://thomasledermann.com
/mscm/.
We thank David A. Kenny for helpful comments on an earlier version of
this chapter.
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INDEX
attitudes, 59, 67
A
academic performance, 36, 65 B

access, 5, 7, 9, 21, 28, 30, 61, 78
accountability, vii, 35, 36, 38, 40, 41, 47, banking, 10, 29
51, 57, 60, 61, 67 bankruptcy, 2, 5, 6, 8, 11, 13, 21, 24, 28
accountability ratings, 40 banks, 4, 5, 9, 10, 28
accounting, 14, 52 barriers, 40, 60
achievement test, 40 Bayesian estimation, 98
adjustment, 2, 3, 65, 97 Bayesian methods, 99
administrators, vii, 35, 37, 38, 40, 59, 60, 61 behavioral sciences, 63, 70, 98
adolescents, 68 behaviors, 13
African-American, 63 benefits, 8, 21, 38, 40
age, 37, 80 benign, 21
agencies, 5, 6 bias, 79, 82, 83, 86, 100
algorithm, 42 blame, 71
American Educational Research bond market, 5
Association, 62, 64, 66 bonds, 5
American Psychological Association, 98 bullying, 38
anxiety, 62 burnout, 64
APC, 9
appraisals, 71
aptitude, 36 C
arithmetic, 15
Asia, 3, 31 calorie, 74
assessment, 25, 60, 63, 70, 73, 79, 87 capital gains, 19
assets, 6, 7, 8, 9, 12, 20, 21, 26, 30 case study, 63
asymmetric information, 2, 24, 28, 30 cash, 9, 10, 11
asymmetry, 2, 8, 9, 21 cash flow, 9, 10, 11
atmosphere, 37 causal inference, 87
causal interpretation, 99
104 Index
CEE, 3 criticism, 42
Chicago, 39, 62, 64, 68, 96, 98 crowds, 4
child development, 64 CT, 64, 67
child poverty, 40, 60 culture, 37, 65, 68
children, 36, 71, 97 curriculum, 61
China, vii, 1, 4, 5, 6, 7, 10, 14, 19, 21, 24, customers, 11
25, 26, 29, 32, 34
Chinese firms, 4, 5, 19, 24, 29
Chinese government, 5, 24 D
City, 63
data analysis, 99
clarity, 68
data set, 3, 4, 14, 25, 42, 47, 48, 70, 96
classes, vii, 35, 42, 43, 44, 45, 46, 49, 50,
database, 41, 47, 60
51, 52, 53, 54, 58, 66
debts, 30
classification, 42, 43, 45, 46, 50, 52, 53, 54,
delinquency, 64
56, 58, 59
Delta, 88, 100
classroom, 38, 47, 49, 65
Department of Education, 41, 50, 51, 63, 67
classroom management, 47
depreciation, 8
climate, vii, 35, 36, 37, 38, 39, 40, 41, 42,
depression, 38
47, 48, 50, 51, 52, 53, 56, 58, 59, 60, 61,
derivatives, 88
62, 63, 64, 65, 66, 67, 68
developed countries, 4, 19, 20, 24, 29
cluster analysis, 41, 42, 43, 54, 62, 64, 66,
developing countries, 3, 19
68
deviation, 11, 75
cluster model, 46
disclosure, 6
clustering, 42, 43, 44, 50, 62
disorder, 63, 64
collaboration, 36, 41
disposition, 39
collateral, 7, 8, 10, 26
dissatisfaction, 54
commercial, 10
distress, 11, 24
commercial bank, 10
distribution, 14, 15, 25, 43, 44, 46, 50, 58,
communication, 62
78, 101
community(s), 37, 39, 60, 61
distribution function, 78
complexity, 9
complications, 4
computation, 50 E
computer, 43
computing, 16, 77 earnings, 9, 11, 21, 24
conflict, 97 Eastern Europe, 3
construction, 3 ecology, 37
consumption, 11, 74 education, 68
controversial, 7, 10, 36 educational research, 100
cooperation, 38 educational system, 61
corporate finance, 2 educators, 38, 62
correlation, 100 elementary school, vii, 35, 39, 42, 47, 51,
cost, 8, 9, 10, 11 52, 53, 54, 58, 59
creditors, 21 emerging markets, 5
criminal acts, 36 empirical studies, 8, 14
Index 105
energy, 74
enforcement, 40, 49
G
entropy, 46, 52, 53, 54, 62
Germany, 2
environment(s), 3, 4, 37, 38, 47, 49, 54, 59,
governments, 6
61, 64
GPA, 39
EPR, 8
grades, 39, 40, 47, 67
EPS, 9, 12, 17, 18, 22, 26
group membership, 41, 45
equity, 5, 7, 9, 10, 11, 13, 19, 20, 21, 29
grouping, 4, 42
equity market, 5
growth, 5, 6, 8, 21, 26, 29, 57, 66
estimation problems, 78
ethnicity, 37
Europe, 3 H
European Union (EU), 3, 32, 33
evidence, 3, 8, 20, 41, 45, 84, 87 happiness, 85, 86, 87
examinations, viii, 36 health, 63, 67, 68, 72, 98
experimental design, 87 health care, 98
external financing, 11 health education, 68
high school, 49, 63, 65, 98
history, 41
F homogeneity, 44
Hong Kong, 1, 30
factor analysis, 4, 40, 46, 48
House, 65
families, 62
human, 37
family life, 83, 84, 85
hypothesis, 2, 8, 9, 21, 53, 59
family system, 97
hypothesis test, 53
fear, 10
financial, 3, 5, 7, 9, 10, 11, 14, 16, 20, 24,
28 I
financial condition, 28
financial crisis, 24 identification, 16, 100
financial distress, 11, 24 improvements, 38, 39, 40
financial institutions, 5 income, 6, 9, 13, 59, 85, 86, 87
financial sector, 5, 10 income tax, 6, 13
Finland, 68 independence, 44
firm size, 25, 28, 29, 30 independent variable, 71, 98
flexibility, 51 indirect effect, viii, 69, 70, 71, 73, 74, 75,
food, 74 76, 77, 78, 79, 80, 84, 85, 87, 89, 90, 91,
force, 84 92, 93, 94, 95, 96, 97, 99, 100, 101
formula, 82, 83, 86, 89 individuals, 43, 45
France, 2 industrial sectors, 14
free trade, 6 industry(s), 3, 5, 14, 20, 25, 26, 28, 29, 30
freedom, 38 inefficiency, 4
funding, 60 insider trading, 6
funds, 11 institutions, 5, 10
interdependence, 99
interest rates, 10
106 Index
internal financing, 9, 21 long-term debt, 5, 7, 9, 19, 20, 21, 24, 26,

internalizing, 71 28, 29, 30
interparental conflict, 97 LTA, 9, 12, 17, 18, 22, 25, 26
interpretability, 44, 46, 54
intervention, 41, 61
investment(s), 5, 8, 11, 21, 29 M
investment capital, 29
magnitude, 74
investors, 4, 8, 28
majority, 5, 26
Iowa, 39
management, 5, 9, 10, 19, 20, 47, 101
IPO, 19
manufacturing, 14, 26
issues, 65, 98
marriage, 80, 81, 84
materials, 49
J mathematics, 39, 40, 41
matrix, 15, 44, 78, 88
Japan, 2, 19 measurement, 14, 15, 16, 20, 46, 48, 52, 74,
job satisfaction, 38, 61, 65, 80, 84, 85 85
median, 79, 101
mediation, vii, viii, 69, 70, 71, 72, 73, 74,
K 75, 76, 77, 78, 79, 80, 81, 83, 86, 87, 88,
89, 90, 91, 95, 97, 98, 99, 100, 101
Korea, 3, 32
mediational analyses, 101
Medicaid, 51
L medicine, 33
membership, 41, 44, 45, 46, 58, 59
labor force, 84 messages, 66
laws, 29 meta-analysis, 60
lead, 14, 78 methodology, 4, 42, 101
leadership, 38, 39, 49, 66 misunderstanding, 75
learners, 59, 60 mixing, 45
learning, 36, 37, 38, 47, 49, 59, 60, 61, 64, model specification, 44, 45
67 models, vii, viii, 2, 43, 44, 45, 46, 51, 52,
learning environment, 37, 47, 49, 59, 61, 64 53, 59, 63, 64, 65, 66, 67, 69, 70, 71, 72,
learning outcomes, 38 73, 74, 75, 77, 80, 84, 85, 87, 88, 89, 90,
legislation, 41 91, 92, 93, 94, 95, 99, 100, 101
lending, 10 moderators, 98
life satisfaction, 80, 84 monopoly, 5
light, 76, 88 morale, 40
Likert scale, 48 motivation, 36, 38
linear model, 3 multidimensional, vii, 35, 37
liquid assets, 9, 21 multiple fit, 52
liquidity, 6, 10, 21, 26, 29 multivariate analysis, 96
liquidity ratio, 10
loans, 4, 5, 9, 21, 28, 29, 30
local government, 6
locus, 60
Index 107
prevention, 41, 64
N prior knowledge, 48
private firms, 20, 25, 28, 30
NAEP, 40
private sector, 4, 5
National Center for Education Statistics, 63
probability, 11, 43, 44, 45, 46, 54, 56, 59
negative affectivity, 98
probability distribution, 43
negative effects, 21, 28
problem behavior, 39
negative mood, 74
profit, 9
negative relation, 11, 39
profit margin, 9
net profit margin, 9
profitability, 6, 9, 21, 26, 29
New Zealand, 31
programming, 63
No Child Left Behind, 36
project, 64
normal distribution, 15
property rights, 29
normative behavior, 37
psychological stress, 72
psychology, 62, 98, 101
O psychosocial climate, 68
public schools, 36
obstacles, 60
operations, 28
opportunities, 8, 29
Q
ownership, 5, 6, 10, 24, 25, 26, 29
qualifications, 36
ownership structure, 5, 6, 10, 25, 26, 29
quality of life, 80
quick ratio, 10
P
R
parallel, viii, 69, 70
parameter estimates, 20, 25, 46, 75, 88, 89
reading, 39, 40
parental involvement, 40, 67
reality, 30
parents, vii, 35, 36, 37, 38, 40, 41, 47, 48,
recommendations, 101
49, 59, 61
reform, 5, 10, 40, 61, 62, 98
participants, 39
regression, 4, 14, 15, 20, 25, 40, 50, 79, 101
path model, 99
regression analysis, 4, 14, 25
pathways, 73, 88
regression equation, 14
performance indicator, 58
regression model, 25
personality, 37
regulations, 5
Philadelphia, 63, 66
reputation, 21
physical environment, 49
requirements, viii, 10, 41, 51, 69, 87
physical health, 72
researchers, 5, 14, 37, 39, 41, 42, 43, 44, 46,
pluralism, 63
48, 50, 61, 70, 75, 97
policy, vii, 6, 11, 24, 35, 36, 61, 62
residuals, 71
policy makers, vii, 35, 36, 61
resources, 4
population, 43, 78
response, 16, 41
positive relationship, 8, 28
restrictions, 44
poverty, vii, 35, 39, 40, 41, 42, 50, 52, 58,
retained earnings, 9
59, 60, 61, 65, 66
108 Index
revaluation, 8 software, 43, 48, 51, 75, 77, 79, 97

revenue, 9, 11 solution, 42, 44, 45, 46, 49, 52, 53, 54, 75
rights, 6, 10, 29 South Korea, 3, 32
risk(s), 5, 6, 11, 16, 19, 20, 24, 28, 29, 30 Soviet Union, 3
root(s), 77, 88 specifications, 45
rules, 37, 40 spending, 10
stakeholders, 24, 61
standard deviation, 11, 50, 75
S standard error, viii, 46, 69, 70, 77, 80, 82,
83, 84, 85, 86, 88, 94, 101
safety, 37, 40, 47, 49, 63, 64, 67
standardization, 75, 78
sanctions, 19
state(s), vii, 2, 5, 10, 19, 20, 24, 25, 26, 28,
SAS, 25, 48
29, 30, 35, 36, 40, 41, 47, 51, 54, 57, 58,
school, vii, 35, 36, 37, 38, 39, 40, 41, 42,
59, 60
47, 49, 50, 51, 52, 53, 54, 56, 57, 58, 59,
state control, 10
60, 61, 62, 63, 64, 65, 66, 67, 68, 74, 98,
state-owned banks, 5, 28
100
statistical inference, 100
school achievement, 39, 59, 64, 74
statistics, viii, 18, 22, 23, 26, 27, 51, 56, 62,
school activities, 49
69, 79
school climate, vii, 35, 36, 37, 38, 39, 40,
stimulus, 24
41, 42, 50, 53, 56, 58, 59, 60, 61, 62, 63,
stock, 5, 14
64, 65, 66, 67, 68
stock exchange, 14
school culture, 37, 65
stress, 38, 61, 72
school improvement, 39, 60, 61, 62, 64, 65,
structural characteristics, 67
67
structural equation modeling, vii, 1, 4, 15,
school learning, 67
96, 101
school performance, vii, 35, 41, 59, 60, 61
structure, vii, 1, 2, 3, 4, 5, 6, 7, 8, 10, 14, 16,
school success, 36, 38
21, 24, 25, 26, 29, 30, 35, 37, 48, 49, 50,
school work, 65
64, 65, 67, 78, 99, 100, 101
schooling, 59
structuring, 61
science, 41, 65
student achievement, 36, 39, 40, 41, 58, 62,
secondary schools, 36
63, 65, 67
security(s), 21, 50
substance use, 38, 99
self esteem, 86
substitutes, 8
self-esteem, 38, 85, 86, 87
substitution(s), 10, 11
sensitivity, 88
suppliers, 11
shareholders, 6, 9, 10
suppression, 73, 99
showing, 41, 53, 54, 56, 58
surplus, 28
signals, 9, 28
suspensions, 59
signs, 73
Switzerland, 69
simulation, 66, 100
social costs, 28
social psychology, 98, 101 T
social sciences, 42
society, 38 target, 2, 3, 18
socioeconomic status, 37, 65 tax policy, 6
Index 109
tax system, 24
teachers, vii, 35, 36, 37, 38, 39, 40, 41, 42,
V
47, 48, 49, 50, 56, 58, 59, 60, 61, 65
validation, 62, 63
techniques, 16, 40, 43, 79
variables, vii, viii, 13, 14, 15, 16, 25, 35, 36,
technology, 6
37, 38, 41, 42, 43, 44, 46, 50, 53, 54, 56,
test anxiety, 62
57, 59, 60, 62, 69, 70, 71, 72, 74, 75, 76,
test scores, 38, 39, 41, 47, 51, 57
77, 78, 79, 80, 84, 85, 87, 88, 90, 91, 93,
testing, vii, viii, 69, 70, 73, 75, 77, 78, 88,
96, 97, 98, 99, 100
98, 99, 100, 101
variance-covariance matrix, 44, 88
textbooks, 49
vector, 15, 44, 88
third dimension, 49
Vietnam, 3, 33
thoughts, 47
violence, 41, 64
trade, 2, 3, 6, 8, 9, 11, 13, 21, 24
volatility, 11, 24
trade-off, 2, 3, 8, 9, 11, 13, 21, 24
voting, 10
training, 60
trajectory, 66
transaction costs, 9 W
transformation, 5
turnover, 41, 59, 61 waiver, 51, 52, 58
Washington, 63, 98, 101
web, 36, 66
U weight loss, 74
workers, 11, 84, 98
uniform, 7
working conditions, 84
unique features, 5
workplace, 65
United, 2, 3, 31, 32, 36, 63
United Kingdom (UK), 2, 31, 33, 68
United States, 2, 3, 32, 36, 63 Y
urban, 40, 65, 67
urbanicity, 40 yield, 7
USA, 63

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Published by Nova Science Publishers, Inc. † New York

Structural equation modeling (SEM) is a general, cross-sectional statistical

classes were distinguished based upon school climate scores. Differences in

THE DETERMINANTS OF CAPITAL

Xin-Dan Li1, Xiang-Nan Feng2, Bin Lu3

identified, which are closely related to the special micro and

Keywords: capital structure; chinese listed companies; structural equation

2. CHINESE INSTITUTIONAL SETTINGS

Many researchers have made cross-sectional comparisons among

Financial institutions: Although Chinese listed firms have been reformed

Structure of Listed Companies” by the China Securities Regulatory

3. THE FIRM-SPECIFIC FACTORS

A. Capital Structure Measurements

The choice of the corporate capital structure measures is controversial.

C. Non-Debt Tax Shields

The trade-off hypothesis of capital structure suggests that high-growth

lending institutions for monitoring management spending by undertaking more

The shares structure of Chinese listed firms is officially classified into

State-owned shares: A firm with substantial state ownership is more likely

Business risk is a proxy for the probability of financial and bankruptcy

Dividend payout ratio (DIV) is selected as the indicator of signal. Mazur

Table 1. Measurement of Variables (Firm-specific Factors and Indicators)

4. DATA AND METHODOLOGY

In Section 3, we discussed a number of attributes and their indicators that

In this study, the structural equation modeling (SEM) technique is used to

where y is a q × 1 vector of observable indicators;  is an m × 1 vector of

where is a p × 1 vector of endogenous variables; X is a n × 1 vector of

in Section 3 and Table 1, we have identified three leverage measures of capital

Table 2. The Industry Distribution Characteristic of Chinese listed Firms

Table 3. The Structure of the Measurement Equation

Table 4. Descriptive Statistics of the Data

Variable Mean Median Maximum Minimum Std Dev

Variable Mean Median Maximum Minimum Std Dev

5.1. The Characteristics of Capital Structure of Chinese Listed

Table 5 shows the characteristics of leverages for Chinese companies.

5.2. Empirical Estimation Results

In this section, we present the empirical results. The parameter estimates

Table 5. The Characteristic of Leverage for Chinese Listed Firms

Year TDR (%) SDR (%) LDR (%) STER (%)

Firstly, the most significant determinants of the capital structure choice

Ownership structure ( 7 ) has significantly positive effects on all

5.3. Model Assessment and Robustness

Under the Bayesian framework, a commonly used statistic for model

5.4. Multisample Analysis

In China, state-owned firms and private firms have very different

three debt ratios and growth ( 3 ), profitability ( 5 ), and liquidity (  6 ) are

Table 8. Estimates of Regression Coefficients

Variables TDR LDR SDR

the institutional settings and government policies in China. Seventh, the

Fattouh, B., Scaramozzino, P. & Harris, L. (2005). Capital Structure in South

Mazur, K. (2007). The Determinants of Capital Structure Choice: Evidence

Titman, S. (1984). The Effect of Capital Structure on the Firm‟s Liquidation

Christine DiStefano, Elizabeth Leighton,

personnel in examinations of malleable factors related to school

Defining School Climate

Every school may be thought of as having a distinct personality or

effectiveness. Specifically, positive school climate has been found to correlate

or school-level interventions, an older grouping method was used. Instead of