An Explicit Test for Capital Structure Convergence

Abstract:     
We test for leverage convergence across a set of US firms. There is one big convergent club detected. The convergence happens in rates: leverage has the same rate of change across the firms of the big club. Firms belonging to the big club are bigger, more profitable, have more tangible assets, fewer growth opportunities and higher payout ratios than the rest of the firms and exhibit counter-cyclical leverage over the business cycle. These characteristics imply that big club firms are financially unconstrained. Our contribution to the ongoing debate for the existence of convergence among firms’ leverage is twofold: (i) to obtain our results, we do not impose any of the direct or indirect restrictions used in the existing literature and so we avoid all pitfalls associated with them and (ii) we can distinguish constrained from unconstrained firms, without having to employ any of the classification criteria used in the literature.

Number of Pages in PDF File: 23

Keywords: Capital structure, Convergence, Financial constraints

working papers series