A Review of Empirical Capital Structure Research and Directions for the Future
John R. Graham
Duke University; National Bureau of Economic Research (NBER)
Mark T. Leary
Washington University in St. Louis - Olin Business School; National Bureau of Economic Research (NBER)
April 7, 2011
Annual Review of Financial Economics, Vol. 3, 2011
This paper reviews empirical capital structure research, concentrating on papers published since 2005. We begin by documenting three dimensions of capital structure variation: cross-firm, cross-industry, and within-firm through time. We summarize how well the traditional trade-off and pecking order approaches explain these sources of variation and highlight their empirical shortcomings. We review recent research that attempts to address these shortcomings, much of which follows the following broad themes: i) Important variables have been mis-measured in empirical tests, ii) The impact of leverage on non-financial stakeholders is important, iii) The supply side of capital affects corporate capital structure, iv) Richer features of financial contracts have been under-researched, v) Value effects due to capital structure appear to be modest over wide ranges of leverage, vi) Estimates of leverage adjustment speeds are biased, vii) Capital structure dynamics have not been adequately considered. Much progress has been made addressing these issues, some of which has led to the study of an expanded range of capital structure topics, including debt maturity, loan and covenant characteristics, collateral effects, and alternative financing sources such as leasing and credit lines. We conclude by summarizing unanswered questions and areas for future research.
Number of Pages in PDF File: 59
Keywords: capital structure, leverage, debt ratio, tradeoff theory, financial contracting, target leverage, speed of adjustment, partial adjustment model
JEL Classification: G32
Date posted: December 22, 2010 ; Last revised: October 24, 2011
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